Title 4.7 Business Models.pdf ✅

1. Company Z (Z) offers short-term car rentals through its digital platform. The rental cars are provided by willing car owners, and Z charges a percentage fee on each transaction. If all transactions are sold under Z's own brand, then Z is best described as a(n):  A. aggregator. B. affiliate marketer. C. marketplace business. Explanation E-commerce business models Description Examples Affiliate marketer Generates commissions by promoting and selling clients' products and services Social influencers that specialize in promoting luxury brand clothing Marketplace business As a digital marketplace, facilitates transactions between numerous buyers and sellers Amazon Marketplace, eBay Aggregator Under its own brand, markets services provided by other parties Airbnb, Uber, Spotify, Turo A business model describes how a company positions itself to deliver goods and services to customers and thus generate profits. E-commerce business models leverage web-based technology to generate sales. Three common types of e-commerce models are: affiliate marketer, marketplace business, and aggregator. An aggregator markets services provided by other parties under its own brand. Frequently, an aggregator charges a percentage fee on each transaction amount. In this scenario, Company Z offers car rental services under its own brand name and charges a fee based on each rental transaction between a car renter and a car owner. (Choice B) An affiliate marketer generates leads and sales for its clients. It typically earns a commission from the sales or leads generated. (Choice C) A marketplace business facilitates purchases and sales transactions between parties. The products or services traded are not marketed under the business's own brand. For example, products sold on eBay are not eBay-branded products. Things to remember: Three common types of e-commerce models are affiliate marketer, marketplace business, and aggregator. An aggregator markets services provided by other parties under its own brand. Describe key features of business models LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
2. Which of the following is most likely a form of price discrimination?  A. Auction models B. Optional product pricing C. Razors-and-blades pricing Explanation Forms of price discrimination Description Example Tiered pricing Price based on volume purchased Tier 1 CRM software pricing: 500 users at $20/month per user Tier 2 CRM software pricing: 100 users at $30/month per user Dynamic pricing Price based on demand at different times Ride-sharing surge pricing before rush hour: $30 per ride Ride-sharing surge pricing during rush hour: $55 per ride Auction/reverse pricing Price based on bids Limited edition soccer jersey on online auction platform: $5,000 for the first card, $7,000 for next identical card CRM = Customer relationship management Pricing is a key component of a firm's business model since revenue directly impacts profits. Pricing (ie, revenue) models are either value-based or cost-based. Value-based pricing is based on the value delivered to customers (eg, Apple charges relatively high prices for iPhones). Cost- based pricing is based on input costs plus a markup (eg, budget retailer sells clothes for cost plus margin). Price discrimination occurs when different customers pay different prices for the same goods (or services). There are several types of price discrimination, including: Tiered pricing involves charging different prices based on the volume of usage. Dynamic pricing refers to charging different prices at different times, based on demand at the point of sale. Auction pricing requires each customer to express an estimate of value through a bidding process; the price is usually established by the highest bid for a particular item. (Choice B) Optional product pricing is designed for customers who buy additional services or features. For example, a vendor may offer to sell extended warranty protection on a new computer. Customers accepting this offer would pay more than other customers but receive an additional product feature. (Choice C) Razors-and-blades pricing pairs complementary products, generally pricing one product (eg, a printer) at a low margin to attract the customer, then pricing another product—ideally, replenishable accessory parts (eg, ink cartridges)—at a high margin. Things to remember: Price discrimination occurs when firms charge different customers different prices for the same goods or services. Tiered pricing, dynamic pricing, and auctions are three forms of price discrimination. Describe key features of business models LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
3. Which of the following pricing models most likely relies on hidden revenues to rapidly increase scale?  A. Free online newspaper B. Discounted digital streaming bundle C. Freemium-priced video game service Explanation Companies use various pricing models to lower the cost for customers and encourage them to adopt the company's products or services. Increasing such adoptions builds customer scale, which may result in the company achieving a cost advantage or improved profitability in the long run. Using a hidden revenues business model, the company can generate revenues from third parties, such as advertisers, instead of its customers. This alternative revenue source allows the company to give the customers free access to its products or services. The third-party revenues remain "hidden" from the customers in the sense that they are not paying the company directly. In this question, an online newspaper's hidden advertising revenues allow for granting customers free access to newspaper content; this access encourages increased customer adoption and scale. (Choice B) A bundle of products sold at a relative discount lowers the cost of customer adoption, but it does not generate hidden revenues from third parties. (Choice C) In freemium pricing, customers gain free access to a sample of products or a basic level of features, but they must pay directly for premium features. Since freemium model revenues are paid by customers, these revenues are not hidden. Things to remember: Companies that generate revenues from third parties (eg, advertisers) can offer customers free access to products or services. The third-party revenues are "hidden" from the customers. Pricing models can be used to lower the cost barriers to customer adoption, thus allowing companies to build scale. Describe various types of business models LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
4. If a company prices a product based on the product's low total cost of ownership, the company's pricing model is best described as: A. cost-based.  B. value-based. C. bundle discounting. Explanation Pricing models Value-based Premium for customer value Cost-based Markup of company costs Price discrimination Volume discounts Off-peak or "surge" pricing Auction Multiple products Bundling discount Product with consumables Optional features or services Growth Discount pricing Free version of product or service Third-party revenues Companies that differentiate their products or services relative to competing alternatives often employ a premium pricing strategy. Product differentiation results in additional value for customers due to: greater capabilities (eg, performance, functionality), and/or lower total cost of ownership (TCO) over the product's useful life. In a value-based pricing model, the potential for pricing a product at a premium corresponds directly to the relative value a customer realizes over the entire ownership period; this benefit to the customer is the product's value proposition. In this scenario, the lower TCO represents the value a customer realizes subsequent to purchasing the product, which would offset a higher upfront purchase price. Thus, the company uses a value- based pricing model. (Choice A) Cost-based pricing is focused internally on a company's costs to produce and sell a product. In contrast, TCO is focused externally on the costs incurred by customers. (Choice C) Bundle discounting of a combination of products or services lowers the customer's purchase cost but does not necessarily impact other costs the customer incurs over the product's useful life. Things to remember: In a value-based pricing model, the potential for pricing a product at a premium is directly related to the product's value proposition. Customers realize more value from products with greater benefits and/or lower total costs of ownership. Cost-based pricing is focused on the cost to the producer, not the customer. Describe various types of business models LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.