ECONOMICS OF STARTUPS

UNIT – III
Crafting business models and Lean Start-ups

ROGERS' DIFFUSION OF INNOVATIONS MODEL

Rogers' Diffusion of Innovations Model is a widely used framework to understand how new ideas,
products, or services spread within a population. Developed by Everett Rogers, a sociologist, the
model identifies five stages through which individuals adopt innovations:

1. Awareness:

• Individuals become aware of the innovation, but they may not have much information
about it.
• They may hear about it through media, social networks, or personal contacts.

2. Interest:

• Individuals become interested in the innovation and seek more information about it.
• They may research the innovation online, read reviews, or talk to others who have adopted
it.

3. Evaluation:

• Individuals evaluate the innovation to determine if it is compatible with their needs, values,
and experiences.
• They may weigh the benefits and drawbacks of the innovation and compare it to
alternatives.

4. Trial:

• Individuals try the innovation on a limited basis to assess its effectiveness and suitability.
• This may involve testing a sample or using a trial version of the product or service.

5. Adoption:

• Individuals decide to adopt the innovation on a full-time basis.

• They may purchase the product, subscribe to the service, or integrate the innovation into
their daily lives.

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Factors Influencing Adoption Rate

Rogers also identified several factors that influence the rate at which individuals adopt innovations:

• Relative Advantage: The perceived superiority of the innovation over existing

alternatives.
• Compatibility: The perceived fit of the innovation with the values, beliefs, and needs of
the target audience.
• Complexity: The perceived difficulty of understanding and using the innovation.
• Trialability: The ease with which the innovation can be tested or experimented with.
• Observability: The extent to which the results of the innovation are visible to others.

Types of Adopters Rogers also categorized individuals based on their adoption rate:

• Innovators: Individuals who are the first to adopt a new innovation. They are risk-takers
and often have high social status and financial resources.
• Early Adopters: Individuals who adopt the innovation shortly after the innovators. They
are opinion leaders and respected by others in their social network.
• Early Majority: Individuals who adopt the innovation after a significant number of others
have done so. They are more cautious than the early adopters but are still relatively open
to new ideas.

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 • Late Majority: Individuals who adopt the innovation only after it has become widely
accepted. They are skeptical and may be reluctant to change their habits.
• Laggards: Individuals who are the last to adopt the innovation. They are resistant to
change and may only adopt the innovation when it is no longer considered new.

Understanding Rogers' Diffusion of Innovations Model can help businesses and organizations
develop effective strategies for introducing new products, services, or ideas to the market. By
identifying the factors that influence adoption and targeting the appropriate audience segments,
organizations can increase the likelihood of successful innovation diffusion.

INTRODUCTION TO BUSINESS MODELS

A business model is the blueprint that outlines how a company creates, delivers, and captures
value. For startups, building a solid business model is crucial for survival and growth. Unlike
established companies that may rely on traditional and proven models, startups need to be more
agile and innovative in their approach, as they often operate in uncharted markets with limited
resources

Key Components of a Business Model

1. Value Proposition: The unique value a company offers to its customers, addressing their
needs or pain points in a way that competitors cannot.
2. Customer Segments: The different groups of people or organizations a company serves.
3. Channels: The ways a company reaches and communicates with its customers.
4. Customer Relationships: The types of interactions a company has with its customers.
5. Revenue Streams: The ways a company generates income from its customers.
6. Key Resources: The assets a company needs to operate its business model.
7. Key Activities: The most important actions a company performs to deliver its value
proposition.
8. Key Partnerships: The relationships a company forms with other businesses to support
its business model.

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 9. Cost Structure: The expenses incurred by a company in operating its business model.

A business model answers fundamental questions about a business:

• Who is the customer?

• What value does the business provide?

• How does the business deliver value to the customer?

• How does the company make money?

In its simplest form, a business model consists of two core elements:

1. Value Creation (How the business creates value for customers)

2. Value Capture (How the business generates revenue or profits)

These components break down into multiple parts, often represented using a framework called the
Business Model Canvas.

Steps to Building a Business Model for Startups

Building a business model for a startup involves more than filling out a canvas. Here’s a step-by-
step guide to create a robust and sustainable model:

Step 1: Customer Discovery and Segmentation

• Objective: Identify and understand the different customer segments you will target.
Customer segmentation is critical because each segment may have unique needs, buying
behaviors, and price sensitivities.

• Action: Conduct market research, interviews, surveys, or pilot tests to identify

customer pain points and their willingness to pay for a solution.

• Deliverable: Clearly defined customer segments with associated characteristics

(e.g., demographics, behaviors, preferences).

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Step 2: Defining the Value Proposition

• Objective: Develop a unique value proposition tailored to your customer segments.

• Action: Identify the core benefits that your product or service will provide. Ask
questions like:

• What problem are you solving?

• What needs are you fulfilling?

• How is your solution better than existing alternatives?

• Deliverable: A compelling and clear value proposition statement for each customer
segment.

Step 3: Selecting Revenue Models

• Objective: Determine how your startup will make money. It’s essential to choose
revenue models that align with customer expectations and the value proposition.

• Action: Explore various revenue models like:

• Direct Sales: Selling a product or service directly to customers.

• Subscription Model: Recurring revenues for continuous service (common in SaaS

startups).

• Freemium Model: Offering a free version with optional premium upgrades.

• Commission Model: Taking a percentage of transactions (e.g., marketplaces like

Airbnb or Etsy).

• Deliverable: A clear description of revenue streams and the pricing strategy.

Step 4: Mapping Distribution Channels

• Objective: Identify the most effective ways to reach your target customer segments.

• Action: Determine the marketing, sales, and distribution channels you will use,
such as online sales (e-commerce, social media), offline sales (retail stores, trade shows), or hybrid
approaches.

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 • Deliverable: A list of channels with a strategy for how they’ll be used.

Step 5: Customer Relationship Strategy

• Objective: Define how you will interact with customers throughout their journey
(acquisition, retention, support).

• Action: Choose the level of engagement—whether high-touch (personal support)

or low-touch (automated services). Implement feedback loops to capture customer insights and
improve the product.

• Deliverable: A customer relationship plan that aligns with the value proposition and
chosen channels.

Step 6: Determining Key Resources and Activities

• Objective: Identify the resources and activities needed to deliver your value
proposition and scale the business.

• Action: Map out the necessary human, technological, and financial resources. Key
activities might include product development, marketing campaigns, or operational logistics.

• Deliverable: A list of key resources and a roadmap of crucial activities.

Step 7: Establishing Partnerships

• Objective: Identify potential partners that can help accelerate growth or reduce
costs.

• Action: Look for suppliers, technology partners, distributors, or complementary

startups that can help you expand faster or deliver better services.

• Deliverable: A list of strategic partnerships with defined roles and agreements.

Step 8: Mapping Cost Structure

• Objective: Understand and project the costs associated with running the business.

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 • Action: Create a budget by listing fixed and variable costs such as employee
salaries, marketing expenses, infrastructure, software, and administrative overheads.

• Deliverable: A detailed cost structure that helps you manage expenses and forecast
profitability.

Business Model Types in Startups

Several established business model types are commonly used in the startup ecosystem. Below are
examples:

1. Marketplace Model:

• Connects buyers and sellers without owning inventory. Examples: Amazon,

Airbnb, Uber.

2. Subscription Model:

• Users pay a recurring fee for continuous access to a product or service. Examples:
Netflix, Spotify, SaaS startups like Salesforce.

3. Freemium Model:

• Offers basic services for free, charging premium prices for advanced features.
Examples: LinkedIn, Dropbox, Slack.

4. On-Demand Model:

• Provides immediate delivery of products or services when customers need them.

Examples: DoorDash, Instacart, TaskRabbit.

5. Direct-to-Consumer (D2C):

• Products are sold directly to customers, bypassing intermediaries. Examples:

Warby Parker, Casper, Glossier.

6. Crowdsourcing/Crowdfunding Model:

• Uses large groups of people to either raise funds or generate content. Examples:
Kickstarter, GoFundMe, Wikipedia.

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Creating Value Propositions

A value proposition is the core element of a business model. It defines the unique benefits a
company offers to its customers. A value proposition is a clear statement that explains how a
product solves customers’ problems, meets their needs, and delivers specific benefits. It also tells
customers why they should choose this product over competitors.

For startups, value propositions are vital. They often operate with limited resources in competitive
markets, so having a strong value proposition can be a key factor in securing investment, attracting
early adopters, and building initial market share.

There are two primary approaches to creating value propositions:

1. Conventional Industry Logic

Conventional industry logic focuses on competing within existing industries and offering
incremental improvements to existing products or services. Conventional industry logic refers to
the traditional approach that established industries take to compete within their existing market
boundaries. Companies in these industries often compete by focusing on either cost leadership
(offering lower prices) or differentiation (offering unique features).

Characteristics of Conventional Industry Logic:

• Focus on Competition: The primary aim is to outperform competitors in an existing

market space.

• Incremental Improvements: Companies rely on small, incremental innovations or

improvements to existing products and services.

• Customer-Centric Innovation: Companies focus on understanding the needs and

preferences of their current customers and improving their offerings accordingly.

• Defined Market Boundaries: Firms generally operate within established market

boundaries and target the same customer segments as their competitors.

• Risk-Averse Culture: Conventional industry players tend to adopt a risk-averse

mindset, making safe, predictable moves in product development and market strategy.

Examples:

• Automotive companies historically improved fuel efficiency or added luxury

features to attract consumers in a highly competitive market.

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 • Telecom companies reducing pricing plans or improving network coverage to stay
ahead of the competition.

2. Value Innovation Logic

Value innovation logic seeks to create new markets and redefine existing ones by offering products
or services that are both innovative and affordable. Value innovation logic is about breaking away
from conventional competition by creating new market spaces and providing unprecedented value
to customers. This concept is closely associated with Blue Ocean Strategy, which focuses on
creating uncontested markets.

Characteristics of Value Innovation Logic:

• Creating New Demand: Rather than competing for existing demand, value
innovators focus on creating new demand in uncontested market spaces (often called “Blue
Oceans”).

• Simultaneous Pursuit of Differentiation and Low Cost: Value innovators aim to

differentiate themselves by offering something unique while also reducing costs, making their
offerings accessible to new customer segments.

• Innovation that Adds Value: Innovation is not just for novelty but adds substantial
value to both the company and the customer.

• Focus on Noncustomers: Instead of focusing only on existing customers, value

innovators target noncustomers—people who are not currently being served by the industry.

• Breaking Traditional Trade-offs: Conventional wisdom suggests you must choose

between offering more value or lower prices. Value innovators aim to achieve both simultaneously.

Examples:

• Uber: By offering on-demand rides via a mobile app, Uber created a new category in
transportation, serving customers who may not have used traditional taxis regularly.

• Netflix: Redefined the movie rental industry by offering on-demand streaming of movies
and TV shows, eliminating the need for physical stores and late fees.

By understanding these two approaches, businesses can develop effective value propositions that
differentiate themselves from competitors and create sustainable competitive advantages.

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THE BUSINESS MODEL CANVAS
The Business Model Canvas is a strategic tool developed by Alexander Osterwalder that provides
a visual representation of the key components of a business model. It consists of nine building
blocks that describe how a company intends to create, deliver, and capture value.

The Nine Building Blocks of the Business Model Canvas:

1. Customer Segments
The different groups of people or organizations a startup aims to reach and serve.
• Example: A SaaS startup may target small businesses and enterprise clients
separately.
2. Value Proposition
The unique mix of products and services that create value for a specific customer segment.
• Example: Uber provides convenience, real-time ride tracking, and on-demand
services.
3. Channels
How a company communicates with and reaches its customer segments to deliver its value
proposition.
• Example: A D2C (Direct-to-Consumer) startup might use its website, mobile app,
or third-party marketplaces.

4. Customer Relationships
The type of relationship a startup establishes with each customer segment.
• Example: Startups may adopt self-service (e.g., e-commerce), automated services
(e.g., chatbots), or personalized support (e.g., premium consulting).
5. Revenue Streams
How the company makes money from its value proposition.
• Example: Subscription fees, advertising, or direct sales.
6. Key Resources
The assets required to deliver the value proposition, reach markets, maintain customer
relationships, and earn revenues.
• Example: Human resources, technology infrastructure, intellectual property.
7. Key Activities
The most important actions a company must take to make its business model work.
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 • Example: Software development for a SaaS startup, or supply chain management
for a retail startup.
8. Key Partnerships
The network of suppliers, partners, and alliances that help the business operate.
• Example: A startup may partner with a logistics company to handle shipping or a
bank for payment processing.
9. Cost Structure
All costs incurred to operate the business model.
• Example: Salaries, technology development costs, operational overhead, and
customer acquisition costs.

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