Transitioning Web2 Businesses Into Web3; A Stern Review of Business Models
Laying structures seem the hardest work of a businessman. A successful business goes through hurdles to set the business to the mood of it's costumers. Finance, Models, Survey, research and many more strenuous activities. The most important in building a business structure for profit making is the modelling of that business. Just as a simulation is done with excel and python to see through the actions of a particular objective quite before launch and predict it's future, a business model see through the money making mechanisms of that business.
What is a Business Model?
You might have checked Google for definitions and have many answers. However, simply defining, it is a plan to make money for upcoming and existing businesses. Business is human activity in a competitive market setting, characterized by the exchange of goods and services for money. It brings people, and a collection of decisions, resources, buildings, products, values, actions and other ingredients necessary to sustain the activities together.
Models therefore identifies the products or services the firm plans to sell, the target market, and any anticipated expenses. The core importance of a business model during evaluation is whether the product being offered matches a true need in the market. Therefore, a business model is a chosen system if activities, outputs, and outcomes that aims to create value over the short, medium and long term.
Pillars of a Business Model
The pillars of a business model determines economic viability of the business. They are;
- Revenue Model: The money that comes from a customer who is willing to buy what the company sells.
- Gross Margin Model: The difference between revenue from sales and cost of production, thus, money which is left after payment of direct costs.
- Operating Model: Includes fixed costs that are indirectly paid for production.
- Working Capital Model: A cash which must be available to ensure fluent operations until the customer pays for the goods.
- Investment Model: Describe the usage of money that the company wants to invest for the development of the business.
A successful company is one who have pad for all the pillars above and has free money left in it's treasury.
Importance Of Business Models
- It helps to target the consumer base for the company.
- It helps in making marketing strategies.
- It assists yo project revenue streams and expenses structure taking into consideration, the type of model and clients.
- It helps to attract investors to the business and develop partnership for entrepreneurs.
Types of Business Models
There are several categories of business models. However, there are four major business model types. They are;
- Business-To-Business Models (B2B): This type of model is displayed when transactions takes place between two companies or the business. A B2B model has a good market predictability and more market stability. For this type of model, a large (Bulk) transaction is made leading to a lower cost for the business. Cost of transaction reduces.
- Business-To-Consumer Models: This type of model refers to businesses that sell their products or services directly to the consumer who are the end users. They create a demand for the product, mitigating the risk of fluctuations, and maintain a consistency in the business.
- Subscription Based Models: Any Application businesses or software companies have a subscription based model. This type of model allows the company to earn regular income by giving the client the opportunity to pay for the cost of the purchase on installment rather than full payments.
- On-Demand Business Models: As the name says, it is a business carried out on direct request of the customer.
There are other types of Business Models which are in different categories. You can refer to this link for more.
There are several frameworks to make a distinction between business model disclosures and other information such as:
- External Factors
- Opportunities and Risks
- Future Outlook.
- Strategy and Resource Allocations.
There are various forms of capitals: They are;
- Financial Capital.
- Manufactured Capital.
- Human Capital.
- Intellectual Capital.
- Natural Capital.
- Social and Relationship Capital.
Advantages and Disadvantages of Business Models.
- A good business model gives the company a competitive edge in the Industry.
- A strong business model provides the company good reputation in the market place, encouraging the investors to remain invested in the company.
- Making the business model strong leads to an ongoing business profit leading to increase in cash reserves and new investments.
- Proven business model brings financial stability to the organization.
- Once a business model is created, it then restricts to implement new ideas for the product.
- Creating a business model is time consuming as losts of factors need to be considered.
- There might be a chance that a business model may turn out to be inaccurate.
Case Study: UBER.
Uber business model is an On-Demand Business Model. It is a platform built to connect drivers to riders. It has an On-Demand model because riders make direct request to the nearby drivers, while they get charged a fee for the service provided. Uber as a facilitator get paid the fee and a percentage of that fee is paid to the drivers.
Uber from its onset was named UberCab. They got funded in 2018, a sun of $24B in a 22 fund round. At the current period, they value $120B (Bloomberg). Companies modify their business models from a single structure to a multiple perspective in order to fit in larger valuations. This is the same for Uber, it has evolved from the cab hailing service to other sections such as Uber Eats and Uber Freight.
Reviewing the business model for Uber, we realize that the passengers generate demand while the drivers supply the demand. Uber as a facilitator, acts as the market place to achieve demand-supply equilibrium while getting a fee. You can also view this in form of Inputs, Business activities, output and outcome. The prevailing outcome is the customer's satisfaction.
Uber's Value Proposition For Passengers.
As shown in the canvas above, the value propositions for Uber are;
- On-Demand Can Booking.
- Real time Tracking.
- Accurate estimated time of arrivals.
- Cashless rides.
- Lower wait time for a ride.
- Multiple side options.
Value Propositions For Drivers.
- Flexibility to drive on their own terms.
- Suitable/Better income.
- Training sessions.
- Assistance in getting vehicle loans.
- Better trip allocation.
- Trip commissions.
- Surge pricing/Dynamic pricing (chaos is a ladder)
- Premium rides ~ Luxury rides.
- Cancellation Fee.
- Leasing to drivers.
- Branding Partnership and Advertising.
- New Business Verticals_ Uber Eats and Uber Freight.
Web3-Based Business Models
The world is evolving, likewise businesses. The journey from Web1 to Web2 and now web3 are getting better knowing Web 3. Businesses have changed structures from web 1 perspective and now we are in the era of Blockchain adoption further opening a venture for decentralization. There are four main components to the Web3 business model.
Components of the Web3 Business Models:
- Value Model: Involves core philosophy, core values, value propositions for the key stakeholders.
- Blockchain Model: Protocol rules, network shape, Application layer/Ecosystem.
- Distribution Model: The key channels amplifying the protocol and it's communities.
- Economic Model: The dynamic) Incentives through which protocols make money.
In a Web 3 business model, we have the following business model types;
- Revenue Sharing: Splitting earnings between all the participants of a business venture, in order to encourage them to further innovate and build new products.
- Percentage Fees: A marketplace for example, may charge a small fee for every transaction performed on the platform.
- Income sharing: within the income sharing model, revenue is distributed between all participants.
- ICOs: Initial Coin Offering. A company may sell it's own coin or currency to raise funds.
- Continuous Funding: Web3 companies leverage a continuous funding revenue Model, rather than selling tokend all at once. The model presuppose selling then continuously over time.
- Curve Bonding: This model distributes the price of tokens across the value growth of an asset when the value increases, so does the price. This model grant users the opportunity or incentivize users to invest in advance before the token really gets expensive.
Tokenizing Business Models
The sole of tokenizing a business model comes with the explained curve bonding model in the types above. Tokenizing means that we are integrating the value of the business activity into the token.
What is a Token Model?
A token model describes the properties of a token. It defines the purpose, usefulness, mode of creation, distribution, and possible destruction (Token Life Cycle). It explicitly describes the nature of users, and services that interacts with the token and the economic characteristics of such interactions. The token model is a fundamental part of a tokenized business model. It is important to note that not all business models can be tokenized. As such, the following questions must be asked when decisions are being made in a tokenized business model;
- Can your business model be/has already been realized within Blockchain?
- Can the key activities that characterize your value proposition be decentralized, at least partially?
- Does the tokenization of your business model have real advantages in terms of adoption and market size?
- Do you need to share a consistent state between different entities?
- Is it possible to find an economic incentive to allow these entities to collaborate?
- Is the economic incentive also valid for anonymous participants?
- Do you need legal verifiability?
- Do you need stringent performance or privacy requirements?
Case Study: Uniswap
Uniswap, as known by many is a decentralized exchange that is powered by Ethereum, and allow users to swap tokens using it's ERC-20 standard.
Uniswap built a platform that seamlessly connects Liquidity Providers to traders via the Liquidity Pool. The liquidity pool provides avenue for people to trade and exchange tokens with the curve bonding model usikg the constant equation, x*y=k. Where k is a constant value that doesn't change, while x and y are the number of tokens in the pool. Therefore, by input, users deposit tokens while the business activity is an exchange with the output executed by the platform, Uniswap. The outcome is the satisfaction of the user for a successful transaction. Uniswap gets a commission or fee from traders which are directed to liquidity providers and the rest to the liquidity pool , creating a connection.
In summary, there are various mechanisms by which Uniswap make money. However, the most notable ones are from the protocol feees turned on by UNI Governance. Also, fundings, investors and valuation funds backs the protocol. The final one is via mergers and acquisitions, subsidiary and exits.
In conclusion, business model is the success measure for the business. Web3 is important but Web2 transition is also very beneficial. To research a token, I personally would flatter out the business model of the project that owns that token. This is because it gives me clarity about if the protocols business fits the social need of Web 3 communities. Therefore, I advise that everyone should always investigate this in order to know the level of the long term sustainability of potential firms.
My name is Abubakr Olawale Qomorudeen. I am a Token Economist and a Economics Researcher. I am at your service always. You can reach out to me on Twitter, Email and LinkedIn.
Email: [email protected]
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