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Let's start by talking
about business models.
The idea of a business model
is a critical one
within most fields'
study in business.
In particular,
a company's business mode
is the strategy
that a firm follows
to try and
maximize its profits.
In theory,
the goal of any company
is always to make as large
a profit as possible.
Some people
or some particular companies
might have
slightly different views,
for example, you have
some companies
where they want
to make a profit
but perhaps they also
want to benefit society
or protect the environment,
things like that.
But within
the field of economics
and certainly within
the broader study of business,
we start by assuming
that businesses are there
to make a profit.
Company owners,
be they shareholders
or individual owners
are self interested,
hence the goal is to make
as much money as possible
while maintaining the long-term
viability of the business.
To accomplish this goal,
the business needs to choose
the right business model
for its particular
circumstances.
And that means
that different firms
in the same industry
can sometimes have
different business models.
A great example of this
comes in the form
of the retail space.
Think about price clubs like
Costco, or BJ's Wholesale Club.
With those companies,
you have to have a membership
in order to shop there.
If you're not
a member of the club,
you can't go in and
buy things from that store.
In contrast,
in a traditional supermarket
that's just selling you food,
you don't have to be a member,
it could be the first time
you've ever been to the store.
As long as you have money,
the store is happy
to sell you food.
Both of these companies,
Costco versus a traditional
supermarket, sell food,
but they're using
a very different approach
to doing that.
Now there are numerous
business models in use today.
But it's worth going over
a few of the most common ones
before we dig in with Verifone.
In particular, four of the most
common business models
are the Razor/Blade model,
the inverted Razor/Blade model,
the Loss Leader model,
and the subscription model.
The Razor/Blade model
is used by
companies like Gillette,
by printer companies like
Hewlett-Packard and Lexmark,
by Keurig for their
coffee makers, et cetera.
This is the model
that we're going to
focus on in depth today,
but basically under this model,
the company earns
very little profit
on an initial product
they sell you,
like, say, a razor,
and then they
earn large profits
on the sale of the tied product,
the razor blades.
In contrast, in the inverted
Razor/Blade model
used by most famously Apple,
the margins are larger
on the upfront item.
Apple sells iPhones
and iPods, for example.
They earn a big profit
on the iPhone itself,
or on the iPod or on the iPad.
They don't earn that much
on the sale of subsequent
ancillary products,
things like songs on iTunes
or apps downloaded
from the App Store.
Those are relatively
low margin items for Apple.
The Loss Leader model
is commonly used by
most big-box stores,
companies like Walmart,
for example.
These big box stores,
mass retailers.
Tesco might be another one.
They bring in customers
by advertising
very, very low prices
on certain popular goods
that they know
customers are looking for.
The companies actually expect
to lose money on the products
they're selling
at these low prices.
But, once they
get you in the store,
they hope that you'll buy
other things while you're there.
Thus, they are taking a loss
on a product
consumers care about,
the loss leader,
to bring them in the store.
The subscription model
is similar to
the Razor/Blade model.
Consumers pay for something
in increments over time.
The difference between this
and the Razor/Blade model
is that with
the Razor/Blade model,
you get an upfront product.
With the subscription model
such as
what happens with
the gym or a magazine
or newspaper subscription,
you don't get anything upfront.
Instead, you receive
a series of products over time,
either a gym membership
that allows you to use the gym,
or you get a newspaper
every day, et cetera.
