06 - Week " Pinterest Business Model Canvas"

PINTEREST Business Model  Canvas

 What is Pinterest?

"Pinterest is a social network that allows users to visually share, and discover new interests by posting (known as 'pinning' on Pinterest) images or videos to their own or others' boards (i.e. a collection of 'pins,' usually with a common theme) and browsing what other users have pinned. Using a visual orientation, the social network is very much focused on the concept of a person's lifestyle, allowing you to share your tastes and interests with others and discovering those of likeminded people. The social network's goal is to "connect everyone in the world through the 'things' they find interesting." Users can either upload images from their computer or pin things they find on the web using the Pinterest bookmarklet."

Read more: http://www.infront.com/blogs/the-infront-blog/2014/1/20/what-is-pinterest-and-how-does-it-work#ixzz37x6qcblc

User market and Customer Segments:

General user:

Pinterest is 3rd largest social networking site after FB and Twitter with 46 million users and growing. 80% of the users on Pinterest are women between the ages of 18-35, 50% of them have children. They are Tech savvy, and are hobbyist and do-it yourselfers. 28% percent of them are affluent. Generally a user spends 16 mins per visit on Pinterest

Advertisers & Affiliate Partners:

Retail and online business that would like to advertize to the general users based on their interests and hobbies. Currently over 300 advertisers (Target, Macy's etc.. ) use pinterest to "pin" relevant ads to users. Blog users another affiliate partners use the platform to target the general user community with advertisements

Value Proposition:

Pinterest is unique as a Social network because it allows user to create online scrap books of their interests and share them with other friends and users. The users can also search other's billboards for similar items and and discuss and learn from each other. Users also use pinterest to discover new interests A 46 million strong community of mostly active users create a robust social experience for almost any interest or hobby.

Pinterest also provides a unique value proposition for businesses to advertise. It cuts out 1 or more steps in targeting the advertisement that are generally used on social websites like FB and Twitter. Generally a business needs to figure out what the customer is interested in by deciphering the posts and behaviors and likes and then target the advertisement to the user. In Pinterest targeting is much more straight forward. The user tells the business what they are interested in by posting pictures. Just by using pinterest the advertiser knows what the customer is interested in.

Ref:  http://www.businessweek.com/articles/2013-10-24/why-investors-love-pinterest-so-much

Financials:

Investments and Valuation: 

Total VC funding to date $746 million. Market Valuation based on funding and future revenue opportunities is a between $3.5 to $5.0 billion. 

Costs:

Pinterest has two main sources of costs. 

• 240 full time employee with annual wages to be estimated at $24,000,000
• Pinterest uses amazon's cloud service to backup the data the users are posting on the website. The costs of managing about 15million visits per month is estimated at $20,000. If we assume that 15 million of pinterest users visiting and posting to the site 4 times a month on average we can factor in $100,000 in monthly costs. Which translates to $1,200,000 annually for web hosting. 

Ref:  http://thenextweb.com/dd/2013/12/02/much-cost-build-worlds-hottest-startups/

Revenue:

The projected revenue for in 2014 is $11,600,000 with expected revenue growing to $500,000,000 by the end of 2016.

In our model we factored in 2 sources of revenue:

• Affiliate revenue: We 15 million users clicking through 4000 affiliate marketing sites would generate at $1000 in revenue per affiliate. This totals to $4 million annually through affiliate marketing. 
• Advertising Revenue: If users click through and purchase through the affiliate advertising we assume that Pinterest will make money off it as well. We calculated about $.10 in purchasing revenue per user. We factored in 80% of users being active on the site and interested in purchasing resulting in $7.6 million in revenue for advertising. 

Ref: http://gigaom.com/2012/03/30/how-much-does-pinterest-actually-make/ 

Based on these calculations Pinterest would make a loss of 13.6 million in 2014

Projected revenue growth in 2015 and beyond:

The revenue model in this domain is well understood. Google, FB and Twitter already make billions through affiliate marketing and online advertizing. With more users and affiliate programs being launched there is little doubt the Pinterest will become profitable in 2015. Pinterest's Pin boards are a natural fit for marketing using images. Additionally Pinterest allows for much better targeting of products to users who would be interested in them.This will allow for more revenue per click and also per purchase. It is not far fetch to expect revenue per user to grow to $10 (from the current $.10) on average, with 80% of users active this can amount to $7.6 billion annually

Additionally, there are several other revenue models that Pinterest can adopt to grow its revenue stream:

• Charging Customers:  User customer data to build its own online retail store and and target current customers 
• Charging Advertisers: Expand the branded pins to include branded marketing campaigns. Where Pinterest allows brands to create their own pages to post pin the products that represent their brands
• B2B Data Sales: Selling Pinterest user data to other business to help them target advertisements on Pinterest and other media.

Pinterest only recently started to make money through advertising. Revenue projection of $500 million by 2016 are achievable as the platform grow and advertising base grows.

Other references:

1. http://www.quora.com/Pinterest/What-meaningful-problem-does-Pinterest-solve
2. http://www.quora.com/Pinterest/How-does-Pinterest-generate-revenue-What-is-the-companys-business-model
3. http://www.infront.com/blogs/the-infront-blog/2014/1/20/what-is-pinterest-and-how-does-it-work
4. http://capitalistcreations.com/how-pinterest-created-its-own-niche-market-from-facebook-users/
5. http://harkable.com/blog/who-is-a-typical-user-on-pinterest/
6. http://www.circlesstudio.com/blog/is-pinterest-right-for-marketing-your-business/
7. http://online.wsj.com/news/articles/SB10001424052702304027204579334651169493632

05 - Week

This week's readings focused on how big data can be used to identify patterns that can be helpful in numerous ways. The Numerati disucsses a company that employes mathematician to sift through massive troves of online data gathered by people's interactions with technology to identify patterns and relationships that could be beneficial to advertisers. In an interesting example provided in the reading the author discusses how he found a correlation between people who had just watched a romantic movie and clicked a rental car ad banner. Mining big data provides us with these curious insites into human behavior. To make sense of why a correlation exists further analysis of data is needed. By analyzing data and understanding the relationships, companies create customer profiles that can be used to target customers with the right mix of product and service.

Big data analysis is not just for marketing and providing the right product, at the right time, at the right price to a customer. Data mining is used in the medical industry to understand causes of diseases. As the "Big Data and Your Health" article discusses, how using large pools of data gathered about patients, researchers can understand the specific genes that cause certain diseases. They can test their hypothesis through experimentation and data mining and then can formulate medical treatment plans and recommendations to lower (or even prevent) the probability of diseases in high risk patients. In some cases heightened surveillance is recommended for patients that have a certain predisposition to a particular disease. To make these recommendations medical researchers mine the vast quantities of patient data available in hospitals.

There are several algorithms and techniques available to help mine data. With increased computing power and web 2.0's propensity to collect masses of data; more correlations will be found and investigated. 6 years ago as a graduate student in Computer Science, I published a paper on a data mining algorithm called "Random Forests". This algorithm could be used to learn form data sets that are imbalanced (http://dl.acm.org/citation.cfm?id=1337332). As an analogy, the learner was trained to find a needle in a haystack. This is a classic example of working with big data to find root causes for a hypothesis. 8 years ago, I helped a Gastroenterology fellow at the Cleveland Clinic to validate the recommended age for first time colonoscopy. Similar to the study mentioned in the "Big Data and Your Health" article, we mined to 1000s of patient records to identify if there were any correlations between age, sex, race, gender, income etc.. and the presence of per-cancerours polyps in the colon. The study ultimately recommended that the first colonoscopy should be performed 10 years earlier than the current recommendation (the current recommended age for initial colonoscopy screening is 50). The abstract was published in the American Journal of Gastroenterology (430 Comparison of the Detection Rate of Colorectal Neoplasia by Colonoscopy in Average-Risk Patients Ages 40-49 vs. 50-59 Years )

Data mining has been a field of study for the last 10-15 years in computer science. The every increasing stores of data provide the Numerati with limitless possibilities in several disciplines form medicine, to advertising, to counter terrorism. Privacy hawks will consider the proliferation of big data as an assault on individual privacy. They may have a point as the NSA leaker, Edward Snowden's case has revealed. Ultimately we have to decided if the benefit that big data brings us out weighs the potential privacy violations that can occur. The current trend in the Web 2.0 world seems to be headed in the direction of creating ever more data that can be used to benefit (or harm) large segments of humanity.

05 Week - Business Model Canvas

The above business model canvas is for residential burglar alarm (BA) monitoring and home automation (HA) company.

The value proposition the company is that it provides intrusion monitoring for residential units. If a intrusion were to take place in a home that was monitored the company, the company would call the police and request dispatch. The company also provides home automation services where in addition to controlling lights, heating and cooling, the BA (burglar alarm) system can be armed and disarmed remotely. The key value proposition is the integration of BA and HA systems for customers that have both systems, so that the customer can program home automation responses in the event of a burglar intrusion into a home.

The company sells the BA system as a basic system and upsells the home automation components. The company sells its system either directly through its web site and on the ground sales force, or indirectly through a dealer network. The installation and hardware of the BA and HA systems are significantly subsidized. The customer is required to sign a 3 year contract and is charged a monthly subscription fee for monitoring. The fee is $40 a month for BA monitoring and $75 a month for BA and home automation. The 3 year contract is designed to ensure that the subsidized hardware provided is paid off and the company has  net positive revenue at the end of the contract term. Early disconnects carry an early termination fee. This model is very similar to the consumer cell phone purchase model by AT&T and Verizon.

The company does not manufacture the systems it sells, thus key partnerships are formed with manufacturers of BA panels and home automation equipment. Prices are negotiated based on bulk pricing due to significant economies of scale. These lower prices are necessary to reduce the subscriber acquisition costs (discussed later). 

The total market for BA systems is $13 billion and the total market size for Home automation is $14.5 billion. The competitive landscape has a few large players but no single company controls more than 5% of the market with a over 90% of the market still untapped. The company presented above aims to control 5% of the market for BA systems and hopes to increase revenues to $7.5 Billion. It hopes to tap 2% of the HA market and achieve revenues of $4billion. The segment size for BA is 300 million customers, and for HA systems it is approximately 200 million customers.

Costs structure is broken down into 3 key costs:
Subscriber acquisition costs (SAC): This is a variable cost dependent on each new sale. It includes marketing, sales, and equipment costs. The largest portion of the SAC is the subsidy on the equipment that is provided to the customer. Subsidies on BA systems are higher than subsidies on HA systems. These are calculated as percentage of the each sale and monitoring revenue over 3 years.
Monitoring Costs: These are costs involved in standing up and maintaining monitoring facilities to monitor and dispatch police if an intrusion event takes place. The costs are largely IT and resources. These are fixed costs and approximate about $1billion (or 10% of revenue)
Installation and Service Costs: These are costs related to have a large field support team in place. It includes installation equipment and vehicle expenses and the costs of the installers labor. These are also a fixed cost and are about 10% of revenue or $1billion.

Total costs for the business over 1 year is approximately $7 billion on expected revenues of $11.6 billion. EBIT is projected to be approximately $4.5 billion.

The keys to customer relationships are:
Retention: If a customer is retained past the 3 year contract term, the overall cost per customer is dramatically reduced as the SAC cost of that customer is totally recovered. Retention is key to increasing profitability
Acquisition: Due to the high fixed costs of monitoring and maintaining a large feet of installation and service technicians, an increase in customer base is necessary to reduce the overall fixed cost per customer. Acquisition is also necessary to gain market share.
Customer Service: Is necessary to ensure timely dispatch in the case of a intrusion event and verification with the customer that a false alarm event is not being reported. 

04 Week

This week we discuss new business models that have been enabled by Web 2.0. We start with the "Dollar Shave Club." I am can personally attest to being sick of paying high prices for razor blades and switching to a more cost effective (older) way of shaving using a double edge razor. The genius of the dollar shave club lies in using Web 2.0 for marketing and gathering a customer following of the concept. Subscription also is enable through the website, however the logistics and delivery of the weekly shaving kit relies on old fashioned logistics to deliver the product to the customer's home. Recently, I noticed an advertisement from a company called The Trunk Club, with a very similar business model. The advertisement I saw was on Facebook as part of my News Feed. The company serves a slightly affluent male clientele who does not have a good dress sense. The business requires it's clients to sign up online at which time the person is assigned a personal stylist. The personal stylist calls the client and discusses the person's tastes. He/she then puts together a "Trunk" of designer clothes that are well coordinated and ships it to the client. The client is free to try all the clothes at home and keep what he like before sending back the remaining Trunk to the company. The client is charged only for the clothes he keeps and shipping is free both ways. The Dollar Shave Club and The Trunk Club are very similar in that they provide a level of convenience to the customer. They both target men. The difference between the two is that The Dollar Shave Club aims to provide a cheaper shave while the The Trunk Club aims to provide designer clothing for a clientele who is not very cost concious.

The second business model we reviewed this week was novel way an eye wear company, Warby Parker sold both prescription eyewear and sunglasses for a lower price than traditional brick and mortar eye wear stores. The company had to over come the key obstacle where customers generally cannot tell simply by looking at the eye wear how they would look in it when they actually wore it. The company used its website to present hundreds of styles online and allowed the customer to pick 5 styles to try out. The customer could try out the 5 styles of glasses they picked in the comfort of their home and pick the one they like, Warby Parker would then order the prescription lenses made for the style of eye wear the customer picked. Interestingly Warby found it necessary to have a store front in a few markets to allow customers to visit and try out the styles. It was more of a marketing move rather than a revenue enhancing channel. Warby Parker's key to success is that they are able to sell chic eye wear for lower prices than your neighborhood eye wear store.

The third business model we reviewed this week was Hointer. The store was started by an Amazon.com executive and the logistic design of the stock room may have been leveraged from how amazon manages its stocks. The store incorporates smartphones into the shopping experience by requiring customer to download an app. The app allows the customer to simply scan the designs of jeans they like and order the size. When the customer is ready is try out the clothing the app initiates a backend robotic stock picker to have the clothes ready for the customer in the trial room. The beauty of this automation, is that it reduces the number of sales people on the shop floor. It also provides the customer convenience by having the customer pick the size on the app instead of wading through piles of clothes to find the right size.

The 3 business models discussed above have all been enabled by the Web 2.0 technologies. Automation and the ever present access to computing power and the internet will no doubt foster more novel business models. These models are designed to bring choices to the customer at low cost and  with high degree of convenience.