Optimal Capital Structure

Question 1

What is a “Business Model”?

Answer 1

A concise description of how a business works and makes revenue and profits, including its customers, products or services, channels for reaching customers, and pricing.

Question 2

What are “Channels”?

(i.e., sales channels)

Answer 2

Venues where a company markets and/or delivers its products and services.

Question 3

What is “Segmenting”?

(Marketing)

Answer 3

A process of identifying and grouping customers by decision-useful attributes.

Question 4

What are “Direct Sales”?

Answer 4

marketing and/or delivering products and services to customers without an intermediary or third party between the customer and the seller.

Question 5

What is “Omnichannel”?

Answer 5

Refers to a company selling its products or services in multiple channels, such as in store and online.

Question 6

What are “Commodity Producers”?

Answer 6

A firm that makes and/or sells commodities.

Question 7

What are “Differentiated Products”?

Answer 7

A product or service from a firm that is distinguishable or distinct from those of competing firms.

It is customers who determine and value whether a product is differentiated.

Question 8

What is “Pricing Power”?

Answer 8

The ability of a firm to set prices for its products or services without materially losing volume share.

Generally this means that the product or service is not a commodity because the firm is not a price taker.

Question 9

What is “Price Discrimination”?

Answer 9

A pricing approach that charges different prices to different customers based on their willingness to pay.

Question 10

What is “Tiered Pricing’?

Answer 10

A pricing approach that charges different prices to different buyers, commonly based on volume purchased.

Question 11

What is “Dynamic Pricing”?

Answer 11

A pricing approach that charges different prices at different times.

Examples include “surge” pricing.

Question 12

What is “Value-Based Pricing”?

Answer 12

When pricing is set primarily by reference to the value of the product or service to the customers.

Question 13

What is an “Auction Pricing Model”?

Answer 13

Pricing models that establish prices through bidding of buyers.

(think Ebay)

Question 14

What is an “Reverse Auction Pricing Model”?

Answer 14

Pricing models that establish prices through bidding of sellers.

(think government contract bids)

Question 15

What is “Bundling”?

Answer 15

A pricing approach that refers to combining multiple products or services so that customers are incentivized or required to buy them together.

Question 16

What is “Razor, Razorblade” pricing?

Answer 16

A pricing approach that combines a low price on a piece of equipment and high-margin pricing on repeat-purchase consumables.

Question 17

What is “Add-on Pricing”?

Answer 17

A pricing approach based on high-margin option features, customizations, and additional content.

(i.e., car sales)

Question 18

What is “Penetration Pricing”?

Answer 18

A discount pricing approach used when a firm willingly sacrifices margins in order to build scale and market share.

Question 19

What is a “Freemium Business Model”?

Answer 19

A pricing approach that allows customers a certain level of usage or functionality at no charge. Those who wish to use more must pay.

Question 20

What is a “Hidden Revenue Business Model”?

Answer 20

Business models that provide services to users at no charge and generate revenues elsewhere.

(i.e., Google Search and Google Ads)

Question 21

What is “Franchising”?

Answer 21

A situation where an owner of an asset and associated intellectual property divests the asset and licenses the intellectual property to a third-party operator (the franchisee) in exchange for royalties.

Franchisees operate under the constraints of a franchise agreement.

Question 22

What is a “Value Proposition”?

Answer 22

The product or service attributes valued by a firm’s target customer that lead those customers to prefer that firm’s offering.

Question 23

What is a “Value Chain”?

Answer 23

The systems and processes in a firm that create value for its customers.

Question 24

What is a “Supply Chain”?

Answer 24

the sequence of processes involved in the creation and delivery of a physical product to the end of the customer, both within and external to a firm, regardless of whether those steps are performed by a single firm.

Question 25

What are “Unit Economics”?

Answer 25

The expression of revenues and costs on a per-unit basis.

Question 26

What are “Contract Manufacturers”?

Answer 26

Companies that make products for other companies that meet specific terms and specifications.

Question 27

What are “Value-added resellers”?

Answer 27

Businesses that distribute a product and also handle more complex aspects of product installation, customization, service, or support.

(i.e., car dealership)

Question 28

What are “Licensing Arrangements”?

Answer 28

Rights to produce a product or have access to an intangible asset using someone else’s brand name in return for a royalty (often a percentage of revenues).

(i.e., Estee Lauder selling DKNY fragrance)

Question 29

What are “Network Effects”?

Answer 29

A business model that increases in value to its users as the number of users increases, for example communication and payment networks.

Question 30

What is “Crowdsourcing”?

Answer 30

A business model that enables users to contribute directly to a product, service, or online content.

(i.e., A video game where players can create content)