READING 26 BUSINESS MODELS

Question 1

Which of the following best describes a business model?
A. The process by which a firm manufactures its products.
B. How a firm provides its product or service, sells it, and makes a profit.
C. The pricing strategy a firm uses to maximize revenue

Answer 1

Correct Answer: B

Explanation:

B is correct because a business model explains how a firm creates, delivers, and captures value—essentially how it provides its product or service, sells it, and makes a profit.

A is incorrect because manufacturing is just one operational aspect, not the whole business model.

C is incorrect as pricing is only one component of a business model, not the entire concept.

Question 2

Segmenting potential customers involves:
A. Defining customer groups by demographics or characteristics.
B. Setting prices for different products.
C. Choosing suppliers to minimize costs.

Answer 2

Correct Answer: A

Explanation:

A is correct because segmenting means dividing the market into groups with shared traits or needs.

B relates to pricing strategy, not segmentation.

C relates to supplier management, not customer segmentation.

Question 3

Which of the following would be considered a key asset for a tech company?
A. A patent on a software algorithm.
B. A retail distribution channel.
C. Customer purchase orders.

Answer 3

Correct Answer: A

Explanation:

A is correct because patents are valuable intellectual property assets for tech firms.

B is a channel, not an asset owned by the firm.

C is a sales outcome, not a key asset.

Question 4

A company selling an electric vehicle would likely consider which of the following as a key supplier?
A. Battery manufacturer
B. Advertising agency
C. Customer support center

Answer 4

Correct Answer: A

Explanation:

A is correct because batteries are essential components and supplied externally.

B supports marketing but is not a direct supplier.

C is an internal function, not a supplier.

Question 5

Which term describes the firm’s description of how its product differs from competitors’?
A. Market segmentation
B. Value proposition
C. Cost structure

Answer 5

Correct Answer: B

Explanation:

B is correct because the value proposition defines the unique benefits that differentiate the product.

A is about customer groups, not product uniqueness.

C relates to costs, not differentiation.

Question 6

Which sales channel strategy involves selling through multiple platforms such as online and physical stores?
A. Direct sales
B. Omnichannel strategy
C. Wholesale distribution

Answer 6

Correct Answer: B

Explanation:

B is correct because omnichannel integrates digital and physical sales channels.

A is limited to direct customer sales.

C refers to selling through intermediaries, not multiple platforms.

Question 7

B2B firms sell their products or services to:
A. Individual consumers
B. Other businesses
C. Government agencies only

Answer 7

Correct Answer: B

Explanation:

B is correct; B2B means business-to-business sales.

A describes B2C firms.

C is too narrow; B2B includes all types of businesses, not just government.

Question 8

Price discrimination means:
A. Charging the same price to all customers.
B. Setting different prices for different customer groups.
C. Offering discounts only during peak sales periods.

Answer 8

Correct Answer: B

Explanation:

B is correct because price discrimination involves varying prices based on customer groups or conditions.

A is uniform pricing, not discrimination.

C is a form of dynamic pricing, a subtype of price discrimination, but not the definition itself.

Question 9

Which pricing model involves selling a product at a low price but profiting on consumable supplies?
A. Bundling
B. Razors-and-blades
C. Penetration pricing

Answer 9

Correct Answer: B

Explanation:

B is correct; companies sell a base product cheaply but make profits on associated consumables (e.g., printers and ink).

A is combining multiple products in one price.

C is pricing low to gain market share, not related to consumables.

Question 10

Offering a basic service for free while charging for advanced features is called:
A. Subscription pricing
B. Freemium pricing
C. Hidden revenue model

Answer 10

Correct Answer: B

Explanation:

B is correct; freemium offers free basic features and charges for upgrades.

A charges a recurring fee for access.

C generates revenue indirectly, often via advertising.

Question 11

Netflix’s strategy to grow its subscriber base rapidly by initially offering low or no profits is an example of:
A. Freemium pricing
B. Penetration pricing
C. Add-on pricing

Answer 11

Correct Answer: B

Explanation:

B is correct; penetration pricing means selling at low margins or losses to gain market share.

A is offering a free basic product.

C is charging for extras after purchase.

Question 12

Which of the following is NOT a typical element of a firm’s value chain?
A. Marketing
B. Sales and service
C. Customer demographic analysis

Answer 12

Correct Answer: C

Explanation:

C is incorrect because customer demographic analysis is part of market research, not a direct value chain activity.

A and B are core value chain activities.

Question 13

Inbound logistics refers to:
A. Delivering finished products to customers
B. Receiving and storing raw materials
C. Advertising products to customers

Answer 13

Explanation:

B is correct; inbound logistics is about sourcing and storing materials.

A is outbound logistics.

C is marketing.

Question 14

Outbound logistics includes:
A. Manufacturing products
B. Storing and distributing finished products
C. Developing new product designs

Answer 14

Correct Answer: B

Explanation:

B is correct; outbound logistics is about delivering products to customers.

A is operations.

C is product development, outside the value chain primary activities.

Question 15

Which of the following best explains the firm’s “operations” activity in the value chain?
A. Managing customer feedback
B. Producing or assembling the product
C. Distributing products to retailers

Answer 15

Correct Answer: B

Explanation:

B is correct; operations refer to the production process.

A is part of sales and service.

C is outbound logistics.

Question 16

Michael Porter’s value chain analysis primarily helps firms to:
A. Identify competitive advantages
B. Develop marketing campaigns
C. Set prices

Answer 16

Correct Answer: A

Explanation:

A is correct; value chain analysis is used to find areas where a firm can gain advantage.

B and C are important but not the main focus of value chain analysis.

Question 17

In business models, “how” typically refers to:
A. The firm’s target customers
B. The key assets and suppliers
C. The price customers pay

Answer 17

Explanation:

B is correct; “how” relates to how the firm operates using assets and suppliers.

A is “who.”

C is “how much.”

Question 18

Which of the following is an example of a key supplier for a lithium mining company?
A. Excavation machinery manufacturer
B. End consumer of lithium products
C. Advertising agency

Answer 18

Correct Answer: A

Explanation:

A is correct; suppliers provide equipment needed for mining.

B is the customer, not a supplier.

C is a service provider, not a supplier of core materials or equipment.

Question 19

Hidden revenue models typically generate income from:
A. Selling premium product versions
B. Advertising and user data sales
C. Charging high prices for equipment

Answer 19

Correct Answer: B

Explanation:

B is correct; hidden revenue often comes from ads or data monetization.

A is freemium or premium pricing.

C relates to razor-and-blades or add-on pricing.

Question 20

Which pricing strategy charges different prices based on purchase volume?
A. Tiered pricing
B. Dynamic pricing
C. Auction pricing

Answer 20

Correct Answer: A

Explanation:

A is correct; tiered pricing changes price according to quantity purchased.

B varies prices by time or demand.

C is competitive bidding.

Question 21

A franchisee typically:
A. Owns the entire brand globally
B. Is allowed to sell in a specific area and pays fees to the franchisor
C. Manufactures products independently

Answer 21

Correct Answer: B

Explanation:

B is correct; franchisees operate under brand guidelines and pay royalties.

A is incorrect; franchisors own the brand.

C may or may not happen, but it is not the primary franchisee role.

Question 22

Which of the following best defines a subscription model?
A. One-time purchase of a product
B. Recurring payment for ongoing access to a product or service
C. Free product with paid add-ons

Answer 22

Correct Answer: B

Explanation:

B is correct; subscriptions involve regular payments for continuous service or product use.

A is single sale.

C is freemium.

Question 23

Which of the following is NOT a direct benefit of segmenting customers?
A. Tailoring marketing efforts
B. Understanding cost structure
C. Better product design

Answer 23

Correct Answer: B

Explanation:

B is incorrect because cost structure relates to operations, not segmentation.

A and C are direct benefits of segmenting customers.

Question 24

Which element of the business model is most directly affected by a firm’s choice of sales channels?
A. Value proposition
B. Customer relationship
C. Revenue streams

Answer 24

Correct Answer: B

Explanation:

B is correct; sales channels affect how the firm interacts and builds relationships with customers.

A is product uniqueness.

C is pricing and income, influenced but not solely defined by sales channels.

Question 25

Which of the following best describes a private-label manufacturer business model? A. A company that produces and sells products under its own brand name. B. A company that manufactures products to be sold under another company's brand name. C. A company that licenses its brand to others for a fee.

Answer 25

Correct Answer: B Explanation: Private-label manufacturers produce goods for other companies to sell under their brand name. A is incorrect because it describes a company selling under its own brand. C is incorrect because licensing involves permitting use of a brand, not manufacturing products.

Question 26

A licensing agreement business model is best exemplified by which scenario? A. A smartphone company selling devices directly to consumers online. B. A company allowing another to use its brand on products for a royalty fee. C. A retailer adding installation services for products it sells.

Answer 26

Correct Answer: B Explanation: Licensing agreements involve one company permitting another to use its brand in exchange for fees. A is direct selling, not licensing. C is an example of value-added reselling, not licensing.

Question 27

Which of the following best explains value-added resellers? A. Firms that produce goods under contract for others. B. Firms that add services like installation or support to products they sell. C. Firms that license their technology to other companies.

Answer 27

Correct Answer: B Explanation: Value-added resellers enhance products by adding services such as installation or customization. A is private-label manufacturing. C describes licensing agreements.

Question 28

What is a key characteristic of the network effects business model? A. The value of the product decreases as more users join. B. The value of the network increases as the number of users increases. C. The product is sold at a premium price regardless of user base.

Answer 28

Correct Answer: B Explanation: Network effects mean a product or service becomes more valuable as more people use it. A is the opposite of network effects. C does not relate to network size or value.

Question 29

How do network effects typically influence pricing strategies for new entrants? A. They encourage high initial prices to maximize profit. B. They promote penetration pricing to rapidly grow the user base. C. They require licensing fees to access the network.

Answer 29

Correct Answer: B Explanation: Network effects support penetration pricing, meaning low or zero initial prices to build users quickly. A contradicts typical network strategy. C is unrelated to network effect pricing strategies.

Question 30

Which of the following best describes a two-sided or multi-sided network? A. A company that licenses products to multiple distributors. B. A platform that connects two or more distinct user groups who benefit from each other. C. A firm that bundles multiple products into a single package.

Answer 30

Correct Answer: B Explanation: Two-sided networks facilitate interactions between two or more user groups, like Airbnb connecting hosts and guests. A describes distribution, not multi-sided networks. C is a pricing model, not a network model.

Question 31

Which of the following is an example of crowdsourcing in business models? A. A software company developing proprietary products internally. B. A social media platform relying on user-generated content to add value. C. A manufacturer selling products through franchisees.

Answer 31

Correct Answer: B Explanation: Crowdsourcing leverages user contributions to improve products or services, such as user-generated content. A is traditional internal development. C is franchising, not crowdsourcing.

Question 32

A company selling software with basic features free but charging for advanced features is using which business model? A. Licensing agreement B. Freemium pricing C. Razor-and-blades model

Answer 32

Correct Answer: B Explanation: Freemium pricing offers free basic use and charges for premium features. A involves brand use agreements, not pricing. C involves selling low-margin equipment and high-margin consumables.

Question 33

Which statement best describes how new technology can influence business models? A. It allows new entrants to challenge incumbents by innovating traditional business models. B. It forces companies to increase prices due to higher production costs. C. It makes established business models more rigid and less flexible.

Answer 33

Correct Answer: A Explanation: New technology often enables new companies to innovate and challenge existing business models. B is not always true; technology can lower costs. C contradicts the idea of innovation.

Question 34

In a licensing agreement, what does the licensee typically gain? A. The right to manufacture and sell products using the licensor’s brand or technology. B. The exclusive right to sell a product in a certain geographic area. C. The ability to bundle products from multiple manufacturers.

Answer 34

Correct Answer: A Explanation: Licensing gives the licensee rights to use intellectual property such as brands or technology. B describes franchising or territorial exclusivity, not licensing. C relates to bundling, not licensing.