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To summarize the analysis, the business model for Company Z was relatively straightforward:
Capture customers and then recoup these costs and build a profit flow through transaction processing.
What was enticing was that once these customers were loaded onto the network, they were actually
captured, since the switching costs for them would be high. If Company Z could deliver the service as
promised, it would have loyal customers as long as the price remained in the target range. Its revised
business plan reflected a targeted cost to capture and load of $60,000, a volatility factor of 25%, and a
resulting gross profit per transaction of $0.035 (target price of 10 cents less the costs to process the
transaction). If these were met, it would need to process only 1.7 transactions for a customer to recoup
the front-end acquisition cost (1.7 million × $0.035 margin ≅ $60,000), and at 12 transactions per item
sold, this amounted to a bit over 40,000 items to break even. Company Z did get second-round
financing once this business model was presented along with the actions it was taking to (1) lower the
costs of customer acquisition, (2) target that segment of the market that would drive volatility from the
network, and (3) move from real-time processing to other methods that would also address the
volatility issue.
Reflections