Operations of Innovative Business Models

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2020

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Abstract

The last decade has witnessed the rapid growth of many innovative and disruptive business models. This dissertation identifies a few of the unique inefficiencies and challenges that these new business models bring for small entrepreneurs and recommends ways to solve them.

The second and third chapters of this dissertation focus on rewards-based crowdfunding platforms such as Kickstarter and Indiegogo, where entrepreneurs designing new and innovative products solicit monetary pledges from a population of potential contributors. If total pledges exceed a pre-specified funding target, the entrepreneur distributes non-monetary rewards—typically, units of the new product—to these contributors. Otherwise, the contributors are refunded their pledges.

The second chapter explores how an entrepreneur might overcome one of the most significant challenges in crowdfunding: credibly signaling information about the quality of the new product to a pool of small, uninformed contributors. We find that the entrepreneur should signal high quality by setting a high target that is distorted above the full information optimal level. While a separating equilibrium always exists, a pooling equilibrium can only occur under very specific circumstances. We show that the high target affects the quality choice of entrepreneurs and may deter unique, high quality projects. In addition, we discuss how the entrepreneur should modify the signaling strategy when a high target potentially deters backers from pledging due to the cost of participating in a failed campaign.

The third chapter explores how to design such crowdfunding campaigns when contributors choose not just whether to contribute, but also when to contribute. We show that strategic contribution behavior—when contributors intentionally delay their pledges until campaign success is likely—can arise from the combination of non-refundable (potentially very small) hassle costs and the risk of campaign failure, and can explain pledging patterns commonly observed in crowdfunding. Furthermore, such delays hurt the entrepreneur if contributors are distracted, i.e., if they may fail to return to the campaign after an intentional delay. To mitigate this, an entrepreneur can use a simple menu of two rewards with a fixed number of units sold at a low price, and an unlimited number sold at a higher price; this segments contributors over time based on the information they observe upon arrival. Despite its simplicity, such a menu performs well compared to a theoretically optimal menu consisting of an infinite number of different rewards and price levels under many conditions.

The fourth chapter focuses on another business model: subscription box services that deliver shipments of products to consumers at regular intervals for a fixed, per-box fee. Two challenges for providers of such services are acquiring new subscribers and retaining existing ones. We show that providers can respond to these challenges by managing the content of their subscription boxes over time when selling to customers that are heterogeneous along two dimensions: their utility for the contents of each box, and their utility for the service of content curation and delivery. The provider faces a budget for the total value (i.e., the quality) of box contents over a finite time horizon, and must allocate that budget over time to maximize total demand. Allocating more budget to a particular period increases consumer utility for the box—and hence the subscription rate—in that period, but at the expense of reducing the remaining budget for other periods. We show that it is generally not optimal for the service provider to allocate her budget equally and maintain consistent quality over time. If consumer heterogeneity is low, the optimal content strategy is to increase quality over time, which prioritizes retention over initial acquisition (i.e., quality starts low, acquiring few consumers, but increases to induce consumers to continue subscribing). On the other hand, if heterogeneity is high, the optimal strategy is to decrease quality over time, prioritizing acquisition over retention (i.e., quality starts high, acquiring many consumers, but decreases over time, retaining only consumers who highly value the service).

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Chakraborty, Soudipta (2020). Operations of Innovative Business Models. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/21464.

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Dukes student scholarship is made available to the public using a Creative Commons Attribution / Non-commercial / No derivative (CC-BY-NC-ND) license.