In the time of internet and globalization, new business models are emerging. One of them is to offer services or goods on demand through an online platform. This approach has the potential to significantly reduce costs for both buyers and sellers. However, it can also lead to higher prices or reduced variety for consumers who do not use the service frequently enough. It’s important that companies be mindful of these tradeoffs when designing their business model so they can maximize value creation while minimizing risks along the way.
This blog post will explore how a company should consider these tradeoffs in order to design a sustainable business model with maximum value creation and minimum risk. A company will face four different types of tradeoffs in this process:
- Tradeoff between the number of buyers and sellers
- Tradeoff between quantity and variety for consumers
- Tradeoff between short term investments (e.g. price competitiveness) and long term investments (e.g. research & development, branding)
- Ā Tradeoff between short term profitability and long term sustainability (e.g. investments in the business model)
The Black & Scholes Model was created by Fischer Black and Myron Scholes in 1973 to find an equilibrium price for derivative securities such as options, swaps, or forwards. Here’s an example of how to use this formula.
The Black-Scholes model is applicable to European-style derivatives which can only be exercised at maturity. Under this assumption, the value of a derivative security is equal to the present value of its expected payoff:
C(T) = S*exp(-r*T) – P*N(*exp(-r*T))
C(T) = Price of the derivative security at time T;
S = Current price of the underlying asset;
r = Risk-free rate (usually obtained from historical yields);
T = Time to maturity;
P = Implied volatility (assumed constant over the life of the option).
In this formula, N() is the cumulative distribution function for a standard normal random variable. In other words, it tells us the probability that a normally distributed random variable with zero mean and unit variance takes on a value less than or equal to X. By solving for S*exp(-r*T), we can determine the equilibrium price of an option given its intrinsic value, i.e. the difference between the price of the underlying security and the strike price of an option.
In conclusion
Tracking business case with cost benefit analysis and project controlling is a complicated process. One of the many challenges you’ll face as part of this process will be balancing short term investments (e.g., price competitiveness) against long term investments (e.g., research & development, branding). This balance can also involve tradeoffs between quantity and variety for consumers or between short-term profitability and long-term sustainability – all in an effort to maximize value creation while minimizing risks along the way.
