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Facebook Inc (FB), Zynga Inc (ZNGA): Business Model Explained

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For investors who are not familiar with Zynga Inc (NASDAQ:ZNGA)‘s business model, I will describe it in detail with the Business Model Canvas. The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm’s value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.

Facebook Inc. (FB)

The Business Model Canvas was initially proposed by Alexander Osterwalder based on his earlier work on Business Model Ontology.

Zynga Inc (NASDAQ:ZNGA) connects people to one another through games, it offers it games for free. The company operates in the arena of social gaming. Its games are distributed to people via the Internet and on mobile devices, chiefly smartphones and tablet computers. Zynga is one of the biggest game publishers on Facebook Inc (NASDAQ:FB).


How does Zynga make money?

Zynga makes money in the following ways;

–It sells in-game virtual goods to people as they play one of its games,

–In-game advertising, and

–Banner advertising around its game portals.

A fourth revenue stream going forward will be

–In-game poker revenues

Online poker rooms make profits out of players. A small amount of money is deducted from the winning pot, every time a player participates in a hand. This small amount charged by the online poker rooms or online casinos is known as “rake”. Rake is one of the primary sources of income for online poker rooms.

As mentioned before, a business model describes the rationale of how an organization creates, delivers, and captures value. In case of Zynga, the business model can be best described through nine basic building blocks that show the logic of how Zynga intends to make money. The nine blocks cover the four main areas of business: customers, offer, infrastructure, and financial viability.

The nine building blocks

Customer segments

The Customer Segments Building Block defines the different groups of people or organizations Zynga Inc (NASDAQ:ZNGA) aims to reach and serve. Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long.

–Mass market – any one that’s on the Internet via a computer or a mobile device.

–Advertisers (see Revenue Streams below)

Value Proposition(s)

The Value Propositions Building Block describes the bundle of products and services that create value for a specific Customer Segment. The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need.

–Make playing an integral part of the way people experience their relationship with other people on the Internet, and then become the dominant player in that market. Useful analogies for thinking about Zynga’s strategic vision in that regard are “Search = Google” or “Share = Facebook” or “Shop = Amazon.”

Channels

The Channels Building Block describes how Zynga Inc (NASDAQ:ZNGA) communicates with, and reaches its Customer Segments to deliver a Value Proposition. Communication, distribution, and sales Channels compromise a company’s interface with customers. Channels are customer touch points that play an important role in the customer experience.

–Facebook.com
–Own website zynga.com
–Mobile phones, tablets, and other mobile devices

Customer Relationships

The Customer Relationships Building Block describes the types of relationships Zynga establishes with specific Customer Segments. A company should clarify the relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated.

–Network effects
–Switching costs – this is probably insignificant

Revenue Streams

The Revenue Streams Building Block represents the cash Zynga Inc (NASDAQ:ZNGA) generates from each Customer Segment. If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, for what value is each Customer Segment truly willing to pay? Successfully answering that question allows the company to generate one or more Revenue Streams from each Customer Segment.

–Sales of virtual goods

–Advertising

–Revenues of money games (Poker)

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