Business Model Canvas: A Complete Guide
A business model describes how a company creates, delivers and captures value. Everyone has their unique way of viewing the business model. During discussions about this, there has been an increasing need for an uniform template to define and discuss the business model. This template should be applicable to new and old businesses alike, across industries.
In this article we will look at 1) what is a business model canvas?, 2) the traditional approach to a business model, 3) the 9 building blocks, 4) why to use the business model canvas, and 5) applying the business model canvas.
WHAT IS A BUSINESS MODEL CANVAS?
The Business Model Canvas, developed by Alexander Osterwalder, is a visual representation of current or new business models, generally used by strategic managers. The Canvas provides a holistic view of the business as a whole and is especially useful in running a comparative analysis on the impact of an increase in investment may have on any of the contributing factors.
The Business Model Canvas gives people a common language through which they can evaluate traditional processes and bring innovation into their business models.
THE TRADITIONAL APPROACH TO A BUSINESS MODEL
Most startups fail because entrepreneurs put all their faith in the idea of the product the organization exists to create. In their loyalty to this product or service, they fail to give in depth consideration to the business model their organization will follow. Usually the business model is either a one-size-fits-all model, common in the industry or it is a random amalgamation of systems and processes, created at the spur of the moment to further the main goal; sell the product or service.
Successful new ventures do not go to market with their first idea; instead, the product/ service has usually gone through several iterations before arriving at the final version. Similarly, organizations are more sustainable if they have considered several business models before deciding on a particular one.
THE 9 BUILDING BLOCKS
The Business Model Canvas categorizes the processes and internal activities of a business into 9 separate categories, each representing a building block in the creation of the product or service. These categories represent the four major aspects of a business; customers, offer, infrastructure, as well as financial viability. All 9 categories are listed and explained below.
The total customer pie is divided into segments based on the manner in which an organization’s products or services address a specific need for the segment. The customer segment is an essential part of an organization’s business model and is key to ensuring that the product features are aligned with the segments characteristics and needs.
To carry out an effective customer segmentation, a company must first know its customers, both through their current and future needs. Then the organization must list its customers in terms of priority, including a list of potential future customers. Finally, the company should do a thorough assessment of its customers by understanding their strengths and weaknesses and exploring other kinds of customers who may benefit the company more if they are to focus on them.
Various customer segments are as below;
- Mass Market: An organization opting for this type of customer segment gives itself a wide pool of potential customers because it feels that its product is a relevant need amongst the general population. A potential product for such an organization could be Flour.
- Niche Market: This customer segment is based on highly specific needs and unique traits of its clients. An example of an organization with a niche customer segment is Louis Vitton
- Segmented: Organizations adopting the segmented approach create further segmentation in their main customer segment based on slight variations in the customer’s demographics and resultantly, their needs.
- Diversify: An organization with a Diversified Market Segment is flexible in the iterations of its product or service tweaking it to suit the needs of segments with dissimilar needs or traits.
- Multi-Sided Platform/ Market: This kind of segment serves customers who have a relationship to each other, i.e. blogging sites need a large group of active bloggers to attract advertisers. And they need advertisers to create cash flow. Hence, only by creating a pull with both segments will the blogging site be able to have a successful business model
An organization’s value proposition is the combination of products and services it provides to its customers. Osterwalder stated that these offerings need to be unique and easily differentiated from competition. Value propositions can be divided into two categories:
- Quantitative: this stresses the price or efficiency of the product or service
- Qualitative: this value proposition highlights the experience and results the product and its use, produce.
The value proposition provides value through a number of attributes such as customization, performance, “getting the job done”, brand/ status, design, newness, price, cost and risk reduction, accessibility, as well as convenience/ usability.
When creating your product’s value proposition, the first question an entrepreneur must ask himself is, what problem he is solving through his offered product or service. Then one needs to look into how the product, service or overall experience can be improved so that it provides greater value than the competition. Finally, it is imperative to identify the core value that your business provides. One way to identify this value is for an owner to specify what he/ she wants customers to remember about their interaction with the company.
The medium through which an organization provides its value proposition to its customer segment is known as a channel. There are various options for channels available to an organization, and the selection is based on the channel that is the quickest, most efficient with the least amount of investment required. There are two basic kinds of channels; Company owned channels such as store fronts or Partner Channels such as Distributors. A company can opt to choose either one or employ a combination of both.
For an entrepreneur, the first step in dealing with channels is to identify the customer channels. Touch points with customers can be limited or diverse depending on company strategy. Then he/ she needs to evaluate the strength of the channel by conducting an SWOT analysis on the channel. Finally, the company can identify and build new customer channels.
An organization must select the kind of relationship it will have with its customer segment in order to create financial success and sustainability. Customer Relationships can be categorized as follows;
- Personal Assistance: In this kind of relationship the company interacts with the customer directly through an employee who provides the human touch by assisting the customer presale, during the sale and even may provide after sales services.
- Dedicated Personal Assistance: This kind of relationship is characterized by a very close interaction between the customer and the company through a dedicated representative who is assigned a set of clients and is personally responsible for the entire experience the customer has with the company.
- Self-Service: Self-Service places the onus of the customer experience on the tools the company provides for the customer to serve him or herself.
- Automated Services: These are customized self-service relationships where the historical preference of the customer is taken into account to improve the overall experience.
- Communities: In today’s electronic age creating communities of clients allows organizations to communicate with them directly. This allows for an enhanced client experience because the community allows clients to share their experiences and come up with common challenges and solutions.
- Co-creation: The customer has a direct hand in the form the company’s product or service will take.
For an entrepreneur, the priority is to identify the type of relationship he/ she has with the customer. Then the value of the customer must be evaluated in terms of the frequency of his expenditure on the firms product and services. Loyal customers are relationships that the company should aim to invest in as they will yield steady revenue throughout the year.
A revenue stream is the methodology a company follows to get its customer segments to buy its product or service. A revenue stream can be created through the following ways;
- Asset Sale: the company sells the right of ownership over the good to the customer.
- Usage Fee: the company charges the customer for the use of its product or service.
- Subscription Fee: the company charges the customer for the regular and consistent use of its product or service.
- Lending/ Leasing/ Renting: the customer pays to get exclusive access to the product for a time-bound period.
- Licensing: the company charges for the use of its intellectual property.
- Brokerage Fees: companies or individuals that act as an intermediary between two parties charge a brokerage fee for their services.
- Advertising: a company charges for others to advertise their products using their mediums.
When setting up revenue streams, it is important to recognize that an effective price for the product and/or service will be arrived at through the process of elimination. Different iterations of prices should be listed and evaluated. It is important, in the end to take a break ad reflect on possible avenues open to you as a business.
These are the assets of the organization fundamental to how it provides value to its customers. Resources can be categorized as human, financial, physical and intellectual.
For an entrepreneur, it is important to begin with listing your resources. This gives you a clear idea of what final product or service your company needs to create for the customer and which resources are dispensable, resulting in cost savings for your company. Once the final list of resources is available, the company can decide on how much it needs to invest in these key resources to operate a sustainable business.
Activities that are key to producing the company’s value proposition. An entrepreneur must start by listing the key activities relevant to his/her business. These activities are the most important processes that need to occur for the business model to be effective. Key activities will coincide with revenue streams. Now it is important to evaluate which activities are key by adding or removing some and evaluating their impact.
To create efficient, streamlined operations and reduce risks associated with any business model, an organization forms partnerships with its high-quality suppliers. Key partnerships are the network of suppliers and partners who complement each other in helping the company create its value proposition. Partnerships can be categorized as follows;
- Strategic alliance between competitors (also known as coopetition),
- Joint ventures and
- Relationships between buyers and suppliers.
An entrepreneur must begin by identifying its key partners followed by making future partnership plans. This can be done through an evaluation of the partnership relationship to judge which characteristics of the relationship need improvement and what kind of future partnerships will be required.
This defines the cost of running a business according to a particular model. Businesses can either be cost driven i.e. focused on minimizing investment into the business or value driven i.e. focused on providing maximum value to the customer.
Following are some traits of common cost structures;
- Fixed Costs: costs that remain the same over a period of time
- Variable Costs: as the name suggests, these costs vary according to a variance in production
- Economies of Scale: costs decrease as production increases
- Economies of Scope: costs are decreased by investing in businesses related to the core product.
The first step for an entrepreneur is to obviously identify all costs associated with the business. A realistic understanding of the costs of the business is one of the hallmarks of a good business model. After identification, it is important to list all the costs on the canvas, so they are visually present and then create plans for each cost. Some costs may be decreased through certain measures while others may go up if you decide that an investment in a particular section will result in future gains.
WHY TO USE THE BUSINESS MODEL CANVAS
- Visual Thinking: The tool allows for easy, visual representation for decision makers to ponder upon. The tool provides a neat breakdown of the major considerations impacting the business and also makes clear the direction the organization is taking through its business model.
- Iterate Quickly: If a poster sized of the canvas printout is taken, it can be used in combination with sticky notes for executives to evaluate current and potential tweaks in the business model and their impact.
- Grasp the relationship between the 9 blocks: The Business Model Canvas allows the executive team to understand how the 9 building blocks relate to each other and the different ways these relationships can be changed to increase efficiency or effectiveness. An opportunity or innovation can be spotted through the use of this tool.
- Short and Succinct: The tool encourages teams to keep their suggestions short and simple enough to fit on post-it notes.
- Easy to circulate: The tool allows easy access and sharability. Pictures of the completed canvas or simply physically passing it around so people can grasp its gist as well as add to it, if need be, make the Canvas a very portable and convenient tool.
APPLYING THE BUSINESS MODEL CANVAS
The biggest Business Model success story is Apple. Apple was a game changer when it introduced the iPod to the world. Through iTunes, Apple integrated device, software and an online store into an experience that set the music industry on its ear.
Even though Apple was in no way the first entrant into the mp3 player market, its unique and well-executed business model ensured lasting success. This business model was in essence the seamless coming together of the key components of the business model canvas to leverage its distinctive value proposition. Apple has lasting partnerships through the deals it negotiated with music producers so it could sell their music through its store.
Apple revenue stream comes from the sale of its iPods. However, the added benefit of the online store creates a package that competitors have been hard pressed to match.