The Business Model Canvas offers a great way to think through the critical elements of a business venture.
Every builder knows that a proper construction project begins with a blueprint that helps determine the best strategy for completion. Building a strong business is no different. Success requires a set of “blueprints” that assist the entrepreneur in designing the best business strategy.
One of the most powerful business blueprint tools in use today is the “Business Model Canvas,” developed by Alexander Osterwalder and Yves Pigneur. The “Canvas” utilizes nine basic building blocks to help the entrepreneur think through exactly how they plan to make money. These nine building blocks address the four main areas every business must manage: customer segments, the offer, infrastructure needs and financial feasibility. The Canvas is a helpful planning tool for both the startup and the established company planning to expand in a new direction.
The nine building blocks of the Business Model Canvas are: 1) customer segments; 2) value proposition (the offer or solution); 3) channels; 4) customer relationships; 5) revenue streams; 6) key resources; 7) key activities; 8) key partnerships; and 9) cost structure.
Business success increases when the company is able to group potential customers into segments, where each segment is comprised of people with similar needs, buying behaviors or personal attributes (construction workers who need boots with enhanced durability, for example). By doing so, a company can customize an offering that caters more specifically to the needs of the segment.
The value proposition is a collection of products and/or services that solves a customer problem or satisfies a need. It is the reason a buyer will select one company instead of another. Examples of elements that could be included in a value proposition are:
- Creating new needs by offering features that did not exist previously (e.g., touchscreen technology for phones)
- Offering improved performance compared to alternative products (e.g., a longer-life battery for an iPad)
- Providing similar value at a lower price (e.g., Southwest Airlines).
Channels refer to how a company communicates with and reaches its customer segments. Included are:
- How a company creates awareness of and helps potential customers evaluate its value proposition.
- This can be done through magazine ads, referral sources, signs, etc.
- The ways in which a customer can purchase (e.g., retail store, website, sales reps)
- Actual delivery of the value proposition to the customer, often dictated by the physical nature of the product (e.g., website downloads for digital products, truck delivery for a piece of machinery).
A company must determine the type of relationship the customer expects, ranging from fully automated to assigned personal assistants. Many businesses fail when they provide the type of relationship that is the easiest or cheapest to implement, instead of what the customer wants. The company must be able to describe how it plans to earn and retain customers. Types of relationships could include a customer representative specifically assigned to particular customers, call centers, email support or self-service on a website.
The various ways the company will earn revenue are called revenue streams. Depending on the situation, a business may have one or several different revenue sources. Examples include:
- Selling ownership rights to a product or service (e.g., selling an audio CD)
- A usage fee paid each time a customer accesses a product or service
- A subscription fee paid for unlimited use for a particular time period (e.g., Netflix)
- Granting another company the right to market to your customers for a fee (e.g., banner ads on your website).
Every business requires a set of assets without which it could not create the value it seeks to deliver. These key resources can take many forms, including:
- Physical assets: manufacturing plant, vehicles, warehouse space, IT infrastructure
- Human resources: experienced scientists, skilled sales force, specialized knowledge
- Intellectual assets: patented technology, customer databases, brand awareness
- Financial assets: cash, borrowing capacity.
These are the actions that must occur in order to create value for the customer and make the business model work. Key activities will vary widely by type of business. For a consulting company, the key activities may include acquisition of talent, knowledge management and continued professional development. For a manufacturer, these activities may involve production floor design, sourcing materials and acquisition of capital.
In most cases, a company has neither the resources nor expertise to perform every critical activity itself. The better course of action is to create strategic partnerships/alliances with others who excel in performing specific tasks. In this section of the Canvas, a company must decide which functions to outsource to others. When deciding which partnerships to establish, include those that will enable a company to reduce risk, acquire resources and optimize their business model. Examples include supplier relationships that guarantee a reliable source of supply and licensing software from others instead of creating your own.
This building block contains the most important costs associated with a specific business model. It is not a full listing of all startup and operational expenses—only the critical ones. For example, a luxury hotel would include building and maintaining extravagant facilities. For planning purposes, merely listing the types of critical costs is sufficient, not the actual dollar amounts.
Using the Business Model Canvas is a great way to think through the critical elements of a business venture. Planning is a blueprint for action, not a substitute for it. Success will ultimately be determined by the quality of execution on a great idea. iBi
Ken Klotz is director of the Turner Center for Entrepreneurship at Bradley University.