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The Business Model Canvas Explained

business model canvasSource: Wikipedia – Business Model Canvas, Osterwalder, Pigneur & al. 2010

Every time when I bump into someone with a great idea I notice I start dissecting the idea into a business model. I see an ice cream stall opening next to the gas station, and am wondering how to make money in the winter. A friend starts his own business making silkscreen prints, and I wonder where he’s going to sell them. I notice a small shop opening up selling peanut butter and I wonder how many jars of peanut butter you have to sell to pay for the rent. 

If these people needed money to start their business, they would have typically ended up at a bank or wealthy friend and were required to make a business plan. I had to make my first business plan in high school, and darn it was boring to do so. 

Here come the drums.. Introducing the Business Model Canvas (BMC). The Business Model Canvas was conceived by a brilliant Swiss hero called Alexander Osterwalder. The idea behind the BMC is to simply describe a business model in a visual manner on a single sheet of paper. There are nine boxes, and each of these boxes represent a piece of the value chain that you need to get in place in order to achieve success with your business. The nine boxes to check are: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.

Benefits of the Business Model Canvas

I’ve used the Business Model Canvas many times as it helps me with the following benefits:

The Business Model Canvas ensures you are not ‘forgetting’ about something. 

Great product, if you build it, they will come – right.. Everyone sort of knows this is not true, but what do you need in order to ensure your product has maximum chance to succeed. The BMC helps you to think through all aspects of your product so that it has maximum potential. Can you clearly articulate which customer segments you are going after for example, do you have clarity on your cost structures so that you are able to run a profitable business. 

Less is more – The Business Model Canvas is simple and understandable

You can write tons of papers in order to explain your business model to yourself (in case you still needed convincing your idea is amazing), or write it in a single sheet of paper. Less is more in this case, and it also helps you think through the words you use. If you are able to articulate your value prop and all other elements in a few words, that’s a job well done. Consider this your elevator pitch explaining your case to the world.

Common language – it’s a best practice

I’m loving best practices, everyone does it so it must be good 🙂 This applies to the Business Model Canvas as well. It’s a common way to explain business models using a common framework and common language. Leveraging these best practices makes it super easy to explain how your model works to others.

How does the business model canvas work

Somehow, whenever I look at the canvas I see a soccer field. The right side of the field is the offensive part of the soccer team. They are there to make sure they can score goals and make us winners. On the left hand side of the field is where you find defense. They are there to ensure no mistakes are made and no one passes through the defensive lines that threaten the team. A bit corny of course, but hey – whatever makes it work right. 

Offense

Customer Segments

Probably the most important question, the question of questions – who is your customer. Are you going after the world, and are you targeting the masses, or is your audience more specific. The more specific you can write down who your audience is, the easier it will be to craft a value proposition for that audience. 

Consider decision points like: 

  • Global, national, or local 
  • English, or localized languages 
  • Men, Women, Children
  • Consumers or businesses 
  • Elderly people, youngsters,  mothers with children
  • Hipsters, Environmentalists, Traditionalists

There are many ways to segment your customers. You can also serve multiple customer segments with your solutions, but keep in mind that when you are targeting multiple segments, you probably also need multiple value propositions. To give an example – a grocery delivery service can be convenient for elderly people as they don’t need to leave the house and carry the heavy stuff home. The same service can also be convenient for busy parents who don’t have time to go shopping. 

Channels

How are you going to reach your customers. Are you selling online, through physical stores, or in a hybrid model. Are you selling all products through the same channels, or are specific products ‘only’ available in a local shop or online. Are others reselling your products, and if so, what are the conditions for them to resell your products. Can they also sell competitor products in their shop. Thinking your channel strategy through is important, and keep in mind as well that it can have a significant impact on your costing model.  

Physical stores means your rent will be high. Online stores means you need to store your products somewhere. Digital products only require server space, but these days you really need to consider security services to avoid getting hacked.

Customer Relationships

What type of relationships are you going for with your customers. Will they order online through an anonymous website like Amazon.com, or are they getting personal shopping assistance. Are you the brand of your organization and do you know your customers personally like the local butcher used to do. So is your relationship transactional and can customers easily switch from you to another provider or are you investing in a relationship, including a loyalty program, coupons, etc. 

Customer value proposition

The value proposition is the description that makes you unique. Why would customers choose you over other providers in the market. What problems are you solving, or what benefits are you providing to your customers. How is this different from what your competitors are doing. Write it down in plain simple English, so that your mother would understand it.  

When crafting your value proposition you have to start thinking about the product propositions that you are taking to the market. What are your core products and how are you selling them to the market. If your core product is digital, perhaps you can upsell by packaging additional components to the product. Is it a one-off sale, or are customers buying a subscription. If you are selling a Lexus, your focus is not on selling masses, but on selling a unique experience.

Mid field

Revenue streams 

Mid field is about ensuring offense and defense are working well together. They are the glue that connect the dots. Offense generates revenue, defines is where you are spending it. Revenue streams explain how you are collecting the money that will fuel your company. Are you selling products in a transaction based model, or are you gaining recurring revenues through subscription services. 

There are many ways to generate revenue, and its’ up to you to find out what is the best model for your business. 

  • Freemium – free to start, then paying for services
  • Pay per use – pay for every usage of a product
  • Subscription model – recurring revenues
  • Fixed fees  – all you can eat models.
  • Etc.

Cost structure

This is where a lot of new businesses mess up – they don’t have a good understanding of their costing structures. Cost structures is where you define how your business is spending money. Consider things like rent, your time, do you have employees, contractors, legal fees. 

When you’ve figured out your expenses, move to the next level quickly: Cash flow management. Startups go sour often because they don’t have their cash flow figured out. It’s not a business model canvas area, but something to take into account. When do you receive revenue versus when do you need to pay your suppliers. Are they in sync?

Defense 

Key resources

Key resources are the things you need in order to run your business. No business runs without people, equipment, money and pizza. I refer to these areas of the 9 boxes as defense, as these are the critical building blocks that your company is built on. If you don’t have the right resources in place you will fail to score goals and win the match. The type of resources you need depends on the customer segments you choose, the channels you leverage and the relationships you want to have with your customers.

Customer intimacy requires you to have resources to engage with your customers, and perhaps a fancy coffee machine in a big building to entertain your customer. Targeting mass markets requires big marketing budgets, running an online business means you typically need loads of smart programmers. Every business model has a different requirement for resourcing.

Key partners

Who do you need in order to engage with your customers. Do you have contracts with the right suppliers that allow you to gain a competitive edge in your market, or are you not in a position of power and just a number for your suppliers. What does your relationship with your competitors look like, are you engaging with them in a joint venture to approach the market together? 

Are your suppliers reliable, or do you need to consider alternative ways to obtain raw materials or products to distribute. 

Figure out what are important stakeholders for you, and then determine if you have the right relationship with these partners.

Key activities

What are the core activities that you are performing on a day to day basis to keep your company going. Are you building products, storing them, and then shipping them to customers. Are you deploying serious brainpower on a day to day basis solving customer problems, or are you supporting the platform economy and are managing an ecosystem connecting customers with suppliers.

When writing down your key activities, it helps you to figure out also if these activities are core to your business, or if you are performing activities that don’t contribute well to the success of your business, and perhaps you should stop doing these. 

How to make a Business Model Canvas.

The end-goal is to fill all the 9 boxes of the canvas. You cannot skip a box, that’s a rule. If you are on your own, the best way that I found was to just download a blank template from the internet (there are tons available) and put it in a blank google slide or powerpoint deck. Start writing text in the 9 boxes and see how far you will get. Once done, let it go for a few days and then come back to it. It’s an iterative process and typically it takes a bit of time to get it right. 

When there are more of you, the best way that I found was to plaster the wall with flipover sheets or use wallpaper. Write the 9 boxes on the wall, and then start deploying sticky notes. This will be a fun and creative process.

 

Arjanhttps://www.productpizza.com
I've worked in product management most of my professional life. I enjoy all aspects of the product management role, except for anything related to administration. Coming up with new ideas, building great products, and working towards adoption and satisfied users drives me. Always looking forward!

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