An introduction to the business model canvas.
The Business Model Canvas was developed by Strategyzer, and is used by entrepreneurs that are creating their business model. The canvas features nine segments, and teams use post it notes with their thoughts and ideas in each column of the canvas. This article will introduce the business model canvas to you, and will take you step by step through the process of building your business model.
What is a business model?
A business model describes how a company creates, delivers, and captures value and encompasses all areas of the business, from channels, to cost structures. A company’s competitive advantage can stem from it’s business model, and innovations in a business model can create disruptive innovation in your sector.
What is the business model canvas?
The business model canvas is a tool used by entrepreneurs when creating and refining their business model. The canvas is pictured below, and you can use it by taking notes on how your business addresses each segment of the canvas.
The business model canvas has nine segments.
- Customer Segments.
- Customer Relationships
- Value Propositions.
- Key Resources.
- Key Activities.
- Key Partnership.
- Cost Structure.
- Revenue Streams.
Using the canvas.
When using the canvas, be sure to start from right to left. Take the heading of each segment of the canvas, and then begin taking notes on how your business fits into each segment. When the canvas is complete, you should have a clear image of your business model.
Part One: Customer Segments.
We’ll start by addressing the customer segments that our business is looking to serve. You should aim to create a clear picture of your ideal customer. For example: “Amy is the target customer for my luxury holiday business. She is 26 years old, and has a passion for travelling with her friends and uploading the photographs to Social Media. She earns £30,000 per year, and lives in an apartment in Leeds with her dog.”
The three areas you’ll need to know about your customers are:
Customer Jobs. What is the customer trying to achieve by using your product/service? Let’s look at water as an example. In this case, the job a customer is trying to get done is to quench his/her thirst, as cheaply and as easily as possible.
Jobs also depend on context. You may buy a small bottle of water when travelling, however you may prefer a large, two litre bottle of water when at home. Ultimately, the customer (you) has the same job, but they are having to complete the job in a different context. When travelling, customers don’t want to carry a two litre bottle of water around with them. However, when at home, this becomes easier and saves space in the fridge.
Customer Pains. Now that you’ve identified a customer’s job, we’ll look at what pain points they have when completing the job. This could include the price, the convenience, or emotional factors (such as looking bad by using a certain brand).
Customer Gains. Finally, list the gains that customers desire by using your product/service. What added value can you add to the product/service that customers will love?
Part Two: Channels.
Now that we’ve identified our target customer, we can begin looking at how we reach them. “Channels” refers to the route you take to reach the customers. We’ve listed a few channels that you can use to reach customers below:
- Mailorder. Customers use a catalogue and order items through the phone and receive the goods through the post.
- Online Sales (E-Commerce). Customers order from your website, and receive the goods through the internet, or through the post.
- Wholesalers. Wholesalers buy items in bulk, and sell them on to shops further down the chain.
- Retailers. Selling your product or service through retailers.
- Platforms. Using platforms like Airbnb, Amazon, and Ebay to sell your products.
Part Three: Customer Relationships.
Next, we’ll look at customer relationships. How will you build relationships with customers and engage with them? Will they subscribe to your services, or only use them when required?
In this section, be sure to look at your “touch-points”. Map out every point of contact that your customer has with your business, and ensure that they are receiving a high quality service at each touch point.
Part Four: Value Proposition.
This section highlights how you product/service helps your customer achieve their job, whilst minimising pain points and creating added value in the process. Be sure to use the customer value proposition canvas to help you with this section.
Case Study: Airbnb
Airbnb have grown from a small start-up to a global business through the use of a “platform based business model”.
This video will show how Airbnb has created their business model, and used it to build a ten-figure valuation.
Part Five: Key Resources.
Businesses exist to turn resources into products and services that customers benefit from. In this section, we’ll look at what resources we need to service our customers and run the business, and you’ll have to list everything you need (including time!) to run your business.
Resources aren’t limited to tangible, physical goods. Time, labour, and property are examples of resources. In this section, make a list of all the resources you’ll need, the cost of the resources, and the amount required. This will come in handy when we look at the cost structure element of the canvas.
Part Six: Key Activities.
“Activities” refer to the actions that the business takes when turning inputs into outputs. We’ll look at systems in detail during a subsequent course. For the time being, we’ll create a list of all the actions your business must take to fulfil the needs of your customers.
We can gather actions together to create systems. A system is a process that, when followed, will produce a pre-planned outcome. Businesses need systems to produce consistent results for their customers and employees.
Routine Systems are actions that you take consistently to “keep the wheels turning”. Examples include: “send customer feedback form every Friday”, or “review sales figures on the last Friday of each month”.
Cue Systems are actions that you take when a specific prompt, or cue, arises. For example, what process do you have in place if a customer makes a complaint? What process would you follow if your staff member was absent?
Policies are the rules, or parameters, that govern every employee’s conduct within the organisation. For example, “employees must not mention the company’s name on social media”.
Part Seven: Partnerships.
Partnerships are agreements between two or more organisations that are working together to achieve a specified outcome. Businesses can use partnership agreements to capture the resources of other organisations, and use them to achieve mutually beneficial outcomes.
Can you think of any potential partnerships that your business could leverage?
Part Eight: Cost Structure.
The bottom two sections of the canvas look at the finances behind the business. In this section, we’ll look at the cost structure of your business. Businesses can separate their costs into overheads, and direct costs.
Direct costs encompass everything you need to directly produce a product or service. This could include raw materials and packaging.
Overheads refer to the recurring costs that your business will have. This could include rent, insurance, staff wages, and IT equipment.
Part Nine: Revenue Streams.
Finally, create a list of all the revenue streams your business will have. Remember, your business could have multiple revenue streams. Some common revenue structures include:
- Markup pricing: where you add a % surplus above your costs, leaving you with a profit margin of your choice.
- Subscriptions: where customers pay for the product/subscription through a subscription.
- Freemium: where a level of service is provided for free, and customers pay more for extra services.
- Credit Options: This can be used for consumers making large purchases, granting them the option of spreading payments over a longer time frame.
Applying the canvas to your business idea.
That’s a lot of information! The business model canvas is designed to be used in teams. With a mentor, or a fellow Orbiteer, write the heading of each segment and begin taking notes on how your business fits into each of the segments.
By the end of the session, you should have a clear business model that shows how your business creates and captures value.