The Business Model Canvas

What is a Business Model Canvas?

A Business Model Canvas is a simplified visual representation of the various elements of a business model. It allows you to see the relationships among the parts of your model, identify the hypothesis, assumptions, and risks of your business, and plan validation testing. (Ensuring that the product meets the client’s needs and that it fulfills its intended use in a given environment.) The model also allows the user to find ways to add value and or reduce costs, as well as brainstorm new market disruption strategies. The model can be filled in quickly and can be used as an effective tool in fleshing out an idea or reexamining a current business plan.

Customer Segments

The first section of the Business Model Canvas requires you to identify your customer segments. Ask yourself the following questions: Who are the most important users and customers of your product or service? Customers and users can sometimes be the same people. However, they are often different sets of people. For example, if you were selling a fitness tracking app like CoachMe, your target customer may be gyms or personal trainers, while your end user would be people that go to said gyms or receive coaching from the trainers. To fully take advantage of the Canvas, you need to ask yourself more that just “Who is your customer?” Who are your stakeholders? Which people are most motivated to use your product, and who needs your product the most? Even though a segment may have the most need for your product, will they benefit the most from its use?

Value Proposition

A product’s value proposition is arguably the most crucial part of the encompassing business. If a product provides no value to the consumer, why would they have any motivation to buy it? Beyond that, a product often creates value for more than just the consumer. For each customer segment, ask yourself, what is this segment’s problem and how does my product remedy their pain? This is a great way to evaluate whether an idea targets a real problem or if it is trying to solve a non-existent one.

Distribution Channels

Next, diving further into the business model, you need to establish how you will distribute your product from production to after the final sale. How are potential customers and users going to discover your product? If they want to purchase it, through what platforms can they acquire the good or service? How will you deliver the product? What will you do to maintain the product after the final sales? All of these questions will help you to map out how you will deliver your product’s value, and how you can potentially add value at each step of the process. For example, a customer may discover a product through Facebook Ads and may then proceed to buy the product on your business’ website. You then use UPS to ship the product to the end customer, providing customer service and maintenance after the final sale.

Customer Relationships

Figuring out how to deliver the product to the customer is one thing, but the way you plan to get, keep, grow your customer base is just as critical. What media are you going to use to attract customers to your business? If you are running a web business, where are you going to place ads to drive people to your website? How do you plan to get word about your product beyond word of mouth? Once you have established a customer base, how are you going to ensure that you can retain these customers and encourage them to spread the word about your product? Are you going to offer discounts to return customers or bonuses for referrals? New businesses often focus on making the first batch of sales, but taking the time to create a plan for future customer engagement can keep them on target once they have started to gain some traction.

Revenue Streams

Another essential part of the business model is establishing how you are going to make money from each customer segment. This involves questioning how much customers value the benefits your product provides as well as how much of said value they are willing to pay for. An important part of determining your revenue streams is pricing. You should price on the value of your product, not the cost. Make sure to consider your pricing model, examples of which include a subscription, a rental, licensing, and the freemium model (think Spotify or other music streaming services.)

Key Resources

Establishing your business’ key resources is more straightforward. What infrastructure and resources do you need to deliver your value to the customer? This can include tools, equipment, space, locations, personnel, licenses, IP, supplies, and materials. Additionally, financial requirements should be worked into your list of key resources. The goal of this process is to note which resources are challenging to obtain, and how you plan to obtain them (lease or buy). As for your personnel, you need to state what qualifications are necessary, and whether you plan to keep people in-house or subcontract work.

Key Activities

Like key resources, your business’ key activities are the deliverables that must be produced for your business to operate. For a company like Microsoft, their main key activity would be software development. For a consulting firm like Bain, the key activity would be solving client’s problems. Your business’ key activity is what creates value and is often what gives you a competitive advantage.

Key Partners

On top of your key resources and key activities, your business will also need to rely on other people, organizations, and companies to succeed. Some prevalent examples include suppliers, manufacturers, developers, distributors, investors, collaborators, and affiliates. You also want to keep in mind who your competitors are, and what alternatives exist

Cost Structure

Lastly, you need to determine the critical elements of the cost structure of your business. Which costs are fixed (office rent) and which are variable (material costs)? What costs are associated with your key resources, activities, and partners? Furthermore, what are the costs related to your infrastructure, operations, sales, and employees? What about taxes? There are a lot of costs, both big and small, that go into running a business. Listing all of your costs can shed some light onto where you may be able to save some money and where the risk lies.

A great illustration of Skype’s business model using the BMC

Conclusion

Putting all of these building blocks together provides a streamlined, yet effective business model. Whether you are an entrepreneur trying to get a new venture off the ground or are a small business owner looking to reevaluate the current state of your company, the Business Model Canvas is a fantastic tool for visualizing and organizing the details of your operation.

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