The Business Model Canvas
The Business Model Canvas allows you to design a new or describe an existing business model.
It is particularly useful in its ability:
- to provide multi-displinary teams with a common language for talking about and analysing a business in holistic terms.
- to enable startup founders to move beyond a great product idea towards a great business idea.
Layout of the Business Model Canvas
The Business Model Canvas is typically laid out as follows:
Description of categories in the Business Model Canvas
There is not implicit order in the Business Model Canvas. However, for a number of reasons, it is advised to start from the top right, move towards the left and finish with the two categories at the bottom.
This is where you identify, segment and describe your target customers.
Segmentation can be based on needs, attidues, behaviours, demographics or other attributes.
Segments can be broad (i.e. mass market) or narrow (i.e. niche).
The description should include their needs (or jobs to be done) and how they will use the product or service to meet them. It should also include estimates of the numbers of customers in the segment, and the rate of growth of the segment.
Customers can be individuals or businesses.
Organisations can pursue some blend of:
- a resource-based strategy where they seek to identify customer segments which want the capabilities, products and services where the organisation has a competitive advantage. This would typically involve a larger number of target segments, or
- a marketing-led strategy where they choose a specific customer segment and then provide it with the products and service it needs. This would typically lead to a smaller number of target segments.
Markets can be single or double-sided markets. In single side markets, organisation acquire inputs from suppliers and sell these to customers. In double-sided markets, organisation match buyers and sellers, typically retaining a commission on each transaction between them.
It is sometimes useful for organisations say who is not in the target market. Which segments they will ignore. That is not to say they would turn such a customer away. But it does mean they won't devote scarce resources to addressing their specific needs where these are different from those of the target market.
See also: What is segmentation and how does it work?
This is where you descibe how an organisation will reach and communicate with its customers.
This should cover all stages of the customer interaction: marketing, sales and servicing.
Channels may be:
- physical or digital. Physical channels include high street retail stores. Digital channels include web-sites and social media.
- owned or not owned. Organisations may own their own physical retail stores, or distribute through third party physical stores like department stores. Similarly, they may own their own web-site or distribute through third party sites like Amazon or eBay.
- direct, intermediated or wholesale. Organisations may market, sell and or provides services directly to their customers. Or they may operate through intermediaries like brokers and agents. Or they may wholesale to large distributors like supermarkets.
Organisations can be choose a single channel, multi-channel strategy or omni-channel strategy.
The choose of channels may be based on
- customer preferences like cost, speed and convenience,
- organisational considerations like cost, and
- relational considerations like how involved and complex the customer interactions are.
This is where you describe what kind of relationship the organisation will have with its customers.
As with channels, this should cover all stages of the customer interaction: marketing, sales and servicing.
Relationships may be:
- transaction or relational. In transactional relationships, the customer and organisation engage only briefly for each transaction, like buying an icecream at a cafe when you'd on holiday. In relational, or long-term relationships, the relationship is sustained over a long period and across multiple interactions, like the relationship you have with your bank.
- self-service, assisted or automated.
- personal or impersonal. Organisations can personalise their products and services for individual customers, or provide a uniform product or service to all.
- community-based: Many organisations now try to engage with their customers as communities, such as athletes. The community members often help each other to get the most out of the organisations products and services.
- co-creative: Organisations engage their customers in helping to develop and improve their products and services.
Customer relationships can be used to build loyalty and/or increase switching costs.
This is where you describe the actual value the organisation delivers to its customers.
This value added is usually the solution to the problems or jobs-to-be done identified for the customer segments (see above). Value add can be expressed in terms of product or service benefits.
The value proposition should also clearly show how what the organisation offers is different from what its competitors or substitutes offer. That is, why the target customer segments should choose this organisation's value proposition above all others. (See also: Examples of Strategy Canvases.)
Value propositions can deliver:
- Performance: by providing a better solution to the customer's problem or job-to-be-done.
- Cost reduction: by solving the customer's problem or job-to-be-done more cheaply.
- Risk reduction: by reducing the risk to the customers.
- Convenience: by make the solution more flexible, or more easily accesible to or convenient for the customer.
- Status: by conferring greater status or a greater sense of wellbeing on the customer.
This is where you describe what the organisation must do in order to deliver its value proposition through its customer relatioships and channels to its customer segments.
Types of activities include:
- Core operations: acquiring inputs, producing outputs, selling them and serving customers.
- Support operations: other necessary functions such as financial, personnel, office/premises and supply chain management, administration and supporting technologies.
- Improvement: such as strategy development and execution, research and development, training and innovation.
See also: Porter's Value Chain Analysis.
This is where you describe the key resources the organisation needs to support is key activities.
Key resources can be:
- Physical: plant and machinery, access to resources.
- Legal: contracts and exclusive rights, patents and trademarks.
- Human and intellectual: special skills, knowledge, systems and processes.
- Digital: proprietary systems and data sets.
- Financial: financial resources, capital, credit lines guarantees, options.
- Brands and the trust with which they are embued.
This is where you describe the key partners and suppliers on which the organisation relies.
These can be described as individuals or individual organisations, such as 'ABC Corporation', or as segments, such as 'farms' or 'spare parts manufacturers'. Partners and Suppliers can provide raw input for your products or service, or support Key Activities or Resources with which you create and deliver them.
It is a key consideration for any organisation how much it chooses to do itself versus how much it relies on partner and suppliers. This has significiant impact on costs and risks. In particular, many suppliers can reduce both costs and risks through increase specialisation and economies of scale. But they might also reduce an organisations ability to differentiate itself within its market and/or innovate.
Partnerships vary from arms-length supply to strategic partnerships and join ventures. They may be between competitors on non-competitors. They may or may not be exclusive in either direction.
This is where you describe the main costs to the organisation, their magnitudes, and the basis on which they are incurred.
Costs can be fixed or variable. They can benefit from economies of scale, scope and experience. The timing of payments, espcially relative to revenues, can be an important factor in cash flow management.
Organisations can pursue low-cost or high-value strategies.
This is where you describe how the organisation makes money. Revenue typically comes from customers. This is the lifeblood of any sustainable commercial organisation. But it can come from donors or other sources. It does not include loans or investments.
Revenues may be earned for:
- Sales, e.g. of a physical asset
- Usage, .e.g consumption of a service.
- Brokerage fees
- Advertising revenue
Payments may be:
- In advance or in arrears.
- One-off or recurring. Subscription models are a recurring revenue model which has gained in popularity. (See Why the Subscription Model Will Be Your Company's Future - and What to Do About It)
- Fixed, discounted (based on volume or loyalty, etc.) or variable (for example, if set at auction).