What is a business model?
Before we get into the business model canvas, it’s best to first define what a “business model” is.
A business model is defined as a plan for the successful operation of a business, identifying revenue streams, target customers, products, and financing details; it also explains how the key elements of a business fit together. If you think about writing all of this down in one document, it’s clear that it would take up many pages to capture all of the information. Now think about trying to process all of this at once. You see, business models can easily confuse us.
The business model canvas is here to help you create a clear business model in just one page. The interesting thing is that it can be used to describe any company; From the world’s largest company to a startup with just one employee.
What are the benefits of a business model canvas?
It’s understandable: because the canvas is just one page and is very visual and easy to understand;
It’s focused: it eliminates all the errors that can occur in a traditional business model and is perfect in every way;
It’s flexible: it can quickly and easily make changes to your model and also sketch out different ideas;
It’s customer-centric: because it forces you to think about the value of the services you provide to your customers and how to reach them;
It shows connections: because the single graphic canvas page shows how the different parts of the model relate to each other; while this is very difficult to see with a traditional business plan;
It is fluid: because it is understandable and easy to relate to; you can also easily share the vision with your team.
How to use the business model canvas?
The first thing you should notice is that the diagram consists of 9 structural elements, each of which we will explain in detail below; in short, each section tries to answer the following questions:
How to use the business model diagram?
Customer Segments: Who are your customers?
Value Proposition: Why do customers buy from you? What benefit do you have for them or what need do you fulfill?
Channels: How are your products and services marketed?
Customer Relationships: How do you attract, retain, and grow your customers?
Revenue Streams: How does your business generate revenue?
Key Resources: What unique strategic resources does your business have or need?
Key Activities: What unique strategic activities does your business perform to deliver its value proposition?
Key Partnerships: Which minor activities can you outsource to focus more on core activities?
Cost Structures: What are the major costs incurred by your business?
Left/Right Division of the Business Model Canvas
Before we get into the details of each of these elements, there is one thing you need to know; in general, the elements on the left side of the diagram represent the costs of doing business, while the elements on the right generate revenue for the business. Below we will go into detail about each of these nine elements.
1. Customer Segments
In this building block of the canvas, you enter a list of target customers or people you plan to serve later; you can also define one or more personas for the segments you serve. A persona is a description of the customers you deal with. This method highlights the “motivations” and “problems” of the customers and provides you with information about their “nature”. A very important point is that serving customers is your job! Many businesses only serve their target customers; for example, Google only serves people who search and advertise.
If you were to define personas for the target customers you are advertising to, you would likely find a wide variety of people; for example, some big-name American companies like Nike, with their massive advertising budgets, might have just one type of persona, while small one-person businesses could have a variety of different personas.
2. Value Proposition
The “value proposition” of your business model canvas describes the value you provide to your target customers. What problems you solve or what needs you fulfill.
The value proposition answers the question: “Why do customers buy from us?”
Some of the most common value propositions include:
Freshness;
Impressive performance;
Customer-friendliness;
Design;
Brand/Reputation;
Price;
Cost Reduction;
Risk Reduction;
Convenience.
3. Channels
Business Model Diagram – Channels
A channel refers to how you sell products or provide services to customers. To complete this section, ask yourself, “How do customers reach your business? How do you reach them?”
In general, you can have your channels or partner with someone else.
Personal channels can be like your own stores, resellers, or website. Partner channels also include a variety of options; working with a wholesaler, working with affiliates to sell your products, or even using Google Adsense.
4. Customer Relationships
The customer relationship section answers the question of how you attract, retain, and grow your customers.
Customer Acquisition: How do customers find out about you and make their first purchase? This could be done through Google Ads, for example;
Customer Retention: How do you keep your customers? For example, excellent customer service can help retain them;
Customer Growth: How do you convince your customers to buy more? You can send them a monthly newsletter to let them know when your latest products are in stock.
The easiest way is to put yourself in the customer’s shoes; this way, they will learn about your business and investigate your products in order to purchase.
5. Revenue Streams
Where will the money come from? In this block of the business model canvas, you specify where your revenue will come from.
It may seem simple at first, but it’s not; you want to understand what strategy you’re using to get the most value from your customers. Will customers pay at some point? Is there a monthly subscription fee? Maybe you’re offering your product for free, like Skype, and hoping that a portion of your customers will upgrade to premium services.
Consider Google; advertisers pay to have their ads shown to users who are likely to buy; for example, if you search for Nike sneakers, you’ll see ads; if you search for “flower photos” without any intention of buying, you probably won’t see any ads.
In essence, Google is offering non-purchase search without charging any fees to attract customers. This policy forces people to use Google.
A Step Back
If you look at the explanation we’ve given so far, we’ve put the value proposition and the building block on the right.
So far, in short, we’ve developed our understanding of all the issues that concern our customers.
Now let’s move on to the left side of the value proposition. We need to build our infrastructure to be able to deliver the best value proposition; so let’s look at the first part of the infrastructure, which is the key resources.
6. Key Resources
Business Model Diagram – Key Resources
This building block describes your most important strategic assets that are needed to make your business model work. In general, resources can fall into one of four categories:
Physical: such as buildings, vehicles, machinery, and distribution networks;
Knowledge: such as brands, know-how, patents, partnerships, and customer databases;
Human: Sometimes, people will be your most important resource; this is especially true in creative and knowledge-based industries;
Financial: Such as maximum credit and account balances.
7. Key Activities
Key activities are the most important strategic tasks you need to do to make your business model work. Key activities should be directly related to your value proposition.
If your core activities are not related to your value proposition, there is a problem because the activities that you consider to be of the highest importance are not of any value to your customers.
Typically, key activities can be divided into 3 main categories:
Production: This is about delivering your product. You typically do this with high quality or quantity;
Problem-solving: Problem-solving consultancies and other service organizations often have to come up with new solutions to solve individual problems for customers;
Platform/Network: Networks and software platforms can act as a platform; for example, a key activity for Facebook is updating the operating system.
When completing this block, it is a mistake to list all of your business activities; instead, only list the activities that are core to your value proposition.
8. Key Partners
In this section of the business model canvas, you list the important tasks and activities that you will not do yourself; instead, you will use your partners and sponsors to make the business model work.
Let’s take a look at Spotify. Spotify’s main activity is updating its platform; however, since it does not produce its own music, one of Spotify’s main partnerships is dealing with music publishers and publishing houses, without whom it would have no music on its platform!
Typically, there are 3 reasons for forming partnerships:
Economies of scale;
Reducing risk and uncertainty;
Acquiring resources or activities; for example, music for Spotify.
9. Cost Structure
Leave a Reply