Business Model Canvas is the most popular tool for entrepreneurs to create their business models. The Business Model Canvas is an analytical tool outlined in the book Business Model Generation by Alex Osterwalder. It is a visual template preformatted with the nine blocks of a business model, which allows you to develop and sketch out new or existing business models. It’s an amazing and powerful too and instantly creates a shared visual language while defining a business.
A business model describes the rationale of how an organization creates, delivers and captures value. Using the Business Model Canvas, the business model is defined across 9 key areas. With a central focus on the value proposition facilitated groups are able to quickly capture (i) how the business will actually create the products, (ii) how customers will access the products, and (iii) how the business will monetize the transactions. The nine building blocks for a business model are:
- Customer Segments – Definition of the different groups or organisations a company/enterprise aims to reach and serve.
- Value Propositions – Describing the bundle of products/services that create value for a specific customer segment.
- Channels – Describing how a company communicates with and reaches its customer segments to deliver its value propositions. Channels have five distinct phases: awareness, evaluation, purchase, delivery, and after sales. Each channel can cover some or all of these phases. We can distinguish between direct channels and indirect ones, as well as between owned channels and partner channels. Finding the right mix of channels to satisfy how customers want to be reached is crucial in bringing a value proposition to market. The trick is to find the right balance between the different types of channels, to integrate them in a way to create a great customer experience, and to maximize revenues.
- Customer Relationships – Describing the types of relationships a company establishes with specific customers. A company should clarify the type of relationship it wants to establish with each customer segment. Relationships can range from personal to automated. Customer relationships may be driven by the following motivations: Customer acquisition, Customer retention and Boosting sales.
- Revenue Streams – Describing the cash a company generates from each customer segment. (Revenue – costs = earnings/profits)
- Key Resources – Describing the most important assets required to make a business model work. These resources allow an enterprise to create and offer a value proposition, reach markets, maintain relationships with customer segments, and earn revenues. Different key resources are needed depending on the type of business model. Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.
- Key Activities – Describing the most important things a company must do to make its business model work. These are the most important actions a company must take to operate successfully.
- Key Partnerships – Describing the network of suppliers and partners that make a business model work. Examples of partnerships include strategic alliances, cooperation, joint ventures, and buyer-supplier relationships.
- Cost Structure – Describing all the costs incurred to operate a business model. Some companies are less concerned with the cost implications of a particular business model design, and instead focus on value creation.
The Business Model Canvas is a one page framework that captures all the above nine key elements that work together to make a business model successful on a single paper. It provides a very useful template to guide an entrepreneurial team when developing a new business. Teams should begin by breaking their business idea down across all the boxes in the canvas, even if some of the elements are very preliminary concepts at this point. Once all the elements are defined, the team can determine which elements follow those of proven businesses, and which are leaps of faith that define the innovative components of the business and need to be verified and most likely adapted in the marketplace. Teams can then focus on finding ways to test the leaps of faith with customers using the simplest, lowest cost product model that will give actionable feedback (sometimes called the minimum value product). Understanding the business model in this way enables entrepreneurial team to iteratively develop a very clear view of what the business model is, and whether or not it will scale. Key assumptions can be tested through activities such as product prototyping, customer observation and analysis of sales results.
The power of the Business Model Canvas lies in the narrative and visual approach to the business plan, which makes it easy to understand and interpret for stakeholders of the business.
- A Better Way to Think About Your Business Model (Harvard Business Review)