Business Model Canvas – Explained
In today’s fast-paced business world, new business models are being invented on a daily basis and as such leaders need to continually be at the top of their game to help them navigate this fast-changing business landscape. The business model canvas is a great tool to help you as you start up or expand your business.
Originally developed by Strategyzer.com the business model canvas has grown in popularity and is a great tool to help you build an exceptional scalable business model that can take your business to the next level. Challenge your existing business model and identify the areas of improvement.
In this Business Model Canvas Innovation guide, we aim to provide you practical tips on how to build your business model canvas
The first part of the business model canvas is focused on your customers. Let’s start with defining your customer segments!
Business Model Canvas Step 1:
Define your Customer Segments
Customers segments have something in common with each other allowing you to reach them more easily by knowing what their interests are, where you can reach them and what do they need.
Here are 3 ways that you can define your customer segments if you are a start-up:
- Mass Market includes a broad range of people that could be interested in your offerings. This is quite common in consumer products, but reaching that mass market is very costly for start-ups. A lot of consumer goods like chocolates, soap, and milk follow such a model as well as others like WhatsApp
- Niche Market includes a more specific group of people that come together because of their age, location, and interests. It is easier for a start-up to reach such a customer segment since it’s easier to grab their attention through your knowledge of their interests. Health products, organic, specific apps could follow this model
- Multi-Sided Market is specific to companies that have users of the products or service who could be using it for free and clients who have an interest in reaching that set of users. Advertising businesses use this model where advertisers are the clients can reach readers who are the users
All through the development of your business, it is crucial that you and your team are very clear on the market segment that you are trying to reach as this would guide many other decisions that you need to take.
Business Model Canvas Step 2:
Define your Value Proposition
Your value proposition is what defines your business, and what excites your clients to do business with you. If you are not exciting your clients enough, they would not go through the effort of trying your product or service.
Here are 4 questions to ask yourself about as you define your value proposition:
- What is the problem that you are trying to solve?
- What is the value that your product or service add to your target segment?
- How do you address the needs of your target segment?
- How is your value proposition different from others – or unique?
Keeping your value proposition clear and effective allows you to communicate it effectively within your company and to your target segments. Every one of your team members needs to understand how their work contributes to that value proposition.
Business Model Canvas Step 3:
Channels are the way that you interface with your clients and services. Your aim is to find the most convenient way for your clients to buy your products and services and to have a great experience doing so.
Here are 2 commonly used channel strategies to sell through to your channels.
- Direct Channels where you sell directly to your clients either through your website, through your stores or through your sales teams
- In-Direct Channels where you rely on others to sell your products or services. These could be distributors, retailers or resellers that already have the supply chain or customer relationship and would thus provide you with the most efficient way to reach your clients and possibly to support them
Deciding on the channel model in a startup is very important since each way would have its advantages and disadvantages. As the business evolves, it can have a hybrid channel model that makes use of both routes to reach your clients.
Business Model Canvas Step 4:
Customer Relationship Types
Your customer relationship will influence the experience that they will have with you and the frequency of engagement with them.
Here are 5 commonly used customer relationships as part of your Business Model Canvas development:
- Self Service or Automated relationships where clients can conduct most or all of the service they need without assistance by anyone in your business. A lot of monthly subscription or online services follow this model
- Personal Relationships where your direct teams are involved in selling and servicing your clients. This is common in physical retail, high value and corporate sales.
- Co-Creation Relationship where clients contribute to the growth of your business, such as the case with social media sites
- Transactional Relationship where the client can use your product and service once and might never have the need to return to you and use it again
- Switching Cost are sticky relationships where it becomes difficult for a client to change a service since they have invested so much time and effort into the relationship. First movers in this type of relationship have the most to gain
Determine which one of these relation types have the most value to your business and to your clients’ experience resulting in great customer service.
Business Model Canvas Step 5:
Key Revenue Streams
Revenue streams or sales refer to how you generate cash from your clients. In the Business Model Canvas, different client segments could pay you in different ways. Without sales, a business can’t function, so this is the most important aspects of any business.
7 most used revenue types include:
- Asset sales refer to cases where you sell a product to a client who then becomes the owner of that product. This is the most widely used model in business and takes place anytime we buy a car, computer or a building
- Usage fee refers to when a client uses your product or service but its ownership remains with you. This is common in the hotel or airline industry
- Subscription fee refers to when your clients subscribe on a monthly or weekly basis and can use your infrastructure. Examples of this include software as a service, gym memberships, etc..
- Leasing or renting or lending refer to allowing clients to use your assets for a period of time as if it is theirs
- Licensing revenue is earned when you give clients a permission to use your intellectual property. This is common in content production and inventions.
- Brokerage fees are earned when you take commission from facilitating a business transaction between two parties.
- Advertising results from fees for advertising a particular product or service or brand
Ensuring which of the above revenue streams is most convenient for each of your target segments and in turn allowing you to generate the most business is an essential aspect of having your business survive and thrive.
After focusing on the customer aspect of the business, we shift our views to the internal operations which sustain our business model.
Business Model Canvas Step 6:
Key Resource Types
Key resources reflect the most important assets of your business. Identifying them will help you in protecting these assets and making the most of them.
Here are 3 common resource types:
- Physical resources include vehicles, offices or stores, data center, manufacturing equipment
- Intellectual Property assets brands, copyrights, patents, platforms and even customer databases.
- Human Capital representing your team. In most businesses, this is your most important asset as the team helps in keeping innovations coming in and in providing your clients with a great experience
Identifying your most important assets in your business and protecting them is essential to making your business function well.
Business Model Canvas Step 7:
Key Activities your Business Engages in
There are many daily tasks that are done within the business, but it is always important to be clear about what are the key activities that need to be conducted within the business to deliver on the value proposition that you are promising your clients. By identifying these activities, it would help you to prioritize the efforts taking place in your business.
As part of the Business Model Canvas template, some of the common activities in a business include:
- Production activities which focus on the design, manufacturing, and delivery of a product or service – common in manufacturing
- Problem-solving which covers a lot of services businesses that work on addressing customer problems
- Platforms bring together users and clients on a common space for them to interact – Credit card companies, Software platforms, and online merchants are examples that have platforms as a key activity
Reviewing your key activities and improving the performance is an essential part of innovating a better product or service to your clients.
Business Model Canvas Step 8:
Forming strong partnerships with your ecosystem is a great tool to help in expanding your reach and making sure that your business is delivering its promise to clients.
Some essential partnerships in a business include:
- Alliances these are entities that can complement your offerings or your reach to your clients – these can include joint ventures or general partnership agreement
- Suppliers are essential in providing you non-core business elements that allow you to focus on your core areas of strength
Continuous evaluation of the available partnership options is essential to stay abreast of the latest developments.
Business Model Canvas Step 9:
Important Cost Structures
Cost structure refers to all the costs that you incur to deliver on your business model. Keeping your costs under control is essential to maintain a healthy business.
2 Essential Cost Structure elements include:
- Fixed Costs – which refer to all costs that you need to incur whether you sell or not. These could include factory, general administration staff, rent, management staff costs etc..
- Variable Costs – which refer to costs that are associated with the sales of your products or services. The more you sell the more these costs would go up. Variable costs include things like the raw material for your products or cost of consultants that you would etc..
When you are starting up a business keeping the fixed costs as low as possible is essential so that you don’t run out of cash too quickly before you start selling enough products and services to cover your costs.
We hope that through the above-mentioned steps you would be able to learn what should be done to Build a Scalable Business Model by using our guide to the business model canvas.
To empower yourself through our real-world education and reach your business potential, we invite you to visit our store. You will find in it practical courses, services, guides, products, and other resources to help you succeed.
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