Business Model Canvas – what, why and how

What is it?

The Business Model Canvas was designed by Alexander Osterwalder. In short, it is a business plan on a page which can help assess a new business model or provide a snapshot of your business at a point in time. It helps to define your customer segments, how you communicate with them, what resources are needed for that relationship to work and how the finances stack up as the customer works their way through your business. It can highlight areas of trade-off or gaps in processes.

Any business at any stage can use a Business Model Canvas to support business improvement, development and growth.

One section of the business market recommended to use a Business Model Canvas are start-ups. It will help identify if the business idea is viable before you put in the hours of work needed to write a full business plan. However, a word of caution, recent research suggests that an over reliance on a ‘lean start-up’ approach can sometime lead to a lean idea, less disruptive and less unique. You will need to decide what sort of start-up you wish to create and whether this tool is just a starting guide or more of a bible.

Why do I need it?

As mentioned, a Business Model Canvas is a plan on a page. Working through each section identifies who you are selling to and how they group together. How you communicate with each segment and whether there any differences in those channels. How you reach your customers and what resources are needed to make that sales channel work. Are these resources the same for each customer segment. What exactly do you do and what partnerships are vital to your activity? Finally, and probably the most crucial aspect is what does it cost to make all this happen and are your revenue streams covering those costs.

How do I use it?

The Business Model canvas is split into nine segments. There are no rules as to which one you should start with, but my personal preference is to start with customer segments.

Customer segments

This section can be easier to complete if you are already trading however you will still have a good idea who your target customer groups are when you develop the concept. Think about who you are trading with. What sort of customers are they? How do you define them? Are they large or small, private or public, mass-market or niche, manufacturing or service? There are many different categories that you can use here and how you define them is up to you. What is important is that you DO define them, especially if you are selling to different customer segments as what you will see as you progress through this activity is how your relationships might differ between them or not and this can be powerful information.

Customer Relationships

In this section, you need to think about how your relationship can be defined with each customer segment. Is it a personal service or is it automated e.g. through a portal? Is it self-service such as an e-commerce business or do you link through communities? This can be an interesting section to work through especially if you begin to see that you communicate differently with different segments. If this is the case, why? Should it be different? Is one relationship more successful than another?

Channels

This is about how you reach new customers? Do they visit your website or come into your store or warehouse? Do you have a sales system in place? Has it been reviewed recently? Are you networking and using social media? Do different customer segments respond differently to your approaches, how are you measuring this and are you maximising what your data is telling you?

Value Proposition

The value proposition is your offer. What is it you are providing to the customer? What problem are you trying to solve, or which pain point can you relieve? Are the same solutions helping all your customer segments or do the offerings differ? – how and why? What are the characteristics of your offering – is it new, repackaged, cheap, expensive, reduces risk or increases performance to list just a few. What do you offer that your competitors do not? I prefer to use the term ‘value-added’ rather than a unique selling point but it’s essentially the same thing. It the answer to just one question – So what!

The four sections above can often be referred to as the ‘desirability’ section of the Business Model canvas.

If you are thinking about starting a new business and you can’t identify your customer segments and how you will communicate with them and reach them, if you do not know what value you are adding for them then there are some questions to be asked about the validity of your business idea. Don’t fret though – you may just need to tweak it; now do you see how useful the Business Model Canvas can be? Four simple steps and you may be already changing your first thoughts. This isn’t about restricting your vision though, just ensuring you have thought it through pragmatically – how it will work.

If you are already trading, has this process thrown up any interesting thoughts? Are you treating all customers the same? If not, why not or even if you are, should you be? Are there any efficiencies to be made?

The next three sections will give you an idea about the feasibility of your business. How will it come together and what will you need in order to make it happen?

Key Activities

What activities does your value proposition require to be able to happen? You can break this down into smaller segments if that helps. For example. if you are making a product what production processes are required, are they in-house or outsourced? Will you need to rely on technology to deliver your output and if so, how will it do that. Think about your relationship with your customers and your suppliers – how will they work and what processes are needed to ensure consistency and efficiency. How will you distribute your product or service, what are the logistics required? Again, do different customer segments require different methods of delivery.

Key Resources

This section is self-explanatory. What do you need in order to deliver your value proposition? Do you need physical equipment e.g. machines, office space, IT equipment, vehicles? What about human resources? Will you need to recruit staff or contract freelancers or third-party companies, what about the legal aspects of both scenarios? One area that often gets overlooked is Intellectual Property. Patents, copyrights, data – will it be your own or are you leasing them? Finally finance – how much do you need to deliver, what is your bottom line? This section can on occasion throw up areas that have been missed. Sometimes it can help to think about the customer journey step by step.

Key Partnerships

You may have identified some of these in key resources, especially if they are crucial to your offer but this section also includes some of the incidental partnerships you may need. Here, you not only need to think about who they are but what tasks they perform and why. Do they reduce risk e.g. your accountant or allow economies of scale e.g. virtual assistant? Where in the customer journey do they fit, if at all? Are they long term partners or do they just allow you to get over a pinch point in your business? Will they evolve over time?

If you are using this tool to support a new business idea your customer journey should now be clear. If you are already trading, has this confirmed what you know or highlighted any gaps to fill or efficiencies that could be made.

Once you are clear that these sections have been filled fully you can move on to the finances. This section is very straight forward. How much does it cost to deliver your offer and what revenue is brought in from your offer?

Cost Structure

This section is the detail on what it costs to make your value proposition available. What is the activity that is most expensive and what resource costs the most? Which costs are variable, and which are fixed? Can any costs be reduced? Are there any economies of scale or scope?

Revenue Streams

What are your customers willing to pay for your value proposition? How do they pay? What does each revenue stream contribute to the overall revenue of the business and is each one making you a profit? If not, why do you still offer it – justify it?

Once all the sections have been completed you should now see a clear picture of your business and how it all pieces together.

I like to go through this exercise on a large piece of paper and have it pinned to the wall. It helps to revisit every so often so see if anything has changed in the business but also to thinking about whether any new technologies have come about that may drive improvement in some processes.

It can also be useful if you have a new revenue stream you wish to explore. You will be able to identify whether you already have in place what you need to deliver it or whether an investment or additional resources are required. 

You can download the Business Model Canvas templates here in various formats depending on your preferences.