The business model canvas framework is relatively new but it’s based on tried and true business principles. In this article, we’ll teach you what a business model canvas, why your company needs one and we’ll also show you how to use the framework effectively in just three steps.
What’s a Business Model Canvas?
A business model canvas is a visual chart that illustrates a company’s business model. Originally conceived by Swiss business theorist, Alexander Osterwalder, a proper business model canvas is composed of nine major building blocks.
These are customer segments, value propositions, channels, customer relationships, revenue streams, key activities, key resources, key partners, and cost structure. Let’s explore each of these in greater detail.
Value propositions refer to the things a business offers its customer base. This building block can include both products and services.
For example, a local music store sells guitars, drums, and more. But they also repair damaged instruments and teach lessons. So they sell both products and services.
According to Alexander Osterwalder, your company’s value propositions are what differentiates it from the competition. The uniqueness and quality of your offerings, the price you sell them for, and the customer experience you provide all factor in.
The customer segment building block outlines the target audience an organization aims to serve. Customer segments can be broad (i.e. car buyers) or more narrow (i.e. luxury sedan buyers who are under the age of 30 and living in the United States.)
A business may serve multiple customer segments. Listing them all in a business model canvas will allow the company to ensure it meets each segment’s needs appropriately.
Channels refer to the way a business delivers its value propositions to customers. This can be done in two different ways: through channels the business controls or ones it doesn’t.
A controlled channel would be a company’s physical storefront or online store. An example of an uncontrolled channel, also known as a partner channel, would be the distribution of a company’s products in major retail outlets.
The most effective channels are those that are fast, convenient, and cost-effective.
The customer relationships building block identifies how a company interacts with its customers.
Does your company provide complete hands-on assistance to customers?
The kind where each buyer get’s a dedicated company representative to answer every question and address every need?
Or does your organization provide its customers with the tools they need to easily and conveniently serve themselves?
Other customer relationship models include automated and community-based versions. There’s no right or wrong customer relationship structure. The business model canvas just helps you identify the proper one for your company.
Next, we have cost structure.
This building block describes the monetary consequences inherent with different business models. As you’re probably aware, businesses can either be cost-driven or value-drive.
A cost-driven business focuses on lowering prices and giving bare-bones service. Think budget hotel chains. Value-driven businesses, on the other hand, concern themselves with creating great value.
Luxury brands like Mercedes Benz and Prada are good examples. But it doesn’t matter if a business is cost-driven or value-driven. It still has a few basic characteristics like fixed costs and variable costs.
The cost structure element in a business model canvas outlines all of these monetary consequences.
The revenue streams category lists all the ways that a business makes money from each customer segment. Different models include:
- Asset Sale: Physical goods sold to customers.
- Usage Fee: Fees charged to customers for the one-time use of a specific service.
- Subscription Service: Fees charged to customers for continued access to a specific service.
- Leasing: When customers purchase the right to an asset for a specific amount of time.
There are plenty more, but the three revenue streams listed above are the most common.
The key activities in a business are the activities that allow a company to effectively execute its value propositions. For example, an organization that manufactures clothes might decide to build a streamlined supply chain.
This will make their factory more productive. And higher productivity will lower operating expenses.
A company’s key resources are anything it needs to provide value to its end customers. These resources may be the people who work for the business or specific tools or physical objects. They could also be financial sums or intellectual ideas.
The last of the “keys,” the key partners building block refers to the relationships a company builds in order to run more efficiently.
Partnerships with suppliers, alliances with other businesses, and other business relationships should be included.
Great, But Do I Really Need a Business Model Canvas?
The short answer is, no, you don’t need a business model canvas. But having one will give you and your business a couple of distinct advantages:
The nine building blocks used in a business model canvas will give you amazing clarity into your business. You’ll be able to easily see how each component interacts and affects the others. And you’ll be able to quickly pinpoint areas of strength and identify potential setbacks within your organization.
Because the business model canvas is a one-page document, it can be filled out and adjusted quickly. Theories can be tested and improved on the fly. Necessary iterations can easily be made. Business models change. Especially the business models of young startup companies. The business model canvas will enable you to make changes quickly.
2 Steps to Business Planning Success
At this point, you should have a solid understanding of what a business model canvas is and how it can benefit your business. Now, let’s discuss how to create and use one. There are 3 steps you need to follow.
1. Research Your Market
Before doing anything. Before you bust out your favorite pen and notebook or start scribbling ideas down on the whiteboard in your office, you first need to research your market.
What can your business bring to the table that’s currently missing?
Is there a demographic of customers whose needs aren’t being met?
Do your best to get a feel for the industry and where your business can sit within it. This step is especially important for new companies.
If your business is already established and you already understand your market, feel free to skip to the next step.
2. Fill Out Your Business Model Canvas
Once you’ve conducted thorough research, it’s time to begin filling out your business model canvas. But there are a few important guidelines you should abide by:
Use a large surface. A large piece of display paper or a whiteboard will do nicely.
As you begin to fill out each of the nine sections listed above, be sure to allow for changes and iterations. That means using sticky notes to catalog ideas or writing them down in erasable ink.
Whatever you do, make sure your business model canvas can easily be adjusted as new ideas are put forth and accepted.
A Business Model Canvas In Action
Before we put a bow on this article, we want to take a quick minute to illustrate the business model canvas in a real-life scenario. Hopefully, it will give you a better idea of how to use the information we shared above.
Drew’s Dogs is a food truck in Austin, TX that sells delicious, artisan hotdogs to hungry customers.
Business is going well, but Drew wants more. He’s decided he needs to create a business model canvas to help him dominate the Austin food truck scene.
First, Drew researches his market. He knows that there are nine other food trucks that serve food in the same area as him. He also knows that the lunch hour is the busiest.
His customers enjoy eating his hotdogs in between work sessions. Once his research has been completed, he begins to fill out his business model canvas, starting with his value propositions.
In this category, Drew lists speed, and affordability. He’s able to feed his customers quickly and for a low price. Moving on to the customer-oriented building blocks, Drew realizes that most of his customers are men between the ages of 24 and 45 who work in the area.
He serves them himself and therefore has a personal relationship with his audience.
Lastly, his only channel is the truck he sells his hotdogs out of. As for revenue, Drew makes money by selling hotdogs, drinks, and fries, and by accepting tips. Now it’s time for the “backstage” portion of Drew’s business. His key activities are making and marketing his food.
His key resources include his food truck, the ingredients he uses, and his culinary knowledge. At this point, Drew doesn’t have any key partners.
Finally, Drew looks at his cost structure. He is a cost-driven business and doesn’t offer his customers a lot of frills. As for expenses, his fixed costs include the monthly auto loan payments he makes on his food truck and his own salary. His varied costs include marketing expenses for Facebook ads and promotional flyers, and the cost of ingredients.
Master the Art of the Business Model Canvas
A business model canvas is an extremely important document. It will help you make the right decisions for your company and, when necessary, adjust quickly.
Fortunately, it’s not that hard to create. You just need to break your business down into nine key building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key activities, key resources, key partners, and cost structure.
When this is accomplished, you’ll be able to see how each block relates to the others and where changes need to be made. We encourage you to build your own business model canvas today. Good luck!