BUSINESS MODEL CANVAS
What exactly is a business model?
A business model describes the rationale of how an organization creates, delivers, and captures value.
The Business Model Canvas (BMC) provides a simple, but comprehensive, format for mapping and refining key factors of a business. The relationship between entrepreneur and canvas is similar to that between an architect and a blueprint. Unlike the traditional business plan, they are flexible–easily adapted to changing business ideas and new information.
Customers are the individuals whom a company is creating value for. No company can survive very long, if at all, without profitable customers. A customer segment is a group of consumers with similar needs, behaviors, or other factors. However, no business can meet the needs of every single group. To be successful, a company must consciously decide which segments to serve and which to ignore.
Customer groups represent separate segments if:
- their needs require and justify a distinct offer
- they are reached through different distribution channels
- they require different types of relationships
- they have substantially different profitabilities
- they are willing to pay for different aspects of the offer
Some examples of customer segments:
- Mass Market – when the value propositions, distribution channels, and customer relationships all focus on one large group with similar, broad needs. (Common in consumer electronics)
- Niche Market – cater to specific, specialized customer segments; often found in supplier-buyer relationships. (Restaurant with locally grown produce vs. Red Robin)
- Segmented – multiple customer groups with similar behaviors and basic needs, but each group also possesses slightly different higher needs. (Bank customers with assets up to $10,000 vs customers with assets over $1,000,000)
- Diversified – when a company serves two unrelated customer segments with very different needs. (Amazon.com sells online storage space for web companies along with their retail business; serving web companies and online shoppers)
A company’s value proposition is the reason why customers choose one firm over another–it solves a problem or satisfies a need. Each value proposition caters to the needs of a specificCustomer Segment. They may be quantitative (price, speed of service etc.) or qualitative (design, customer experience etc.). Value Props can be new innovations, or similar to existing offers with added features.
There are an endless variety of Value Propositions a company can provide; here are some common elements:
- Newness – satisfy needs customers previously didn’t perceive as having (cellphones created a whole industry around mobile communication)
- Performance – improving upon product or service performance (computers are constantly improving)
- Customization – products and services tailored to the specific needs of individual customers (custom wedding dress)
- Design – a product can stand out through ‘good’ design, a difficult element to measure (fashion industry, consumer electronics)
- Brand/Status – aligning with a specific brand (nike, rolex, burton etc.)
- Price – providing similar value at a lower price than competitors (walmart, southwest airlines)
- Cost Reduction – helping costumers reduce cost (wordpress.com for free website creation vs. hired professional)
- Accessibility – making products or services available to consumers who previously lacked access (mutual funds, HP tablets vs. apple iPad)
- Convenience – making products or services easier to use (iTunes made it easier to search, buy & download music)
Channels are how a company reaches its Customer Segments to deliver a Value Proposition.
They are important customer ‘touch points’ that serve several functions, including:
- raising awareness among customers about a company’s products and services
- helping customers evaluate a company’s value propositions
- allowing customers to purchase specific products and services
- delivering a value proposition to customers
- providing post-purchase customer support
A company can choose between using its own channels, partner channels, or a mix of both. Owned channels can be direct, such as in-house sales force, or indirect, such as retail stores own by the organization. Partner channels are indirect and include a range of options, such as: wholesale distribution, retail, or partner-owned websites. The trick is to find the right balance between the different types of channels and integrate them to create an optimal customer experience.
Customer Relationships describe the types of relationships a company establishes with specific Customer Segments. Relationships can range from personal to automated. The Customer Relationships a company calls for deeply influence the overall customer experience. They
Relationships may be driven by the following motivations:
- customer acquisition
- customer retention
- boosting sales (upselling)
There are several categories of customer relationships, which may co-exist in a company’s relationships with a particular customer segment. Here are some examples:
- Personal Assistance – based on human interaction, the customer can communicate with a real customer representative during or after the sales process (Chase banking boasts customer service available 24/7)
- Self-Service – no direct relationship with customer, everything is provided for them to help themselves (PODs mobile storage unit)
- Communities – user communities can make it easier for a company to become more involved with its customers, and to facilitate connections between members (weight watchers online community)
- Co-Creation – goes beyond traditional customer-vender relationship to co-create value with the customer (amazon.com allows customers to write reviews, youtube’s content is created by the users)
Revenue Streams represent the cash a company generates from each Customer Segment (cost subtracted by revenue). This part of the canvas answers the question of what Value Propositions a particular Customer Segment will pay for, and how much. A company can have more than one Revenue Streams, and each stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning etc.
A business model can involve two different types of Revenue Streams:
- Transactional – one-time customer payments
- Recurring – ongoing payments to either deliver a value proposition to customers or provide post-purchase customer support
There are several ways to generate Revenue Streams, here are a few examples:
- Asset Sale – selling ownership rights to a physical product (car dealership sells cars, bookstore sells books etc.)
- Usage Fees – generated by the use of a particular service (hotel charges per day)
- Subscription Fees – generated by selling continuous access to a service (gym membership)
- Lending/Renting/Leasing – temporarily granting someone the exclusive right to use a particular asset for a fixed period of time (car rental, leasing an apartment, renting a vacation home etc.)
- Licensing – giving customers permission to use protected intellectual property in exchange for licensing fees (the north face pays licensing fees to use fabric created by gore-tex)
- Advertising – allowing a company to promote a particular product, service or brand and charging a fee (facebook, twitter, cable)
Key Resources are 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.
Resources can be categorized as physical, financial, intellectual, or human:
- Physical – assets such as manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems, and distributions networks (walmart has enormous global network of stores, huge logistics infrastructure, psychical inventory etc.)
- Intellectual – brands, proprietary knowledge, patents, and copyrights, partnerships, and customer databases (nike relies heavily on their brand as a resource)
- Human – every enterprise requires human resources, but some people are particularly important to certain businesses (pharmaceutical company relies on highly intelligent, experienced scientists and skilled sales force)
- Financial – financial resources or guarantees, such as, lines of credit, or a stock option pool for hiring employees (paycheck advances, banks etc.)
Key Activities describe the most important things a company must do to make its business model work. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key activities differ depending on business model type.
Activities can be categorized as follows:
- Production – relate to designing, making, and delivering a product in substantial quantities and/or of superior quality (manufacturing firms)
- Problem Solving – coming up with new solutions to individual customer problems (consultancies, hospitals, and other service organizations)
- Platform/Network – networks, matchmaking platforms, software, and even brands (ebay must constantly develop and maintain its platform)
Key Partnerships describe the network of suppliers and partners that make a business model work. Companies create alliances to optimize their business, reduce risk, or acquire resources.
While there are many types of partnerships, here are four major types:
- Strategic alliances between non-competitors
- Strategic partnerships between competitors
- Joint ventures to develop new businesses
- Buyer-supplier relationships to assure reliable suppliers
There are countless motivations behind creating partnerships, here are a few examples:
- Optimization and Economies of Scale – designed to optimize the allocation of resources and activities; it is illogical for a company to own all resources or perform every activity by itself (often involve outsourcing or sharing infrastructure)
- Reduction of Risk – designed to spread out or reduce uncertainties (multiple consumer electronic companies came together to create the blu-ray disc, but compete selling their own blu-ray products)
- Acquisition of Resources and Activities – it is rare for a company to own all the resources it needs; rather, they rely on other firms to furnish particular resources or perform certain activities (a mobile phone manufacturer may license an operating system for its handsets rather than create one in-house)
Cost Structure describes all the costs incurred to operate a business. Creating and deliveringvalue, maintaining Customer Relationships, and generating revenue all incur costs. Naturally, costs should be minimized. But low Cost Structures are more important to some businesses than to others. Therefore it can be useful to distinguish between two broad classes of BMC structures (although a BMC’s can fall in between as well!).
The two broad classes of cost structure include:
- Cost-Driven – focus on minimizing costs wherever possible; aims at creating and maintain the leanest possible Cost Structure (‘no frills’ airlines, such as southwest and easyjet)
- Value-Driven – focus on value creation through premium value propositions, usually with a high degree of personalized service (luxury hotels)
While there are many varieties of costs that can make up a Cost Structure, here are a few examples:
- Fixed Costs – costs that remain the same despite the volume of goods or services produced (salaries, rents, etc.)
- Variable Costs – costs that vary proportionally with the volume of goods and services produced (utilities, material cost etc)
- Economies of Scale – cost advantages that a business enjoys as its output expands (larger companies benefit from lower bulk prices)
- Economies of Scope – cost advantage that a business enjoys due to a larger scope of operations (large companies can use the same marketing activities or distribution channels may support multiple products)
Putting it All Together:
Let’s try an example:
In 2001 Apple launched its iconic iPod brand of portable media player. The device works in conjunction with iTunes software that enables users to transfer music and other content from the iPod to a computer. The software also provides a seamless connection to Apple’s online store so users can purchase and download content.
This potent combination of device, software, and online store quickly disrupted the music industry and gave Apple a dominant market position. Yet Apple was not the first company to bring a portable media player to market. Competitors such as Diamond Multimedia, with its Rio brand of portable media players, were successful units until they were outpaced by Apple.
How did Apple achieve such dominance? Because it competed with a better business model. On the one hand, it offered users a seamless music experience by combining its distinctively designed iPod devices with iTunes software and the iTunes online store. Apple’s Value Proposition is to allow customers to easily search, buy, and enjoy digital music. On the other hand, to make this Value Proposition possible, Apple had to negotiate deals with all the major record companies to create the world’s largest online music library.
The twist? Apple earns most if its music-related revenues from selling iPods, while using integration with the online music store to protect itself from competitors.
Apple’s Business Model Canvas: