The Business Model Canvas (BMC) is a useful tool for creating and recording business models. Created by Alex Osterwalder, it consists of nine building blocks that explain how a company plans to create value and generate income.
The BMC shows a visual chart describing a company or product's value, structure, clients, and finances to help businesses get ready to start a venture. It aids in explaining and shaping current or new business models, studying rivals, and boosting innovation.
It consists of nine blocks that cover three key parts of a business: desirability, viability, and feasibility. Can we deliver it, do customers want it, and what is it worth?
Stephen Paterson, Dean at the National University of Management, emphasized that the BMC, and also Lean Canvas, are design tools that help users visualize the entire business startup. It is a working document or snapshot of a startup at a certain point in time and can be used to test and validate business model assumptions.
In addition, he added that business plans tend to be relatively fixed and static, while the BMC is much more of a dynamic design tool to visualize and then help test and validate the different parts of a business model.
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This model acts based on simple business terms. It includes nine important sections: Key Partnerships, Key Activities, Key Resources, Value Proposition, Customer Relationships, Channels, Customer Segments, Cost Structure, and Revenue Streams.
Key Partnerships
The Key Partnerships describe the network of suppliers and partners that make the business model work. Companies form partnerships for various reasons, which have become essential for many business models. These alliances help optimize operations, reduce risk, and acquire resources.
Questions to ask:
- Who are our key partners?
- Who are our key suppliers?
- Which key resources are we acquiring from partners?
- Which key activities do partners perform for us?
There are four types of partnerships that take in strategic alliances, coopetition, joint ventures, and buyer-supplier relationships.
Strategic alliances are partnerships between non-competitors aimed at optimizing business models and sharing resources.
The competition involves strategic partnerships between competitors, where they collaborate in certain areas while competing in others.
Joint ventures are partnerships formed to develop new businesses by combining resources and expertise from multiple companies.
Buyer-supplier relationships are partnerships that ensure reliable supplies by establishing relationships between companies that provide goods or services and those that purchase them.
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Key Activities
Key activities are the important tasks a company must do to make its business model work and deliver its value proposition. In a business model, there are key activities that are crucial for a company's success.
These actions are necessary to create and offer a value proposition, reach markets, maintain customer relationships, and generate revenues.
Questions to ask:
- What key activities do our value propositions require?
- Our distribution channels?
- Customer relationships?
- Revenue streams?
Types of key activities include production, problem-solving, and platform.
Production refers to activities that involve designing, manufacturing, and delivering products in large quantities or of high quality. This is common in manufacturing firms.
Problem-solving is the key activity in this category that focuses on finding new solutions to individual customer problems. Service organizations such as consultancies and hospitals often prioritize problem-solving activities, including knowledge management and continuous training.
Platform/network refers to business models that rely on a platform as a key resource and have key activities centered around that platform or network. This can include managing networks, matchmaking platforms, software, or brand-building activities.
Key Resources
Key resources are essential assets for a business model to succeed. They can be human, financial, physical, or intellectual.
Questions to ask:
- What key resources do our value propositions require?
- Our distribution channels?
- Customer relationships?
- Revenue streams?
Types of key resources include physical assets, intellectual property, human resources, and financial resources.
Physical assets include manufacturing facilities, buildings, vehicles, and distribution networks.
Intellectual property includes brands, proprietary knowledge, patents, copyrights, partnerships, and customer databases.
Human resources are crucial in knowledge-intensive and creative industries.
Financial resources and guarantees include cash, lines of credit, and stock option pools.
Value Proposition
The value proposition describes how a company's products or services bring unique value to a specific group of customers. It is the reason why customers choose one company over another, as it solves their problems or fulfills their needs.
Questions to ask:
- What value do we deliver to the customer?
- Which one of our customers’ problems are we helping to solve?
- Which job are we helping the customer get done?
- Which customer needs are we satisfying?
- What bundles of products and services are we offering to each customer segment?
According to Osterwalder, value propositions can create value in various ways. These include newness, innovation, enhanced performance, customization, effective problem-solving, attractive design, brand association, competitive pricing, cost savings, risk reduction, accessibility, and user convenience.
- Newness: Offering something innovative or unique that meets customer needs in a way that was not previously available.
- Performance: Delivering superior performance, quality, or functionality compared to alternatives in the market.
- Customization: Tailoring products or services to meet the specific needs and preferences of individual customers, providing a personalized experience.
- "Getting the job done": Focusing on helping customers accomplish specific tasks or solve problems efficiently and effectively.
- Design: Creating products or services that stand out aesthetically or functionally, enhancing the overall user experience.
- Brand/Status: Associating the product or service with a desirable brand image or status, appealing to customers' aspirations or social recognition.
- Price: Offering competitive pricing or value for money, providing affordability or cost-effectiveness.
- Cost reduction: Helping customers save costs or achieve cost efficiencies in their operations or daily lives.
- Risk reduction: Mitigating or minimizing potential risks or uncertainties associated with using the product or service.
- Accessibility: Making the product or service easily accessible and available to customers, ensuring convenience and reachability.
- Convenience/Usability: Simplifying the customer experience and making it user-friendly, ensuring ease of use and convenience in interactions.
- Value propositions are divided into two main types: quantitative and qualitative. Quantitative emphasizes price and efficiency, while qualitative centers on the customer experience and emotional benefits.
Customer Relationships
Customer relationships ensure the survival and success of any business. It is important to establish different types of customer relationships with specific customer segments.
Questions to ask:
- What type of relationship does each of our customer segments expect us to establish and maintain with them?
- Which ones have we established?
- How costly are they?
- How are they integrated with the rest of our business model?
There are varieties of customer relationships:
- Personal assistance: Employee-customer interaction during and/or after sales. Provides individualized assistance.
- Dedicated personal assistance: Assigning a sales representative to handle the needs of specific clients. Provides a high level of personalized support.
- Self-service: Indirect interaction between the company and customers. Customers serve themselves using provided tools.
- Automated services: Personalized self-service with the ability to identify individual customers and preferences. For example, Amazon.com suggests books based on previous purchases.
- Communities: Creating a platform for direct interactions between clients and the company. Allows for knowledge sharing and problem-solving among clients
- Co-creation: Involving customers in the development of the company's products/services. Customer's direct input influences the final outcome.
Customer Segments
The customer segments block describes the various groups of individuals or organizations that a business intends to target and serve. Customers are essential for any business to thrive and succeed.
Without profitable customers, a company cannot sustain itself for an extended period of time.
A customer is someone who purchases a product or service from a business. The design and implementation of a business model are influenced by their needs and preferences.
A customer segment is a group of customers sharing similar needs, characteristics, or behaviors. A business model that meets the needs of these segments can be developed and tailored to meet their specific requirements by identifying and understanding them.
Questions to ask:
- For whom are we creating value?
- Who are our most important customers, clients, or users?
- Businesses use different customer segmentation approaches to effectively target their audience, such as Mass Market, Niche Market, Segmented, Diversified, and Multi-sided platforms.
- Mass Market refers to targeting a wide range of potential customers without specific differentiations. It aims to reach a broad audience without customization.
- Niche Market refers to focusing on meeting the specialized needs of a specific group. Products or services are tailored to cater to the preferences of this niche customer base.
- Segmented refers to categorizing existing customers into smaller subgroups based on demographics or other factors. This allows for more precise marketing strategies for each subgroup.
- Diversified refers to serving multiple customer segments with unique needs. This strategy helps businesses expand their market presence by catering to a broader range of consumers.
- Multi-sided Platform or Market refers to acting as a bridge between different customer groups.
Channels
The Channels Block describes how a company connects with its customers. Channels are points of contact that impact the customer experience.
Channels refer to the different methods a company uses to deliver its value proposition to customers. They bridge the gap between the company and its customers, facilitating the transfer of products, services, and information.
Questions to ask:
- Through which channels do our customer segments want to be reached?
- How are we reaching them now?
- How are our channels integrated? Which ones work best?
- Which ones are most cost-efficient?
- How are we integrating them with customer routines?
Choosing the right channels is important to ensure the efficient and cost-effective distribution of the company's value proposition.
Companies have different types of channels. They can use their own channels, partner channels, and combinations of channels.
Own channels are owned and operated by the company itself. For example, physical stores, websites, mobile apps, or direct sales teams. They provide direct control and personalized interaction with customers.
Partner channels involve collaborations with external entities, such as distributors, retailers, or online marketplaces. Partner channels leverage existing customer bases and distribution networks for a wider reach.
Combination channels are when companies use a mix of their own channels and partner channels. This approach offers a diverse and comprehensive distribution strategy, such as having an online store and partnering with retailers.
The choice of channels depends on factors including the target market, product characteristics, customer preferences, and cost considerations.
Viability
Cost structure
The cost structure describes all the expenses to run your business model. It refers to the financial implications and considerations related to operating under various business models. It involves managing the costs incurred by a company to provide its products or services.
Questions to ask:
- What are the most important costs inherent in our business model?
- Which key resources are the most expensive?
- Which key activities are the most expensive?
Key aspects of cost structure are classes of business structures, which is divided into two categories: cost-driven and value driven.
Cost-driven focuses on minimizing costs and operating efficiently. It offers products or services at competitive prices by reducing unnecessary expenses.
Value-driven emphasizes creating value for products or services. It is less concerned with cost-cutting and focuses on delivering high-quality, premium offerings.
Business owners have to consider characteristics of cost structures, such as fixed cost, variable cost, economies of scale, and economies of scope.
Fixed costs are costs that remain unchanged regardless of production or sales levels. These include rent, salaries, and insurance payments.
Variable costs are costs directly related to production or service delivery. They tend to fluctuate based on quantity, including raw materials and performers' fees.
Economies of scale are cost advantages achieved as production or order volume increases. Costs per unit tend to decrease due to factors that include bulk purchasing or increased efficiency.
Economies of scope are cost reductions resulting from incorporating related businesses into the original offering. Synergies and shared resources lead to lower costs.
Understanding cost structures helps businesses make better financial decisions and stay competitive.
Revenue Streams
Revenue streams describe the ways a company earns income from its customers. These sources of revenue contribute to the financial sustainability and profitability of a business.
Questions to ask:
- What value are our customers realistically willing to pay?
- How would they prefer to pay?
- How much does each revenue stream contribute to overall revenues in terms of percentages of the total?
Common methods of generating revenue include asset sales, subscription fees, leading, licensing, brokerage fees, or advertising.
Asset sales is selling ownership rights to physical goods, such as retail sales.
Usage fees refers to charging customers for using a particular service, such as delivery fees.
Subscription fees refers to selling access to a continuous service, such as Netflix subscriptions.
Lending/Leasing/Renting is granting exclusive rights to an asset for a specific period of time, such as car leasing or property rental.
Licensing is charging fees for the use of protected intellectual property, such as trademarks or patents.
Brokerage fees refers to earning commissions or fees as an intermediary between parties, such as real estate agents.
Advertising is charging fees for product advertising, such as allowing businesses to promote through various channels.
Diversifying revenue streams can help businesses reduce risk and improve financial stability.
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