The business model canvas is an invaluable tool for any organization. It provides a structured and straightforward way to create a business model. Instead of writing lengthy paragraphs and documents to explain what the business does and how it makes money, the business model canvas enables companies to explain their business model in one page. Let’s explore how to use this tool and how you can create your first business model canvas.
What is a Business Model?
Before we can even begin to create a business model canvas, we must first have a common understanding of what a business model is.
A business model is an outline of how a business intends to generate money. In the book Business Model Generation by Alexander Osterwalder and Yves Pigneur, a business model describes the rationale of how an organization creates, delivers, and captures value.
But what exactly should a business model include? Most aspiring business owners often think that as long as you have a product idea, you’re good to go on your business venture. They later realize that having a product idea isn’t enough. We need to determine who you’ll sell those products to, why they’ll buy your product, and how you’ll make a profit.
And this is where the business model canvas enters the picture.
What is a Business Model Canvas?
A business model canvas is a tool that combines all the elements that comprise a business model into a single-page document. The goal of the business model canvas is to provide a structured and straightforward way to create a business model. No fluff. No lengthy paragraphs with unicorns and rainbows. Only the essential building blocks to create a robust model are in the business model canvas.
Below is how the business model canvas looks. Each block in the canvas corresponds to a business model building block.
Let’s go over the nine building blocks of a business model to better appreciate the benefits of the business model canvas.
The Nine Building Blocks of the Business Model Canvas
The customer segment building block defines who the business aims to cater to. Who will purchase the product? Customer segments can represent different groups of people or even types of business organizations. A business can cater to more than one customer segment.
It’s also recommended to combine customer segments where possible. This could be because they have the same purchasing behaviors or common needs and wants. But the company must decide on which customer segments to focus on. It is not required to serve them all. The company can choose to focus on the segments that they have a better understanding of or the ones they feel that have the most profitability.
Once the business has decided which customer segments to serve, the other building blocks of the business model should revolve around satisfying and delivering value to these chosen segments.
The value proposition building block defines why customers would avail of the company’s products. It describes what customer problems are solved or what customer needs are satisfied by the company’s products. The value proposition gives customers an idea of why they would choose one business over the other.
Here are some examples of product or service features and elements that relate to customer value creation.
- Innovation or newness – Offering the first of its kind in the market
- Performance – High levels of performance and speed of service; larger capacities to get more done faster
- Reliability – Consistency in getting the job done
- Design – Superior design that separates the product from its competitors
- Price – Give the same value at a lower price
- Brand/Status positioning – Your brand as a status symbol or being part of a niche
- Customization – Tailor-fit the features of the product to the needs of the customers
- Accessibility – Offering the product to people who’d otherwise not be able to get them
- Usability – Make things easier for customers to do
While the list is not exhaustive, these ideas should trigger you to ask, “Why would customers buy from you?” Once you’ve answered that, then you’ve got your value proposition.
The channel building block describes how the company reaches out to its customer segments to deliver its value proposition. This includes communication pathways, distribution methods, and sales channels. The channels used by the business ultimately accompany the customer in the buyer’s journey.
Companies can choose to employ their own channels or partner with other organizations that will sell the products for them. Own channels can be from the company’s physical stores or own eCommerce website. Partner channels can be retailers, wholesalers, or affiliate sites.
The customer relationships building block describes how the company gets, keeps, and grows its customers. Relationships can range from personal (e.g. personal assistance, communities) to automated (e.g. self-service help centers, automated personalized services). The common drivers for establishing these customer touch points are:
Companies can use a mix of both personal and automated customer relationship methods. But all customer relationship methods you choose to use should be integrated with the rest of your business model.
The revenue streams building block defines how the company generates profit from each of the customer segments it caters to. We answer the question, “how much would customers be willing to pay?” We also define the ways by which the customers will pay for your products and services.
There are two main types of revenue streams.
- Transaction revenue – results from one-time customer payments.
- Recurring revenue – results from ongoing payments and is the case for continuous delivery of a value proposition or provision of a post-purchase service.
You can then choose to use either a fixed-pricing or dynamic pricing mechanism for each of your revenue streams.
The key resources building block lists the main assets that are required to run the company’s business model. They are needed to create and deliver the value proposition to its target customer segments. Here are the main categories of key resources:
- Human – Your employees are your main assets. This mostly applies to knowledge-intensive and creative-focused industries where the employees generate the product. A pharmaceutical company, for example, relies on its scientists and sales force to create and deliver its products.
- Financial – This defines your financial assets which include cash, stock options, and lines of credit.
- Intellectual – This includes copyrights, brands, proprietary knowledge, patents, and customer databases to name a few.
- Physical – This includes factories or manufacturing plants, machines, equipment, distribution networks, vehicles, buildings, etc.
The key activities building block lists the main activities that need to take place to run the business model. Like key resources, key activities are required to create the value proposition of the company and deliver them to its customers. Key activities will differ depending on the business model of the company. There should be key activities identified for the profit-generating blocks of the business: customer channels, customer relationships, and revenue streams.
Businesses may often have key activities that they outsource or key resources that they don’t own. They engage external partners for these key elements to run the business model. Your key partnerships could be your suppliers, vendors, strategic alliances, or joint ventures. These partnerships aim to optimize the business model by leveraging external expertise. This reduces the risk and increases competitiveness for the business.
The cost structures building block defines the main cost drivers required to run the business model. The idea here is to map your key activities, key resources, and key partnerships to their associated costs. Each cost is aligned to your value proposition. Otherwise, you’re spending on something that doesn’t create value for you and your customers.
After knowing what each of the nine building blocks of the business model canvas stands for, you will notice that those items on the left are related to costs, while those on the right are what drives profit.
Using the Business Model Canvas Template with Kanban Zone
Now that you know how to make a business model canvas, it’s time to put things into action. You don’t have to do this alone. I highly recommend that you include the key leaders in your company in your business modelling exercise. You can certainly do this for a new business model you want to implement. But you can also do this for an existing business model to gain clarity over your operations.
While you can do this on a physical board while you’re brainstorming with your team, an easier way is to use an online Kanban board where each of the blocks is mapped out. We’ve created a business model canvas template in Kanban Zone that teams can readily use to whip up business models easily.
There are also pre-added Kanban cards that you can edit and put the necessary details for each item. Each block also comes with short guidelines. So, you have a guide on what goes on each block. You can add more cards as you need. It only takes a few clicks to get this ready. Read more about our business model canvas template.
Making Your Business Model Work
It’s important to have a deep understanding of what drives your business and what value comes out of it. Only by doing so will you be poised to continuously improve your value proposition and stay in tune with the needs of your customers.
Review your business model canvas regularly to see opportunities for optimization and scaling. There will also be instances that there are changes to the elements on each of your building blocks as you grow the business. Your customer segments may expand for example. Or you may choose to only focus on fewer customer groups. This goes the same for all other building blocks.
Having your business model canvas readily accessible for everyone will help you gain alignment within the organization. In this way, everyone can rally behind the company’s goals towards delivering the value proposition that the company aspires for.