We are filled with business ideas. We come up with them everywhere and all the time. Some business ideas are good, while others are bad. Nevertheless, the worst thing that can happen to a business idea is burying it underneath miscommunications and misinterpretation.
The best way to explain and follow-on an idea is visualization; Put all the idea’s elements on one whiteboard and link the different elements of this idea together in a visual and easy-to-track way.
Here, the business model canvas (BMC) shines as an ultimate tool for startups and business ideas. In this article, I’ll discuss with you the BMC, its elements, and how to use it to develop business ideas and to communicate this idea with others, such as investors and incubators.
What is the Business Model Canvas?
The Business Model Canvas (from now on, we will call it BMC) is a strategic management tool to quickly and easily define and communicate a business idea or concept.
It is a visual chart with elements describing a company’s or product’s value proposition, costumers, and finances. It is a great way to align the activities and coherently structure the idea.
The BMC captures how an organization creates, delivers, and maintains value.
The left side of the canvas focuses on the business itself (internal), while the right side of the canvas focuses on the customer (external). Both internal and external factors meet around the value proposition, which is the exchange of value between your business or idea and the costumers/clients.
Why do we use BMC?
- To quickly draw and visualize an idea and what it entails.
- It allows us to get a better understanding of the business and to go through the process of making and growing an idea to a functioning business.
- It looks at what kinds of costumer decisions influence the use of the systems.
- It allows everyone to get a clear understanding of what the business will likely be.
How do we use the BMC?
The original idea behind the BMC is to be printed on a large surface so groups of people can start sketching and discussing business ideas and elements together. People can use post-it notes or markers to write their contributions to the BMC. The BMC fosters understandings, discussion, creativity, and critical analysis. A version can be downloaded from Strategyzer.com for free; it is distributed under a Creative Commons license and can be used without restrictions.
The following sections will discuss every part of the BMC, its content, and how to add life to each section, so the BMC is filled with the necessary information.
The value proposition is the fundamental concept of the exchange of value between your business and costumers/clients. According to Investopedia:
Money is a medium of exchange, it allows people to obtain what they need.
Therefore, money is the medium to exchange value, and costumers will pay money for a service or a solution provided by your business. Thus, the value proposition of your business is everything that makes your business unique, and it can be divided into two main aspects:
- Quantitative: Price and efficiency
- Qualitative: Overall experience, customer service, and outcome
Ask yourself and your team the following questions while defining your business and it’s value:
- What are we offering, and how does it solve a problem?
- Why is solving this problem important?
- What motivates this problem?
An effective business model must identify which customers it is trying to serve. Each identified customer is an opportunity or a challenge in the business model.
Customer segmenting is to divide a customer base into groups that are similar in a way, such as age, gender, interests, and spending habits. A business’s market can be:
- Mass market: A business that follows the mass market does not need segmentation. e.g., Netflix
- Niche market: Customer segmentation based on specific needs and characteristics. e.g., GoPro
- Multi-sided market: A company that serves two opposing sides for smooth day-to-day operations. e.g., Credit card companies
- Segmented market: A business can identify multiple customer segments as potential clients. The segments, in this case, might be divided based on gender, age, geographical location, or income. However, the different segments, in this case, share the same needs. e.g., Skillshare
- Diversity: A business might cater to different segments with different needs and characteristics. e.g., Apple
Identify your customer segments by answering the following questions:
- Who are we solving the problem for?
- Who will value our value proposition?
- Which group finds my value proposition appealing?
- What are the characteristics of the people looking for my value proposition?
Channels are defined as the avenues through which your customer come into contact with your business and becomes part of your sales cycle. This is generally covered under the marketing plan of your business or startup.
To fill in the channel part of the BMC, answer the following questions:
- How are we going to tell our customer segments about our value proposition?
- Where are our customers? and are they on social media?
- Are they driving their cars and listening to the local radio stations?
- When do they watch TV or YouTube?
- Can I reach them at events, conferences, or other professional gatherings?
Channels can be anything you may require to reach your customers. It can be social media, emails, SEM, SEO, viral marketing, targeting blogs, affiliates, PR, trade shows, or even content marketing. The channels’ possibilities are endless, and it is crucial to find the right channel to reach a specific customer segment.
Customer relation is defined as how the business interacts with its customers. To ensure a business’s success, the company must identify and maintain the type of relationship they have with their customers. Three main questions must be answered at this point:
- How will the business get new customers?
- How will the business keep its customers?
- How will the business increase its revenue from its existing customers?
Amazon and Netflix suggest new products or series based on the characteristics of previous interactions. This service is based on algorithms, and it is an automated service that keeps the customers hooked.
The relation between the business and the customer can be in-person (e.g., car dealerships), through third-party contractors (e.g., Authorized Rolex sellers), online (e.g., Amazon), Events (e.g., Apple events), or by phone (e.g., automated calls).
Revenue streams are defined as how your business converts your value proposition or solution to the costumer’s problem into financial gains.
The revenue stream can be based on an asset sale, usage fee, subscription fee, lending, leasing, renting, brokerage fee, licensing, advertising, or referral fee, among others.
In this part of the BMC, you should identify the practical resources which are needed to achieve the key activities or actions of the business.
These resources are considered assets to the business that are needed to sustain the business. Key resources can be physical, human, financial, and intellectual.
Key partners are other external companies, suppliers, or parties you may need to achieve your key activities and deliver value to the customer.
Ask yourself: who can support me to achieve my value proposition? A grocery store needs suppliers. A gaming console needs game developers.
The key activities are the actions that your business undertakes to achieve the value proposition for your customers.
Let us, for example, discuss the key activities for Netflix:
- Tech & development
- Content creation
- Content licensing and acquisition
These key activities are needed to reach Netflix’s value proposition. They are not Netflix’s main activity — The main activity listed in the value proposition. However, without them, Netflix cannot deliver its value proposition to the customers.
This section of the BMC identifies the monetary cost of operating as a business. It shall determine all fixed (e.g., salary and rent) and variable costs (e.g., fuel costs for a food delivery business).
The cost structure has to be considered in detail, and the costs have to be discussed thoroughly. The canvas has to identify if the business is cost-driven, meaning the business model focuses on cost cuttings for the customer (e.g., Uber). Or if the company is value-driven, focusing on the end value for the product and service (e.g., Rolex).
It shall also be noted that some costs will increase with growing revenue. For example, Netflix’s operations cost increases with increasing subscribers’ numbers.
Every idea might be a suitable business idea. The Business Model Canvas helps you and your partners to identify and document all the required information for the business on one sheet in a neat visualization.
The BMC generates a better understanding of its value proposition, its customers, and the required financial effort. Using the BNC in an early stage can accelerate the startup’s development from a mere idea sketched on a napkin to a multi-million dollar business.
Sources to read more:
1 - Alexander Osterwalder, Yves Pigneur (2010): Business Model Generation
2 - Netflix Business Model Canvas
Special thanks to Nabil AlSayed for his help and support in writing this post.
Walid Al Otaibi -WAO- is a top writer in Gaming. He works at an engineering company in Germany as a Project Manager. He comes from a multicultural background and is located in Germany since 2003. He is writing about Arab Culture, Multiculturalism, Finance, and Trending topics.
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