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How To Use The Business Model Canvas – A Complete Guide

business model canvas guide to how to use it
The Business Model Canvas is a strategic tool for developing new business models or documenting and improving existing ones. Teams use the Business Model Canvas to discuss their existing and new businesses in a structured and tangible manner and to develop new and innovative business models for new products and services.

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Description

This is a complete guide on how to use the Business Model Canvas. I have also included some downloads for high-quality pdf versions of the Business Model Canvas, the popular canvas created by Osterwalder and Pigneur.

TABLE OF CONTENTS

The Canvas is popular with entrepreneurs and intrapreneurs for business model innovation. Fundamentally, I find it delivers three things:

  1. Focus: It focuses on what’s important the fundamental business logic – what I mean does it all fit together. It quickly clarifies and demonstrates whether the pieces fit together to make a business worth investment.
  2. Flexibility: Often I find that the original ideas get tweaked as the Business Model develops. This is particularly true when working in organisations and across different skills sets.
  3. Transparency: Team can refer to it easily. It is an ongoing tool that facilitates discussion, debate and also requires further research. Further research can be around the financials, segments and partners. Often, once the business model is created there needs to be some initial validation.
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Sections

Before you use the Business Model Canvas for the first time, I recommend just making sure everyone is clear on each section and what does and doesn’t go into it. For a lot of people, this can seem self-explanatory, but when working across different teams and disciplines sometimes meanings get lost. Often people just don’t like to ask. Start with a clear definition and open it up to questions as you go through each element.

The nine business model elements offer a unified way of understanding and designing the key business drivers for any organisation:

  1. Customer Segments: Who are the customers? What do they think? See? Feel? Do?
  2. Value Propositions: What’s compelling about the proposition? Why do customers buy, use?
  3. Channels: How are these propositions promoted, sold and delivered? Why? Is it working?
  4. Customer Relationships: How do you interact with the customer through their ‘journey’?
  5. Revenue Streams: How does the business earn revenue from the value propositions?
  6. Key Activities: What uniquely strategic things does the business do to deliver its proposition?
  7. Key Resources: What unique strategic assets must the business have to compete?
  8. Key Partnerships: What can the company not do so it can focus on its Key Activities?
  9. Cost Structure: What are the business’ major cost drivers? How are they linked to revenue?

#1. Customer Segments

The first section to think about is your customers. Who are you aiming at and how do you define them. As a result of digital platforms that question can add some levels of complexity. So here are some ideas regarding the different ways to think about your customers.

a. Segment Dimensions.

Platforms and multi-sided markets: If you have a multi-sided market then you will have different customers for each side of your market. In other words, a two-sided market will have two, three-sided three and son. In addition, you may even have different segments with the demand and supply side. An example of a two-sided market is eBay. But as you can see from the range of goods they have a diverse range of customers. In their case, they can be split into brands, businesses and individuals who want to sell and consumer segments on the other.

Mass Market: An organization opting for this type of customer segment gives itself a wide pool of potential customers because it feels that its product is a relevant need amongst the general population. A potential product for such an organization could be Flour.
Niche Market: This customer segment is based on highly specific needs and unique traits of its clients. An example of an organization with a niche customer segment is Louis Vitton

Segmented: Organizations adopting the segmented approach create further segmentation in their main customer segment based on slight variations in the customer’s demographics and resultantly, their needs.
Diversify: An organization with a Diversified Market Segment is flexible in the iterations of its product or service tweaking it to suit the needs of segments with dissimilar needs or traits.

b. Segment Composition.

A customer segment is the larger ‘macro’ view of your different types of customers. The detail though comes in piecing together the profile of your customer profiles that sit in a segment. This is the ‘micro’ view. Developing and using a marketing persona then is key to understanding how your value proposition matches the needs of customers in each segment. Start off with one persona and one segment and then build out. Back it up with real research and real data.

c. Problems, Needs, Habits & Current Alternatives.

One of the biggest mistakes is to think you are the customer. On some rare occasions, this can be the case. Generally, though you need to talk to customers. What you are trying to identify and confirm is their needs. are you fulfilling? Also, look for specific alternatives that your customer uses today. You need clearly link your Value Propositions back to these in this next section.

Output: a list of Personas, organized by Customer Segment if you have more than one segment. I recommend trying to prioritize them. Who would you pitch first if you could only pitch one? Who next? And so forth…

#2. Value Propositions

The value proposition provides value through a number of attributes such as customization, performance, “getting the job done”, brand/ status, design, newness, price, cost and risk reduction, accessibility, as well as convenience/ usability.

Which of the Problems or Needs that you identified in your Personas? What is unique about your Value Propositions and why does your customer prefer them to their Current Alternatives? You may have a whole lot of these- and that’s fine. When you’re getting going with this, jot them all done on a whiteboard, index card, Post-It, etc. But then rank them and you’ll probably want to just the top ones. What things do you do that actually cause a customer to pick you over a competitor or alternative?

#3. Channels

The medium through which you will deliver your value proposition to the customer segment(s) is known as a channel. There are various options for channels available, and the selection is based on the channel that is the quickest, most efficient with the least amount of investment required. Channels include entities you use to communicate your proposition to your segments, as well as entities through which you sell product and later service customers.

#4. Customer Relationships

How does the customer interact with you through the sales and product lifecycle? Do they have a dedicated personal contact they see? Call? Is all the interaction over the web? Do they never see you at all but instead talk to a Channel?

Customer Relationships can be categorized as follow:

Personal Assistance: In this kind of relationship your business interacts with the customer directly through your people who provide the human touch by assisting the customer presale, during the sale and even may provide after-sales services.

Dedicated Personal Assistance: This kind of relationship is characterized by a very close interaction between the customer and the business through a dedicated representative who is assigned a set of clients and is personally responsible for the entire experience the customer has with the company. The type of relationship will be determined by your customer segment and your value proposition.

Self-Service: Self-Service places the onus of the customer experience on the tools the company provides for the customer to serve him or herself.

Automated Services: These are customized self-service relationships where the historical preference of the customer is taken into account to improve the overall experience.

Communities: Many organisations now build and harness the power of communities to communicate with them directly. This allows for an enhanced experience because the community allows people to share their experiences and come up with common challenges and solutions.

Co-creation: The customer has a direct hand in the shaping new product(s) or service(s).
For an entrepreneur, the priority is to identify the type of relationship you will have with the customer. Then the value of the customer must be evaluated in terms of the frequency of his expenditure on the product and services. Loyal customers are relationships that the company should aim to invest in as they will yield opportunities for faster growth.

#5. Revenue Streams

A revenue stream is how and at what price customer segments buy products or services. A revenue stream can be created through the following ways;

Asset Sale: the company sells the right of ownership over the good to the customer.
Usage Fee: the company charges the customer for the use of its product or service.
Subscription Fee: the company charges the customer for the regular and consistent use of its product or service.
Lending/ Leasing/ Renting: the customer pays to get exclusive access to the product for a time-bound period.
Licensing: the company charges for the use of its intellectual property.
Brokerage Fees: companies or individuals that act as an intermediary between two parties charge a brokerage fee for their services.
Advertising: a company charges for others to advertise their products using their mediums.

When understanding revenue streams, it is important to research competitors. If the product or service is new to market then extensive testing is needed along with adjustment of the value proposition to get the product market fit.

#6. Key Activities

These are the crucial things the business needs to do to deliver on its propositions and make the rest of the business work- for example, if selling through 3rd parties is part of the model, then activity around channel management is probably pretty important.

It is important to evaluate which activities are key by adding or removing some and evaluating their impact.

#7. Key Resources

Key resources are the strategic assets you need in place, and you need in place to a greater or more targeted degree than your competitors. The Business Model Canvas proposes that there are three core business types: product, scope, and infrastructure. These tend to have similar types of Key Resources.

#8. Key Partnerships

To create efficient, streamlined operations and reduce risks associated with any business model, you need partnerships. Key partnerships are the network of suppliers and partners who complement each other in helping the business create its value proposition.

What Activities and Resources are important but not aligned with what’s a unique strategy for you? What’s outside of your business type? Could partners do some of those? Why? Which?

#9. Cost Structure

This defines the cost of running a business according to a particular model. Businesses can either be cost driven i.e. focused on minimizing investment into the business or value driven i.e. focused on providing maximum value to the customer.

Following are some traits of common cost structures;

Fixed Costs: costs that remain the same over a period of time
Variable Costs: as the name suggests, these costs vary according to a variance in production
Economies of Scale: costs decrease as production increases
Economies of Scope: costs are decreased by investing in businesses related to the core product.

How do they drive costs? Are those costs well aligned with the key Value Propositions? Are the costs more fixed or variable as you test different business models? Are they more linear with your scaling or more fixed? You’ll want to have these in mind as you tweak your model.

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canvas model strengths

Strengths

  • Focus on the problem-solution fit.
  • Defines the main business components and their relationships.
  • Develops clarity of thought for business logic.
  • Tool for facilitating dicussion, debate and further research.
  • Easy to understand.
canvas model weaknesses

Weaknesses

  • Doesn’t take into account competitive arena.
  • Often when used is based on assumptions rather than facts.
  • Doesn’t take into account sustainability – missing broader view of economy, society and environment.
  • Doesn’t show the different stakeholders involved in the business model.
  • Lacks components that are available
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How To Use

Remember if you are a startup then the Lean Canvas is a better place to start. You can, however, progress to the business model canvas once you have your product market fit verified.

The 4 most common mistakes

So what’s wrong with just filling out the canvas? A lot.

These are some common mistakes people make when they use the Business Model Canvas:

#1. You fill it once and you’re done

The BMC, like any other canvas in Lean Startup land, is supposed to be a live documentThis means that you fill it out based on what you know today with the understanding that you will be revising it as you learn more from testing your hypothesis.

Unfortunately doing away with a business plan often doesn’t mean doing away with the habits of a business plan and so you end up with a one pager up on the wall that you will use as something to execute on rather than as guidance to figure out your next test.

#2. You fill it all at once
Often times new founders will download the template, print it out and then proceed to spend an entire afternoon, if not an entire day, debating how to fill every single block. But it often doesn’t end up there and after a night of sleep, the cycle will repeat. I’ve done this and it’s a complete waste of time.

Consider the stage you’re at: are you just starting out? are you filling in the canvas for an existing product? As you can imagine those two scenarios are wildly different and that should reflect on how you use the canvas.

#3. You don’t take everything you wrote as a hypothesis
Building on #1 you should use the canvas as a living document to figure out how to de-risk your business which means coming up with a hypothesis and running tests. For example, if in the revenue stream you wrote $10/m subscription, is that how you’re going to price your product? how did you come up with that price, to begin with?

Pricing is often a matter of understanding the value to the customer, competitors price points and other variables before you can make a hypothesis worth testing.

#4. You are generic in what you write down
This is one of the biggest causes of failure.

Being generic in your value proposition will make it impossible to explain what you do to your customers who will just be confused by what you are communications.

Market size and competition

This isn’t as much of a mistake as it is a shortcoming of the Business Model Canvas. It’s important to mention it: if you’re anywhere around solution validation, and are hopefully approaching product-market fit, you should have a good idea about your competitors and market size. Remember if the market is too small and you have a new product that no one knows about you are trying to educate a market on something new it might not be viable.

The Overall Business Model Canvas Framework

high leel sections of the business model canvas

The above diagram neatly places you in a position of seeing how the overall structure of the business model works. From creating value through to delivery of value and understanding the financials.

How To Use The Business Model Canvas

The first time you engage with the canvas, I recommend printing it out or projecting it on a whiteboard or printing out a large version. See the downloads section.

#Step 1. The Customer Section

how to use the business model canvas section customersOutput: a list of Personas, organized by Customer Segment if you have more than one segment. I recommend trying to prioritize them. Who would you pitch first if you could only pitch one? Who next? And so forth…

#Step 2. Value Propositions

Which of the Problems or Needs that you identified in your Personas are you fulfilling? What is unique about your Value Propositions and why does your customer prefer them to their Current Alternatives?

Output: a prioritized list of Value Propositions and linkages from each Personas to the VP’s relevant to them.

#Step 3. Channels

Channels include entities you use to communicate your proposition to your segments, as well as entities through which you sell product and later service customers.

  • Attention
  • Interest
  • Desire
  • Action
  • Onboarding
  • Retention

What is the absolute minimum set of actions required by the customer to have you deliver on their problem?
How do they first find out that you, your proposition exist? How do you break through the noise floor? What is it that engages them with your proposition? How will you connect? What is the absolute minimum set of actions required by the customer to have you deliver on their problem? 

Output: a list of important Channels, linked to Personas or Segments if they differ substantially. Make notes on what steps are relevant for each- promotion, sales, service, etc. See Note this section for more structure on this.

#Step 4. Customer Relationships

How does the customer interact with you through the sales and product lifecycle? Do they have a dedicated personal contact they see? Call? Is all the interaction over the web? Do they never see you at all but instead talk to a Channel? A few litmus test questions you may want to ask yourself at this point:
– Can the Value Proposition be delivered to the Customer this way? All the way through from promotion, to sale, to post-sale service? (See AIDAOR above on this.)
– Can you make the numbers work?
– Is there a premium support product you need to create/test? Many companies, like Apple, have rejected the false choice of ‘Do we provide phone support or not?’ instead of offering personal support for a reasonable charge.

Output: a description of Customer Relationships, with notes if they differ across Customers (between Segments or among Personas within a Segment) or across the customer journey.

#Step 5. Revenue Streams

business model canvas channels sectionOutput: a list of Revenue Streams, linked (mutually) to Personas (or Segments if the mappings are the same within a set of Personas) and Value Propositions

#Step 6. Key Activities

business model canvas key activities sectionOutputs: a list of Key Activities linked to your business’ Value Propositions.

#Step 7. Key Resources

business mode canvas key resources section

Key resources are the strategic assets you need in place, and you need in place to a greater or more targeted degree than your competitors. The Business Model Canvas proposes that there are three core business types: product, scope, and infrastructure. These tend to have similar types of Key Resources.

Outputs: a list of Key Resources linked to your business’ Key Activities.

#Step 8. Key Partnerships

business model canvas key partnerships section

Map Key Partners to Key Activities. If an activity is key, it’s still part of your business model. This is a way to denote which specific Partners are handling various Key Activities for you.

Output: a list of Key Partnerships with notes on their relationship to Key Activities.

#Step 9. Cost Structure

business model canvas cost structure

Key Activities drive your propositions and hence your revenue. How do they drive costs? Are those costs well aligned with the key Value Propositions? Are the costs more fixed or variable as you test different business models? Are they more linear with your scaling or more fixed? You’ll want to have these in mind as you tweak your model.

Output: a list of Cost Structure elements with notes on their relationship to Key Activities.

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