The Business Model Canvas is a strategic management and entrepreneurial tool. It allows you to describe, design, challenge, invent, and pivot your business model. It gives you the structure of a business plan without the overhead and the improvisation of a ‘back of the napkin’ sketch without the fuzziness.
The Canvas has nine elements:
Customer Segments: To build an effective business model, a company must identify which customers it tries to serve. Various sets of customers can be segmented based on the different needs and attributes to ensure appropriate implementation of corporate strategy meets the characteristics of selected group of clients. The different types of customer segments include:
- Mass Market: There is no specific segmentation for a company that follows the Mass Marketelement as the organization displays a wide view of potential clients. e.g. Car.
- Niche Market: Customer segmentation based on specialized needs and characteristics of its clients. e.g. Rolex
- Segmented: A company applies additional segmentation within existing customer segment. In the segmented situation, the business may further distinguish its clients based on gender, age, and/or income.
- Diversify: A business serves multiple customer segments with different needs and characteristics.
- Multi-Sided Platform / Market: For a smooth day-to-day business operation, some companies will serve mutually dependent customer segment. A credit card company will provide services to credit card holders while simultaneously assisting merchants who accept those credit cards
Value Propositions: The collection of products and services a business offers to meet the needs of its customers. According to Osterwalder, (2004), a company's value proposition is what distinguishes itself from its competitors. The value proposition provides value through various elements such as newness, performance, customization, "getting the job done", design, brand/status, price, cost reduction, risk reduction, accessibility, and convenience/usability.
The value propositions may be:
- Quantitative – price and efficiency
- Qualitative – overall customer experience and outcome.
Channels: A company can deliver its value proposition to its targeted customers through different channels. Effective channels will distribute a company’s value proposition in ways that are fast, efficient and cost effective. An organization can reach its clients either through its own channels, partner channels, or a combination of both.Channels includes entities you use to communicate your proposition to your segments, as well as entities through which you sell product and later service customers. For example, if you sell bulbs for light houses and there’s a website all light house attendants purchase equipment, that site is a sales Channel. If you use Google AdWords, that’s a Channel, too (for getting attention). If you use a third party company to service the bulbs when they break, that’s also a Channel.
Customer Relationships: To ensure the survival and success of any businesses, companies must identify the type of relationship they want to create with their customer segments. Various forms of customer relationships include:
- Personal Assistance: Assistance in a form of employee-customer interaction. Such assistance is performed either during sales, after sales, and/or both.
- Dedicated Personal Assistance: The most intimate and hands on personal assistance where a sales representative is assigned to handle all the needs and questions of a special set of clients.
- Self Service: The type of relationship that translates from the indirect interaction between the company and the clients. Here, an organization provides the tools needed for the customers to serve themselves easily and effectively.
- Automated Services: A system similar to self-service but more personalized as it has the ability to identify individual customers and his/her preferences. An example of this would be Amazon.com making book suggestion based on the characteristics of the previous book purchased.
- Communities: Creating a community allows for a direct interaction among different clients and the company. The community platform produces a scenario where knowledge can be shared and problems are solved between different clients.
- Co-creation: A personal relationship is created through the customer's direct input in the final outcome of the company's products/services.
Revenue Streams: The way a company makes income from each customer segment. Several ways to generate a revenue stream:
- Asset Sale – (the most common type) Selling ownership rights to a physical good. e.g. retail corporations
- Usage Fee – Money generated from the use of a particular service e.g. UPS
- Subscription Fees – Revenue generated by selling a continuous service. e.g. Netflix
- Lending/Leasing/Renting – Giving exclusive right to an asset for a particular period of time. e.g. Leasing a Car
- Licensing – Revenue generated from charging for the use of a protected intellectual property.
- Brokerage Fees – Revenue generated from an intermediate service between 2 parties. e.g. Broker selling a house for commission
- Advertising – Revenue generated from charging fees for product advertising.
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.
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.
Key Partnerships: At this point, hopefully the Canvas has helped you sharpen and articulate your business’ focal points. What Activities and Resources are important but not aligned with what’s uniquely strategy for you? What’s outside of your business type? Could partners do some of those? Why? Which?
Cost Structure: This describes the most important monetary consequences while operating under different business model Canvas . You’ve worked to understand how your 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.