By Ben on January 31, 2012
Are you an entrepreneur working hard to build a great new company? Have you already worked through all of the possible business models and do you have effective tools for communicating your conclusions? At VC4Africa we have used the Business Model Canvas for workshops in Cameroon and Ethiopia. Feedback from the participants showed the workshop were useful in working through scenarios and new ideas so we thought it would be a good idea to share these tools with the rest of the community.
First off: What is a Business Model? Per wiki definition: ‘A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The process of business model construction is part of business strategy.’ The key word for us is ‘rationale’ in so far that someone reading your business plan or conducting due diligence on your business is looking to follow your thinking, thought process and assumptions made throughout the design process. Being able to follow your thinking as an entrepreneur is critical for discussing strategy and approach. This is where the Business Model Canvas can help.
What is the Business Model Canvas? The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm’s value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.The Business Model Canvas was initially proposed by Alexander Osterwalder based on his earlier work on Business Model Ontology. Here is a video that helps understand the nine different building blocks.
Alexander Osterwalder shares a short video to explain the structure of his business model canvas framework. Emphasizing the importance of searching for a business model, Osterwalder says, “Great products are becoming a commodity. It’s the combination between great products and a great business model that is going to keep you ahead of the competition in the coming decade.”
As mentioned in the video, the canvas is built up of nine building blocks:
1) Key Activities: Outline the key activities for your company. What do you focus on ‘doing’ as an organization and where do you rely on others for support? You can put question marks by certain activities and ask yourself if you are best positioned to be doing this or maybe a key competence is outsourced and this activity should be central to your business.
2) Key Resources: What resources do you need to create value for your customer? These resources are the assets you use to build your company and you will want to make sure you have the best resources available. Maybe a resource is missing and this could underpin the need for an external funding proposal. These resources can be human, financial, physical and intellectual.
3) Partner Network: If you have identified your key activities than you also know where you need partners. The Relying on others introduces elements of risk and it is important to make sure your partnerships are well established and tested. It is also important to think about how to structure these partnerships so they are win-win for both parties and ensure sustainability.
4) Value Proposition: What is the solution you offer to the problem you propose to solve? The value proposition needs to be linked to the customer segment and it needs to be clear ‘Who’s’ problem you are solving. According to Osterwalder, 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.
5) Customer Segments: To build an effective business model you have to know who your customers are. Who has the problem and who is willing to pay for the solution? In most cases, you will have more than one customer and you can rank them on a list of priority. Remember, your user (the person or entity who uses your product) is not always the customer (the person or entity who pays for it).
6) Channels: You need channels to deliver your product to the end user. There are likely to be several channels and again you can rank them on a list of priority. Also think about which customer segment is the most important to your business and which channel is likely to be the most effective in reaching them. You want the channels to be fast, efficient and cost effective. Some will be your own, but in many cases you will have to access someone else’s channel. Link this ‘need’ to your analysis on possible partners. Also think about what you offer your partner in exchange for access.
7) Customer Relationship: Managing your relationship with the customer is key. This is what can help you stand out from the competition and build loyalty for your brand. How do you plan to manage your relationships with customers and what will you do to ensure they are happy with your product or service. This is also two way communication. How do you ensure your customers can give you feedback?
8) Cost Structure: This describes the most important monetary consequences while operating under different business models. Think about all of the different expenditures and costs that need to be made to make your model work and to deliver the value your customer expects. You have both fixed costs (costs are unchanged across different applications. i.e. salary, rent) and variable costs (these costs vary depending on the amount of production of goods or services. i.e. each cup of coffee sold)
9) Revenue Streams: Looking at the entire picture you can start to think about different ways to generate and income. Again, there are more ways to make money so you will have to prioritize the options and decide which are the best and why. Here are a few:
- Asset Sale: Selling a product / ownership rights to a physical good
- Usage Fee: Money generated for using a service
- Subscription Fees: Revenue generated by selling the rights to use a service on a regular basis
- Lending/Leasing/Renting: Giving exclusive right to an asset for a particular period of time
- Licensing: Revenue generated from charging for the use of a protected intellectual property
- Brokerage Fees: Revenue generated from an intermediate service between two parties
- Advertising: Revenue generated from charging fees for product advertising
Tips for using the Canvas: Knowing where to start can be a bit tricky. Use post it notes so you can move ideas around. Also try different colors so you can play with multiple scenarios. We find it useful to start with the customer segment i.e. who are we going to target and what is their problem we are going to solve? Once this has been established, and we know the size of the market and what they are willing to pay, the rest of the canvas gets easier to fill in. After the first round go back and start looking at the assumptions you had to make along the way. What happens if you change a particular decision? Questioning your assumptions allows you to start looking at alternative scenarios you might never have considered. This is really where the Business Canvas can offer something new.
We are curious to get the views and opinions of other people who have used the Canvas and their experiences so please share them with the community!