All about the Business Model Canvas

The Business Model Canvas was proposed by Alexander Osterwalder based on his earlier book: Business Model Ontology. It outlines several prescriptions which form the building blocks for the activities. It enables both new and existing businesses to focus on operational as well as strategic management and marketing plan.

“The Business Model Canvas, is a strategic management and entrepreneurial tool. It allows you to describe, design, challenge, invent, and pivot your business model.” – Businessmodelgeneration

It’s a simple graphical template describing nine essential components: Customer segments, value propositions, channels, customer relationships (such as self service or personal assistance), revenue streams, resources, activities, partnerships, and costs. Let’s dive deeper to each segment of the canvas to understand it more.

Step 1: Customer Segments

Let’s start with the customer segments, which is located on the top-right column of the table. It’s basically determining your customers, for whom are you creating value? Who are your most important customers? What’s the market segment, i.e. Mass Market, Niche Market, Segmented, Diversified or Multi-sided Platform? The output of this step should be a list of Personas, organised by Customer Segment if you have more than one segment.

To determine your customers, obviously you are trying to solve their problems with your service/product. So upon deciding who your customers will be, first you need to make sure that you can identify an existing need/problem and identify specific alternatives that your customer uses today. If you’re not sure, go out and observe, talk to some representative people. The most common problem of a Startup is they’re trying to solve a problem that doesn’t exist.

Step 2: Value Propositions

This is the most important step. This is all about your product/service, what you offer to those customers. 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?

You may feel like you’re in good shape on understanding the customer’s world but you don’t have any validation on whether the Value Propositions are clicking because this is a new venture? That’s OK, this is your canvas, it may be full of assumptions initially, but at the later stage you will have to make sure that you validate your value propositions.

Step 3: Distribution Channels

A distribution channel is a way to communicate your proposition to your segments of customers. Or in short – how you distribute your product/service. For example, if you sell shoes for women and there’s an e-commerce website where local brands can sell their products, that site is a sales Channel. If you advertise your products on magazines, that’s an advertising channel. And so on.

But it doesn’t end there. This section is where you will intensively determine which channels work best. How much they cost and how they can be integrated into your and your customers’ routines. This is a way for you to make sure you communicate your product to your customers in the most effective ways, only.

Step 4: Customer Relationships

What type of relationship does each of our Customer Segments expect you to establish and maintain with them? Which ones have you established? How are they integrated with the rest of your business model? How costly are they? These will be a list of ways on how you maintain your relationship with your customers, stuff like personal assistance, Dedicated Personal Assistance, Self-Service system, Automated Services, Communities development, and so on.

Step 5: Revenue Streams

In short – how you will get the money. So we have determined who our customers will be. What are their problems, and what are our value propositions that will solve their problems, or what we are offering them, and how we will distribute our solutions to them. So now, it’s about for what value are your customers willing to pay? What and how do they recently pay? How would they prefer to pay? How much does every revenue stream contribute to the overall revenues? It could be an asset sale, usage fee, subscription fees, lending/renting/leasing, licensing, brokerage fees, advertising, commissions, and so on.

Step 6: Key Activities

What key activities does your value proposition require? What activities are important the most in distribution channels, customer relationships and revenue stream. These are the crucial things your 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 most likely very important.

One thing this analysis should help you to decide is whether or not certain Activities and Resources are actually core, actually important or necessary at all to your business.

Step 7: Key Resources

What resources you will need to do all of the above activities. Could be human resources/staffs, equipments, offices, intellectual properties (brand patents, copyrights, data) or financial resources. They are the strategic assets you need in place, and you need in place to a greater or more targeted degree than your competitors. Again, you will eventually need to scope which resources are the most useful and effective and which are not necessary.

Step 8: Key Partnerships

At this point, the canvas should’ve told you about your business plans. There may be some strategies/actions/values that your resources cannot provide, but they are considered as important activities. So you will need partners to do those things for you. You will need to map Key Partners to Key Activities – this is a way to denote which specific Partners are handling various Key Activities for you.

So this column should tell you about things like, who your Key Partners are. Who your key suppliers will be. Which Key Resources are we acquiring from partners. Which Key Activities do partners perform. And so on.

Step 9: Cost Structure

You’ve worked to understand how your Key Activities drive your propositions and hence your revenue. Now this section is to determine how 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.

The model structure is based on those developed by Alexander Osterwalder & Yves Pigneur, described in their book Business Model Generation. The canvas is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License.