What is the Business Model Canvas?

You have a business idea. Great but where do you start? How about with your business model.

Like an artist about to start a new piece of work, entrepreneurs also start with a blank canvas.

If only there was a way to help focus all of the entrepreneur’s thoughts. Fortunately, there is.

This is what I learnt this week at Kauffman Fasttrac on how to fill in a Business Model Canvas.

The Business Model Canvas is a tool that helps entrepreneurs develop their business model.

It was developed by team of Swiss researchers with input from 400+ business professionals.

It is a well known tool for describing, assessing, visualising, and changing business models.

In this post I talk about the different elements that make up the business model canvas (BMC).

For each of these different elements, I will give an example of what it looks like on the BMC.

Finally, I talk about where to go for additional resources, and how to create your own BMC.

Value Proposition

This is the first part of BMC. Value proposition defines the benefits of your product or service.

Your value proposition can sometimes also be referred to as your Unique Selling Point (USP).

It’s what makes your product/service stand out from the competition. Consider the following:

• Address needs of the target market: what problems do your target customers need to solve?
• Emphasise benefits not features: explain what users will get out of using the product/service.
• Target customers: The market must be identifiable and reachable and the problem sufficient.
• Competitors: how is your product or service different from what is out already in the market.

For example: let’s say you are selling running shows for daily runners with chronic foot pain.

Value proposition: highly durable running shows that ease foot pain at a lower cost to brands.

It’s important to have compelling VP as it will be the basis of your sales and marketing efforts.

Target Customers

This is the 2nd part of the BMC. These are the people who would buy your product or service.

There is 2 ways to define your target audience: customer demographics and psychographics.

Customer Demographics is where the customers can be grouped by similar variables such as: 

Their age, gender, income, occupation, education level, location, social class and many others.

Customer Psychographics are the variables that give insight into how and why customers buy.

Not all your customers will adopt your product or service at once. It may look something like:

• Early Adopters: customers who can’t wait for your product, not waiting for others to buy first.
• Early Majority: customers who buy your innovation but after some time, they’re not in a rush. 
• Late Majority: customers who buy your product after some time, and after some scepticism.  
• Laggards: customers who are last to adopt your innovation. They tend to be averse to change. 

Customer Relationships

This is the 3^rd part of the BMC. It is meant to link value proposition with your target customers.

You can form different types of relationships with your customers, here are some examples:

Functional Relationships provide a very strong value proposition with their target customers. 

This relationship type is all about reliability and convenience between business and customer.

Emotional Relationships connect with customers by providing value on an emotional level.

Businesses with key products bond with customers based on what makes them feel special.

Advisory Relationships is when customers seek the advice of companies in certain domains.

The relationship between business and customer is based on perceived knowledge, skills, etc.

Take a moment to consider the customer relationship between your business and customers.

You may find that the answer is obvious, none of the above, or even a combination of them. 

Distribution Channels

This is the 4th part of the BMC. It is how a business engages with customers to deliver its VP.

Channels include marketing, customer service, etc. Channels fall under two main categories:

Direct channels are channels that are owned, operated, and even controlled by the business.

They allow businesses to engage directly with customers and manage all of their experience.

Indirect channels are channels that are owned, operated, and controlled by another business.

They allow a business to take advantage of existing infrastructure and purchasing behaviours.

Within these main categories, there are common channel types. These include the following:

• Physical Retail: A business can have branded retail stores and also sell through other retailers.
• Digital Retail: A business can sell products via their website and through online marketplaces.
• Person to Person: This type of channel is more common when targeting business customers. 

Revenue Streams

This is the 5^th part of the BMC. You need to understand the characteristics of revenue streams.

By doing do, you can assess if your business model will be viable. Here are the different types:

One time purchase in arrears is when a business gets paid by customers after the transaction.

For example: a restaurant. Customers pay after they have ordered and received all their food.

One time purchase in advance is when a business gets paid by customers before transactions.

For example a retail store. Customers must first purchase the item before they start using it.

Ongoing purchase in arrears is when a business gets paid every cycle after the transaction.

This is a very common model used with subscription services, from streaming to food delivery.

Ongoing purchase in advance is when a business gets paid every cycle before the transaction.

For example: insurance. They collect payment on what you choose before it is implemented.

Key Activities

Key activities fall under primary & secondary activities. Primary activities include things like:

• Research/development: focusing on this allows your business to create innovative products.
• Supply Chain: focusing on your materials would give your products great quality and margins.
• Manufacturing: focusing on this activity would allow you to make more products and sales.
• Customer Service: focusing on this would allow customers to purchase more products easily.

Secondary activities don’t directly deliver the business’ VP but still important. These include:

• Human resources: a good HR team would allow roles to be filled quickly and keep staff happy.
• Technology: having the right technology in place would facilitate work getting done better.
• Maintenance: improper maintenance of machinery and facilities could result in down time.
• Accounting: having proper accounting in place will make sure money is allocated correctly. 

Assets

The 7^th part of the BMC is assets. These refer to the resources that the business is built upon.

Assets have value and you’d be able to generate income from them through usage or by sale.

Using this perspective, we can explore the five different asset types. These are the following:

• Physical: These include all tangible assets such as buildings, machinery, stock, vehicles, etc.
• Intellectual: These include all intangible assets such as brands, IP, trademarks, patents, etc. 
• Human: Employees generate income as well as relationships with partners, customers, etc.
• Financial: This includes money in your business account, possible stock options, property, etc.
• Technology: This includes things like proprietary code, proprietary data, methodologies, etc.

As you can see your business has many assets and can generate income not just from product.

The key to a successful business is to focus on not just building assets, but diversifying them. 

Key Partners

The 8^th element of the BMC is key partners: you may need a good business partner to succeed.

There are 4 types of partners that you can seek to support your business. Let us take a look:

Buyer Supplier relationships are businesses where products are transferred between them. 

For example, your business agrees to distribute your product through a national wholesaler.

A Functional Expertise partnership is with a business that specialises in a back office function.

For example, entrepreneurs will tend to outsource things like accounting, legal, HR, IT, etc.

A Strategic Alliance is formed between companies to share knowledge, assets, and resources.

For example, a software company looking to sell to businesses will usually form an alliance.

A Joint Venture is when 2 businesses join forces to bring complementary values to the table.

This is quite common in property investing: one person finds the deal, and the other funds it.

Cost Structures

This is the 9^th part of the BMC. This looks into how much it costs to get your product to market.

There are 4 different types of cost structures for you to consider. Let’s go through them all:

Build to Order is when a product/service is produced once the customer has placed the order.

Most restaurants use build to order: they prepare the meal after the order has been placed!

Build to Stock is where products are built before orders have arrived and create an inventory.

This is common with retail, where the product is ready to go as opposed to still to be made.

Fixed costs are where costs remain the same regardless of how much product is purchased.

Regardless of how much product you make; salaries, bills, and machinery costs stay the same.

Variable costs are costs that are proportionate to the volume of goods and services produced.

These include things like material costs, which will increase if you start making more products.