Lesson 3: The Business Model Canvas

The business model canvas

A business model is comprised of two sides:

  • Manufacturing: designing a product or service, purchasing raw materials, and then creating the product or service
  • Selling: finding and reaching customers, transacting a sale, distributing the product or delivering the service, and getting that product or service to market.

All the elements of these need to work together cohesively for the business model to be successful.

An incredibly helpful tool, and one that has revolutionised the way people look at and design business models, is the Business Model Canvas (BMC). The BMC was developed by Alexander Osterwalder and is based on his earlier work on Business Model Ontology.  

The Business Model Canvas (Source)  

Together, these elements provide a coherent view of a business’ key drivers. Each component of the business model contains a series of hypotheses that you need to test.  

The components below, and their respective hypotheses, combine to form the cost structure of the business on the left side of the canvas.

  • Key Partnerships: What strategic and cooperative partnerships does a company form to increase the scalability and efficiency of the business? Does having a relationship with these partners allow the business to scale? What can the business afford not to do?
  • Key Resources: What assets and knowledge does a company possess that allow it to provide value to customers, in ways that other companies can’t?
  • Key Activities: What unique activities does a company engage in that allow it to execute its strategy? Do the activities relate back to the value proposition and help establish a presence in the market?
  • Cost Structure: What are the costs associated with each of the above elements? Which components can be leveraged to reduce costs?

The following components and their respective hypotheses represent the right side of the canvas and combine to form the revenue generating mechanism of the business.

  • Value Proposition: What unique value does a company’s product or service create for customers? Why do customers buy and use your product or service over anything else?

This video is useful for understanding more about value proposition.

Prof John Simpson – Video 2 – USP_720P from Red & Yellow School on Vimeo.

  • Customer Segments: What groups of customers is a company targeting with its product or service? Who are these customers? What do they think? See? Feel? Do?
  • Customer Relationships: How does a company plan to build relationships with its customers? How do you interact with the customer through their journey?
  • Customer Channels: What channels does a company use to acquire, retain, and continuously develop its customer base? How are the business’ products or services promoted, sold, and delivered? Why are these channels being used? Are they working?
  • Revenue Streams:  How does the business earn revenue from the value propositions? Does pulling all of the above elements together create multiple revenue streams? Do these streams generate continuous cash flow?

Watch this video for more information on how to sketch out your business model hypothesis.  

The BMC is hugely popular with entrepreneurs and corporate organisations who embrace entrepreneurial thinking. It is a tool that embraces innovative thinking and delivers three key elements for those who use it correctly:

1. Focus: The BMC forces users to improve their clarity and identify elements that will help or harm the scalability of the business.

2. Flexibility: Visually, the BMC sits on a single page, which makes planning and adjusting a lot simpler.

3. Transparency: it’s easier to explain your thought process and vision to your team or potential investors when it’s all on a single page.  

How to use the BMC

The BMC is a really useful tool when developing your business. It is best to work through the model systematically, reviewing each of the nine elements individually. Play with different scenarios while building your model – this is a great way to innovate and think differently about things. While you’re doing this, think back to earlier in this module dealing with spreadsheets and “what if” questions. Once you’ve completed the first round of your proposed BMC, push yourself by asking probing questions that force you to think differently. These might include:

  • What if we gave our product or service away for free?
  • How could we generate money differently?
  • What if we only offered our product or service online?

Strategyzer and Canvanizer are two sites that provide tools for you to develop your own BMC online. Why don’t you try them out now and share your thoughts with your peers on the forum?  

Now that you know what a business model canvas, let’s look at 7 tips for using it effectively.

1. Constantly adjust: The more you put into the canvas, the more you’ll get out of it. Don’t think that quickly filling it in will solve all your challenges; it doesn’t work that way. A business model is a live document that needs to be adjusted and tweaked constantly. View it as a testing ground for your thoughts and hypotheses.

2. Value proposition: Located in the center of the canvas is the Value Proposition block. Begin by working on the problem you’re solving for your customer. Think back to Module Two and start putting down your value propositions for each customer segment here. While doing this, think about what current alternatives might be available to your customer. Keep developing your value proposition to speak past those alternatives.

3. Be specific: Avoid writing down generic statements, especially for your value proposition. Generic statements are difficult to explain and motivate others with. It’s also difficult to test assumptions when you don’t have a clearly defined channel, customer, or resources, for example.

4. Test: It should go without saying, but put time and effort into this process. Fill in all the customer segments and their relevant value propositions, and then test your assumptions. Would one segment prefer being able to communicate with you via email or face to face? Testing helps clarify the canvas and your business process.

5. Brainstorm: Try to create at least two canvases. Brainstorming different scenarios will help you delve deeply into the challenges, test your assumptions, and possibly uncover areas of your business you never knew existed.

6. Keep your BMC close: Always refer back to your BMC. While it might be tempting to rush off and start developing, building, or manufacturing your product or service, keep your BMC on hand and think of it as that all-important blueprint.  

7. Have a weekly BMC Video: Watch online content. Start with this video:

Watch this video to learn more about why business models fail.