The 15 Minute Business Plan: Business Model Canvas for Validating Your Startup Idea Fast
If you have ever thought of starting a new business or working on a tech startup idea, then you must definitely have come up with some sort of a plan.
At least in your mind, you may be thinking of a way to execute your idea and achieve the goal you are looking for from your business.
But how should you plan and how much should you plan? After all, with so much uncertainty and ambiguity what if your plan really doesn’t materialize?
Don’t worry, we are here to help you.
If you are brainstorming about the key aspects of your business and don’t know where to begin or if you are an existing manager who needs a better view of your current business, then you must read this article.
Instead of coming up with a 500 page document, articulating each and every aspect of your business plan, there is a wonderful standard template that applies wonderfully to all different kinds of businesses.
Be it an online business like blogging or ecommerce, or a manufacturing based business, retail or aviation, all types of businesses can use the elegant ‘Business Model Canvas’.
A Business Model Canvas will not only save you the time or hassle of complicated planning, but also provide you a brilliant single page look of your business that you can then use to analyse various aspects of it.
But what is Business Model Canvas?
Let’s dive straight in.
What’s the Business Model Canvas?
In fact, a Business Model Canvas divides all the key activities, internal processes and stakeholders of a business into 9 building blocks, each representing an important area or aspect of business.
Following are the nine building blocks and the key questions they answer.
- Customer Segments: Who are the key customers of your business? And what are their key characteristics and needs?
- Value Propositions: Why do customers buy your product or service? What is the key benefit that your business offers?
- Channels: How are these benefits communicated to your customers and how is the product or service sold or delivered and why?
- Customer Relationships: What are the key touch points between you and your customers? And how do you connect with them throughout their journey?
- Revenue Streams: How does business actually earn money from various value propositions?
- Key Activities: What are the key things that your business strategically does to deliver this proposition?
- Key resources: What are the assets that business requires in order to stay competitive and create value?
- Key Partnerships: What are the external entities or stakeholders that are key to delivering the product and service to your customer? What are some of the partners to whom you have outsourced certain activities to focus more on your core work?
- Cost Drivers: What are the major cost drivers for your business and how are they linked to your revenue?
Here is an example of a simple Business Model Canvas for an ice cream vendor.
These 9 blocks are essential in order to create, capture and deliver value to your customers and affect each other in various ways.
In fact, a change in one of these building blocks may affect other areas and thus looking at them together will give you a sense of what happens in one area if you change another.
For example, say you are in an ecommerce business selling physical products. Today you manufacture your products yourself, but considering the scale you want to achieve you want to outsource manufacturing to an external vendor.
This may affect your key partnerships, cost structure, key resources and key activities. You can then clearly visualize all the changes that such a decision would require.
Well, this gives you a basic idea of what a Business Model Canvas is and its basic template.
But why should you really use a Business Model Canvas and not some other method? And how will it fit in what you want to do?
Why You Should Use the Business Model Canvas. And Not a Business Plan.
A business plan is like a blueprint of the business with detailed business models and financial projections, typically running into hundreds of pages.
On the other hand a Business Model Canvas is like a single page template with 9 building blocks that are key to delivering value to your customers.
So which one should you use and why?
If you are just starting a business or have started one already and are in a growth phase or an environment that is dynamic, we would recommend using a Business Model Canvas and not a business plan.
In fact, today Business Model Canvas is being used for a variety of reasons. And almost 36% of people who use it, do it for an entirely new business.
Here are a few reasons why using a business model makes better sense than using a business plan.
1. Business Model Canvas is Built for Handling Change
A Business Model Canvas represents all the key aspects of your business in a very simple fashion on a one page model.
If there is any change that happens in any one part of the model then you can easily visualize the trickling effect and understand what other blocks will be affected.
This way you can easily change and adjust everything in one place. This is important because when you are starting out or working on a new problem in your existing business, there is great deal of uncertainty.
Modern day business work in an iterative manner. That is, they start with certain assumptions and then as things become clearer they keep on adjusting according to the changing environment.
A business plan on the other hand requires you to put in a lot of work upfront and come up with projections that may or may not turn out to be true.
Adjusting the whole business plan is also tough as various parts are present in different sections of a lengthy document. It is also possible that you may miss out on understanding how a change in part affects the other.
2. Business Model Canvas is a Simple and Commonly Understood and Proven Template
Do you know, companies like Microsoft and Mastercard actually use Business Model Canvas.
Not only that it has proved to be an important tool for startups as well.
The key point here is that this template is not only simple but also well understood by a lot of people hence it facilitates great discussion.
If you want to discuss some key points to strategize or propose some business model to your colleagues then it surely makes a lot of sense to use the Business Model Canvas.
The issue with a 400+ page document is that you tend to lose focus in skimming through such a heavy file.
And also, there are so many different templates of business plans available and some sections of those may not really make sense for your business.
On the contrary, all the 9 blocks of a Business Model Canvas are inherent and applicable to almost all business models.
This leads to much better collaboration and understanding, better teamwork and a structured conversation.
In fact, according to a research, with a score of 3.5/4 better strategizing and sharing a common language were the top two areas that people believed following a Business Model Canvas helped them in.
3. Business Model Canvas Reduces Risk of Failure
When you look at all aspects of your business in a structured manner in a single page template, you are much better able to understand the bonds or pillars that keep your business stable.
Running a successful business involves both strategic planning and efficient implementation.
In order for both these to work, different departments, areas, resources and customers have to be considered and a balance has to be created.
To avoid the risks of failure, it makes a lot of sense to have a robust Business Model Canvas.
For example, consider that you want to shift your business from offline to online in light of the recent pandemic and your long term vision.
Just cataloging your products and building a website will not make your existing and new customers come to your business.
You may have to revisit your customer segments who now have to be digitally savvy and your channels. Your touch points with your customer or the Customer Relationship block will also evolve.
Since, you can see all these aspects you are now better prepared to execute the plan and make sure that all necessary factors are taken care of while evolving your model.
Now, that you understand the importance and usage of a Business Model Canvas, you need to understand how to really create a Business Model Canvas, and how each of the 9 building blocks can be thought of and filled for best results.
It is important to give careful thought to each of these. Don’t worry we will help you out.
Proceed to the next section of the article.
Practical Business Model Canvas Walk-through
Step 1: Customer Segments
Arguably, the most important stakeholders for your business are your customers.
Irrespective of whether you start an online business to earn money, or a business with a physical presence, knowing your customers comes first.
And rightly so, the process of building your Business Model Canvas begins with identifying your customers.
The first step in this exercise is dividing your prospective customers into groups with similar features known as segments.
This is necessary because different groups or segments may have very different needs and hence the product/service that would be most relevant for them may be very different.
Not just for the design of the product or service, but segments are also important when you plan about your marketing communication.
For example, say someone who buys your product in small packs very often may be targeted differently than someone who buys high volumes of your product infrequently.
So, how to go about segmentation.
Deciding between B2C or B2B model
You have to first identify, whether you are going to be in the Business to Business (B2B) or a Business to Consumer (B2C) model.
Typically in a B2B business your customers are other businesses, while in B2C your customers are individual consumers.
The behavior and characteristics of these two types of customers are very different.
B2B customers follow a much more stringent and rational approach towards buying than individual customers and B2B buying is almost never based on impulse.
There are usually clear requirements regarding what a B2B customer is looking for in the product.
On the other hand, a B2C business is mostly driven by brand awareness and the decision making cycle for buying is also much shorter.
In terms of the number of buyers, you may be able to run a very profitable business with a handful of customers in B2B, but you will require a larger base when it comes to B2C.
|Customer type||Individuals||Business entity|
|Key Drivers||Brand Awareness||Expertise, recommendations for similar work, product fit|
|Revenue per user||Low||High|
|Examples||Retail, consumer blogs, ecommerce||Enterprise Software, Consulting|
If you are already an expert in a particular field or have come up with a SaaS product that enterprise can use, you can be in B2B, but if you want to play on brand awareness and individual engagement, then B2C may be a fit for you.
The segmentation strategy will differ according to whether you are in B2B or B2C business. To segment your prospective customers you will need something called a segmentation variable.
Segmentation variables are the basis on which you will divide your customers.
Choosing a Customer Segmentation Variable
Broadly, there are two ways in which you can divide your audience.
The number and characteristics of people who live in a particular area or form a particular group, especially in relation to their age, how much money they have and what they spend it on. – Definition of Demographics by Cambridge University
Demographics will help you understand the basic features or characteristics of your customers and are typically easy to understand and collect.
Alternatively, you can collect this data through primary research, surveys and questionnaires by asking your customers to fill up forms.
For example, say you own a website that publishes content related to writing blogs. A search for the keyword ‘blog’ on this site tells you that around 27% of people searching for this keyword are between the age group 25-34 and more than 54% are females.
For a B2B business your segments may be something like Industry type, turnover, geography, number of employees etc.
While demographics are an important indicator of some things, for a deeper understanding of your customers you would need a more nuanced understanding of their motivations and behavior.
Market research or statistics classifying population groups according to psychological variables (such as attitudes, values, or fears) – Definition of Psychographics by Merriam-Webster
Here are some of the questions that psychographics can answer for you.
- How do your customers spend most of their time?
- What do they do on weekends?
- What are their hobbies and interests?
- What are their religious inclinations?
- Are they heavy users or light users of your products?
Psychographics are extremely important in order to add value to your customers.
For instance, the same product or service may mean different things for different people and the motivations behind using them may vary.
For example, some people may eat healthy food in order to feel energetic throughout the day, others may be doing it to support their gym routine while some others may just want glowing skin.
Understanding your customers this way will not only help you tailor your products or service according to their specific needs but also help you to create your communication in a way that is the most effective.
Now after this exercise you need to understand your target segments.
Choosing your target customer segments
Two extremely important things that would determine whether you earn money from your customers or not are:
- Ability to pay
- Willingness to pay
Ability to pay depends on the income of individuals or businesses that you want to engage with and can be more or less determined from the demographics data.
On the other hand willingness to pay can be estimated on the basis of the psychographics and whether your product or service has a major value add for the lives of your customers.
Some other factors to consider are:
- High audience revenue potential: The market size for your chosen segment should be high.
- Expected growth rate over time: The growth rate of usage and market over time.
- Customer loyalty: The current loyalty levels of customers to available products.
- Attainable Market Share: What amount of market share is achievable for you?
- Market Profitability: Is there enough margin that you can obtain from customers that justifies your cost and goals?
In a nutshell, you would ideally want to be in a market that has substantial demand, which is expected to grow and you can make the existing customers switch to your product because you serve their needs better, at the same time earning profit.
One important thing to understand is that it is possible that you target different segments, this is especially true if you operate a multi sided platform.
For example, say you own a marketplace platform where you earn through your customers by charging them a subscription fee and charge a fixed price from your sellers for advertisements.
Here both end consumers and sellers become your customer. In order for the platform to succeed, you would need to pay close attention to both these stakeholders.
We would recommend, if you are just starting out, to keep your focus on one particular segment.
For instance, say you want to start a blogging business and are deciding on the niche, it is always better to cater to particular segments. This will increase your chances to earn money and your customers are more likely to draw value and become loyal.
Possibly you would be certain about your target customer segments by now, so you can fill out these details clearly in your Business Model Canvas.
For instance, say you are opening a romantic restaurant targeted at young couples and the theme of the restaurant is adventure and will be situated in California, then your target segment could be…
“Young men and women aged between 25-40, who reside in California and are fond of adventure”.
Step 2: Value Propositions
A value proposition is like a simple statement of benefits that your target customers get from your products or services.
This is extremely important because your customers use your products or service depending on how strong your value proposition is.
If you are starting a new business then this becomes even more important because you would want your customers to switch from your competitors to you.
Only if you meet their needs better and they find more value in what they pay you than your competitors will they think about switching.
So, how do you begin?
Understand Customer Problems and Competition
First thing is to understand the problems faced by your customers.
The idea is to answer and resolve the most pressing issues faced by your customers effectively.
Once you narrow down on the key problems and needs of the customer, study your competition to understand what needs or problems they are solving well and where the gap lies.
For example, say you are starting an ecommerce business and want to sell physical products like portable bluetooth speakers.
One great place to understand the demands of your customers and the performance of your competitors is Amazon.com.
You could develop a good understanding of your competition from the reviews section.
In the image, you can clearly see where your prospective competition is good and where customers expect better.
The number of reviews also give you an indication of how much demand already exists for the product.
In fact, it can provide you information on a lot of categories all the way from electronics to baby care and from automotive parts to groceries.
All you have to do is search for the product you want to research on and study the results.
Here is the list of top product categories on Amazon.com.
Another way to research demand and competition is through keywords.
Estimating Consumer Demand and Competition Through Keywords
The internet today gives you a lot of information about what people are searching.
Do you know, around 48% of online shoppers begin their online journeys through search.
Thus, understanding what keywords are being searched for the most and the competition for advertisements and seo for those keywords is a great first step to estimate demand.
One tool we recommend is SEMRush.com.
This tool not only gives you an idea of the total volume of search, but also of how much competition exists for the keyword.
For instance, searching for the keyword ‘bluetooth speakers’ clearly gives the exact volume of search.
The ‘keyword difficulty’ and ‘Com.’ metrics tell you how difficult it would be for you to rank in the first page of Google search if you are new to business.
In our case keyword difficulty level is 92% which is on the higher side.
Now that you know the key questions your customers are asking and what is required in order to beat the competition, next is to decide how you are going to differentiate yourself.
Building a Strategy to Make Your Customer Switch to Your Product/Service
To make the customers switch to your products you can choose one of the four quadrants from the above matrix.
A narrow focus means that you concentrate on a particular segment or niche rather than a mass market.
If you are just starting out, it is better to focus on a narrow approach because you will be able to meet the needs of a particular segment better.
The other option you have to choose from is whether you want to beat your competition on price or by offering a better product.
You can make the customers switch to your product by selling the available product in the market at a lesser price. But to follow this strategy you would either need scale or a way to produce your goods and services at a lesser cost than the competitor.
Hence, we would suggest to first differentiate your product and give benefits and features that are not provided in the market by your competitors.
Writing a Value Proposition Statement
Now that you have a fair idea of what your consumer needs and how you will beat the competition.
You have to come up with clear value proposition statements.
If you are catering to multiple target customer segments, then you should have a clear and simple value proposition mapped to each of these customer segments in your Business Model Canvas.
For instance, say you start a blog that offers tips on making regular food healthy.
The typical target customer segments you have are the people who want to build muscles and stay at home moms.
Now these are two very different segments and your value proposition would be very different.
A good value proposition statement would look like this:
We help stay-at-home moms lose 14 pounds of fat in 45 days without having a jojo-effect.
We help muscle building enthusiasts reduce fat by 5 percent in 60 days without lowering energy.
Now you just have to enter these in the value proposition segment of your business model canvas.
Here is a quick checklist to validate if your value proposition is good or not.
- Are the benefits explicit and clearly stated?
- Is the target customer segment clearly identified?
- Is the value proposition clear and simple?
- Is the value proposition supported by evidence of demand?
- Is the value proposition viable in light of competition?
Step 3: Channels
The third building block of the business model canvas is ‘channels’.
Channels refer to the touch points through which the company delivers value to its customers.
The primary functions of a channel are:
- Educate the prospects regarding services and products that a company offers
- Provide an opportunity to prospects to try these services/products
- Facilitate the purchase of products or services for the customers
- Helping the customers realize and benefit from the value proposition
- Providing the after sales services for the clients
But how do you go about planning your channels and what are the factors to be considered. Don’t worry we have you covered.
First let us classify the channels to be decided.
Broadly we can divide the channels into two types:
- Acquisition Channels: These are the channels that help you acquire your customers and bring to the point of sale.
- Delivery Channels: These are channels through which the product or service is actually delivered to your customers
Let us see how to go about deciding each of these.
Your acquisition channels help you generate more leads that eventually become paying customers.
This part consists of deciding how you will advertise and communicate about your products to the customers and guide them into buying your products.
You can choose to advertise on billboards, television, radio and other physical areas to make a large number of people aware about your offering. However, these channels help you reach a large audience but are also extremely expensive.
Today the internet offers you various avenues where you can get these leads in a very cost effective manner.
If you want to make money online and are in a digital business, it makes even more sense to try digital channels for advertising and generating leads.
Your methods of traffic acquisition could be either organic, which means natural growth and acquisition of your customers without paying. Or inorganic, which includes paid media and channels online.
The main way to acquire traffic online in an organic manner is through SEO.
Search engine optimization or SEO involves making your content search friendly and relevant so as to feature in the top results when someone searches for a product/service you offer.
With most online journeys beginning with search, SEO is the one of most effective ways for long term victory online.
Only downside is that it may take a while before you build your SEO to promising levels.
The next option you have is to advertise on social media channels like Facebook, Instagram, Youtube, Pinterest etc.
The great advantage that these channels offer is that they have sophisticated ways to target customers and you can customize who you want to target based on a variety of factors like demographics, geography and interests.
But how to decide between these channels?
First you have to make sure that the kind of traffic or leads you are looking for are actually logging into these sides.
For instance, if you are in a B2B business then advertising on LinkedIn would be more relevant, given that most decision makers from corporates actually spend time on it or have their profiles there.
While for B2C other channels may make more sense.
It is best to start with multiple channels and then invest more money into the ones which give you better results.
For example, say you invest $50 each on Facebook and Youtube. From Youtube you get 100 leads but only 20 from Facebook.
20 of the 100 leads from Youtube become paying customers and only 5 from Facebook eventually purchase.
Clearly Youtube is offering you better return on investment. Hence it makes sense to pump in more dollars into this channel.
Next comes distribution channels. These channels enable the delivery of goods or services to a customer.
For example, if you are in a business of selling clothes. Then how do these clothes reach the end customers? Is it through a retail outlet, or can they purchase online?
All these questions are answered by what channels you choose to distribute your products.
Broadly speaking there are two different types of channels:
- Direct Channels
- Indirect Channels
Direct channels are those wherein you as a company directly interact and sell to your end consumers.
For example, say you own a website which sells physical products. Your customers ‘directly’ purchase from you online.
Similarly, if you own the brick and mortar retail stores where your customers come and get your products then also you are directly interacting with your consumers.
On the other hand if you sell to some middlemen and they in turn reach your consumers then it counts as an indirect channel.
While you have more control over your margins in a direct channel approach, indirect channels usually offer less margins.
But the flip side is that indirect channels usually buy in bulk and hence are good for volumes.
To choose a particular channel you should consider these factors.
- Number of consumer segments and types of market you are targeting: You want to be selling at a place where your target customers are most likely to visit. For instance, notice how Coke and Pepsi sell their soft drinks at fast food outlets like McDonalds or Burger King.
- Total cost for each channel: There is an associated cost for each channel that you wish to set up. For example, the cost of setting up an ecommerce website or leasing or building your own retail channel could result in higher costs than simply selling your products to a wholesaler.
- Type of product being sold and the consumer's awareness about it: If the product you are selling is fairly standard then you may need much explanation to be given to customers. But a complicated product may require the company to be in direct contact with customers to explain the offering.
- Amount of control required over experience: Channels owned directly offer more chances of making the experience in line with the brand and product, while indirect channels will offer a similar experience for you and competitor products.
- Duration of partnership: How long you intend to sell through the same customers also has a bearing on which channel you would choose. Hence, it is important to negotiate your terms in case you employ indirect distributors for your products.
Once you are sure of which channels to choose you can simply write them in the block. Make sure it is extremely convenient to find and buy your products for all your target customer segments.
Remember, the easier it is for customers to get the products, the more you will sell.
Step 4: Customer Relationships
This is an important block of the Business Model Canvas and helps you engage with customers in one or several ways.
Customer relationships block mentions all the ways in which a company chooses to maintain relationships with the customers.
Customer relationships are maintained with a primary motive of selling more to the customers while keeping the customer satisfied.
The goal of customer relationship management is to assist the customer in three stages of his journey with the company.
- Customer Acquisition
- Customer Retention
Your first task here is to guide a prospect to become a customer.
Typically this happens through different steps in a customer journey.
Let us see how each step in this journey may require different efforts on your part for customer relationship management.
Your customers mainly follow four broad steps before they become paying customers.
These stages are awareness, desire, interest and action.
The first step is to make your target customer segment aware about your offering. This includes letting your customers know that you have a potential solution to a problem that affects them.
Based on the type of business this may be done either in an automated or a manual way.
For instance, if you are in a B2B business you may choose to send over a sales representative or a solution expert to a customer.
Or wait for leads to show up themselves after you publish about your expertise in places like magazines or blogs where these prospective customers find you themselves.
Mostly awareness is built through advertising, SEO and word of mouth for a B2C business.
For instance, to build awareness about your offering you may choose to show a video ad to users who see a music video regarding your online music course.
While many users may become aware about your business, some of them may actually be convinced of its value or at least become curious about your product or service.
Consider that you showed an ad which generated 10,000 impressions or 10,000 users saw the ad. Now say 2,000 of them clicked and visited your website to read about your offering.
These 2,000 have now moved up the funnel by showing interest to buy the product.
At this stage, you may choose to save their email addresses for a more personalized conversation. You may even assign a sales rep to contact them if they choose to leave their details.
All these touch points become part of your customer relationship management strategy.
Now say that the person from your company who contacted the user showing interest manages to explain the value proposition you offer to around 500 of these users who now desire to buy your product.
The next step is to seal the deal with an action on the prospect’s part. The action of purchase by which they become your paying customers.
The goal of CRM (Customer Relationship Management) here is to make this journey as smooth as possible and convert the maximum number of prospects into paying customers.
There are certain goods and services that provide continuous value to customers and so customers keep buying them.
This stage deals with creating loyal customers who stick to your brand.
For instance, say you run an ecommerce website selling gifts. You realize that on an average a person buys gifts for someone at least once every two months. You would ideally want your customers to keep coming back for more orders every second month.
To do this your customer relationship program will have to make sure that you keep communicating with the users, apprising them of latest offers and products.
These are the few ways in which you can increase the chances of customer retention:
- Create a brand image that your customers associate with.
- Deliver the quality you promise.
- Always solve problems and reduce friction for your customers.
- Incentivize them for buying regularly from you with points or freebies.
- Promptly resolve all their complaints.
Your sales will increase by either getting new customers or selling more to the existing customers.
Upselling deals with making your existing customers buy more from you. You can do this by increasing their usage of the existing products or by selling different kinds of products to them.
For example, if you have an online business that helps people find relevant jobs and you charge a subscription fee for sending them relevant openings. You can add more value to them by offering resume making services and earn more for yourself as well.
In a B2B setup, your engagement manager can actively look for opportunities to sell more.
If you are an independent consultant, then you can offer more services to your customers if you have some expertise.
Maintaining Customer Relations through Touchpoints
Now that you understand the main objectives that you can accomplish with this block, you may want to know how to maintain relationships with your customers for different touch points.
There are broadly six ways of engagement:
- Personal Assistance: In this method you personally contact the customers through a human touch. These contacts may be made through call center agents or other employees.
- Dedicated Personal Assistance: For buyers who are very valuable, for example, take people with high net worth for a bank who deposit millions of dollars. A bank may have a dedicated person to maintain the relationship.
- Self Service: The ‘do it yourself’ method works great for reducing cost, but isn’t as strong as a human touch. This can be accomplished through videos explaining a process or an FAQ section on the website.
- Automated: These include all the automated methods like an IVR or a chatbot that interacts to solve problems for your customers.
- Communities: You may create communities and forums with your best customers playing a key role to solve problems for other customers. For example, there are tech groups that help all the users related to a particular technology.
- Co-creation: There are products and services where you engage with your customers to co-create services that suit them. In this method the customer actively participates in the process to add value to himself/herself. For instance, an interior designing service which actively asks customers to define their taste and be involved in the designing process.
You have to focus on the cost of each of these methods and whether the value that the customer brings to you justifies it or not.
For instance, you may not want to have a dedicated person who you pay $1,000 a month for a customer who only gives you $100 business a month.
All you have to do now is enter your chosen ways maintaining customer relations and put it in the block. Remember you should have touchpoints mapped to each of the customer segments.
So for example, if you have an SaaS (software as a service) online business wherein you charge for monthly usage of the product and have individual users as well as enterprise users.
You can map ‘automated’ service of individual users and ‘dedicated’ personnel for enterprise.
Step 5: Revenue Streams
The revenue streams block covers the various ways in which you monetize your business and earn money from your customers.
There are multiple ways of earning money. Some these are:
- Sale of Assets: You can completely transfer the goods or property for a price to a buyer. For example, a hotel chain selling one of the hotels to raise some cash.
- Usage: Payment collected for each usage of a product or service.
- Subscription: When payment is made for a repeated use of a service over a particular period. For instance, Netflix, Amazon Prime etc.
- Leasing/Renting: Renting out an asset for use for a fixed period. For example, renting an apartment for a fixed period.
- Licensing: Allowing the use of your intellectual property for usage by another company or person.
- Brokerage Fees: Acting as an intermediary between two parties and earning a commission as a result. For instance, stock brokers who earn a commission by enabling sale and purchase of equity shares.
- Advertising: Allowing your medium to be used as an advertising platform for other companies. For example, Google, Facebook and other platforms that earn money for allowing other companies to advertise on their platform.
Which method and price will work for you, depends on what kind of business you are in.
Pricing your product or service
The basic rule is that your customers pay you when the ‘perceived value’ they get from your product/service is more than what they pay.
From your perspective, you have to sell higher than the cost on an average so you earn money for yourself.
While this is the basic rule, other things to consider is the price at which competition offers similar products and the supply and demand for the kind of product/service you offer.
If your value proposition is very strong, then you can charge a higher price than your competition. Otherwise to make the customers switch you will have to keep your prices lower.
It is possible that you don’t get your pricing right the first time. You can start with some assumptions and planning, and adjust your prices as you go forward. It is important to have a learning mindset.
Here is a quick snapshot of various pricing strategies that can help you.
One you decide on the price of the service, then next is to choose one of the methods of charging.
Method of charging customers for your product/service
- Transaction Revenue: Charging for each transaction that customer does. For example, each time a user buys an item from your website you charge a fixed amount.
- Recurring Revenue: Similar to a subscription based service where the revenue is collected automatically every month (or any fixed period) depending on usage. For example, your electricity service that charges every month based on usage.
Onboarding customers to services where the charges are recurring is tougher than transactional method because the customer is worried about committing for a longer duration to a service which is new for him/her.
Hence, you see companies offering a free trial before asking the customers to pay.
This way they try to reduce the ‘cost of trial’ for the customer.
You can decide which method will work for you based on the usage of your offering. For example, if you offer a product that is used only once in a long time, then a subscription based charging may not be the best for you.
Thinking long term with pricing
Most businesses exist to earn profit. So, remember no matter what pricing method you choose it should result in a positive cash flow for your business.
It should also be sustainable and should lead to long term success of your business.
With a dynamically evolving environment, various new offerings may be released in the market and you may get new competitors from time to time. Hence, it is possible that you may have to revisit your pricing strategy from time to time.
The important thing is that you keep the customer at the core of your decisions and be extremely clear about the value that you are adding.
If your customer is also convinced of the value, then it will be easy to make them pay.
Managing multiple revenue streams
Different customer segments may contribute to your revenue in different ways.
Take the example of Microsoft, they sell licenses for softwares like Windows, Microsoft Office for individual customers and also earn from enterprises by offering bulk deals or enterprise services through cloud.
You should be aware about what percentage of revenue is contributed by which customer segment, basis the value proposition.
For example, if you are in an ecommerce business, you may have a corporate gifting option specifically for office going people which contributes 10% of revenue.
This is important for you to understand which part of business contributes the most amount of cash for you.
Step 6: Key Activities
This block consists of all the activities that are key to delivering your value proposition to your customers.
The span of control and how you handle the key activities will vary depending on what kind of business you are in.
Some parts of your activities may be outsourced while some may be controlled internally.
To understand the key activities carried out by your business you should focus on the value chain of your business.
Following are the key activities and how to decide if they are key to your competitive advantage. While these activities may differ depending on your business model, the basic flow and idea will remain similar.
Research and Development
The value of R&D is particularly high in technology based companies and big companies spend billions of dollars on it.
Here are the top 10 spenders on R&D (values in million dollars)
Nevertheless, to stay relevant and innovative you always need to research and improve your products.
There are three basic things for which you will use R&D.
- New Product Development: For growth, one of the ways to increase revenue is by offering more products in the market. Imagine a company like Apple, which first came up with iPods, then iPhones and iPads, and then Airpods. With each of these products it was able to grow its revenues multifold.
- Modifications to Existing Product: With the needs of the users changing and improvement in other areas you may choose to make modifications to your existing product. The goal of this exercise may be to reduce cost, earn more revenue, stay relevant or a combination of these factors. For instance, Android comes up with a new version of their operating system with added functionalities and increased efficiencies.
- Radical Innovation: Radical innovation gives you an opportunity to completely disrupt the current ways of working. This innovation may be to develop a product or a process that completely changes the status quo.
Though the chances of success are less in this scenario the gains may be very high. Consider how Uber and Airbnb changed the world, or the invention of smartphones revolutionized the mobile phone industry. If you manage to get a patent, then you can monetize it even better.
This part deals with manufacturing or procuring the end product that your customers may use.
There are three basic models that you can use:
- Producing everything in house: You may choose to produce everything in your factories or facilities by procuring raw materials. The benefit here is that you are able to control the quality of your product extremely well and if you have some specialized technology this can become your competitive edge. The downside is that it is usually very capital intensive and scaling your business may also be difficult using this approach.
- Outsourcing production: The next option you have is to completely outsource production and procure the end product through manufacturing partners. This reduces your overheads, allows you to scale quickly while also covering your risks. The only reason to not follow this approach is when you have some proprietary technology you don’t want to share or when the product is so different that it is difficult to find manufacturing partners.
- Outsourcing a part of the production process: You can also follow a mixed approach where you can outsource a part of the production process. In this case you procure some part of the product and then process it to make the final product. For example, say you manufacture smartphones. You can procure all the parts from outside and just assemble them in house.
This part of the activity will also include handling logistics and inventory.
Logistics include all the transportation including bringing in the raw materials to your facilities, moving the unfinished products between factories (if required), moving the finished products to inventory and then finally delivering to the end customer.
Inventory includes the storage of your products in warehouses that is needed to fulfil demand of the customers. You will have to estimate demand and then plan your inventory to avoid stock outs.
Remember, managing inventory is essential as it is a major cost and you may want to minimize wastage while also maximizing sales.
Sales and Marketing
The key activities that will be performed by this function range from designing the strategy to enabling the last mile fulfillment.
- Strategy: This includes the overall planning for what the company is trying to achieve from the marketing perspective and how it will go about doing it. For instance, say you are targeting a million dollars in revenue in a year, then the strategy would include everything from what products you will sell, how it will be advertised and so on.
- Product Development: The marketing team works together with R&D or product development team to validate consumer demand for the new products being developed and help them design features that are most relevant to customers.
- Communications and Advertising: All the communication to the customers and messaging about the company and product offerings are controlled by marketing. This includes the events that will be arranged for activations of products like exhibitions etc.
- After Sales Support: These set of activities include helping your customers in the post purchase journey. Your customer support departments, automated chatbots and other ways in which you help your customers maximize the value from products they have bought and solve the required problems are covered here.
These sets of activities are just indicative. It is possible that some of them may not be relevant to your business model.
For example, if you are in a blogging business then production may not apply to you like a manufacturing process. Instead it would mean the development of content, which again you can choose to do by yourself or by hiring external help.
Similarly if you are in an ecommerce retail business then you may or may not own inventory depending on your model. In that scenario, partner management would become your key activity.
Step 7: Key Resources
This building block comprises the assets that help you unlock and create value for your customers. Key resources deal with the operational aspects of your business and are responsible for bringing the value proposition to life for your customers.
There are various kinds of key resources that act as enablers for your business.
These key resources should be well differentiated from your customers in order to be better than them
Types of Key Resources
Broadly there are four different kinds of key resources.
Physical resources, like equipment, machinery, buildings etc, are tangible resources which are used to create the products and services for the customers.
While these may not be extremely vital for an online business, they have great importance when it comes to businesses which have to deal with the physical world.
For example, Amazon will need to have large warehouses, where the products are sorted and stored. Similarly, a giant like Apple would need labs to experiment on its devices and manufacturing facilities to deliver value.
A telecom company would need towers, switching centers and servers to ensure continuity of services. A cloud company like Oracle will need data centers to meet the demands of the customers.
Depending on the type of industry, these assets may comprise a large portion of the capital required for setting up business.
Intellectual resources are powerful intangible tools that enable a company to maintain its edge over competitors.
Do you know, Coke has a secret formula for producing the syrup that eventually translates into the beverage. Similarly, Google has its proprietary page rank algorithm that retrieves the most relevant search results for you.
In the world of pharmaceuticals, this is even more important when producing medicines which have been patented.
Another intellectual resource that an online business has is the data that it collects over a period of time. With analytics and machine learning uncovering insights and patterns, data can unlock great opportunities. This also includes the customer lists or emails that you collect over a period of time.
In fact, intellectual resources are a great way to get a competitive advantage. No wonder the number of patents granted in the US is increasing year on year.
Employees are the key enablers of value in an organization. In fact, hardly any company can run successfully without its employees.
Imagine, would the big machines in so many industries function without any operators or maintenance staff? Would Dominos be able to deliver pizzas without delivery guys?
In service industries the role of employees is even more profound. The quality of work delivered by consulting organizations like McKinsey, BCG, Bain or the Big4 is highly dependent on the quality of consultants they have (no wonder they hire the best of people).
Hence, this block should include the key human resources that are important to your business.
In online business, content creators or people who write code for you are very important. Google may not have been the giant that it is, if it did not have expert coders.
This will also give you an idea of what kind of hiring your business would need to deliver the key products.
Financial resources include the capital, the sources of debt (or line of credit) and the stock owned by a company. The requirement of this kind of resource will vary depending on the kind of business that you choose to do.
For example, the capital requirements of a bank may be completely different from that of a business that makes money through online sale of educational courses.
If you are just starting a business, you may choose to raise funds from friends and family in the beginning. Once it gets established you may turn to investors and venture capitalists.
If your business has massive requirements of advertising or needs rapid expansion to various geographies then financial resources will be the key to your success.
Another important consideration here is working capital. Working capital is the money required to meet your day to day operations like paying your vendors and buying inventory etc to keep your business running.
Which resources are most important?
To decide which resources are the most important for you, you will need to evaluate the resources without which you cannot continue your business and those which contribute greatly to your success.
Hence, employees may be more important than machinery when it comes to consulting business. Similarly, power generation will have a major dependence on plants that produce electricity.
Step 8: Key Partnerships
This block consists of entities which are not internal to your business but are extremely important in delivering value.
Consider the supplier of goods for your business, or the manufacturer to whom you have outsourced business, or the investor who has promised to back your venture.
All these are important partners for your business and are critical to the success of your model.
In fact, with the rise of outsourcing partnerships have become even more important.
Would Kindle be a successful product if book writers don’t agree to publishing their content in the format? Or would the Apple iPod be successful without the music producers selling their music on the platform.
Hence, these outside partners are equally important and this justifies their place in the Business Model Canvas.
There are four broad types of partnerships that you will have:
- Strategic Alliances: These are partnerships between non competitors that benefit both the parties. For example, an automobile manufacturer may give exclusive rights to a partner in one country to distribute its products.
- Coopetition: These are alliances between competitors for mutual gain. For example, two video content creators may collaborate for an even greater share of audience, leading to increase in popularity of both influencers.
- Buyer-Seller Relationships: You may procure raw materials or sometimes finished products from outside. These types of relationships or partnerships are referred to as Buyer-Seller relationships. Sometimes, these relationships can also become a great source of competitive edge. For example, say you have exclusive rights to buying a superior quality of coffee in a particular region with a seller. Outsourcing relationships with partners also fall under this category.
- Joint Ventures: Joint ventures are partnerships between two separate companies when they have some sort of a mutual gain in working together. This could include sharing of resources, sharing of technology or if they produce complementary products. For instance, a data storage company may partner with an enterprise software firm to offer an end to end solution to the customer.
Key questions to ask before getting into partnerships
- Have I researched my partner well? The first thing to do is to research your partner well. This includes the history of the company, financial stability, integrity and the quality of products delivered.
- Is it a win win agreement? The partnership should be mutually beneficial. A good long term relationship cannot be built if one loses and the other wins. Therefore, there should be enough money to be made for both the parties.
- How long should the partnership be? Your contract duration should be negotiated on the basis of length of the relationship required to make your business successful.
- Are the key expectations and deliverables well defined? You should be clear about the terms of agreement and they should specifically contain what is to be expected from the partnership.
- Is the process being outsourced part of my core activity? As long as possible you should have direct control of the most key core activity of your business.
- Are my financial resources enough to cover the cost of partnership? You will need to pay your vendors on time to stay in business. Hence, be sure that the rate being negotiated is something you can easily pay for.
- Do I have quality checks in place? Getting work done from partners may require strict levels of quality control. Hence, make sure you have dedicated employees to validate quality.
Why Should You Choose Partners for Some Activities?
We should remember that some types of outsourcing in business process are more common, and there are specific reasons why companies choose to delegate some work to partners.
The major reasons are reducing costs and focussing on core activities.
For instance, you may choose to focus on the core activities that generate value and outsource the ones that can be easily done by others.
Do you know, Coke mostly focuses on its marketing activities and outsources bottling to another company?
Some other reasons are improving quality, conserving capital and increasing speed to market.
Step 9: Cost Structure
This brings us to the last building block – the block for cost structures.
Cost structures include the major sources from which your business incurs cost.
The first step is to understand what are the costs contributed by each of the key activities and key partners. In order to be cash positive you should collect your revenues on time and have cost under control.
Now, different business models will have different kinds of costs attached to it. While some business businesses will be capital intensive, that is, they will require a large amount of capital in order to function (e.g. telecom) while others may not require a lot of capital to begin with (e.g. software development).
There are two major kinds of costs associated with a business:
- Fixed Costs
- Variable Costs
Fixed costs are costs which are paid upfront and do not vary with the number of customers served by a business.
For example, consider the money that the airlines pay to the airports. There is usually a fixed component to it known as the yearly fee. No matter how many customers fly, this cost will always exist.
Another example is rent. Consider a restaurant which pays monthly rent for the building it operates in. No matter how many customers come to dine in, this cost always remains the same.
Now, fixed cost doesn’t always have to remain fixed, it only means that it remains fixed for a particular period of time.
Example of fixed costs:
- Advertising and marketing expenses
Contrary to fixed cost, variable cost varies with the number of customers served. For example, sales commissions paid for each dollar of sales or shipping charges per item delivered to the customers.
The biggest portion of variable costs in most businesses are the raw materials and utility bills.
Examples of variable costs:
- Raw material cost
- Labor costs
- Shipping costs
- Packing supplies
- Utility bills like electricity
Your business model will decide whether you have a larger proportion of fixed costs or variable costs.
For example, consider a brick and mortar apparel business and an ecommerce based apparel business.
A brick and mortar based business will have rent as the major fixed cost while the cost of operations is the major driver of cost in an ecommerce business.
Another way to classify costs is categorizing them as Capital Expense (CAPEX) or Operational Expense (OPEX). Capital expenses are costs which are spent in order to acquire an asset.
Operational costs are costs which are expensed. Consider a company buying stationery, this will be counted as an operational expense. On the other hand the expenditure done to buy a big server to support operations will be classified as a capital expense since the acquired server becomes an asset.
Ideally, the margin that you obtain from your revenue over variable costs should be enough to cover your fixed costs in order to generate positive cash for you.
This can be done in two ways:
- Economies of Scale: Economies of scale occur when you sell enough quantities of an item such that the cost of serving each customer reduces. This happens due to multiple reasons. A first that operates on scale is able to negotiate better prices with the vendors. This is because they get volume discounts. Since, the scale is big, fixed costs are much better covered.
- Economies of Scope: Economies of scope occur when the same fixed costs are covered by different products and services. For example, consider a firm that operates its own logistics network. If it enters multiple product categories then the same trucks can now transport these multiple products sharing the cost for each of them.
How conservative should you be with costs?
This will depend on whether you consider yourself as a cost driven business or a value driven business.
A cost driven business focuses more on reducing cost. For example, consider ‘Ryanair’, the airline is based on removing all the frills and just offering the basic airline services in order to cut costs.
On the other hand a luxurious hotel business will focus less on cost and more on providing the best of comfort and facilities to its guests.
Usually luxury products are focused more on value and basic products that have less differentiation focus more on cost.
Once you decide your major cost heads, jot them down in the cost driver block and see them in conjunction with revenue from various sources.
It is important to validate whether your business model will be successful in generating cash and what level of scale you will require to make it work and whether it is doable or not.
Business Model Canvas FAQ
A business model canvas is a one page visual template that covers the key aspects required to make a business work. It consists of 9 building blocks which should work in conjunction with each other in order to deliver the key value proposition of business to the target customer segments.
A business model canvas has 9 building blocks.
1. Customer Segments: Who are the key customers of your business? And what are their key characteristics and needs?
2. Value Propositions: Why do customers buy your product or service? What is the key benefit that your business offers?
3. Channels: How are these benefits communicated to your customers and how is the product or service sold or delivered and why?
4. Customer Relationships: What are the key touch points between you and your customers? And how do you connect with them throughout their journey?
5. Revenue Streams: How does business actually earn money from various value propositions?
6. Key Activities: What are the key things that your business strategically does to deliver this proposition?
7. Key resources: What are the assets that business requires in order to stay competitive and create value?
8. Key Partnerships: What are the external entities or stakeholders that are key to delivering the product and service to your customer? What are some of the partners to whom you have outsourced certain activities to focus more on your core work?
9. Cost Drivers: What are the major cost drivers for your business and how are they linked to your revenue?
Instead of coming up with a 500 page document that describes your business model, you should start with a quick business model canvas. This will give you an idea of the key parts that are required to make your business work.
Start with a business model and come up with an initial version of your business model canvas. Then test your key hypothesis through experiments and take the learning from those experiments to adjust your business model canvas.
Use this as an iterative process for learning and keep adjusting your business model canvas till it becomes perfect.
Business model canvas is better for testing model assumptions because it is easy to change. It is also a standard template and is well understood by all. Many companies have successfully used it especially in dynamic environments.
There are various kinds of business models depending on what method of monetization you use and how charge your customers for your value proposition.
Here are a few of them you can adopt if you don’t have a completely new business model.
1. Brokerage: Bring together buyers and suppliers and charge a commission for the transaction.
2. Bundling: Offer a few products or services together as one package (eg. iPod and iTunes)
3. Crowdsourcing: Raise funds from a group of people who are interested in supporting your offering
4. Disintermediation: Sell directly by cutting out the middlemen
5. Freemium: Charge a few customers for specialized service and offer a free version with limited functionality
6. Auction: Sell products through an auction rather than a fixed price (Eg. eBay)
7. Subscription: Charge for a fixed period of time for unlimited usage of service (Eg. Netflix)
8. Leasing: Lease or rent an asset for a fixed period of time for money
9. Usage: A simple model where you charge per transaction or usage of product/service
10. Advertising: Charge other businesses for advertising on your platform.
11. Affiliate: Earn a commission by selling someone else’s products.
This list is just indicative, you can have a lot of business models based on one or many of these ideas.
Business model canvas was invented by Alexander Osterwalder. He is a Swiss theorist, author, consultant, speaker and entrepreneur.
Business model canvas is a standard template and the same is used uniformly by everyone. In fact, the fact that it is standard is one of the great points that eases collaboration between teams and business, making the process of planning easy.
Here is the standard template:
Here is an example of a business model canvas for a car repair store.
A lean canvas is just an adapted version of the business model canvas which is more suited for startups.
It was created because there are some blocks of the business model canvas which are difficult for a startup to know when it starts doing business. This is because by definition a startup tries to do something that no one has done before making the whole model extremely uncertain.
Here is a complete list of differences between the two.
|Element||Business Model Canvas||Lean Canvas|
|Target||New and existing businesses||Startup businesses purely|
|Focus||Customers, Investors, Entrepreneurs, Consultants, Advisors||Entrepreneurs purely|
|Customers||Lays emphasis on customer segments, channels and customer relationships for all businesses||Does not lay much emphasis on customer segments because startups have no known or tested products to sell|
|Approach||It lays down the infrastructure, lists the nature and sources of financing and the anticipated revenue streams of the business||It begins with the problem, a proposed solution, the channels to achieving the solution, costs involved and the anticipated revenue streams|
|Competition||It focuses on value proposition in quantitative and qualitative terms as way to stay smart in the market||It assesses whether the business has an unfair advantage over the rest and how to capitalize on it for better grounding|
|Application||It fosters candid understanding, creativity, discussion and constructive analysis||It is a simple problem-solution oriented approach which enables the entrepreneur to develop step-by-step|
Ready to Launch Your Startup using the Business Model Canvas?
Having read this article in detail, you must now be well versed with a business model canvas and how to create a quick one for your business.
If you are looking to start a side business to earn some money online or any full time business then this template is going to be very useful for you.
A lot of learning about your business and whether your assumptions are true or not will become clear only when you start your venture.
The important thing is to think like an entrepreneur and have a learning mindset and you will definitely succeed.
If you are short on money you can apply the business model canvas to earn money from a blogging business with less than a $100 investment or you can choose any business model that suits you.
The important thing is to take the dive and begin, and if you follow all the tips and tricks shared here, you will definitely succeed.