The Business Model Canvas
Understanding What Makes Your Company Successful
Do you know what your company's business model is? How well do you understand it? And why does this matter?
A company's business model determines how it generates its revenue, operates successfully, and makes a profit. If your company's business model is out of date or wrong for its market, then it's likely to fail.
Understanding your company's business model is an important part of developing the "commercial awareness" you need to solve problems effectively, make good decisions, and become known as a trusted leader in your organization.
This article explores a useful model that you can use to think about your business model.
About the Tool
Alex Osterwald and Yves Pigneur developed their Business Model Canvas in 2010.
They collaborated with 470 members of the Business Model Innovation Hub – an online forum for business professionals and researchers – who contributed case studies, examples, and critical comments to their research. As such, the Business Model Canvas represents the collective experience of a community of business people.
It appears as a template of nine basic building blocks, as shown in figure 1, below. These form a blueprint, based on which business models can be systematically designed, explained and challenged.
Figure 1: The Business Model Canvas
|KP = Key Partnerships||CH = Channels|
|KA = Key Activities||CS = Customer Segments|
|KR = Key Resources||C$ = Cost Structure|
|VP = Value Propositions||R$ = Revenue Streams|
|CR = Customer Relationships|
How to Use the Business Model Canvas
To use the Business Model Canvas, think about each building block using the questions below. You may want to download our worksheet to help with this.
CS: Customer Segments
Your customer segments are your target markets – the specific groups of people or organizations that your business serves.
Instead of trying to satisfy everyone, all of the time, group your customers according to common attributes like their location, needs, or behaviors, and decide which segments to focus on. This way, you can deliver a product or service that is closely tailored to the specific needs of particular groups.
See our article on market segmentation for more on this.
Record your results in the CS block of the canvas.
VP: Value Propositions
The value propositions block defines how you'll deliver value to your customers. You can create value in many ways, including offering a low price, a high standard of design, good accessibility, convenience, and high performance. Consider these questions:
- How do you create value for your target market?
- What problem or need does your product or service solve for the customer?
- How does your product or service differ from your competitors' offerings?
Write your value proposition in the VP block of the Business Model Canvas.
R$: Revenue Streams
In this block, you analyze how each customer segment pays for your product or service.
There are many different ways to pay for a product or service. For example, is the price fixed, or will you charge customers for each use, by subscription, or with ongoing payments? Will any negotiation or bargaining be involved? And who, ultimately, is the customer? (Your customer may be an advertiser, for example, rather than the user of the service.)
Consider these additional questions:
- What do your customers currently pay for similar products or services?
- How do they pay for this?
- What do you charge for your product or service?
- Do customers get any free services or perks that your competitors don't offer?
Record this in the R$ block of the Business Model Canvas.
The word "channel" refers to the way you deliver your value proposition to each customer segment. Channels include a direct sales force, web sales, own brand stores, partner stores, and wholesalers. Consider these questions:
- How do you make your customers aware of your products and services?
- What channels do your customers prefer to use?
- How will you help customers evaluate your value proposition?
- How do customers want to buy your products and services?
- How do you provide customer support?
Record your answers in the CH block of the Business Model Canvas.
CR: Customer Relationships
This block defines the type of relationship you want to foster with each of your customer segments. There are several categories to consider here.
- Dedicated personal assistance – This is where the wants and needs of each customer are handled by a dedicated customer service representative. For example, many types of business dedicate an account manager to highly valued clients.
- Personal assistance – Here, customers can communicate with a customer service professional during and after the sales process. This can happen in person at the point of sale, or through a call center, email, or IM.
- Self-service – Customers can purchase products without assistance.
- Automated Service – An automated service recognizes individual customers through a login or other identifier. This provides a customized service that "remembers" the customer's preferences and presents options accordingly.
- Communities – Here, the organization builds communities using social networking and blogs to encourage customers to communicate with one another, share ideas, and solve problems.
- Co-creation – In these relationships, organizations go beyond the traditional customer-vendor relationship by encouraging customers to take a more active role in shaping what the product or service might be. For example, some companies encourage their customers to review their products, or create content that can be shared with others.
To think about how your business develops relationships with customers, you can use the Buy-Sell Hierarchy, Focus Groups, and Customer Experience Mapping to understand what your customers want from their experience, and then use this information to build the customer relationships you need.
Record your findings in the CR block of the Business Model Canvas.
KR: Key Resources
Your key resources are the things you most need to make your business model work, and different types of business need different types of resource.
Key resources may be owned by your company, leased, or used through some other arrangement with key partners.
Consider these questions:
- What human resources will you need?
- What financial resources will you need?
- What physical resources will you need?
- What intellectual property resources will you need?
Conduct a VRIO analysis to explore how you can make best use of the resources you have available.
Make a record of these key resources in the KR block of the Business Model Canvas.
KA: Key Activities
Your key activities are the most important business processes that your organization must use to operate successfully. Examples of these include designing, manufacturing, and delivering a product; providing new solutions to customers; or providing a platform on which customers are able to complete transactions.
List your key activities in the KA block of the Business Model Canvas.
KP: Key Partnerships
This is the network of partners, stakeholders and suppliers that you rely upon to make your business model work. Consider these questions:
- What strategic alliances do you have in place to bring your product or service to market?
- What partnerships are needed to access key resources such as areas of expertise, raw materials, or access to customers?
- What partnerships allow you to access economies of scale?
- Who have you joined forces with to minimize risk and uncertainty?
- Who are the key stakeholders for your product or service? How can you create strategic partnerships with these people?
Write your key partnerships – both potential and present – in the KP block of the Business Model Canvas.
C$: Cost Structure
The last block you need to analyze is your cost structure. This looks at all of the operating costs that your business incurs as part of its business model. These costs should be easy to identify, now that you've defined your key resources, activities, and partnerships.
Record your findings in the C$ block of the Business Model Canvas.
Applying What You Have Learned
By working through the Business Model Canvas for your own company, you'll get a good insight into the things that really matter for your business.
You can use this understanding to make informed decisions about business areas that you are responsible for by checking, in particular, that your decision won't undermine the wider business in any way. You can also quickly identify business areas that will be improved by your decision, and this will help you "sell" your recommendations.
It also gives you a head start when you're scanning the business news or industry press for changes that will positively or negatively affect your business. You'll know the core things that your business depends on, and you can watch out for changes that affect these.
Another advantage of the Business Model Canvas is that it clarifies how your own part of the company affects, and is affected by, other departments. This helps all parts of the business co-operate with one another more efficiently.
The Business Model Canvas was developed by Alex Osterwald and Yves Pigneur, in collaboration with a community of business professionals at the Business Model Innovation Hub. It is a useful tool for designing and analyzing business models in an objective, structured way.
The Business Model Canvas incorporates nine building blocks:
Block 1: Customer segments.
Block 2: Value propositions.
Block 3: Channels.
Block 4: Customer relationships.
Block 5: Revenue streams.
Block 6: Key resources.
Block 7: Key activities.
Block 8: Key partnerships.
Block 9: Cost structure.
You can use the Business Model Canvas to develop a new business model, or refresh an outdated one; analyze the viability of a new business idea; and even to analyze your competitors' business models to discover opportunities for making your own business stand out.