The Best Business Model Tool for Your Business

Whether you are a freelancer, entrepreneur or business owner, you have a business model. As long as you are trying to achieve success by getting a product to customers, a business model is involved. Even the lemonade stand on the street corner has one. But if your model becomes outdated or your competition discovers a superior one, you will quickly go out of business.

On the other hand, if you get your business model right and understand how to make it better than your competitors, you will be playing Chess while they are playing Checkers. You will beat them every time, even if they have a superior product. And that’s where the Business Model Canvas comes in.

What Is the Business Model Canvas?

For the past few years, the Business Model Canvas has been a powerful tool to map out how your business model works in a visual form. To use it, you can download the app version, or print it out and use post-its to fill in the nine parts of the Canvas. Depending on how you use it, the Business Model Canvas can help you spot weaknesses, achieve higher revenues, build strategy and even implement elements of other models into yours.

The 4 Levels of the Business Model Canvas

Why is the Business Model Canvas so extraordinary? Because it is a simple tool that breaks down a business model into nine distinct and interconnected elements. Yet despite this simplicity, it has some very powerful applications. Outlined below are the four levels of using the Canvas, from the simplest to the most complex:

Level 1: The Checklist

The easiest way to use the Canvas is to fill out all nine parts in order to show how you’re making money (revenue) and how you’re spending money (costs). As a checklist it is essentially a tool to describe product/market fit.

Level 2: The Story

Once each part of the Canvas is filled out, you can go one step further to understand how each piece fits with the other corresponding pieces. By understanding these connections, you develop a strategy, which puts you above any competitor using Level 1 thinking. This will help you tell the story of how your business model operates, whether it’s knowing the proper channels by which you deliver your product to customers or knowing which partnerships help you create the most value.

Level 3: Understanding Dynamics

Once you begin to understand your own business model, you can begin to study the models of other companies or industries. This will allow you to see which dynamics make companies’ business models similar or different. At the same time, you can see which particular parts make a successful model so powerful. The more you understand these dynamics, the more you can implement what works into your own model.

Level 4: Evolution

The fourth level can be used in both startup and corporate settings, but it is inherently a method of capturing the entrepreneurial process of testing hypotheses and iterating through failure and success. At this level, each Canvas becomes a picture in time, which is used to create hypotheses to test over time. A startup, for example, can create a Canvas each week as it tries to find a business model for its product. This will allow the entrepreneur to learn what works over time, and it can keep him or her from repeating past mistakes by understanding why they did not fit in the model.

The 9 Parts of a Business Model

Each part of the Business Model Canvas asks a number of questions. Once the questions are answered, you should have a clear picture of how each section works within the whole model.

1. Customer Segments: This part of the business model answers the following questions:

• Who are we creating value for?
• Who are the most important customers?

These questions could have two very different answers. Your customers could be part of mass or niche markets, but need to be segmented and understood. Common segments include location and age, but depending on the business, the segments can coincide with customer needs and pain points.

2. Value Propositions: This part is directly related to your Customer Segments and seeks to answer the following questions:

• What value is provided to the customer?
• What problem are we solving for the customer?
• What products or services are we providing to each customer segment?

Value propositions can come in many forms. Product performance, design, price or customization can all provide value to the customer. Reduction in overall risk or cost for a customer can also be valuable. Different segments can even find different types of value from similar products.

3. Channels: This part of the business model is about how you reach your Customer Segments. This includes how your customers want to be reached and through which channels you are currently reaching them. It is also important to look at which channels are cost-efficient and how they can be integrated with customer routines. There are five essential phases of any channel that need to be understood:

• Awareness: How do you raise awareness about your products and services?
• Evaluation: How do you help your customers evaluate your value proposition?
• Purchase: How can customers buy your specific products and services?
• Delivery: How do you deliver your value proposition to your customers?
• Post-Sale: How do you provide customer support?

4. Customer Relationships: This part describes the type of relationships that you are establishing with your customers. For this, you will want to ask some of the following questions:

• What type of relationship does each customer segment want us to establish and maintain with them?
• Which types have we already established?
• How much do they cost?
• How do they work with the rest of our business model?

Providing personal assistance or creating a self-service feature are examples of ways to build and maintain customer relationships. Building communities is another way to establish bonds with a segment.

5. Revenue Streams: These can come in many forms since a source of revenue is simply anything that generates money for your business. A few examples include selling an asset, usage or subscription fees, or licensing and renting. Answer the following questions to describe revenue streams:

• How are customers currently paying?
• How would they prefer to pay for our product?
• What value would our customers be willing to pay for?
• How much does each revenue stream add to total revenues?

Consider also that there are two types of pricing structures. Fixed pricing could be dependent on list price, product features, volume or customer segment. Dynamic pricing could be based on negotiation, competition or timing. Examples of dynamic pricing can be found in the hospitality and travel industries, and on Amazon.

6. Key Resources: These can include any resources that are needed for your value propositions, distribution channels, revenue streams or customer relationships. These resources can be tangible (i.e. trucks for transport or equipment for production) or intangible (i.e. intellectual property like patents or copyrights). They can also be human resources or financial resources.

7. Key Activities: Like resources, certain business activities can be employed in creating value propositions, distribution channels, revenue streams and customer relationships. These activities can include production activities, problem solving and network activities.

8. Key Partnerships: This part includes both partners and suppliers. It also takes into account the key resources that you are acquiring from these partners, as well as the key activities that your partners perform. Partnerships must be carefully planned, and you must have clear reasons for forming them, such as reducing risks, optimizing and economizing, and getting the resources you need.

9. Cost Structure: This part takes into account the most important costs that your business model is dependent on. It also looks at which key resources and key activities are most expensive. To set up the structure, you will need to know if your business is cost-driven or value-driven:

• Cost Driven: The goal of this business is to minimize any non-essential costs in order to compete. You can achieve this by running lean, through automation and through outsourcing. A company like Southwest Airlines is cost-driven, which is directly tied into its low-price value proposition.
• Value Driven: The goal of this model is about creating value rather than focusing on costs. High-end retailers and brands fall under this category because they are selling premium and exclusive products.

Some of the key characteristics of cost structure include fixed costs, variable costs, economies of scale and economies of scope.

Conclusion

To learn more about the Business Model Canvas, check out this video with the creator of the Canvas, Alexander Osterwalder.

Originally published at www.docstoc.com.