Twenty years ago, if you had an entrepreneurial idea worth pursuing, you’d break out your typewriter, write a 50-page business plan, and within the first two weeks of starting your venture, realize that 70% of the assumptions you made in your business plan had changed and that your carefully crafted novel was now worthless. This process didn’t work. Entrepreneurs needed a leaner method of strategizing their business startup, something they could modify just as quickly as their startup changed. This entrepreneurial tool finally surfaced in 2008: the Business Model Canvas.
The Business Model Canvas (BMC) is nothing more than a one-page template. Developed by a Swiss business theorist, this template categorizes the essential aspects of business into nine sections: the value proposition, customer segments, channels, customer relationships, revenue streams, key resources, key partners, key activities, and cost structure. Today, if an entrepreneur has an idea worth pursuing, they break out their Business Model Canvas, define those nine categories, and two weeks into starting their venture, easily change all outdated assumptions, creating a continually relevant, visual model of their startup. Only when the entrepreneur is looking for outside investment or some other external support do they need to transform their BMC into a small business plan.
In this article, I will explain how to attack the nine categories in the BMC in order to create a solid startup model.
1. Value Proposition
The Value Proposition is the most important aspect of your business because it answers the question: What is the true value your business provides? While this may seem like a simple question, it can easily be answered poorly. Often, entrepreneurs list the myriad of features that their product or service provides. However, this practice only distracts from the true value of your business. The value proposition should explain the pain the business solves or the gain it provides. A good method for discovering your value proposition is asking the three whys.
To illustrate this strategy I will use DoorDash as an example. 1) Why do customers use DoorDash? Because they can use our app to select food, pay for food, and track where it’s at on their phone. 2) Why do customers want all of these features? Because they want to quickly order delivery food from any restaurant in town. 3) Why do customers want to quickly order delivery food from any restaurant in town? Because they want convenience without sacrificing selection.
Once you have outlined your value proposition you will use it to guide the rest of the categories.
2. Customer Segments, Customer Relationships, and Channels
The Customer Segments section of the BMC answers the question: What type of person would be most inclined to seek the benefits of your value proposition? In this section, you should list out all the characteristics, demographics, and other pertinent information regarding your target customers. Frequently, entrepreneurs make the mistake of creating a target customer segment that’s too broad. A narrow customer segment is better, as it creates very specified customer research and increases the likelihood that you can break into that customer segment. Remember, you can always expand your customer segment later.
The Customer Relationships section answers the question: If your business had a personality what would it be? An effective method of answering this abstract question is by deciding where your business lies in two dimensions. Firstly, where does your company lie on a scale of professional to informal? An example of an extremely professional company would be Earnst and Young, an accounting firm. An example of an extremely informal company would be Bird Dogs, a clothing company. Secondly, where does your company lie on a scale of involved to uninvolved with its customers? An example of an extremely involved company would be Orange Theory, a personal training gym. An example of an extremely uninvolved company would be Visa, a credit card company.
Once you’ve established the “personality” of your company you should outline how you will get, keep, and grow your user base. The “get” might come in the form of having a marketing team or expecting your company to spread by word of mouth and virality. The “keep” might come from having a subscription-based revenue structure or having continued incentives. The “grow” might come from continued traditional marketing (usually leading to linear growth), referral systems (usually exponential-ish growth), or something completely different.
The Channels section answers the question: How does your product or service get from the company to your customers? If you’re starting a software company these channels could be as simple as leveraging the web, mobile, or the cloud. For other ventures, these channels might be physical like FedEx shipping, sales teams, ground transportation, etc. Most companies will rely on a combination of both digital and physical channels.
3. Revenue Streams
The Revenue Streams section answers the question: How do you make money by providing your value proposition to your customer? If you’re starting a restaurant this question might seem easy, your customers will pay for the food they purchase. If you’re starting a software company this might be trickier, as you could have a first-month-free subscription model, an ad-based revenue, a freemium model, or many other revenue structures. Overall, the key is to figure out which place in the customer journey is best to collect the money. This process is called value capturing.
4. Key Resources, Key Partners, and Key Activities
The Key Resources Section answers the question: What are the most important assets to the business? This question can be broken up into financial resources, physical resources, intellectual resources, and human resources. If you’re a coffee company your financial resources may include a loan to get started and a credit card. Physical resources may include ingredients, packaging, supplies, and stores. Intellectual resources might include recipes and branding. Human resources may include friendly baristas and smart operation managers.
The Key Partners section answers the question: Which partners does your business need to acquire those key resources? That same coffee company might need to partner with a bank to acquire financial resources. They might need farmers, manufacturers, designers, and distributors to source ingredients, provide packaging, provide supplies, and distribute your coffee.
The Key Activities section answers the question: What are the activities that your company needs to perfect in order to optimize your value proposition and business model? A coffee company might need to perfect its ingredient sourcing process, its brewing process, its cafe environment, and its customer service. It’s good to list all the activities you need to perfect but choose a few to focus on in the beginning. Choosing too many will dilute the laser-focus that you need.
5. Cost Structure
The Cost Structure section answers the question: What are the most impactful costs to your business and what are the dynamics of those costs?
You should start by outlining your biggest costs. As a rule of thumb, these should be costs that are greater than 5% of what you think your total costs will be. Once these large costs have been outlined, you need to categorize them as either fixed or variable costs.
A fixed cost is a cost that doesn’t change based on how many goods or services you sell. A good example of fixed costs is rent. If you’re a coffee company, the number of espressos you sell doesn’t change the fact that you owe $1000 every month for the café.
A variable cost is a cost that does change based on how many goods or services you sell. Following the café example, a variable cost would be the coffee beans you use in your coffee. The more coffee you sell, the more coffee beans you’ll need to purchase.
Next, you should consider your business’s cost pattern. Cost patterns are essentially a year-long perspective of your costs. Common cost patterns include plateaus, trends, and seasonality. A movie theater might have a plateau pattern, meaning that from January to December, the revenues and costs to the theater are relatively constant, they don’t swing up too much, they don’t swing down too much. A trend can be represented by a social media company. Month to month, revenues and costs consistently rise little by little creating an upward trend. Seasonality can be represented by an ice cream truck. During the warmer months, there will likely be more revenues and costs, during the colder months it will be fewer revenues and costs.
Lastly, you should consider the importance of economies of scale. An economy of scale can be thought of as the discount you receive when buying in bulk. If you’re a coffee company you may consider taking advantage of buying your coffee beans in bulk in order to reach an economy of scale. The one thing to additionally consider is whether you have adequate demand to sustain an economy of scale.
The Business Model Canvas turned the old clunky business plan into a lean, iterative template. Each of the sections within the Business Model Canvas answers one key question about the business:
Value Proposition: What is the true value your business provides?
Customer Segments: What type of person would be most inclined to seek the benefits of your value proposition?
Channels: How does your product or service get from the company to your customers?
Customer Relationships: If your business had a personality what would it be?
Revenue Streams: How do you make money by providing your value proposition to your customer?
Key Resources: What are the most important assets to the business?
Key Partners: What partners does your business need to acquire those key resources?
Key Activities: What are the activities that your company needs to perfect in order to optimize your value proposition and business model?
Cost Structure: What are the most impactful costs to your business and what are the dynamics of those costs?