The Business Model Canvas Explained
All you need to know about the Business Model Canvas
The Business Model Canvas has grown in popularity since its inception by Alex Osterwalder in 2000. People all around the world — academics in top ranked business schools, students, organisations and startup founders, are adopting the Canvas in teaching, venture building, and innovation. What then, is the Business Model Canvas?
“No business plan survives first contact with customers, so use a Business Model Canvas”
— Steve Blank, The Step-by-Step Guide for Building a Great Company
The Business Model Canvas (BMC) is a powerful tool which systematically works through the fundamental building blocks of a business, structuring an idea in a coherent manner. It quickly draws a picture of what an idea entails, allowing both yourself and others to better understand your business idea, bridging the gap between having an idea and actually starting a business.
Things to note: a pre-Business Model Canvas checklist
What is a Business Model?
Before starting to fill in the BMC, it is important to first understand what a business model is. A business model is a detailed plan for how all the key aspects of the business fit together. This includes how revenue is generated, what value the business brings to its target customer sector, how the product will be manufactured and marketed, and the expenses it will incur in doing so. In summary, the upshot of a business model is a detailed plan of how a business will monetise.
With that in mind, we can better understand how the BMC creates value for its users. The BMC is a simple, one page document broken into nine building blocks that work through all the fundamental elements of a business model. This canvas allows you to better articulate all the different segments of your business model coherently, making your business idea clearer to yourself, your team, and future investors.
The right side of the BMC focuses on the customers, delivering and capturing value, while the left side focuses on creating that value.
The Business Model Canvas as a constant work in progress
All the information you input into your BMC are known as assumptions or hypotheses. Validation needs to be done to truly understand what your market needs and/or wants, and the results of your validation has to be linked back to each of the nine segments in your BMC. There is no one-size-fits-all BMC, and your BMC is a constant work in progress — always iterating as you gain new insights from your primary research.
The feedback loop
Before filling in your BMC, understand your Customer Profile and Value Proposition through the Value Proposition Canvas (detailed explanations below!).
After which, carry out market validation to ensure that you have filled in your Canvases accurately! This is important as you want to be certain that the market has space for your idea before starting up!
The Value Proposition Canvas explained
To better understand the BMC and its segments, we have to acknowledge the role of the Value Proposition Canvas (VPC) in understanding your Customer Profile and how you can create value to suit your Customer Profile.
A Value Proposition Canvas can be used to better describe your customers’ needs, and how you can create value for your customers. By starting off with the VPC, you will be well poised to fill in the first two segments of your BMC — the Value Proposition and Customer Segments.
The circle in the VPC focuses on the Customer Profile. The Customer Jobs-to-be-Done refers to the underlying purpose which drives customers to buy products, services, and solutions. The Gains are what customers want to achieve, and the Pains are what customers go through when using current solutions, or non-solutions.. This knowledge of the Customer Profile is very important in understanding your Customer Segments in the BMC.
The square in the VPC highlights the value that you can create with your product or service. This is done by relieving pain, and/or creating gain for customers. This is useful for defining the Value Proposition of your product or service in the BMC.
Diving into the Business Model Canvas
Now that we have some knowledge on the VPC, learn more about the nine building blocks of the BMC and how they connect with each other to form a coherent business model, with ride-hailing application, Grab, as an example.
Grab is a Singapore-based technology service that offers ride-hailing services through a mobile application. It allows users to book, track and pay a driver to get from one place to another all on the application. In addition to transport services, Grab also offers food delivery and mobile payment services.
For the purpose of this example, focus will be placed on the transportation aspect of Grab, and the business model behind it.
#1 Value Proposition
Your value proposition is all about solving a problem or catering to a need with your product or service. It refers to the benefits that your business brings to each customer segment, should they buy your product. (Remember, the same product can solve different problems for different customer segments!) As highlighted in the VPC, your value proposition creates gain and relieves pain for your customers.
In short, the value proposition answers one important question, “what compels customers to buy from us?”.
In the case of Grab, the value propositions for its customers include more efficient pick-ups and bookings, lower prices than the conventional taxis, convenience, and security.
#2 Customer Segments
Your business is all about solving a problem that your customers face. Hence, it is important to understand the psyche of all your potential customers. These potential customer bases can be segmented according to various characteristics that they may share, such as age, spending habits, interests, and even their motivations in life. When segmenting your customers, it is important to create customer archetypes for each potential customer segment.
A customer archetype, or persona, is a description of each customer type which captures the typical background and behaviour of this group. When determining your customer segments, consider these questions:
- Who are the people who will benefit from my value proposition?
- What are the demographics of these people?
- What are their spending habits?
- What motivates them?
- What is a typical day like in the life of these people?
Grab’s general customer/rider base is simply people who are looking for an alternative to the conventional taxi services.
#3 Key Channels
Channels are the means you use to sell your products or services to your customers, how customers first come into contact with your product, and how your product ends up with the customer. This is largely tied in with the marketing and advertisement plan for your business.
With the rise of technology, the traditional brick and mortar channel is now complimented with many different social media channels, online web stores, applications, and even Google Ads.
Your knowledge of your customer segments is thus especially important when determining what channels to use to reach them, out of the multitude of options available. Some essential questions to answer when identifying channels to reach your customers include:
- Do our customers use social media? If yes, what platforms are they on?
- What are the places they frequent?
- Do they watch television programmes/listen to the radio/read the newspapers?
- How receptive are they to advertisements?
Some channels for raising the awareness of Grab and their customer acquisition include:
- Campaigns: Promo codes and vouchers
- Billboards and print advertisements
- Social media posts and digital advertising
#4 Customer Relationships
Now that you are familiar with your customer segments and how your value proposition can solve the problems that your customers face, how do you get your customers to buy your product? More importantly, how do you keep your customers, and grow your customer base? This segment is highly connected with the Channels, as it delves into the points of engagement between your business and its customers. It helps you determine the avenues for your company to get, keep and grow customers.
Getting customers: How does your company incentivise customers to make their first purchase?
Keeping customers: How does your company keep your customers coming back?
Growing customers: How do you get your customers to spend more?
In this case, it is important to build good customer relationships, through mutual interaction. Some examples include meeting customers personally, online, at events, or through third party contractors.
Grab has to consider various elements in its customer relationships. To incentivise customers to take a Grab for the first time, promotional codes and vouchers may be used. To keep their customers coming back, the company has to ensure that customers have had a satisfactory experience with the company by dealing with customer issues appropriately and efficiently.
#5 Revenue Streams
How is your revenue generated? In this segment, you figure out your revenue model, and how you will capture your revenue. The revenue model you choose depends on your business, and multiple business models could be used. There are many different pricing mechanisms, which will be highlighted below:
- List price: Fixed prices for individual products or services
- Volume dependent: Price correlated with the quantity of products purchased (incentivising bulk purchase)
- Product feature dependent: Price is changed with respect to the number and quality of features in each product
- Customer segment dependent: Price differs for each customer segment (for example, lower prices for students)
- Real-time market: Price is established dynamically based on supply and demand (ride hailing applications like Grab and Uber)
- Yield management: Price depends on inventory available and time of purchase
- Auctions: Price is determined by the outcome of competitive bidding
- Negotiation: Price is negotiated between two or more parties, often on online marketplaces
Grab usually takes a cut of the fee that its drivers receive. The prices that its riders pay are based on the demand of cabs, and the supply of drivers in the area at any given time (real-time market).
#6 Key Partners
Key partners are the other stakeholders that you will have to make partnerships with to grow your business. They are other companies or individuals who are able to accomplish tasks and activities that your company or team does not carry out by itself. These could include suppliers and technology providers.
Establishing partnerships with various companies and investors is also extremely important in showing that your startup has gained traction, or that there is a strong demand for your product. This can be done by signing a Memorandum of Understanding (MOU), which shows that two businesses intend to take the next steps together, towards reaching a mutually beneficial agreement.
These are three examples of Grab’s key partners. Firstly, the drivers. Without the drivers (who are on the supply side of the company’s services), the company would be unable to operate. Next, Grab has technology providers which are essential in the inception and development of its application. Lastly, investors are a key partner in the success of the company.
#7 Key Activities
The key activities are the strategic actions your team must undertake to make the business model work, and achieve the value proposition you have set out to achieve. Some activities include building and delivering a product or service, marketing the product to potential customers, and maintaining a steady growth in revenue.
To keep the business going, Grab has to constantly innovate. Since its inception, the company has expanded to include subsidiaries such as GrabPay, and GrabFood. Other activities include the daily operations of the company, updating and developing new features, recruiting and training drivers.
#8 Key Resources
What are the resources your business needs to carry out the key activities mentioned above? These are the assets needed for your company to grow. An important resource for many new companies is funding. Physical resources such as an office space or raw materials to build your prototype might also be necessary. Some companies also require intellectual properties, such as patents and copyrights. Of course, talent is another key resource, and is crucial for every business.
Besides its technology and staff, some other key resources for Grab include its database of customer information and its platform infrastructure.
#9 Cost Structure
The last aspect of the BMC is cost structure. The cost structure is what you need to pay to keep the business running. Now that you are clear about the key partners, activities and resources you need, it is easier for you to determine what the costs are, and how best to allocate your financial resources.
Some costs incurred by Grab include: the cost of customer acquisition, the development of new features, salaries for staff, expansion into new markets.
Building your Startup
So you have identified a problem and come up with a brilliant idea to solve it, what do you do next?
Step 1: Fill in the VPC and BMC for your business idea, to lay the foundations for your startup!
Step 2: The next step is to get out of the building — and validate! Speak to as many people as possible to ensure that you are correct about the problem, and if your proposed solution is well-received by your customer segments.
“There are no facts inside the building: you have to talk to your customer to move forward.”
— Steve Blank, The Step-by-Step Guide for Building a Great Company
Step 3: Record and link the results of your validation into your BMC, to better visualise if each aspect of your business model correlates with the results you found.
Step 4: Do not be afraid to pivot your idea to better suit your customer segments based on your results, and start the feedback loop once again.
Step 5: Once your idea is validated, go ahead and start building your Minimum Viable Product (MVP)!
The BMC is a valuable tool to help you craft and build an entirely new business, or to revamp existing business models and strategies. Whether you are just starting out or already an owner of an established business, the Canvas provides you with a fuss-free solution to visualise your business plan and fine-tune your business strategy.
Ready to build your startup and innovate? Try out the Business Model Canvas and input your validation results on Pitchspot!
Still have questions on the BMC? Write in to us at firstname.lastname@example.org!
Pitchspot is an open-access innovation platform for innovators to discover, share, and build validated ideas using widely recognised frameworks such as the Business Model Canvas.
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