Writing out a complete business plan has its time and place, but if you haven’t tested your assumptions in the real world, it will serve little to no use during the early stages of your app startup. So before you write out a comprehensive 15-page business plan from scratch, start with a business model canvas first to lay out the foundation of your company.
“Unless you have tested the assumptions in your business model first, outside the building, your business plan is just creative wrtitng.”
— Steve Blank: Entrepreneur, Consultant and Educator
The Business Model Canvas (BMC) is a lean startup technique for developing new or documenting existing business models. It’s a visual chart that describes your product’s value proposition, infrastructure, customers, and finances. What’s more important than the canvas itself is the process designed for it. This process involves making assumptions and then either iterating or validating them based on customer interviews. When done the right way, the business model canvas is a great framework for going from idea to product market fit.
In this article, we’ll be using excerpts from Steve Blank’s video course “How to Build a Startup” to illustrate and explain each box in the business model canvas. We’ll also walk through a real-world example of the BMC by using the popular mobile app Instacart as an example. At the end of this article, we explain more about the process that you can use to apply the BMC to your startup.
Introduction to the Business Model Canvas
At the end of the article, we provide examples of all nine components of the Business Model Canvas with our Instacart Case Study, but we recommend you start with these three sections.
1. Key Partners
Finding a co-founder is an essential first step needed to turn your idea into a real business. A successful business can rarely be a one-man or one-woman show. However, it’s crucial that you don’t just pick a friend as a co-founder, but someone who can eliminate inertia and enable growth.
2. Value proposition
By identifying the benefits of your app and its points of differentiation, you and your team can offer a value proposition that can successfully intrigue future investors. Determining this isn’t as easy as you might think, which is why you’re going to want to read our previous post on how to create a value proposition for your app.
3. Customer relationships
If your product doesn’t satisfy customers, you won’t have a business in the long run. It’s essential that you and your team strategize a plan to make your app a consumer favorite.
When do you identify as a business?
Eric Ries, the author of “The Lean Startup” says that startups turn into businesses once they find a repeatable and scalable business model. At its core, this type of business model is nothing more than a set of steps that you can follow over and over that generate revenue.
You need to know your business model if you’re a startup founder. That’s where the business model canvas comes into play. The canvas lets you repeatedly iterate your plan until you have a working business model that has been validated by outside forces.
Before this tool was created by business theorist Alexander Osterwalder, startups believed that the “5-year business plan” and execution were all they needed to be successful. In reality, this doesn’t hold up. It is simply impossible to predict how the market will react to a brand-new business model. This is the reason behind the often-quoted dictum “no plan survives first contact with customers.”
Instacart, a case study*
*It’s important to note that Instacart did not initially start with this business model canvas. After validating and iterating on their assumptions, they decided the business model canvas (BMC) above was scalable.
The nine BMC blocks
In the following sections, we’ll include a quick video from Steve Blank’s How to Build a Startup course, an explanation of what Instacart put in each block, and advice on applying this strategy to your startup.
1. Customer segments
Instacart uses this section to outline the archetypes of each group of people involved with the app. Their users are the people who get value from door-to-door grocery delivery. The types of customers most likely to get value from this are those who don’t like shopping, those who don’t have a car, and senior citizens. Instacart’s shoppers are the people who are delivering the groceries. The most common archetypes are people who have a smartphone and a car, people who love shopping, and individuals who want to work as a freelance shoppers. A store that would be interested in being a part of Instacart’s business model would be those looking to increase their sales and potential reach.
2. Value proposition
For each customer segment, Instacart offers a different value proposition:
- Customers can shop for groceries through the app and get delivery within two hours.
- Shoppers can have a flexible working schedule similar to Uber and Seamless.
- The stores increase their number of customers and sales.
It’s important you provide value to each segment of people involved in your business — otherwise, they have no motivation to be involved.
3. Channels
Instacart reaches people through its website and its mobile app for Android and iPhone. When it comes to mobile app businesses, your channels are often limited to current mobile operating systems, particularly Android and iPhone.
4. Customer relationships
Instacart acquires, retains, and grows its customer relationships through social media outreach/advertising and personalized customer service. Many mobile app companies focus too much on the “acquisition” aspect of customer relationships. Overlooking things like customer service can be a costly mistake; it’s always cheaper to get an existing customer to buy from you than acquire a new one.
5. Revenue streams
Instacart makes money by charging users a delivery fee or a membership fee for using the platform. They also add a surcharge to the prices stores charge for their items.
6. Key resources
To succeed as a business, Instacart needed to build partnerships with many local stores, a fast shopper workforce, and the technology for their platform. If your startup sells physical items, you need to work with manufacturers, find warehouses, establish distribution routes, create retail outlets, and more. That’s why one of the biggest benefits of starting a web or mobile business is the lack of physical resources needed to succeed.
7. Key partners
Instacart also needed to establish partnerships with both local stores and financial institutions. Some web and mobile businesses may not need any external partnerships to get off the ground. That said, it’s much easier to work with an established business for services like product sourcing than building them all up yourself. Instacart would never have succeeded if they were committed to opening their grocery stores instead of partnering with established ones.
8. Key activities
The key activities Instacart focuses on are:
- Creating a technological infrastructure
- Managing partnerships with local markets
- Managing the shopper workforce
- Customer service
If you’re building a physical system like Instacart or Uber you may have very specific key activities in mind such as “managing the shopper workforce,” but building a solid technological infrastructure will be your primary key activity.
9. Cost
Instacart’s costs include:
- Technical set-up and operational costs
- Salaries for permanent employees
- Commission-based payments to shoppers
For your app business, the first two of Instacart’s costs will likely be applicable. Infrastructure and hosting are necessary costs for you, but luckily the pricing of those services often scales up as your user base grows.
How to use the business model canvas
Start with putting sticky notes in each block of the canvas with elements that you believe will work for your business. Next, run small-scale tests (this is typically accomplished by talking to people) that will help you validate whether or not your initial assumptions were right. Continue iterating on every block until you have validated all aspects of your startup, and then move forward. At the end of the process, your business model canvas should look significantly different than when you started. It’s easier to understand this from an example. Here’s a video of how a company called JerseySquare went through this process after being coached by Steve Blank.
Conclusion
The business model canvas is the perfect tool to use for visual thinking, collaboration, and iteration — all of which you need to build the foundation of your business.
This article was originally published on December 16, 2019 on Rapptr’s Academy.
