The Business Model Canvas is a structured framework to develop a business plan. It contains every aspects of a business, including 9 building blocks. In this article, we are going to dive into the nine elements. At the end of the article, there is a link to a FREE Business Model Canvas Excel Template!
The business model canvas consists of the following nine elements:
- Value proposition
- Cost structure
- Revenue streams
- Key activities
- Key resources
- Customer relationships
- Customer segments
- Key Partners
The Business Model Canvas is visualized in a simple template, consisting of the above-mentioned 9 pillars:
Each business model must be viable (e.g. generating profits). Additionally, the different building blocks of the Business Model Canvas must be consistent: the different elements have to form a good fit in order for the business model to be successful.
Let us dive into each of the nine elements in detail.
1. Value proposition
The value proposition focuses on why customers would buy your product or service. What do you have to offer that makes them choose you? It describes what problem you are solving for them. Your value proposition should include what makes your business have a competitive advantage over your competitors.
The term ‘value proposition’ was first used by Michael Lanning & Edward Michael (yes, Michael & Michaels) in a staff paper of McKinsey in 1988. In this paper, the following definition is mentioned to describe value proposition:
“a clear, simple statement of the benefits, both tangible and intangible, that the company will provide, along with the approximate price it will charge each customer segment for those benefits.”
This definition also seems to include the ‘revenue streams’ and ‘customer segment’ pillar of the business model canvas. We will describe these pillars in more detail below.
2. Cost structure
requirements to run the business successfully. The description of the other eight pillars should help to have a clear image of your cost structure. Costs may arise from your key activities, resources, partnership or marketing & distribution channels.
When writing down the cost structure of a business, it is recommended to categorize the costs, for example by differentiating between fixed costs and variable costs:
- Fixed costs: costs that do not change depending on how many products/services a business produces or sells. Examples of fixed costs are rent, mortgages, or depreciation.
- Variable costs: costs that change when the number of produced/sold products or services changes. Examples are labor costs & material costs.
3. Revenue streams
There are different ways to generate revenues. Business can sell products, subscriptions, advertisements, services. There is more than one way to make money. For a business is important to have a clear view of what its revenue streams are and an estimation of how big they are/should be.
There are different types of revenues:
- Direct revenues: Revenues from selling products or services. This is the most common type of revenue. It is the revenue stream directly related to the core business of an organization.
- Indirect revenues: revenues that are not directly related to the core business of an organization. Examples of indirect revenues are investing income from stocks (dividend) or bonds (interest).
4. Key activities
What are the most important business activities, needed to run the business? Key activities are activities that are essential to make money through the value proposition. Some activities will be done internally, while others are outsourced.
It is pretty subjective to classify an activity as a ‘key activity’. A good approach to determine the key activities could be to list all activities, and for each activity, determine if the organization could still reach its value proposition if it doesn’t engage in that particular activity. For startups, it is usually not that hard to list the key activities. For larger corporates however, it is not uncommon that unnecessary activities slowly emerged without anyone noticing they are really not that important.
It is important to mention that what is a key activity for company a, does not have to be a key activity for company b. For a top level biopharmaceutical company that needs to invent new medicines regularly, research and development would be classified as key activity, while R&D will be much less important for companies that do not have the same reliance on new developments, such as a distributor of pharmaceuticals.
5. Key resources
Each value proposition requires resources. Key resources are those resources necessary to deliver the value proposition.
Examples of resources are personnel, IT hardware/software or intellectual property.
If the key activities and the value proposition are clearly defined, it will be much easier to identify the key resources. Resources necessary to execute the key activities and to deliver the value proposition are almost automatically key resources.
Resources can be classified into the following types of resources:
- Human resources (people)
- Physical resources (e.g. buildings, machines, vehicles)
- Technological resources (systems, databases, network technology, software, hardware)
- Intellectual resources (Intellectual property such as patents, a strong brand, copyrights
- Financial resources (money, in terms of cash, debt, stocks (equity))
6. Customer relationships
Different value propositions require different customer relationships. A high-end luxury product could require more customer contact & service than a bag of salt.
Building customer relationships consists of not only acquiring new customers, but also retaining customers to make them come back to your business.
To make customer relationships manageable, larger companies will have a CRM (customer relationship management) tool: a system in which relationships with clients & information about current and future clients can be registered, built, maintained and improved.
The next element of the Business Model Canvas is “Channels”. By Channels, we mean the ways through which a business reaches out to its customers. Channels should be included in the marketing & distribution strategy. How are we contacting our customers? How to we make sure our products reach our customers?
Examples of channels are social media, e-mail, & in-store sales.
Channels are closely related to customer relationships & customer segments, as channels entail the mechanisms used by an organization to communicate with its clients.
8. Customer segments
Selecting the right target audience is essential to develop a successful value proposition. The customer segment also influences through which channels customers are reached. A target audience consisting of kids under 12 requires a different marketing strategy than a target audience of people over 75. Aside from age, customer segments can also differ in terms of gender, geographic location, education, interests & beliefs.
For business-to-business markets, the categories will be different. In that case, customer segments could be classified based on industry, size, or location.
To have a clear idea of who your customers are and what they want, you may want to gather information about your customers. This could be done in many ways, such as:
- Public information
- Data analysis based on website traffic
9. Key Partners
To make value proposition successful, partnerships may be necessary. It is important to have a clear view, which skills and expertise are present within the organization already, and which skills need to be acquired through the help of another party.
Examples of partnerships are software suppliers, marketing bureaus or logistics companies. To be more specific, there are different types of partnerships. The ones below are some common examples:
- Partnerships with buyers / suppliers: probably the most common partnerships, in which a deal is made between a buyer and a supplier.
- Strategic alliances: a close collaboration between two organizations for the common benefit.
- Joint ventures: one step further than a strategic alliance. In a joint venture, two companies work together by creating a new business entity. An example of a joint venture is Avanade, an IT consulting company which is a joint venture of Accenture and Microsoft.
- Public / private partnerships: a collaborative agreement between one or more private firms & public organizations. Typically, this type of partnerships exists when a governmental entity and a private organization work together on a project.
Look towards the future
When filling in the business model canvas for existing organizations, do not only look at the present, but also take into account what your goals are and what will be needed to reach those goals. For instance, Perhaps you want to generate new revenue streams by targeting another customer segment, for which more resources are needed.
Business Model Canvas Excel Template
If you have a business, or want to start a business, it would be a good idea to try to fill in the Business Model Canvas yourself. Below I have created a simple FREE Business Model Canvas Excel Template! Download the template via the following link: