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A “business model” is a high-level description of a business.
A Business Model Canvas is a 1-page tool that outlines the nine major components of a business model, created by Alexander Osterwalder.
Established companies can use a Business Model Canvas to analyze and communicate their business models to others, whereas…
New companies often use the Business Model Canvas to understand all of the hidden assumptions within their business model.
Once entrepreneurs understand the hidden assumptions of their business models, they can run “business model experiments” to test whether those assumptions are true.
If an assumption is invalidated, the entrepreneurs can “iterate” on their business model by hypothesizing a new assumption, and run a new experiment to test the new assumption.
This systematic, almost scientific, process of hypothesizing business assumptions and continually running experiments to test them is called “business model validation” and was popularized in large part by Eric Ries in his book The Lean Startup.
Business Model Canvas Components
The first step to validating a business model is understanding the components of one. Below you’ll find a description of each of the components of a Business Model Canvas, as well as two example Canvases.
Business Model Canvas components:
- Customer Segments
- Value Propositions
- Customer Relationships
- Revenue Streams
- Key Resources
- Key Activities
- Key Partners
- Cost Structure
Customer Segments are groups of people the organization seeks to serve.
Organizations will often serve more than one segment, especially if the customers…
- Are acquired through different channels. In the Lemonade Stand example, friends and family may be acquired through social media, where as drivers are acquired via signage.
- Are interested in different value propositions. In the Lemonade example again, friends and family may be motivated by the value proposition of supporting a young entrepreneur where as a neighbor may be primarily interested in a refreshing drink.
- Require the presence of the other segments to receive the value proposition. Airbnb for example, serves at least two different segments (e.g. home owners and travelers) because both are required for the “marketplace” business model to be effective. This business model is often referred to as a “multi-sided market.”
Value Propositions are the collection of product or services an organization provides to a customer segment.
Value Propositions often involve either:
- Solving a problem for a segment. In the Lemonade example, someone walking by who is thirsty on a hot day would value a refreshing drink.
- Resolving an emotional need. In the Angry Birds example, a customer may feel bored riding the bus and the game provides an entertaining alternative to that boredom.
Channels describe where the organization reaches and interacts with its customer segments.
Organizations will often utilize multiple channels because there are several different types of interactions the organization must have with its customer:
- Awareness. How does the organization make its customers aware of the value proposition it provides? In the Angry Birds example, the app stores (Apple and Google primarily), mobile ads, social media and word of mouth are all channels they use to build awareness.
- Evaluation. How does the organization enable its customer to evaluate its value proposition? Angry Birds may use its website and its reviews on the app stores as their channel here.
- Purchase. How does the organization collect payment from its customers? Angry Birds uses an in-app purchase channel, facilitated by the app stores.
- Delivery. How does the organization deliver its value proposition to customers? Again the Angry Birds relies on the app stores here as their channel.
- After Sales. How does the organization support their customers after purchasing the value proposition? For Angry Birds, they may use their website and social media to support their customers, as well as incorporating feedback from app store reviews.
Note how one channel may be used for several different types of interactions. In the Angry Birds example, the app stores are leveraged for every type of interaction the organization has with their customer, which means the makers of Angry Birds are heavily reliant on that channel for their success.
Where Channels describe where an organization interacts with their customer segments, Customer Relationships describes how an organization interacts with its customers.
Customer Relations are often categorized as:
- Personal service: representatives of the organization interact directly with customers. For example, in the Lemonade example, the entrepreneur personally serves customers.
- Self-service: customers largely serve themselves. In the Angry Birds example, customers don’t ever need to interact with Rovio (the company that makes Angry Birds) or any of its employees before downloading, playing or purchasing anything.
- Automated: organization offers customized service via an automated workflow. Airbnb for example, uses automated interactions to on-board new customers as they create profiles and get recommendations for places to stay.
- Communities: customers largely interact with other customers through communities facilitated by the organization. Craigslist is a great example where buyers and sellers interact with one another, very rarely having any direct interaction with the Craigslist organization itself.
- Co-Creation: the organization and a subset of its customers, collaborate to create interactions with a larger segment of customers. In this case, Twitch and YouTube are great examples where the organization empowers content creators to build their own “channels”, collaborating with one another to reach a larger audience together.
Revenue Streams are the sources of cash an organization makes from each Customer Segment.
Common categories of Revenue Streams are:
- Product Sale: a physical asset that can be consumed, modified, re-sold, or destroyed by the customer segment. In the Lemonade example, the lemonade.
- Usage or Service Fees: the more of a service that is consumed by a customer segment, the more revenue produced. In the Angry Birds example, in-app purchases for power ups are examples of usage fees, as are wireless data plans that charge per gigabyte downloaded.
- Subscription Fees: recurring fees (e.g. monthly, yearly) that provide continuous access to a service. For example cell phone plans that provide unlimited calling and texting for a set price every month use subscription fees.
- Lending/Renting/Leasing: revenue generated by letting a segment borrow an organization’s asset for a limited amount of time (e.g. renting an apartment, bank lending money, etc.).
- Licensing: revenue generated by letting a segment use the intellectual property (e.g. brand, patents, copyrights, etc.). In the Angry Birds example, they licensed the use of their characters to the makers of the Angry Birds film.
- Advertising: revenue generated by advertising other organization’s value propositions to this organization’s customer segments.
Key Resources are the most important assets an organization needs to deliver their value proposition.
Common categories of Key Resources are:
- Physical Resources: building, equipment, machinery, infrastructure, etc. In the Lemonade example, the kitchen, and the lemonade stand.
- Intellectual Resources: brands, patents, copyrights, customer data, etc. In the Angry Birds example, their brand is an extremely valuable resource.
- Human Resources: staff with specialized skills or knowledge required to deliver the value proposition like developers, pharmacists, mechanics, etc.. In the Lemonade stand, the staff to make the lemonade, sell it, and clean up afterward.
- Financial Resources: large amounts of cash, or lines of credit available typically utilized by organizations like banks to make loans, or investors to support new projects.
Key Activities represent the work an organization must perform in order to interact with their customers and deliver the Value Proposition.
Examples of Key Activities are:
- Lemonade Stand: make lemonade, wave to passers-by, make signs.
- Angry Birds: game development, produce ads.
Key partners are the other organizations this organization relies on, or outsources to, to interact with their customers or deliver their Value Proposition.
In the Lemonade example, the organization:
- Relies On: parents to help the entrepreneur get the ingredients from the store and setup the stand on the lawn.
- Outsources To: the grocery store for acquiring the ingredients for the lemonade.
The Cost Structure represents all of the costs the organization will incur…
- Reaching Customers: for example producing and displaying ads in the Angry Birds example.
- Maintain Relationships with Customers: for Airbnb supporting travelers and homeowners.
- Acquiring Key Resources: for the lemonade example, purchasing wood and signs for the lemonade stand.
- Performing the Key Activities: salary to pay the Angry Birds developers.
- Establish Key Partnerships: purchasing ingredients from the grocery store.
…delivery their Value Proposition.
Designing a Business Model Canvas
Now that you know the different components of the Business Model Canvas, pick one of the following organizations to complete a canvas for:
- A new non-profit that helps foster children – children not living with their biological parents – attend and/or thrive at college.
- A new school club that teaches anyone who wants to learn, how to program.
- A new startup that offers on demand doctors appointments at home (i.e. Uber for doctors)
Note: the descriptions above are intentionally vague so that you have the freedom to define the most effective business model you can.
Be sure to include enough detail in your business model canvas so that your professor can understand exactly how your business model works.