Business Model Canvas is an A3 template for describing how a company or project/product creates value and makes money on it. It is necessary so that the output is a working result, and so that it does not turn out that for some reason the plan fails.
The author of the model is Alexander Osterwalder, a Swiss business thinker, so the Business Model Canvas (BMC) is sometimes called the Osterwalder matrix. Since then, the approach has become quite popular. It is used by both startups and huge corporations like Microsoft, SAP and General Electric.
The Canvas Business Model allows you to organize all the elements of a business idea into 9 sections.
- Customer Segments
- Key Partnerships
- Key Activities
- Revenue Streams
- Value Propositions
- Key Resources
- Customer Relationships
- Cost Structure
We will have a look at each of them separately. To get started with BMC, grab a board/sheet of paper, markers, stickers, your team, and about an hour of free time.
This section is for the target audience. To get a clear idea, divide your customers into groups. This will allow you to take into account their pains and desires and create competent positioning.
For example, clients in the IT-sphere can be both individuals and large corporations. They require a different approach. Besides, customers can be differentiated, for example, based on the types of devices. Mobile traffic is ahead of the number of computer users, so this indicator should be analyzed for a responsive design.
Be sure to write down those partners without whom your business cannot exist. Remember, not all of your partners are your key partners. You can divide them into 4 categories:
- buyer-supplier (most common type)
- alliances with non-competitors (mutually beneficial use of each other’s resources)
- joint ventures (for example, to sell your product to a new niche)
- coopetition (a partnership of competitors. This is how PayPal came about through the merger of competing financial companies.)
Indicate the main stages of your business process. According to Business Model Generation, you can group all of your activities into three main categories:
- problem solution
- platform. Most of the software vendors are in this category. It means that their budget goes to support the whole system.
Identify all the income you receive and break it down by type: fixed income, floating sales, rent, etc. It can be divided by customer groups or sales types.
Depending on your product or service, you need to have a clear understanding of how to monetize it.
- Advertising. Many free platforms make money from advertising, like YouTube. This is a request to disable AdBlock, displaying relevant ads, and a Premium subscription to watch videos without ads.
- Affiliate Marketing. You can earn a commission for educating your audience about a variety of useful products.
- Subscriptions. This model is popular by online publications or streaming services such as Netflix or Spotify.
- Freemium. A combination of a free version of the product and its fully functional paid version.
- Fee-based. This model requires a large pool of users who find the service valuable enough to pay a small fee.
Here you should describe the benefits that the consumer receives by choosing your services or goods. It is important to clearly understand what problems the user wants to solve and what he/she is afraid of.
Keep your value proposition short. Make sure both you and your users can read it in less than 5 seconds and clearly understand what your product is about. Throw away vague descriptions and jargon. Here are some outstanding examples of value propositions that work:
The project management tool with prioritization. Do the work that matters, faster. (Hygger)
Fast, detailed, and entirely offline maps with turn-by-turn navigation – trusted by over 140 million travelers worldwide. (Maps.me)
You can create the perfect product that the market undoubtedly needs, but if the distribution channels are not established, everything else does not matter. This section is devoted to the company’s interaction with consumers. Channels can be direct and indirect, proprietary and partner. For example, Airbnb is an online platform that is both a product and a channel.
It is necessary to allocate all the resources necessary for both production and building relationships, distribution channels, etc. Break down resources by type: physical, intellectual, human and financial. A software development company will likely have human and intellectual assets as its main resources.
This section is about the relationship with clients, how you support them. Somewhere you may get the insufficient output, and some customers require more attention. It helps to plan interaction with consumers and find the most effective ways.
According to the Business Model Generation, there are 5 types of customer relationships:
- personalized assistance (24/7 support)
- self-service (automatic updates)
- automated service (lists of recommendations)
- communities (exchange of experience among users)
- co-creation (YouTube is a good example)
The information makes it clear the rationality of the distribution of financial resources. Look for ways to cut costs while keeping quality in mind.
According to MarketRealist the developer’s company often allocates costs as follows:
- 10-25% for research and development
- often the same amount for marketing and supply
- 5% for innovations
- rest for testing
This may vary depending on the product and market situation. Besides, do not forget that the budget goes to
- capital costs (for example, modernization)
- overhead costs (electricity bills)
- personnel costs (salary)
Pros of Using the Canvas Business Model
This presentation of a business idea provides a clear understanding of the interdependence of sections and allows you to step back.
Some businessmen compare BMC to a business plan, which is fundamentally wrong. A business plan is a solid document with many pages that take time to process. BMC is a document that can be easily modified. This way your team can make immediate decisions and make changes.
Business Model Canvas allows colleagues to think in the same direction. You can take your BMC sheet to a meeting, brainstorm, use sticky notes to outline your new ideas, and then place the canvas right on the wall to make it easier to see and adjust ideas.
There is no single right business model. You may have to try several options to fully reveal all the possibilities of your business idea or project. Besides, no plan works as you imagine. The best solution is to have a clear strategy but act following the dynamics of the market.
The main advantage of BMC is that you do not waste time developing a multi-page document and can quickly adjust the direction of development.