Many entrepreneurs around the world have the best ideas when it comes to starting a new business. However, they fail to put these ideas into work properly. Some end up creating their own startup, but when they realize things are going as expected, they can’t improve on their existing ideas or plans. The best way they can fix it is to write their business plans in order to put their ideas into work.
However, sometimes, a business plan may not help. In these times, it is best to go back to the basics and define the business and its goals and strategies. The best tool to do so is the Business Model Canvas.
What is the Business Model Canvas?
Before understanding what a business model canvas is, it is necessary to know what a business model is. A business model is a plan for how a company or business intends to make money. It defines various aspects of the business of a company, such as its customer base, products, sources of revenue, etc. Similarly, it explains how the company intends to deliver value to its customers and other aspects of financing.
The business model canvas is a tool that allows companies or businesses to put their business model on a single page. Often used as a strategic management tool, it lets entrepreneurs visualize and assess their business idea or concept. The business model canvas is a single-page document that consists of nine boxes that represent fundamental areas of a business model, which entrepreneurs need to fill.
The business model canvas comes from Alex Osterwalder and Yves Pigneur. They introduced the tool in their book ‘Business Model Generation’, which provided entrepreneurs and business owners with a visual framework for planning. However, it also provided much better functionality by allowing them to use it to test different business models.
While some entrepreneurs may consider making a business model overwhelming, the business model canvas allows for a much easier way for them to understand and define the core elements of their business. Similarly, it is easy to prepare, which adds to its appeal as a business planning tool. The business model canvas has nine elements divided into two parts.
The left side of the business model canvas focuses on the internal factors of a business while the right side focuses on external factors. On the left side, entrepreneurs must define things such as the activities or resources of their business. These are usually things that are within the control of a business. On the right side, they can define the customers or market of their business, which they can’t control.
What is the importance of Business Model Canvas?
The business model canvas is a crucial tool for entrepreneurs, business owners, startups and companies. Firstly, the canvas is a great tool for an innovative business model design. For businesses to be innovative, the need to have an impeccable strategy that can help develop a viable future business model. The business model canvas can, therefore, help clarify the idea of where a business stands and where it sees itself in the future.
Similarly, the business model canvas allows business owners to plan out their business and define its core elements, which can help in its long-term success. It provides a quick overview of the business model and does not include any unnecessary details as compared to traditional business plans. Similarly, due to its visual nature, it is easier to understand, even for those not aware of the technical aspects of businesses.
The business model canvas is also easy to edit and share with others. For example, businesses can easily pass it to their stakeholders or employees. Similarly, it helps businesses and companies of all sizes and be a useful tool for them. The canvas also defines the relationship between various aspects of the business. Lastly, as mentioned, it can help in testing several business models to choose the best one.
Overall, the business model canvas is an outstanding business analysis and planning tool. In comparison to the traditional business plan, the business model canvas is compact and straightforward to understand and prepare. It makes it one of the best tools for strategic management.
9 Components of a Business Model Canvas
The business model canvas has nine components. These include the key partners, key activities, key resources, value propositions, customer relationships, customer segments, channels, cost structure and revenue streams. When making a business model canvas, entrepreneurs and business owners need to define what each of these components is.
A brief description of what each these components represent is as below.
Key partners
The key partners, in a business model canvas, shows the external companies or vendors that will help the business in its key activities. Companies need to create partnerships with other businesses, to reduce their risks and acquire the resources necessary to operate. It is also a good idea to map out the key partners to the key activities to which they relate.
Various types of relationships may exist between a business and its key partners. Firstly, they may come from strategic alliances, which are between non-competitors. It may also come from coopetition, which is the partnership between partners looking to achieve something new. Key partners can come from joint ventures as well, which is a partnership between businesses that have a mutual interest in developing new business. Lastly, it can also come from buyer-supplier relationships.
Key activities
Key activities define all the operations or tasks that a business needs to complete to achieve its purpose. The key activities only contain those activities that are crucial aspects that need to be performed for other parts of the business to work. These activities differ according to the goals and nature of every business, which link to its value propositions.
For example, for a product-driven business, its key activities will include learning about the needs of its users and new techniques to develop a better product. On the other hand, for services-based businesses, it will consist of maintaining expertise on the segment and creating service according to the specific customers.
Key resources
The key resources of a business show its strategic assets that needs be in place for it to operate properly. These are the inputs necessary for a company to carry out its key activities in order to create a value proposition.
Businesses can list several types of key resources in this category. For example, they may include workforce, financial assets, intellectual property or physical property. Through the use of these, businesses can carry out their key activities. Therefore, key resources link to the key activities of a business.
Value propositions
This section is the central idea of the business model canvas. The value propositions represent any unique solutions, either in the form of product or service, for problems faced by the customer. Alternatively, it may include products or services that create value for the targeted customers of a business. Value propositions link to the customer segments.
The value propositions of a business show the areas where it excels and has a competitive advantage. For example, companies can offer innovative or unique products that their competitors do not possess. By doing so, a company attracts its targeted customers and takes over the competition for the targeted market segment.
Customer relationships
The customer relationships part of the business model canvas shows how a business intends to interact with its customers through the sales and product lifecycle. Companies will need to establish the type of relationship they want to maintain with each of their customer segments and how they will interact with those customers.
Customer relationships can be of several types. For example, some companies may provide personal assistance, while others may provide self-services or automated services. Some companies may also give support or keep relationships with customers through communities. Lastly, some companies may also believe in co-creation.
Customer segments
Customer segments show the groups of peoples or companies that a business is targeting to which it wants to sell its products or services. Businesses can categorize customers into groups or segments based on various factors, such as location, behaviour, nature, interests, etc. By categorizing customers, it becomes easier to identify their needs and cater to them.
Businesses need to analyze various aspects of these segments to categorize customers. Firstly, they need to determine whether they have a single- or multi-sided market. Based on that, they can classify customers and then look into each segment to analyze its composition. From there, businesses can identify the problems, needs, habits, requirements or alternatives for the identified segment.
Channels
Channels describe how a business wants to communicate or reach out to its customers. The channels are a crucial way in which companies can raise awareness of their products or services among customers and deliver their value propositions to those customers. These are all the ways in which a business can grab its customers’ attention and keep in contact with them.
There are various channels that businesses can use. For each company, the channel used to communicate with customers will vary. Most commonly, there are two categorizations for channels, which include owned and partner channels. Owned channels are those that specifically relate to a business, while partner channels can come from its key partners.
Cost structure
Cost structure represents all the expected costs of running a business. For this, it is vital to evaluate all the costs involved in creating value propositions and those that contribute to revenue streams. Similarly, costs may also come from customer relationships. Once all these become clear, it becomes easier to define costs related to key resources, activities and partners.
It is crucial to look at its key activities first, to devise the cost structure of a business. From there, all the other associated costs become clear. Some companies can be cost-driven, where they focus on decreasing costs, or they can be value-driven, where the focus isn’t on costs but rather, driving the maximum value to customers. This component helps clarify that.
Revenue streams
Revenue streams define all the sources from which a business expects to generate money. For most companies, revenue streams will include any income generated from selling their products or services to customers. However, for some, it may also come from untraditional sources such as asset sales, subscription fees, leases or rentals, usage fees, licensing, advertising, etc.
Similarly, the revenue streams part of the business model canvas helps identify the type of revenues a firm may expect. There are two types of businesses when it comes to revenue models. They can either expect transaction-based revenues, which comes from one transaction at a time or they may have recurring revenues, which come from ongoing payments from customers.
Conclusion
The business model canvas is a strategic management tool used to devise the business model of a company or business. Furthermore, it’s a great tool often used as a visual and more compact alternative to the business model. The business model canvas has many advantages for business owner or entrepreneurs and their businesses. Similarly, it has nine components, as discussed above.
