Have you been wondering what the business model canvas is? Or, what are the 9 components of the business model canvas? Or, why the business model canvas is important?
If these questions sound familiar, you are not alone.
Since 2021, this guide has been downloaded thousands of times by global leaders, innovators and entrepreneurs to disrupt, redesign, transform and accelerate business competitiveness and growth.
The guide has been updated the guide to respond to today’s ambiguity and volatility with hundreds of hours of research and real-world use, making it the ultimate business model canvas guide.
In the article, I’ll show you :
- What the business model canvas is
- How to fill in the business model canvas
- How to innovate the business model canvas
Let’s get going!
What is the Business Model Canvas?
The Business Model Canvas (BMC), invented by Alex Osterwalder of Strategyzer, is a tool to describe and visualise how a business creates, delivers and captures value all in an easy to understand, one-page document.
It’s a way to organise and present assumptions regarding the nine inter-related building blocks: customer segments, value proposition, channels, customer relationships, key partners, key resources, key activities, cost structure and revenue.
Most importantly, the BMC describes a story of a business strategy or lean startup innovation template. For example, how ‘back-stage’ infrastructure (partners, activities and resources) supports customer facing ‘front-stage’ value (value propositions, relationships, channels and segments).
What is the Purpose of the Business Model Canvas?
BMC has three main purposes:
- A BMC is useful for mapping existing business models to visualise and explain what currently happens. The approach can also be taken to map out competitors to have an understanding of the ‘current state’, differences, similarities and identify some opportunities.
- Often, the BMC is used to design new business models. Whether, a company is a startup or established business, using the BMC for innovation is an effective method to find competitive advantage.
- The BMC can also be used to manage an innovation portfolio or pipeline. Because of the ease of use and visual nature, many promising innovations can be explored during the startup and incubation phase using innovation approaches. Then, during exploration ideas are either ‘killed’ or moved on to be exploited in a growth and business management style.
The 9 Components of the Business Model Canvas
The nine components best understood across the design thinking lens of Desirability, Feasibility and Viability.
Business Model Canvas - Desirability
1. Customer Segments
This section describes who value is created for and who are our most important customers. For example, who is using the product or service, or whose problems are being resolved or needs satisfied.
The customer segment is the ‘customer profile’ from the Value Proposition Canvas. An organisation makes a conscious decision of which customer segment is most important to the business.
Also, customer segments are more than demographics, they consist of common behaviours, needs and attributes. And, what ‘jobs’ they are trying to get done.
A customer segment could be described as broadly as mass market or more niche.
- Create a segment for each distinct and important market. For example, if parents are the market, is it parents with pre-schoolers or empty-nesters. These segments will have very different value propositions.
- If selling B2B then you are likely to need a few segments because you may need to understand and target different ‘customers’ in the same company. The ‘customers’ might include the decision-maker, the buyer, the salesperson, the influencer, the user / customer. Also, keep an eye out for any saboteurs.
- Business models with intermediaries or double-sided markets will need segments and value propositions for both. For example, Air BnB has both home owners and travellers as customer segments.
- The whole BMC is designed to deliver value to each customer segment in a profitable and scalable way that is relevant to the ‘jobs’ they are trying to get done.
- The essential question is: ‘who do you want to create value for and what job are you helping them get done’.
2. Value Propositions
Your Value Proposition describes how your products and services create value for the customer segments.
It is what attracts customers to you, or what fundamental jobs, pains and gains are being addressed?
Ultimately, value propositions are the bundle of products and services and is often why customers may choose business over another.
- A value proposition is how you create value. It often isn’t the product. For example: a pair of headphones value proposition might be – reducing ambient sound.
- A value proposition is needed for each customer different customer segment.
- Use the value proposition canvas for the detail, keeping the value propositions on the BMC high-level.
There are 12 common types of value propositions under the themes of functional, emotional and social:
- Performance: creating value in the form of being faster or better than the competition.
- Accessibility or democratisation: providing access to something that the customer previously didn’t have access to.
- Customisation: Value creation in the form of personalisation of experience.
- Usability: Providing convenience.
- Affordability or cost reduction: Saving customers money.
- Status: Helping customers to signal premium ownership or exclusivity.
- Communication: Messaging uniqueness or other social signals.
- Fashion: Looking trendy or modern.
- Newness: Providing something that isn’t available elsewhere.
- Price: Being the most inexpensive, while sufficient quality.
- Design: The form and functions of the product.
- Emotional state: Such as connection to experiences or identity.
Channels describe the various means that you reach customer segments, such as:
- Communication channels
- Distribution channels
- Sales channels
Examples might be directly through a website or a salesforce or indirectly (partners) through third-party stores or wholesalers.
The purpose of channels is to:
- Raise awareness
- Help customers to evaluate products and services
- Provide a way for customers to purchase
- Deliver the value proposition
- Provide ongoing customer service
The essential question is: ‘how do your customers want to be reached?’
4. Customer Relationships
This section details your relationship to support each customer segment.
The driver for the relationship follows one of these three themes:
- Customer acquisition
- Customer retention
- Customer growth (upselling, cross-selling)
Relationships are on a spectrum within four themes. The four themes are:
- Type. This means that relationships are either direct (customers only deal with you) or indirect (customers only deal with an intermediary).
- Bond. This means that the relationship is either long-term (hard for them to leave) or one-off/transactional (easy for them to leave).
- Intimacy. This means that the relationships are more personal (high touch) or more automated (low touch).
- Life-cycle. This means that the relationship goes through a development from acquisition (how you get customers) to retention (how you keep customers) to cross-selling (how you earn more from customers).
There are several types of customer relationships:
- Personal assistance: By interacting with the customer in-person, via email or personal phone calls.
- Dedicated customer assistance: Such as an account manager for an individual customer.
- Self-service: The ability for the customer to help themselves.
- Automated: Automation to help the customer to help themselves.
- Communities: Providing a platform for customers to solve their own problems. This is also a great option for customer research and testing.
- Co-creation: Customers participating in the creating of a product or service. Such as, lego providing a platform for fans to design new themes.
Business Model Canvas - Feasibility
5. Key Partners
What network of partners and suppliers can be leveraged to make the business model work?
Partners are often strategic to provide a necessary capability that the business does not possess or to help scale the business.
And, they may often take the form of partnerships between competitors or non-competitors, joint ventures or buyer-supplier relationships.
Partnerships evolve to:
- Optimise value chains: Producing a key part of the value chain that the company cannot produce itself.
- Optimise economies of scale: Producing a key part of the value chain to gain the necessary cost advantages.
- Reduce risk and uncertainty: protection from current or potential competitors.
- Acquire resources or activities: That you lack or are unable to perform. Such as knowledge, licences or access to customers.
Remember: no business exists in isolation. So, it is likely that you will need to develop a win/win partnership to be successful.
The essential question is: “what partners could help you maximise your business model.”
6. Key Resources
What critical resources do you need to make the business model work?
Resources are often, physical, financial, intellectual or human and are what is essential to support the delivery of the value proposition, relationships and to reach customer segments.
Resources can be intangible or tangible and might include:
- Intellectual property
- Customer base
- Website traffic
- People are often essential, but not always critical. What are the critics resources that drive you business?
- Challenge your assumptions on what the key that you need internally are. Can these be outsourced?
7. Key Activities
What are the essential activities that drive success for your business model? These are the things that you will need to be great at.
Activities will be different for different product types and may include:
- Problem-solving (ie consulting)
- Risk management (ie banking)
- Production (ie computer manufacturing)
- Net-working (ie credit card networks)
- Customer relations
- Get clarity on what activities you need to be great at delivering.
- Stay high-level. You aren’t at the implementation phase and so granularity isn’t necessary.
Business Model Canvas - Viability
8. Cost Structure
The cost structure is an outline of all the costs that will be incurred when executing the business.
Costs are either fixed (remain the same regardless of the volume produced) or variable (vary proportionally on the volume produced).
Costs will be different for a value driven business compared to a cost driven business.
The two types of cost structures are:
Value driven businesses: Focus more on offering premium value rather than reducing costs.
Cost driven: Focus more on creating a lean cost structure in conjunction with sufficient value. They will focus more on automation and efficiency.
Cost advantages are achieved through:
- Economies of scale: (unit price becomes cheaper as volume increases)
- Economies of scope: (same business model components applied to different products).
Remember to: understand your cost drivers and whether your business should be value driven or cost driven.
Cost examples might include:
- Manufacturing costs
- Sales costs
- Marketing costs
- Research and development costs
9. Revenue Streams
Revenue streams describes how each segment will pay for the value that is delivered thereby ‘capturing value’.
They are either, one-off transactions (asset sale) or recurring such as monthly subscriptions (SaaS) and are an outcome of the choices made in the ‘font stage’ customer focused components.
Types of revenue streams are:
- Assets sales (ie vehicle purchase) where you sell the rights of the product to the purchaser.
- Rental fee (vehicle hire) where you allow exclusive rights to the customer for a period of time.
- Usage fee (ie electricity supply) which charges the customer based on usage.
- License fee (ie intellectual property usage – franchises)
- Advertising fee (ie google ads) charges the customer by allowing them to advertise on company assets.
- Subscription fee (ie access to online newsletters) charges the customer for regular, consistent usage.
- Brokerage fee (ie mortgage brokers) is revenue that is generated by intermediaries.
- Free (ie free use in the case of Google search)
Revenue can have different pricing mechanisms, such as:
- Negotiation (ie vehicle sales)
- Auction (ie competitive bidding on livestock)
- Real-time (ie the stock exchange) which is good for high volume of transactions and a large customer supply.
- Yield management (hotel bookings) which is good for perishable or limited goods.
Remember to: identify who is paying and what they are paying for. This avoids ‘orphan’ revenue streams.
How to Use the Business Model Canvas - 7 Step Guide
There are seven main steps to complete the BMC:
Step 1 – Zoom Out.
Ideally, best practice is to firstly research the environment that the business operates in.
There are four main areas to research – industry forces, market forces, macro-economic forces, key trends.
Industry forces: research your competitors, potential competitors, what are the substitute products or services, stakeholders, value chain actors.
Consider things like:
- Which players are dominant?
- What are their competitive advantages?
- Which segments do they target?
- What are their value propositions?
- How are they different?
- What products or services could customers replace ours with?
- How easy is it for customers to switch over?
- How influential are certain stakeholders?
Market forces: research market issues, segments, customer needs, switching costs and revenue attractiveness.
Consider things like:
- What is shifting in the landscape?
- What are the most important segments?
- What are the growth trends?
- What are customers needs, pains and gains.
- What will customers pay?
Key trends: research technology and regulatory rends, socio-economic, societal, cultural trends.
Consider things like:
- What technology changes are ocurring even in the extremes?
- What are the pending regulatory changes?
- What societal cultural changes are happening or likely to happen?
- What are the disposable incomes?
Macro-economic forces: research global market conditions, capital markets, resources and infrastructure.
Consider things like:
- Is the global economy booming or declining?
- What is happening with unemployment?
- What is the GDP growth rate?
- What is the confidence in the market?
- Is capital easy to access and not too costly?
- Are commodities over-priced?
- Can you access talent?
- Are prices increasing?
The big idea here is to understand the environment that will influence the business and the resultant BMC strategy.
Step 2 – Zoom in – Create your ‘as is’ business model.
Then, working through the 9 components, map out how your current business model looks like using post-it notes.
The BMC can be completed in any order. However, I suggest to start the on the ‘front stage” by completing 1) customer segments, 2) value proposition, 3) customer relationships, 4) channels, 5) revenue streams.
Then, completing the ‘backstage’ components, 6) key partners, 7) key activities, 8) key resources, and 9) cost structure.
Some important things to keep in mind are to:
- Keep the map high level by only documenting the ‘critical’ pieces.
- Make sure there are clear and necessary linkages between the components and that each component supports the model and is not redundant.
- If there are multiple segments, use different coloured post-it notes to see how the components connect to each segment. Alternatively, use different maps for each different segment.
Step 3 – Zoom in more.
Create your ‘as is’ value proposition canvas. Similar to the BMC, we need to understand the current state of the VPC.
Using post-it notes, map out the segments jobs, pains and gains, then the products and services that currently relieve pains and increase gains.
Step 4 – Use the Business Model Scorecard.
The business model scorecard is a set of seven key business model design factors.
The scorecard can be used to assess the competitive advantage of your business model, a competitors and any business model that is being explored.
Rate each factor on a scale of one (poor) to ten (excellent).
Business Model Factors:
- Switching costs. Rating from ‘it is extremely easy to switch companies’ to ‘customers are locked in for the long-term’.
- Recurring revenues. Rating from ‘all of my revenues are one-offs’ to ‘all of my revenues are recurring’.
- Front-loading cashflow. Rating from ‘I incur all of my cost of goods sold before earning revenue’ to ‘I earn all of my revenue before incurring costs of goods sold’.
- Competitive cost structure. Rating from ‘my costs structure is 30% or more higher than competitors’ to ‘my cost structure is 30% or more lower than my competitors’.
- Leveraging people. Rating from ‘I incur all the costs for the value created in my business’ to ‘other external people create for free all the value in the business’.
- Scaling Up. Rating from ‘it takes significant resources and effort to grow’ to ‘there is unlimited growth potential to my business’.
- Guarded from competitors. Rating from ‘I’m vulnerable to competitors’ to ‘I have significant guards that competitors will find it difficult to overcome’.
Step 5 – Innovate your business model.
Taking into account what you have learned so far, are there any key insights that have emerged from the research and indicate potential opportunities or obstacles?
Then, use design thinking to innovate new business model ideas.
Design thinking is a a proven process for innovation and problem-solving and aligns perfectly with the desirability, feasibility and viability of a BMC.
There are several business model factors to explore. however, my starting point is often understanding customers needs and pain points (desirability).
Then, exploring ways to alleviate the pains and increase gains. To learn more about design thinking, I’ve written a comprehensive guide here.
To explore the seven business model factors, try using trigger questions such as:
- How might we increase scalability?
- Or, how might we create more recurring revenue?
- The objective here is to create many different business model ideas not just limiting to one idea.
As you are exploring the environment, consider opportunities like:
- Can you draw inspiration from another business model even if it’s in another sector?
- Can you create a new value proposition that is difficult to copy?
- Can you gain competitive advantage by adopting new technology trends?
- Are there under-served (or soon to be) markets?
- Are there economic trends that are providing opportunities (such as rising living costs)?
As you are exploring your current business model, can you:
- Design a new value proposition based on new partnerships?
- Increase existing advantages that you have with resources and activities?
- Reduce your cost structure?
- Offer customers new value propositions with existing relationships and channels?
- Increase your prices?
- Give away core products to obtain high-vale add-ons or derive revenue from other sources like advertising?
- Find a new customer job, pain or gain that would be game-changing?
- Re-imagine a new product/service or bundle of that creates a gain or relieves a pain.
Step 6 – Experiment.
Starting with the model that indicates the most significant opportunity based off using the Business Model Scorecard, start testing all the hypotheses by running experiments for the most riskiest assumption.
The process follows three main steps:
- What is your idea (BMC hypothesis).
- What needs to be true for the idea to work? (riskiest assumption).
- How can the assumption be tested?
- Have any insights changed the assumption?
Common ways to test business models include:
Testing desirability. Try these methods to test customers interest in your business:
- Run ‘fake ads’. These could be on social media, in newspapers, industry publications or printed flyers.
- Create a landing page with a signup to register or to complete a survey
Testing a customers willingness and ability to pay. Try these methods:
- ‘Fake’ sales by using a ‘buy now’ button on the landing page. Measuring the clicks confirms intent.
- Pre-selling is another way to measure the actions people take. This method is common to obtain funds before building. If you don’t get enough funds, you can return the money.
- Build a minimum viable product. An MVP is a smaller core product version.
Testing customers preferences and priorities. Try these methods:
- Split testing or A/B testing helps understand preferences between two options.
- Have the customer order features under headings of ‘must have’ ‘could have, ‘would have’ and ‘deal breaker’.
Step 7 – Staying lean.
Traditional innovation was a lengthy and risky process of R&D, business planning, building a product and taking to market before getting real evidence of a customers interest in a product, willingness to pay, preferences and priorities.
The same applies to business models.
By making small, calculated risks to test and learn about every part of a business model is far more effective.
Remaining open to change, getting insight from experiments and failure is a sure-fire way to improve the odds of success.
As you learn more, you can increase the investment into more high-fidelity experiments.
Business Model Canvas Storytelling
There are several important elements that are effective for creating and telling the story of your business model canvas:
- Stay high-level. Too much granularity will not help with shared understanding and clarity.
- Use colour-coding to describe the story. This will help your teams to understand the connection and avoid any orphan content.
- Create as-is and to-be business models.
- Identify the known elements and those that are assumptions. Perhaps use colour coding for this too.
- Separate significantly different ideas into different ‘prototype’ canvases.
Business Model Canvas Example - Netflix
Business Model Canvas Example - Airbnb
Airbnb’s business model is based on connecting travellers looking for unique and interesting places to stay and matching those needs with property owners that have spare space or complete homes for rent.
The underlying success of the business model is that Airbnb is avoiding the resource cost of the properties and therefore significantly reducing its cost structure.
Key points for double-sided platform business models.
Airbnb is using what is called a double-sided platform:
- They provide a way for home owners to monetise their spare property by listing on the platform which has a large pool of travellers.
- Travellers find a desirable place to stay and also become part of a community of Airbnb users. Although each property is potentially a different experience, trust has been established through the community and brand.
To explore this type of resource diversion business model, here are some key points:
- Identify your businesses / sectors most costly resources. Airbnb have avoided the most costly resources in the accommodation business, property, staff, vacancies.
- Identify what potential resource owners might provide the required resources. Airbnb found that there are many property owners with spare rooms or complete properties that are under-utilised. And, for short-term stays it would be a hassle for individual property owners to manage the process.
- Design an innovative VP for the partners that you need the resources from. By providing access to a large pool of travellers, home owners can make significant extra income.
- Establish the new cost structure. Airbnb have found a lower cost model compared to traditional hotels because it does not pay property or staffing costs, while its overheads are mostly platform development, maintenance, marketing and promotion.
Benefits of the Business Model Canvas
There are several key benefits to the Business Model Canvas:
- Clarity – The BMC provides a clear picture of either your current business model or the business model that you are innovating towards.
- Communication – Having everyone on the same page is essential in any transformation or innovation process, and the BMC is an ideal way to communicate essential information to all stakeholders. Think of it as a living, one page business plan.
- Collaboration – Now that your team have clarity and a standard communication tool, the BMC allows a unifying platform to collaborate on ideas. Ideas can easily be mapped and explored in a matter of minutes.
- Risk reduction – Building a startup or innovating an existing business is risky. The BMC, helps to understand the risks and prioritise the riskiest factors to then approach validation in a logical way to minimise risk.
- Proven innovation model – The Business Model Canvas has been around for about 20 years, and during that time, thousands of companies have used the BMC for innovation. The BMC has become a standard tool for innovation and strategy.
- Customer-centric – It’s no surprise that the Value Proposition is in the centre of the canvas. When designing your BMC, also use the Value Proposition Canvas (VPC) to oscillate or zoom in and out between the BMC and the VPC. Doing so helps to continually evolve a BMC from within the lens of ‘creating value for the business’ and creating value for the customer’.
- Simple, not simplistic – You don’t need an MBA to pick up the BMC and start to innovate. The critical approach is to make your business model visual, ideate, test and learn as you innovate and develop a business model with competitive advantage.
- Speed – Given the simplicity and practicality of the BMC, many iterations can be made in a short space of time.
- Design thinking – The BMC is one of the best tools for leveraging the power of design thinking for innovation.
Are There Any Disadvantages of the Business Model Canvas?
No. Some people think that the BMC does not consider the environmental forces shaping a sector and, therefore, your business. Or, that it has limitations for start-ups.
While it is true that environmental forces are critical to consider, such as competitors, technology or legal changes, trends or macro-economic factors.
The forces are not part of your business model and, as such, is best understood through other strategy tools such as Porters 5 Forces or the Blue Ocean Strategy.
As far as limitations for start-ups, there may be a preference to use the Lean Canvas because some of the focus and terminology may be specifically tailored towards start-ups.
But, on the other hand, the BMC continues to be used effectively in the start-up phase of a business.
And, if an existing company is exploring new business models and exploiting existing models, then my preference would be to use the consistency of the BMC.
The BMC is a proven innovation tool for both startups and existing businesses.
Business Model Canvas Innovation
Innovate your Business Model Canvas using the following approaches:
- Create a blue ocean: Create an entirely new market opportunity with no competitors.
- Meet unmet demand: Utilise customer research to understand their jobs, pains and gains that are currently not being met.
- Improve the business model: Consider the value chain and what could be either brought in-house to improve margins and control tor outsourced to strengthen areas of weakness.
- Bring something new to the market: something new such as, technology, products and services that provide better value to customers.
The challenge with innovation is that there are two distinct phases of operating:
- Explore. The explore phase is about searching for new value and business models and requires. Uncertainty and risk is high which requires creativity, speed experimentation and adaptation. Leadership need to create a culture and capability to support innovation.
- Exploit. During the exploit phase, uncertainty and risk is low and the business can focus on scaling and investing more into efficiency. Execution is more linear and requires leaders who are are strong in optimisation.
How to Operationalise the Business Model Canvas
- Download the Business Model Canvas.
- Increase your teams capability. Ensure that the team have training in the purpose and use of the Business Model Canvas.
- Clarify context. Understand the current state of the external forces and existing Business Model Canvas.
- Design the Business Model Canvas. Create Business Model Canvas options and test assumptions to select the best one.
- Execute the Business Model Canvas. Once you have chosen a new Business Model Canvas, focus now shifts to execution.
- Manage the Business Model Canvas. Your new Business Model Canvas needs to be continually evaluated and iterated to ensure it meets both the market demand and business demand.
Want More About the Business Model Canvas?
If, after going through the our 7-step guide on how to use the Business Model Canvas you’d like to learn more about business model tools and analysis, contact me here.
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