What is Business Model?
A plan for the successful operation of a business, identifying sources of revenue, the target customer base, products, and details of financing. Essentially it tells us how the key drivers of a business fit together.Business Model Canvas (BMC)
The business model canvas, as opposed to the traditional, intricate business plan, helps organizations to conduct structured, tangible, and strategic conversations around new businesses or existing ones. The BMC is a strategic management tool to quickly and easily define and communicate a business idea or concept. It is a one-page document that works through the fundamental elements of a business or product, structuring an idea in a coherent way. The right side of the BMC focuses on the external customer, while, the left side of the canvas focuses on the internal business. Both external and internal factors meet around the value proposition, which is the exchange of value between the business and the clients. Leading global companies like Google, Skype, P&G use the canvas to manage strategy or create new growth engines, while start-ups use it in their search for the right business model. The canvas’s main objective is to help companies move beyond product-centric thinking and towards business model thinking.Why do we use BMC?
- To quickly draw a picture of what the idea entails.
- It allows us to get an understanding of the business and to go through the process of making connections between what an idea is and how to make it into a business.
- It looks at what kinds of customer decisions influence the use of the systems.
- It allows everyone to get a clear idea of what the business will likely be.
How to use BMC?
Value Proposition:
The Value Proposition is foundational to any business or product. It is the fundamental concept of the exchange of value between the business and the clients. Generally, value is exchanged from a customer for money when a problem is solved or pain is relieved for them by the business.Customer Segments:
Customer Segmenting is the practice of dividing a customer base into groups of individuals that are similar in specific ways, such as age, gender, interests, and spending habits.Things to consider when determining Customer Segments:
- Who are we solving the problem for?
- Who are the people that will value my value proposition?
- Are they another business?
- If so, what are the characteristics of those businesses?
- Or, are they other people?
Customer Relationships
Okay, so we know our Value Proposition and have developed Personas to better understand our Customer Segments or ‘customers’, but what is the relationship we have with our customers? Customer Relationships are defined as how a business interacts with its customers. So, do we meet with them in person? Or over the phone? Or our business predominantly run online so the relationship will be online too? This helps clarify the points of engagement between us and our customers and the modes used to relate to our customers.Channels:
Channels are defined as the avenues through which our customer comes into contact with our business and becomes part of the sales cycle. This is generally covered under the marketing plan for our business. Good questions to ask when identifying the channels to reach your customers are: How are we going to tell our customer segment about our value proposition?- Where are the customers?
- Are they on social media?
Key Activities:
The Key Activities of our business or product are the actions that our business undertakes to achieve the value proposition for our customers.Questions to ask?
- What activities does the business undertake in achieving the value proposition for customers?
- What is the resource used?
Key Resource:
Next, we should think about what practical resources are needed to achieve the key activities (actions) of the business? Key means the resources our business requires to do business. These resources are what is needed practically to undertake the action or activities of our business:- Office Space
- Computer
- Hosting
Key Partners:
Key Partners are a list of other external companies, suppliers, parties which may need to achieve the key activities and deliver value to the customer. This moves into the realm of ‘if my business cannot achieve the value proposition alone, who else do I need to rely on to do it?’. An example of this is ‘if I sell groceries to customers, I may need a local baker to supply fresh bread to my store’. They are a key partner to achieve the value my business promises to the customer.Cost Structures:
Our business cost structure is defined as the monetary cost of operating as a business.- How much does it cost to achieve my business’s key activities?
- What is the cost of my key resources and key partnerships?
- How much does it cost to achieve the value proposition for my customers/users?
Revenue Streams:
Revenue Streams are defined as the way by which our business converts the Value Proposition or solution to the customer’s problem into financial gain. It is also important to understand pricing our business accordingly to the pain of purchase in exchange for the pain of solving the problem for the customer. There are many different revenue models here:- Pay per product (pay per view)
- Fee for service
- Fixed-Rate
EXAMPLE 1: GOOGLE
The first thing you should know about Google’s business model is that it is multi-sided. This means that it brings together two distinct but related customers. In Google’s case, its customers are its search users and its advertisers. The platform is only of interest to advertisers because search users are also present. Conversely, search users would not be able to use the platform free of charge were it not for advertisers. The Business Model Canvas for Google is shown below:
We can see that:
Google makes money from the advertiser customer segment, whose ads appear either in search results or on web pages.
This money subsidizes a free offering to the other two customer segments: search users and content owners.
Google’s business model has a network element to it. That is, the more ads it displays to web searchers the more advertisers it attracts. And the more advertisers it attracts the more content owners it attracts.
Google’s Key Resource is its search platform including google.com, Ad sense (for content owners), and Awards (for advertisers).
The key strategic activities that Google must perform are managing the existing platform including its infrastructure.
Google’s key partners are obviously the content owners from whom a large part of its revenues is generated. OEMs (Original Equipment Manufacturers) also form a key partner.
EXAMPLE 2: Skype
From the Business Model Canvas we can see that Skype has two key value propositions:- The ability to make calls over the Internet, including video calls, for free.
- The ability to make calls to phones cheaply.