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Step 1 - Understand the building blocks of the Business Model Canvas
Step 2 - Understand customers and define Value Propositions
Step 3 - Optimise your input factors (Resources, Partners, Activities)
Step 4 - Define your output factors (Relationships, Channels)
Why I wrote this guide
This Quick Guide is born out of my own experience as a founder of a technology startup business. Back then, I was looking for a better framework for creating business plans. When I first discovered Alex Osterwalder’s book “The Business Model Generation”, I knew I’d found a really useful tool. It took me just a couple of hours to design my first business model using his Business Model Canvas template.
The Business Model Canvas (BMC) gives you the essential structure of a business plan without having to spend hours writing a long-winded document. Or, to look at it another way, its simple and quick like a ‘back of the napkin’ sketch without the fuzziness.
Whilst the book was very helpful, it didn’t give me the easy step-by-step guide for creating a business model canvas that I was hoping for. It took me quite some time to master the process. So at Plio we thought it would be useful to write a guide that lays everything out in simple steps written in no-nonsense language.
We’ve simplified the process of creating and implementing a Business Model Canvas into the 4 straightforward steps listed above. Let’s look at each of these in turn.
Step 1 – Understand the building blocks of the Business Model Canvas
The canvas is a conceptual tool that expresses in 9 boxes how a winning business performance will be delivered. It is essentially a description of the value a company offers to its customers, and how this value will be delivered to generate revenue and profit.
The Canvas has nine building blocks. Together these provide a holistic view of abusiness’ key drivers. It’s easy to create a Business Model Canvas for your own business – simply follow the 6 steps outlined below.
The quickest way to understand what each building block represents is to ask yourself some key questions about your business, summarised in the canvas graphic below. For each building block, create a short list of relevant elements. If we take Tesla as an example business model in the automotive industry, in the Customer Segments section you might list Luxury Sedans, Luxury SUVs and Premium Small Sedans as your target segments (see second canvas graphic below).
Imagine the Business Model Canvas as a flow of work moving from left to right, starting with your Inputs and proceeding through Key Activities to Value Propositions. These are then delivered as your Outputs: products and services provided to Customers on the right hand side of the canvas
However, don’t fall into the trap of starting to fill in the canvas boxes beginning at the left hand side! Instead, you need to start at the right hand side, with the Customer Segments box, because it forces you to think about the perspective and needs of the customer first, before considering how you satisfy these needs. A business succeeds when the customers’ needs drive the business, not the other way round.
Example business model canvas: Tesla Motors
Step 2 – Understand customers and define Value Propositions
Customer Segments
A Customer Segment is a group of customers that have similar needs, which are different to the needs of other customers.
Companies that identify under-served segments can outperform the competition by developing uniquely-appealing products and services.
Segmentation requires you to:
- Think about the profit potential of each Customer Segment by looking at the revenue and cost impact of serving each segment
- Tailor product, service, marketing and distribution programs to match the needs of each target Customer Segment
- Measure the performance of each Customer Segment and adjust the segmentation approach over time.
When segmenting your customers, you should take the time to list out their individual Needs and Wants. Needs are attributes of a product or service that customers definitely require. Wants are attributes that - while not absolutely necessary, like needs - are still desired by your customers.
For example, a customer wants a reliable car for his daily commute, with enough space for 4 passengers. These are Needs. He also wishes to own a premium brand, to support his perceived status among his peers. This is a Want. Needs operate at a logical level, whereas Wants operate at an emotional level. (Note – this is a deliberately simpler-to-use approach than the Strategyzer Value Proposition Canvas, with its three different value components - Pains, Gains and Jobs to be Done)
Questions to ask yourself and your team:
- For whom are we creating value?
- Who are our most important customers?
- Who can we serve better than anyone else?
- What are their Needs and Wants?
Value Propositions
A Value Proposition is a product or service (or combination of the two) that meets a customer need or solves a customer’s problem. It can be expressed as the customer’s view of your product or service.
Value Propositions are about creating
product-market fit
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It’s important to understand that a Value Proposition is not about technology, trends or products; it’s about helping people (or firms) to get things done. In other words it’s about creating a fit between the jobs people want getting done and what you sell. We call this achieving product-market fit.
To demonstrate product-market fit, individual Features and Benefits in your Value Proposition need to be matched to customer’s Needs and Wants. If they can’t be matched, you shouldn’t be offering them. Once you’ve matched them on your canvas, you then need to go out and to talk to customers in the real world, to validate that your matching is real. It’s surprising how much insight you get when you go through this exercise.
The Plio Canvas tool helps you list out the Features and Benefits for each of your Value Propositions, and then link them to the Needs and Wants of each of your Customer Segments.
Here’s a couple of questions to ask yourself and your team to help identify Value Propositions:
- What value do we deliver to the customer?
- Which of our customer’s problems are we helping to solve?
Software tips:
- Use Plio to match customers’ Needs & Wants with the Features &
Benefits within your Value Proposition - Show a visual breakdown of your Customer Segments using Plio’s
built-in charts
If you’re spending a lot of time on this first step,that’s OK. The identification of Customer Segments and their corresponding Value Propositions is really the crucial step that should be driving everything else in your business model.
Step 3 – Optimise your input factors (Resources, Partners, Key Activities, Cost Structure)
Moving on from defining your Value Propositions, you next need to define how you are going to create these Propositions so that you can sell them to Customers. Let’s now take a look at the Inputs side of the Business Model Canvas framework. We’ll start with Key Resources because these represent the most fundamental starting point in creating a Value Proposition, and then move on to define the other input factors.
Defining your Key Resources
A Resource is used by one or more Key Activities, and incurs expense within the Cost Structure. Certain types of business operating model may be labor-intensive, others may be more capital intensive, even within the same industry. Types of Resources include:
- Property
- Human
- Financial
- Information
- Intellectual property
Key question to ask: Who are the Key Partners required to create the Value Propositions you wish to offer to your customers, to plug the gaps in your capabilities? (Be more specific than just listing Partner types)
Defining your Key Activities
Key Activities: a definition -work done by the organization, comprising higher level processes and lower level tasks, ideally with a focus on continuous improvement. Key Activities are the crucial business processes that you need to perform to deliver on your Value Propositions. They are the engine of your organization, turning your key inputs into your Value Propositions. Without the right engine, you can never achieve superior performance.
For a product-driven business, these processes include learning about customers (market research) and about new techniques to build a better product (product research & development). They might include acquiring products and services that are a good fit with the customer segment. For an infrastructure business (e.g. an electricity utility), Key Activities will include keeping the infrastructure working reliably and making it more efficient.
Key question to ask yourself and your team: what are the most important activities we carry out within our organization to create our key Value Propositions?
Defining your Cost Structure
This box in the canvas describes the main elements of operational expense for the business. Different kinds of costs need to be included in the analysis.
Examples of costs from your Profit & Loss statement:
Variable costs: Products purchased (for resale) Components purchased (to incorporate in a product), Shipping costs, Sales commissions ,Fixed costs, Payroll, Rent, Subscriptions
Examples of costs from your balance sheet statement:
Fixed assets: Machinery, Vehicles Computers, Buildings, Inventory, Finished goods, Work in progress, Components, Raw materials
Questions to ask yourself and your team, when analyzing your cost structure:
- What are the most significant costs in our business model?
- Which Key Resources are most expensive?
- Which Key Activities are the most expensive to run?
- Which Key Resources and Activities are best outsourced to Partners?
Software tips:
- Record each cost line using the Plio Canvas
- Use Plio to show a visual breakdown of your cost structure
Now that you’ve defined the key input factors for creating your Value Propositions, you’re getting close to completing your Business Model Canvas. The last key piece of the jigsaw is how you deliver your value to customers, in other words the Output side of the canvas. That’s what we’ll
move on to discuss in the next section.
Step 4 - Define your output factors: Relationships, Channels & Revenue Streams
Relationships
How does the customer interact with you through the sales and product lifecycle? Do they have a dedicated personal contact they see? Call? Is all the interaction over the web? Do they never see you at all but instead talk to a Channel?
A few litmus test questions you may want to ask yourself at this point:– Can the Value Proposition be delivered to the Customer this way? All the way through from promotion, to sale, to post-sale service? – Can you make the numbers work?
Channels
A channel is the set of organizations, people and related activities needed to get your Value Proposition to the customer. Sometimes a channel may be a chain of businesses or intermediaries. Alternatively it may be a direct relationship between the firm and a specific group of customers.
Channels includes entities you use to communicate your proposition to your segments, as well as entities through which you sell product and later service customers (see AIDAOR journey below). For example, if you sell bulbs for light houses and there’s a website all light house attendants purchase equipment, that site is a sales Channel. If you use Google AdWords, that’s a Channel, too (for getting attention). If you use a third party company to service the bulbs when they break, that’s also a Channel.
Revenue Streams
Revenue Streams are the means by which customers reward us for the Value Propositions that we deliver to them. Revenue Streams are essential for all businesses. They allow us to pay the costs that we incur with suppliers and employees, and to generate our profits that are needed to provide a return to shareholders. To generate a Revenue Stream, an organization needs to choose one (or more) revenue models. Different models suit different kinds of businesses. New entrants sometimes choose to disrupt an existing industry by offering a similar product or service but with a new and different revenue model.
Here are some different types of revenue model:
1. Transaction (e.g physical product sale)
2. Recurring (subscription or license or lending/renting)
3. Project
4. Time & materials
5. Usage fee (e.g. mobile minutes)
6. Grants (e.g. research grants from governments)
7. Brokerage
8. Advertising
Transactional
This model is based on selling physical products, and is a very common revenue model. It’s easy for customers to understand, but the downside for the sellers is that they need to expend additional sales & marketing effort on each transaction.
Recurring
Recurring revenue is more predictable than transactional revenue, and can reduce the amount of selling effort (and cost) required. Examples include subscriptions to services (e.g. internet broadband) to physical products (e.g. Dollar Shave Club) and to software cloud services (Dropbox).
Project
In this model the customer pays the supplier a fee on completion of a project. Optionally there may be upfront and stage payments tied to project milestones to smooth out cash flow. This model is common in the construction industry and in some services businesses e.g. custom software development. It’s easy for customers to understand, but requires a lot of time spent in maintaining individual customer relationships.
Time & materials
This model is based upon time incurred in supplying a service, and is often used in combination with one of the other models. Consulting firms who charge by the hour or day are good examples of this model. It can be hard to scale up a business with this type of revenue model, because revenue is directly proportional to time available to be billed.
Grants
Grants are a common source of revenue for tech startups and academic institutions. In many countries, governments have a vested interest in promoting the growth of tech industries, and will offer grants and R&D tax credits. The semiconductor and internet industries were created with the help of large grants from the US government to support military research programs.
Brokerage
In brokerage models, a firm earns a fee or commission based on the value of goods or services transacted. For example, a real estate agent earns a percentage fee levied on the selling price of a house. Firms that use this model earn a fee every time they match a buyer and seller. The model is attractive in its simplicity, but sellers will usually try to reduce the scale of the fee as the transaction size increases.
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Advertising
In this model a firm earns money from the display of advertising messages provided by a customer. Traditional examples include print advertising and TV advertising. More recently this model has spread to other industries, for example pay-per-click search engine advertising, and pay-per-display advertising on web sites.
Optimising revenue
For each of these models, a firm can choose between fixed pricing based on simple variables and dynamic pricing where prices change according to market conditions. Dynamic pricing allows firms to extract greater revenue and to optimize the use of expensive capital assets. It has been used extensively in advertising and in the airline industry and has now spread into other sectors e.g. Uber’s surge pricing model.
Any firm wishing to improve its operational performance should examine different revenue models and experiment to find the model that generates the most revenue in the target Customer Segment.Find the revenue model that generates the most revenue in your target Customer Segment
Questions to ask yourself and your team when identifying Revenue Streams within your revenue model:
- What value do we deliver to the customer?
- Which one of our customer’s problems are we helping to solve?
- What bundles of products & services are we offering to each Customer Segment?
Software tip: Use the Plio Canvas software tool to show a visual breakdown of your Revenue Streams.
Step 5: From business design to business implementation
To succeed in business requires not just a good business model, but also the effective execution of that business model. What we mean by effective execution is the ability to turn ideas and plans into disciplined business operations. The skillset required to do this is very different to the business design skillset.
“Reprogramming founders who grew their business by being agile, relentless, tenacious, and often aggressive, and irrational and at times, into CEOs that can drive organizational growth, is tough. This means quickly learning a new set of skills; sublimating large egos, working through direct reports when their span of control can no longer encompass the entire company; and building repeatable processes that enable scale”
Steve Blank, author of The Startup Owner’s Manual
Sadly, many Business Model Canvas initiatives fall at the implementation hurdle. It’s not easy to translate your new improved business model into actual results, and then into a business that can be scaled up.
The human dimension
The Business Model Canvas helps you to visualise a better business design. To implement it, you’ll have to engage people within your team to push the business forward.
The more you can engage your team in your change process, the more likely you will be to succeed.
Implementation of a business model canvas is especially challenging if you are an established business, not a startup. Your team will be in the groove of running your existing business model. At least part of this will need to be dismantled as you move to the new business model.
The best way to maximise this engagement is to involve your team in the business model design process. I recommend that you do this by running a business design workshop. This gives you an opportunity to communicate your vision and forge a shared commitment to reaching the destination. Guidance on how to run a workshop is given below.
Running workshops
The business model canvas lends itself to a collaborative design process. Canvases are normally developed in workshop sessions with 2 – 10 key team members. You should organize workshop sessions as early as possible in your business design project.
What makes the canvas such a powerful tool is its ability to stimulate discussion and collaboration
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Before starting your session, you will need a data projector and an editable version of the business model canvas. You can find an editable MS Word version here. Alternatively you can use the Plio Canvas software tool, which will make it easier to capture inputs from team members. You can sign up for a free single user account on Plio Canvas here.
Next, display the canvas on a wall in your meeting room (using a data projector and a large screen). Start by explaining the basic principles of the canvas. Explain that this is an exercise to map out an ideal future state of the business.
Then start with the Customer Segments box and go round the room. Ask people to suggest possible Customer Segments. Enter these into your Canvas. Hopefully this will lead to quite a lot of debate with re-writing and reshuffling of the Segments. Go through each of the Canvas boxes in a similar way, until you reach a first cut of a complete set of Canvas items covering all the 9 boxes. Don’t try and make it too perfect. You can always organize a follow-on session to do more work on the canvas.
The Key Activities Flywheel plug-in
To build a scalable business your new business processes will need to be standardized i.e. made reliable and repeatable. You need to build in the flexibility to continuously improve these processes to incorporate the new knowledge that you will gain from operating them. To help with this challenge, we’ve created the Key Activities Flywheel plug-in.
It works as a plug-in to the Business Model Canvas, extending the existing Key Activities box. It helps you to visualise and organize your Key Activities in a systematic way.
To use the Flywheel to implement a business model canvas, you’ll need to follow five straightforward steps:
Step 1 – Validate your business model
Step 2 – Set your Key Goals
Step 3 – Define Standards for your Key Activities
Step 4 – Run regular improvement cycles
Step 5 – Manage Risks and Constraints
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The Business Model Canvas helps you to design a better business model. The Key Activities Flywheel plug-in helps you to implement this better business model
To sum up, the Business Model Canvas helps you to design a better business model. The Key Activities Flywheel plug-in helps you to implement this better business model by visualizing and organizing your Key Activities.
Using this plug-in is explained in more detail in our second learning guide “Implementing a Business Model Canvas” available as a free download from www.pliohub.com.
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