A product is (usually) not a business. A business model canvas can help you to understand what your customers value, create what they need, and ensure that your business is profitable.
The canvas works by breaking your business model into small elements that help you to work out the detail of the way your business needs to run to make money.
A product is (usually) not a business.
Why use a business model canvas?
Using a business model canvas might help you to realise that the amount of money you spend to acquire customers is less than the profit you make from them. You might choose to change the ‘customer relationship’ from personal assistance (e.g. every customer meets is served by a member of your team) to self-service (e.g. customers buy products online instead).
What does a business model canvas look like?
The business model canvas shown above was designed by JAM visual to represent the key elements of a successful business: there are a lot, aren’t there? It can be daunting to see all of these elements laid out for the first time – we often focus on ‘the thing we’re making’ or ‘the thing we’re doing’ (i.e. the ‘value proposition’) and don’t think about (or don’t want to think about!) all of the other elements needed to make a business a success.
Understand your customers and give them what they need.
Breaking down the business into these elements, and showing their relationship to one another is incredibly useful. The two most fundamental elements are ‘Customers‘ and ‘Value Proposition‘:
– ‘Customers‘ are at the heart of the business model and they are where you should start. Create a product or service for customers that you understand inside-out is easy. Creating customers for a product that you understand inside-out is hard. – ‘Value Proposition‘ follows from a great understanding of your customers. Which your customers’ problems are you solving?
Next, think about ‘Customer Relationship’ and ‘Channels’.
– ‘Customer Relationship‘: what’s the nature of the relationship between you and your customers? Think about shops: traditionally, buying books, music, and DVDs involved a customer visiting a building and exchanging money with an employee (personal assistance); Amazon disrupted this style of buying and allows customers to order goods online (self-service). Shops are disappearing whilst Amazon continues to grow. – ‘Channels‘: how will you reach customers? If you choose to advertise, how will you work out the effectiveness of advertising? If word of mouth is your best source of business, how can you incentivise your advocates?
What’s it worth?
What is the monetary value of your product or service? Understanding ‘Revenue‘ is fundamentally important:
- what are your customers willing to pay?
- What are they paying for similar products or services?
- How do they prefer to pay?
Don’t limit yourself to charging for the ‘real’ value of your product. Fragrance is smelly water and costs pennies to make but costs huge sums to market: their marketing positions them as culturally significant and so their market value is a reflection of their cultural value (rather than their ‘real’ value).
Now switch direction and think about how you actually ‘do’ what your business needs to do – what’s involved in running your business?
– ‘Key Activities‘: how do you actually create and sustain your product or service? How do you reach your customers? How do you support your customers? How do you ensure payment? – ‘Key Resources‘: what do you need to carry out you business activities? Think about your team (managers? sales? ‘doers’?), your accommodation (office? building? home?), your equipment (computers? phones?), etc – ‘Key Partners’: do you need someone to help you find customers? Are their suppliers who are crucial to your business?
What’s it cost?
And finally, what does it cost to run your business?
‘Cost Structure“: what are the costs inherent to your business (i.e. activities, resources, partners)?
Is your business worth more than it costs?
The final assessment of your business model (and the main use of the business model canvas) is to help you work out if your business generates more than it costs. If ‘Revenue‘ is less than ‘Costs‘ then you’re off to a good start, but if not then the business model canvas will help you to fine-tune your business model. You might need to change your ‘Customer Relationship‘, or you may need to switch suppliers and sacrifice on quality for affordability. You may need to make more dramatic changes like moving to a different type of customer, or changing the product or service itself. Or you may decide that there isn’t a business model that works for you at the moment! It’s fine to fail, you just want to make sure that you fail fast and fail cheap.
So, how do you write a business mode canvas?
- Start with customers
- Meet the needs of customers
- If costs are greater than revenue then try changing elements of the business model canvas to see what impact they have on profitability.
Remember, a business model canvas is just one tool amongst many. The important principles it embodies are customer driven product development and assessment of revenue vs. costs (e.g. profitability).
This article is a brief introduction to creating and using a business model canvas and you can find out much more online. A good place to start is the ‘Business Model Generation‘ handbook.