Business model canvas explained

Business Model Canvas provides a visual framework for understanding the essential components that drive a business, highlighting how value is created, delivered, and captured. Developed by Alexander Osterwalder in 2008, it allows entrepreneurs and business leaders to view their business from different perspectives and make informed decisions. The BMC consists of nine key building blocks, each representing a fundamental aspect of a business.

1. Customer Segments

The first building block of the Business Model Canvas focuses on identifying the different groups of people or organizations that the business aims to serve. These are the customers who benefit from the product or service offered. A company must understand the specific needs, desires, and characteristics of each customer segment.

Businesses can serve:

Mass Market: Broad customer segments with similar needs.

Niche Market: A specific group with unique needs.

Segmented: Different groups with slightly different needs.

Diversified: Different and unrelated customer groups.

Multi-sided Platforms: Two or more interdependent customer segments (e.g., a marketplace).

2. Value Propositions

A Value Proposition defines the bundle of products or services that create value for a specific customer segment. It explains why customers should choose this product or service over competitors'. This is the key reason customers would purchase from the business rather than someone else.

A strong value proposition addresses customer pain points and fulfills their needs, whether it's offering convenience, innovation, performance, customization, or price competitiveness. For instance, Uber’s value proposition is providing on-demand, convenient, and relatively affordable transportation via a mobile app.

3. Channels

Channels are the various ways a company communicates with and delivers its value proposition to customers. These can include physical or digital channels such as retail stores, online platforms, direct sales, or distributors. The effectiveness of channels plays a crucial role in customer acquisition and retention.

Companies should determine:

Communication Channels: How to reach customers and create awareness (e.g., advertising, content marketing, etc.).

Distribution Channels: How the product or service is delivered (e.g., physical stores, e-commerce, shipping).

4. Customer Relationships

Customer relationships refer to the types of relationships a company establishes with its customer segments. These can range from personal to automated, and the goal is to foster customer loyalty, retention, and engagement. Different business models may adopt different types of customer relationships, including:

Personalized Service: Offering tailored experiences to customers.

Automated Service: Providing pre-set services or information automatically (e.g., AI-based chatbots).

Self-service: Customers help themselves with minimal interaction.

Communities: Creating platforms for customers to connect and engage.

5. Revenue Streams

Revenue streams describe how a business generates money from its customer segments. Businesses can generate revenue through various methods, including:

Direct Sales: Selling products or services directly to customers.

Subscription: Regular payments for continued access to a product or service (e.g., Netflix).

Licensing: Allowing others to use intellectual property for a fee.

Freemium: Offering a basic product for free while charging for advanced features (e.g., LinkedIn).

Advertising: Earning revenue by allowing third parties to advertise (e.g., Google, Facebook).

The key is to identify which revenue streams are the most sustainable for the business model.

6. Key Resources

Key resources are the assets necessary to create, deliver, and capture value. These resources are crucial for executing the business model effectively. They can be:

Physical: Buildings, machinery, equipment.

Intellectual: Brands, patents, trademarks.

Human: Employees with skills and expertise.

Financial: Capital, investments, or cash flow.

The type of key resources will depend on the nature of the business and its industry.

7. Key Activities

Key activities are the critical actions a company must perform to make its business model work. These activities relate to producing the product or service, reaching customers, maintaining relationships, and generating revenue. Some examples include:

Production: Creating and manufacturing goods.

Problem-Solving: Offering solutions to customers' problems.

Platform Management: Maintaining a digital platform or marketplace.

These activities must be aligned with the company's goals and strategy.

8. Key Partnerships

Key partnerships refer to the network of suppliers, partners, or collaborators that help a business carry out key activities and access key resources. Partnerships can help a company reduce risk, acquire resources, and leverage external expertise. Some types of partnerships include:

Strategic Alliances: Non-competitors working together for mutual benefit.

Joint Ventures: Two or more companies collaborating to achieve a common goal.

Supplier Relationships: Businesses relying on suppliers for resources.

9. Cost Structure

The cost structure outlines the major costs associated with operating the business. It focuses on the expenses incurred in delivering value to customers, maintaining key activities, and managing resources. There are two main types of cost structures:

Fixed Costs: Costs that remain the same regardless of business activity (e.g., rent, salaries).

Variable Costs: Costs that fluctuate based on business activity (e.g., raw materials).

Understanding the cost structure is essential for managing profitability and ensuring sustainable growth.

Conclusion

The Business Model Canvas is an invaluable tool for entrepreneurs and companies to streamline their business ideas and strategies. By breaking down the business into nine essential components, the BMC provides a holistic view of how a business creates, delivers, and captures value. It is especially useful in the startup phase, as it allows founders to pivot, refine, or validate their ideas quickly and cost-effectively. The visual nature of the BMC also encourages collaboration and communication across teams, helping to align the entire organization toward a common goal.