Creating a business model aids entrepreneurs to get clarity on how their enterprise plans to create and deliver value.
It also helps to identify opportunities and threats in the internal and external environments.
Defining the business model is essential to gain valuable insights to understand the business organization and design strategies for future growth and innovation.
A well-defined business model also aids in better communication with the team, clients, investors and other stakeholders.
There are several tools to develop and refine a business model. Business model canvas is one such tool.
What is Business Model Canvas?
Business model canvas is a strategic management tool used to document and assess existing and new business models.
According to Strategyzer “The business model canvas is a strategic management and entrepreneurial tool. It allows you to describe, design, challenge, invent, and pivot your business model.”
The business model canvas is a one-page template that provides a glimpse of the core elements of the business and aids in defining and refining the business model.
It breaks down the business model into nine components – key activities, value proposition, customer segments, customer relationships, key resources, cost structure, revenue streams and key partnerships.
The nine components of the business model canvas were initially proposed by Alexander Osterwalder in 2005, based on his thesis work on business model ontology.
A few years later, the business model canvas was published in 2008 by Osterwalder and a team of 470 co-creators.
Why is Business Model Canvas Important?
The business model canvas is an effective alternative to a business plan.
The template can be used by organizations of all sizes, no matter whether you are a large corporation or a startup, to define your business model.
Here are some reasons why a business model canvas is important for businesses.
- It provides a quick overview of the fundamental elements of a business model and aids in strategic decision making.
- The visual nature of the template makes it easy to comprehend.
- Working on a business model canvas promotes collaboration as the template can be shared with the team and stakeholders.
- Entrepreneurs can identify the relationship between different components of the business model and create growth strategies
- It helps to gather information about specific risks such as market conditions, competitors, etc. and address them.
- The business model canvas can be shared with the investors, clients and other stakeholders to showcase what your enterprise does and how it will be successful in the long run.
- It helps in business innovation by aiding entrepreneurs to have a close look at the different components that can affect the business and how they interact with each other.
Components of a Business Model Canvas
The template of the business model canvas is divided into two sections.
The right side has the external components such as customer segments, customer relationships, distribution channels, and revenue streams, while the left side features the internal components such as key partners, key resources, key activities and cost structures.
The value proposition is at the centre and signifies the exchange of value from the business to the customers.
There are 9 components in a business model canvas. Let us take a closer look at each of them.
Customer Segments
This component highlights the details of the customers, whom you will be selling your products or services. You can segment the customers based on different parameters such as age, gender, geography, interests, etc. Creating customer segments helps to understand the customers and create customized solutions that deliver value. There are various customer segments such as
- Mass market
- Niche market
- Segmented
- Diversified
- Multi-sided
Customer Relationships
This segment defines your relationship with each of the customer segments and describes your interaction with them. It will help you identify the demands of the customers at different stages of the customer journey and develop strategies to acquire new customers or retain existing customers. Customer relationships can be classified as
- Personal assistance
- Dedicated personal assistance
- Self-service
- Automated service
- Communities
- co-creation
Distribution Channels
In this segment, you have to identify the touchpointswhere the customer connects with the business. Channels help to communicate your value proposition to the customers and increase brand awareness. Distribution channels can be primarily of two types
- Owned channels
- Partner channels
Key Activities
This segment lists the key activities that your business must undertake to be successful. These activities must focus on reaching out to customer segments, building customer relationships, communicating the value proposition and generating revenue. Key activities can be broadly classified as
- Production
- Problem-solving
- Platform
Key Partners
Key partners are the external parties such as vendors, suppliers, etc. who help you in carrying out the key activities. They also help in acquiring key resources. Types of partnerships include
- Joint ventures
- Strategic alliances
- Coopetition
- Buyer-supplier agreements
Key Resources
Key resources are the resources required to carry out your key activities and fulfil your value proposition. Key resources can be classified as
- Human resources
- Intellectual resources
- Financial resources
- Physical resources
Value Propositions
The value proposition is the core component of the business model canvas. It defines your unique solution to solve the problems faced by your target customers, or to satisfy a need of the target customers. The value proposition should be unique to differentiate your product/service from the competitors. Value propositions can be
- Qualitative
- Quantitative
Cost Structure
This segment describes all the costs associated with creating and delivering the value proposition, acquiring key resources, building and maintaining customer relationships and developing revenue streams.
Revenue Streams
Revenue streams are the sources of income for the business. This section lists how you plan to earn revenue through your value propositions. Revenue can be generated through multiple activities such as asset sales, subscription fees, usage charges, brokerage, licensing charges, renting or leasing an asset, and advertising. Revenue streams can be classified as
- Transaction-based revenue model
- Recurring revenue model
To understand the concept better, let us have a look at the business model canvas of Google.
Business Model Canvas of Google – Example
Customer Segments – Google’s customer segments are multi-sided. They have three separate groups of customers, who are interrelated to each other. The three customer segments of Google are search users, advertisers, and content owners.
Customer Relationships – Google has multiple customer relationships based on the customer segments. The three major customer relationships are automated, communities, and co-creation.
Channels – Google uses both company-owned and partner channels to deliver the value propositions to its customers.
Revenue Streams – Google displays ads on its search results pages and web pages. They generate revenue from search ads and display ads. The revenue also comes from eCommerce transactions, Google Cloud, Google Play, hardware and YouTube non-ad revenue.
Key Activities – The key activity of Google is to manage the existing search platform and its framework, crawl and index content, match search queries to content, and conduct research to improve customer experience on the platform.
Key Resources – The key resources of Google include their daily active users, data assets, algorithms, advertising infrastructure, patents, digital assets and the Google brand.
Key Partners – The key partners of Google are content creators, Original Equipment Manufacturers, developers, customer service partners, influencers, and advertisers.
Cost Structure – The company has two significant costs – payments to content creators. The costs incurred to manage and maintain the platform.
Value Proposition – Google business model has multiple value propositions for each of its customer segments. For search users, the platform provides free and fast search. For advertisers, they provide a platform to showcase their ads, and for content creators, they provide a platform to monetize the content.
The business model canvas is a dynamic tool to document and redefine existing business models and create new business models.
Defining the core components with accuracy enables you to have a clear view of the business model and identify growth opportunities.
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