Making sure that a business succeeds is not easy, but creating and understanding your business model can help in ensuring optimal operations that contribute to success. A business model can be defined as a plan for the effective operation of a business. It identifies the products that the business offers, its customers, its revenue sources, its sources of financing, and its partners, among others. A business model is essentially a description of how the different elements of the business work together. Building a business model can get complicated, and this is why knowing what a business model canvas is can be advantageous. In this post, we provide a brief definition of the business model canvas, its building blocks, and examples.
The Business Model Canvas
The business model canvas or BMC was proposed by the Swiss business theorist Alexander Osterwalder. It is a tool used to map out business models. Composed of a single sheet, the canvas offers a concise overview of the entire business model in a way that a viewer can easily understand. Moreover, it helps show the connections between the various building blocks. Because of its simplicity, the business model canvas is suitable not only for viewing business models in a single glance, but also for mapping out and modifying other existing business models, such as the BCG matrix, as well as creating new ones. In other words, the business model canvas offers a simple but effective way for developing, visualizing, and communicating business models.
The business model canvas is a template composed of nine segments that correspond with the nine building blocks of a business model. They are arranged as tables, with the left side representing the costs of conducting business and the right side representing the revenues for the business.
- Customer Segments. Customer segments represent the clientele of the business—that is, the people who use the goods and services offered. Customer segments can be composed of only one type or many types of clients. For instance, assume that your business involves the design, manufacture, and distribution of cosmetics. Your customer segments, therefore, involve the general public. But more specifically, you may have various types of customers, from individuals who buy your products for personal uses to groups who make purchases out of necessity. A good way of identifying customer segments is asking who avails of your products.
- Value Propositions. Value propositions refer to the value that a business provides to its customers. Note that value here pertains not only to the product itself, but also to intangible characteristics and benefits associated with the product. For instance, if your actual product is cosmetics, you may also be offering other benefits that come with these such as competitive prices, high quality, variety, convenience, and even brand image and reputation.
- Channels. This building block refers to the ways by which a business reaches out to customers and delivers products. A business may have its own channels such as a storefront, via partner channels such as distributors, or a combination of the two. Channels vary among businesses, but some of the more common ones are through storefronts, retail locations, direct selling, and delivery. More recent channels are through digital mediums such as websites and mobile applications. Going back to the example provided, cosmetics can be delivered in a number of ways. You may have your own stores, employ a sales force, or consign your products to retailers.
- Customer Relationships. This segment covers the activities that a business conducts to acquire, maintain, and expand its clientele. These activities vary depending on the aims of the business. Firstly, acquiring clients involves introducing your value propositions to your clients in order to enable an initial purchase. For instance, your cosmetics business may place ads on television and magazines. Secondly, maintaining clients involves keeping them loyal to your business. For example, providing excellent customer service and high quality products are some of the ways to keep your customers satisfied. Finally, growing the clientele involves getting your customers to purchase more. Going back to the example, you can encourage your customers to buy more cosmetics by keeping them informed of developments, launching new products, and offering promos such as discounts and bundles.
- Revenue Streams. Revenue streams refer to where the money comes from. Revenue streams usually come from the customers who purchase the products, but this is not always the case. This building block also goes beyond identifying where the money comes from; it is also about forming a strategy of getting the most value from your customers. For instance, search engine companies primarily cater to the needs of the general public by providing their services for free, but their revenue generally comes from other companies who purchase space for advertisements. As for the cosmetics business, customers represent the biggest source of revenue since they pay directly for your products.
- Key Resources. Key resources refer to the most crucial assets you utilize. Resources come in different forms, namely physical, intellectual, human, and financial. Physical resources involve tangible infrastructure such as buildings and machinery; intellectual resources include brands, copyrights, technologies, and patents; human resources pertain to key personnel that drive the business; financial resources include credit and cash reserves. For example, some key resources for your cosmetic business involve your brand image, technologies that you have developed, and creative properties.
- Key Activities. This segment refers to the most important activities a business conducts to operate the business. These activities should be the ones delivering the most value to the business. Key activities vary depending on the business. For example, logistics is a key activity for a company handling perishable goods whereas a company offering cloud computing would consider software development as indispensable. As for the example provided, key activities for a cosmetic company include research and development, logistics, and marketing among others.
- Key Partners. This building block pertains to parties who provide tools, materials, and services that you need to run your business. A good way to identify key partners is by determining the external entities that your business works with. For example, key partners for a cosmetics business would be suppliers of raw materials, retail shops who distribute your products, and celebrity endorsers.
- Cost Structure. This segment refers to the main costs entailed by your business operations. Every company has operating costs, but where its money goes depends on the nature of the business. The important thing, however, is to align the costs with the key activities and value propositions—that is, to ensure that you are spending money on the most important activities, and these activities in turn should be geared towards delivering your value propositions. Alignment of these building blocks helps ensure that your costs and activities are maximizing value for your business. For instance, the most crucial costs for your cosmetics company would likely include marketing, research writing and development, and product distribution.
The business model canvas is a simple but highly effective way to map out a business model. It is also valuable for being applicable to virtually every business, regardless of size and type. Learning more about the business model canvas can help you develop a streamlined, coherent, and successful business model.
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