In the beginning there was an empty screen and a flashing cursor, our only prompt that it was our turn to serve. Before the internet came into its current form we needed to create communications protocols. We needed to link together networks from schools, businesses, and government networks. And we needed to create the products and services that would give us something to do. We needed market structures, revenue streams, distribution channels, product standards and we needed consumer demand. This was not going to be an easy task…
When we plan on doing any kind of disruptive innovation and creating new markets, we need to understand the way in which those new markets are going to work. Amongst other things we’ll need to define products and services, setup supplier partnerships, create distribution channels and define cost structures. Without some kind of framework you could quickly get swamped before you even get started.
The Business Model Generation project was conceived by Alexander Osterwalder and Yves Pigneur following their doctoral research into business model innovation. Created in a collaborative effort with 470 practitioners across 45 countries, the book provides the tools to systematically understand, design and differentiate business models in any industry. You can see a preview of the book here, and follow Alexander’s blog here.
Today I’m going to walk through the Business Model Canvas, a tool for understanding the market you are in and a great starting point for some creative thinking about business models and strategy.
The Business Model Canvas
This simple canvas uses 9 building blocks to understand the way in which our chosen business actually works. The idea is to stick a giant copy of this on the wall and have people cover it in post its. Let’s go through each of canvas areas using the humble corner coffee shop as an example.
A customer is a customer, but a customer segment has some special properties. To quality as a distinct segment, you’ll need your own distribution channel, your own source of profit, and your own distinct offer. You’ll have a different relationship with the business and be interested in different value points for the products and services on offer.
Let’s amp up our corner coffee shop to give us two distinct customer segments:
- Walk in customer: we want a cup of coffee, in a cup, and we like your vibe man
- Catering company: we put on corporate breakfasts, and we need you to supply us with a machine and a barista for an hour. We’ll pay for more than just the coffee, and you’ll get back some value brand recognition
Once you know your customer segments, you can start thinking about new products, new services and new ways of providing value to your customers. If you’re planning on being disruptive you can introduce entirely new value propositions that nobody else has thought of yet.
This is more than just the product, we are talking about the augmented product. BMG talks about novelty, performance, customisation, getting the job done, design (fashion, sex appeal, cool factor), brand status, price, cost savings, risk reduction, accessibility, and usability as some key factors to consider. It’s really about answering the question “what’s in it for me?” for your customer, and understanding what they are going to get out of the transaction.
For our coffee shop walk in customers we might have the type of coffee, the machine, the skill of the barista, the pictures on top of the coffee, the ambience of the shop, speed of service, price, or how cool the other patrons are.
You need to do more than just provide a way of getting your product to your customer (distribution channel), you also need to let them know about it (marketing channel) and potentially keep in touch with them afterwards (after sales channel). For each of the different ways you have for getting in contact with your customers and completing the transaction, BGM suggests 5 phases to consider:
- Awareness: how do you let people know about your good stuff
- Evaluation: how do you help people decide that your stuff is the best around
- Purchase: how do you actually make the sale
- Delivery: how do you get the goods into their hands
- After sales: how do you handle returns, or resale at a later date
For our coffee shop we might look at the way we advertise and who to, the key selling points we are using and how well they fit the value proposition from the customer’s perspective. We would also look at the way we take payment and deliver coffee (would we have business accounts for the caterer?), and anything we do afterwards (get feedback to improve our service)
This is all about winning new customers, keeping the existing ones, and up selling wherever we can add value. Here are some suggested ways of doing this, with coffee shop examples in the parentheses:
- Personal assistance (can I help you),
- Self service and automation (help yourself)
- Communities (loyalty cards for repeat customers)
- Co-creation (design your own coffee cups, or choose your barista)
This is the big one…How are we going to monetize this business? There are a bunch of ways of doing this. Here are a few:
- Price tag (they call it asset sale)
- Pay per use
- Renting and leasing
- License fees and franchising
- Brokerage fees (being a middle man)
On top of this there are a heap of pricing models from fixed price, through auctions, to volume discounts and demand sensitive pricing.
For our coffee shop we might go beyond the cost of a cup of coffee to consider afternoon specials, loyalty reward programs, bring a friend discounts, renting out machines, and selling advertising space on our cups
This is all the stuff you need to produce your product, from raw materials and component goods through to the premises and staff. BMG suggest physical, financial, intellectual and human resources but they miss out organisational resources (such as our operating procedures and hiring policy)
For our shop we might include the shop, staff, machines, beans, milk, fridges, cups, furniture, training, capital, and so on.
The things you do to turn your raw materials (supplied good and services) into the final product. For our coffee shop we make the coffee, advertise our services, and rent out our travelling barista to catering companies.
The relationships we have with our suppliers, cooperative agreements with competitors, joint ventures and strategic alliances with non-competitors all go to making up the complex web of business relationships we can expect to see in any market. For our simple coffee shop this could include relationships with the coffee, milk, machine and cup suppliers, maintenance crews, the landlord, catering companies, advertising agencies and the local businesses housing the majority of our walk in customers.
Extending this section you should try to list out all possible stakeholders and elaborate on the way in which you interact with them. You never know where a source of future competitive advantage might be found.
This will be determined by the way in which the rest of the model fits together, but it is worth understanding what sort of cost structure your business is in (or could be in). Here are the main ones:
- Price driven: we are competing on price with our rivals, so we’ll do everything we can to keep costs low
- Value driven: we are competing on non price factors such as brand, service quality and uniqueness.
Within both of these models, costs can be fixed or variable with selected resources having opportunities for economise of scale.
For our coffee shop we might recognise our dependence on the cost of supplied goods (coffee, milk, rent, electricity, staff wages etc) whilst focusing on reducing the price sensitivity of our customers.
The featured image is of the opening screen from an Atari 8-bit, manufactured mostly in the 80’s. Around the same time the internet was starting to get its shit together