A lot of startups worldwide focus a great deal on the technology, the product, and design, but forget to ever figure out the business — i.e. how the startups make money by acquiring customers. Unless this aspect of the venture is well-defined, the business will not succeed. Often, the founders spend a lot of resources on documenting big business plans that they create to satisfy the investors. Sadly, these documents are seldom read or referred to once the investments are secured. Instead of becoming the guiding documents for building a successful business, they end up being bureaucratic paperwork.
A Business Model Canvas is a better way to represent an enterprise’s business plan. It is a business tool that offers focus, flexibility, and transparency. Unlike the long complex traditional business plans, it is a single-page document that brings clarity to an organization’s core objectives and leaves out all the unnecessary stuff. A business can easily identify its strengths, weaknesses & priorities using this business model.
Business Model Canvas was initially proposed by Swiss entrepreneur and Strategyzer co-founder, Alexander Osterwalder. He elaborated on Business Model Canvas in his book “ Business Model Generation”.The key idea was to categorize the Business Model into 9 different elements and each element contains a series of hypotheses about the business model which need to be tested throughout our business processes. It allows the business models to be visualized through different business model canvas templates. While the business model canvas is popular with the proponents of the Lean Startup method, any new product or business can benefit from using it. Unlike traditional business plans, it is a one-page document that is easy to read and understand and it is more customer-centric which also helps in achieving the market fit.
In this article, we will look at the 9 core components of a business model canvas.
- Customer Segments
- Value Propositions
- Customer Relationships
- Revenue Streams
- Key Resources
- Key Activities
- Key Partners
- Cost structure
To give you better clarity, we will be using H&M as an example here:
The first block of the Business Canvas Model is about understanding who are the customers to whom you’re delivering value. What do they do? And why would they buy your product or service? None of the businesses can survive without their clients or customers.
Customer Segments define the groups of people or organizations you are targeting or serving. Every company needs profitable customers to survive. Using the Business Model Canvas, you will determine what your customer segment will be.
In the case of H&M, there are three distinct customer segments to whom they offer different products. Men, Women, and Children.
The second block is a Value Proposition which is about the assurance of the value your business is delivering, which answers ‘why’ someone should choose you over your competitors.
A few important questions to ask while determining your Unique Value Proposition are:
- Which specific customer pain point are you trying to solve?
- What job are you helping customers get done?
- How does your UVP eliminate customer pain points?
Applying this to H&M and analyzing it, one important thing to take note of is “What makes the people choose to purchase from H&M, over their competitors?
The clear answer to the above question is: Their value propositions involve offering various ranges of trendy men’s, women’s, and kid’s clothing and accessories at a reasonable price, involving great e-commerce experience and fast fashion.
Their great value proposition is one of the reasons for the brand’s success.
Channel describes how a company communicates with and reaches its customer segments to deliver its value proposition. It is important to understand which path (or channel) is best for your company to reach your customers.
A few questions every startup needs to think about:
- Which channels are to be focused on to reach the desired customer segments?
- How are those channels integrated?
- Which ones are the most cost-effective?
H&M has 3 primary channels in which they communicate and deliver products to its customers:
- Direct sales through their stores
- Online (both app and website)
- Social media for communicating with customers
Once you have acquired customers, you will need to think about how you can build, nurture, and grow those relationships. Customer Relationships describe the type of relationship a company establishes with its specific customer segments.
If we talk about H&M, it includes online store assistance, personal assistance, and automated services.
How will the business make money? Who are the customers willing to pay and for what benefit? How would they prefer to pay? How are they currently paying? How does each stream add up to the total revenue?
Revenue streams refer to the sources from which a company makes money by selling its product/service. And one should clearly describe how you will generate revenue from your value propositions. There are various ways to generate a revenue stream for your company such as asset sales, subscription fees, leasing, licensing, advertising, etc. These revenue streams should be linked to the personas or segments and the value propositions.
At H&M, revenue is generated by making money based on sales of clothes and accessories either at a store or online.
The next step is to define the key activities — the areas you need to be good at to create value for your customers
For H&M’s — Design is a key activity as its value proposition is to provide the latest trendy clothing items at an affordable price. Their collections need to be constantly updated to follow the latest fashion trends at the time.
Apart from that manufacturing, customer service, retail process, and distribution channels are also the key activities of the brand.
Key Resources describes the most important assets required to make a business model work. These can be things like your office, hosting requirements, human resources, finances, transportation, electricity, etc. These resources should be mapped to the key activities. They are considered an asset to a company, which are needed to sustain and support the business.
In the case of H&M, different key resources are stock management, interconnected networks, brands, and logistics.
Key partners are the external companies or suppliers that you would need to perform your key activities and deliver value to the customers. To optimize operations and reduce the risks of a business model, organizations usually cultivate buyer-supplier relationships so they can focus on their core activity.
Complimentary business alliances also can be considered through joint ventures, strategic alliances between competitors, or non-competitors. Key partners also should be mapped to key activities.
H&M’s key partners include manufacturers, designers, online platform agencies, and renting space owners.
The final step of the Business Model Canvas is about the cost estimation, the total cost to run your business model.
This particular block includes some of the essentials of any business, such as manufacturing costs, physical space, rent, payroll, and also marketing and advertising cost. Cost Structure defines all the costs and expenses that your business will incur while operating the business model. This final step in this process is important because it will help your team decide whether to pivot or proceed.
In H&M, it includes labor, material, taxes, marketing, logistics, energy sources, etc.
Creating a Business Model canvas forces you to think through the important factors that will make or break your business. It is important to go through the Business Model Canvas with your team so that you can improve the odds of launching a successful business.
Now it's time to get your work done and begin your market discovery journey with Prodeasy’s easy Business Model Canvas.
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