Business Model Canvas

business model

Value Proposition

Your value proposition can be related to (but is not limited to)…

  • Price
  • Quality
  • Customer intimacy

Example: SoundCloud

SoundCloud is an application that allows you to find new music and connect with artists.

Value proposition: enhances the music listening experience by allowing the user to directly connect with the artists rather than just listening to their music. The application also shows trending music so the user can easily find new music and stay up to date with the latest hits.

 

Tips to help you identify and establish a strong value proposition:

  • Research your audience and potential customers. Understanding what motivates your customers will help you understand how you can appeal to them.
  • Research your competitors. There is no point in having two businesses that offer the same exact thing. Knowing your competitors will give you an idea of what is already offered in the market and what you can offer differently.

Customer Relationship:

This building block dictates the nature of the relationships that an organization will develop with its customer, whether through people or automated means.

The three main phases the startup shall go through are:

  1. Customer acquisition: the process of persuading a customer to select your organization’s product over choices available in the market.
    1. For startups with limited resources, content marketing is the solution; social media marketing and e-mail marketing might be good examples for this.
    2. This phase gives more space for optimization: the more your company starts attracting customers, the stronger your chances are of acquiring them by making minor tweaks to your content and outlook.
  2. Customer retention: long-term relationship a company establishes with its customers
    1. There are various ways to do that; using the words your customers would love to read, providing personal offers to them, choosing the right platform to appeal to them, also by getting ideal customers to be VIPs.
  3. Upselling: Boosting the sales of your startup, such as:
    1. Asking a customer if he would like to add a drink or fries to his order at a Fast food restaurant. (Ex: Mcdonald’s)
    2. Convincing a customer who is getting his laptop fixed that he should get more RAM, or a bigger hard drive installed.

 

Examples of Customer relationship:

  • Do it Yourself relationship: Google and Facebook use it by creating self-serve auction based Ad products, making the company’s “Price Deciders” rather than the more typical “Price Acceptors”.
  • long-term relationship: Starbucks focuses on creating a with its customers and has largely been successful in this endeavor. By making itself so widely available to its consumers through its unique atmosphere that is uniform across outlets, it assures customers of the same wonderful experience regardless of where they are getting their coffee.
  • Personal Assistance: Based on human interaction. Customers can communicate directly with company representatives throughout the sales process and after the sale is complete.  This may happen in person, by email, through call centers, etc. Vodafone would be a good example of this.
  • Dedicated Personal Assistance: Also based on human interaction, but adds the specificity of a dedicated customer service representative. This is the deepest type of customer relationship and normally develops over a long period of time.
  • Self-service: instead of maintaining a direct relationship with its customers, the company provides all the necessary means for the customer to help themselves. Think of how you buy music through iTunes.
  • Automated Services: Automated customer service is not constrained by time zones or public holidays. This gives organizations the ability to deliver always-on customer service to resolve issues as soon as they arise. This means customers can have their inquiries resolved 24 hours a day, and don’t have to wait hours or even days for a response.

Revenue stream

Revenue is the money a business receives from selling its goods and services.

Revenue streams can be:

  1. Direct: such as the sale of a good or service
  2. Indirect: commissions received for performing a service, interest received from an investment.

Examples of revenue streams:

  • Advertisements
  • Cash payment
  • Online payment
  • Registration fees
  • Subscription fees
  • Usage fees
  • Renting
  • Licensing

 

Example: What is Snapchat’s revenue stream?

Half of Snapchat’s revenue comes from the advertisements placed through its Discover feature. Media partners such as CNN publish content on Snapchat’s Discover section in the form of stories. Geofilters, where businesses display branded images when a user is close to their location, are also another source of revenue for the business.

Customer Segment

It’s the community of customers or businesses that you are aiming to sell your product or services to, whether a single or multiple groups.

Types of Market Segments:

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How to pick your customer segments

  1. Mass Market: Products and services have little differentiation, and are appealing or fulfill the needs of a wide cross section of the population.
    1. Example: Water bottles. Chipsy, some detergents like Fairy.
  2. Niche Market: Niche market refers to a customer segment with extremely defined characteristics and very particular needs.
    1. Example: Macbook pro, Mercedes
  3. Segmented: These segments may have very minute variations in their needs and requirements, hence require different value propositions, distribution channels and customer relationships according to these small differences in the customer segment
    1. Example: iPhone 5 and iPhone 5c (same mobile, but each targets a different economic segment)
  4. Diversified: These segments have very different needs and wants. The customer profiles have few overlaps but due to varying reasons, the organization sees value in investing in appealing to both these diverse segments.

Amazon.com started by selling books online. As it’s business grew, its IT infrastructure became more and more sophisticated. Leveraging this value proposition, Amazon began offering its IT infrastructure through cloud services to business customers. Hence, Amazon now has individual customers and business customers as well.

  1. Multi-sided Platforms: When customer segments are related through dependency, it makes business sense to serve both ends of the equation.

Example: A credit card company not only cares about customers that hold credit cards but also cares about having stores that accept credit cards. If either segment fails, the other will automatically fail.

Cost Structure

This building block represents all the costs that a business can or will incur if it opts for a particular business model.

Cost-driven: focuses on creating a lean cost structure through offering cheaply priced value propositions, a high degree of automation, and outsourcing costly functions.

Ryanair is example of a ‘no frills’ airline which provides a cheap solution to its customer segment for air travel by reducing costs through increasing seats in their planes and have a limit on luggage size.

Values-driven: This strategy is characterized by complete focus on the creation and delivery of a high value proposition which is highly customized to the customer segment’s preferences.  Example: Luxury hotels opt for a values driven approach.

The Hyatt prides itself on its customer services and amenities. They put a lot of effort into creating an experience which customers are willing to pay top dollar for. Employees of the hotel are encouraged to anticipate individual customer’s needs right down to greeting a repeat customer by name and providing them with a room with their preferences already in place.

Some businesses fall somewhere in the middle between these two

Characteristics of Cost Structure

  1. Fixed costs: Expenses that remain the same regardless of the volume produced by the business such as Salaries and rent
  2. Variable Costs: Heavily dependent on the volume of output a company produces. They increase directly proportional to increases in labor and capital.

Key partnerships:

Are the network of suppliers and partners that make the business model work. Companies forge partnerships to optimize their business models, reduce risk, and/or acquire resources.

Four types of partnerships are commonly distinguished:

  1. Strategic alliances: These types of alliances are between non-competitors.

Example: Coca cola and Etisalat. Earning minutes for every bottle you drink

  1. Co-opetition: There can also be strategic partnerships between competitors. Such a partnership will help spread the risk both companies may take. It may also help when both partners are trying to do something new; additionally it could mean a confirmed supply stream.

Example: The collaboration between Nokia and Microsoft in producing windows phones

  1. Joint-Ventures: Two businesses could have a mutual interest in developing new business, possibly due to the emergence of a new market or access to a new geographic area. Both organizations will only opt for such an option if they both provide some inputs into the business.

Example: Dutch company that specializes in producing cheese might choose to go into a joint venture with milk producing local company to start making cheese in the new region.

  1. Buyer-Supplier Relationships: These are the most common type of partnerships which assures that you have a reliable source of supplies coming in and for your supplier this means they have a steady confirmed buyer for their product.

Motivations behind partnerships:

  1. Optimization and economy of scale: Since a company rarely owns all the resources needed to perform every activity by itself, it enters into partnerships with companies who can supply at optimal cost.

Example: Citroen, Peugeot and Toyota joined hands to create a small, cheap car for the masses that they tried to sell for 5000-6000 euros. These cars looked almost the same except for the chassis and a few internal and external details.

  1. Reduction of risk and uncertainty: Competitors often form a strategic alliance in one area while competing in another.

Example: Blu-ray was  jointly developed by a group of the world’s leading consumer electronics, personal computer, and media manufacturers. The group cooperated to bring Blu-ray technology to market, but individual members compete in selling their own Blu-ray products.

  1. Acquisition of particular resources and activities

Companies extend their own capabilities by relying on other firms to furnish particular resources or perform certain activities. Resources may include knowledge, licenses, or access to customers.

Example: CocaCola invests in new cafes by providing  equipment and investing in the décor of the place. In return, the cafe provides CocaCola’s soft drinks exclusively. Hence, CocaCola gets a repeat customer for their soft drink while the cafe owner can minimize the cost of setting up the business. However, the cafe owner is limited to selling just CocaCola, so if CocaCola increases the prices of its soft drinks, the cafe owner has no choice but to abide by the new prices.

Case Studies

Starbucks:

Starbucks has established several key partnerships worldwide such as with coffee growers worldwide to grow eco and farmer friendly coffee beans. This key partnership is a typical buyer-supplier relationship, motivated by a need to acquire key resources. Another key partnership is with specialized coffee machine makers who make specialized coffee makers for Starbucks. Again this helps Starbucks mitigate cost because it does not have to invest in infrastructure, R&D, and manpower to create these coffee machines in-house. Instead, it is much more cost effective to partner with an organization that already holds expertise in this area and has the infrastructure in place already to cater to Starbucks’ needs. Conversely, Starbucks provides them with a steady buyer for their product as well as the added boost that the Starbucks brand holds for the coffee machine manufacturer.

Key Activities

These are the crucial things the business needs to do to deliver on its value propositions.

TYPES OF KEY ACTIVITIES

  1. Production: The design, creation and delivery of significant quantities of the product.

Example:For a company that manufactures and sells pantyhose:

Value Proposition:

  • This pantyhose lasts longer thus saves money that would get spent on replacements.
  • It provides resistance, so feet don’t slip in heels.
  • The product is machine washable.
  • Easy to store packaging.

The Key activities would then be;

  • Control of production and manufacturing;
  • Manage website, online orders and the distribution of the product;
  • Create a branding strategy;
  • Marketing and promotion of the product;
  • Product and packaging design.
  1.  Problem-solving: Organizations that list problem-solving as a main activity are usually aiming to find unique solutions to these individual problems. For example, Jiffy Lube is a chain of over 200 businesses in North America which offers oil change and other automotive services to its clientele. So it is a service firm that aims to provide a solution to a recurring problem its target customers may have. Jiffy’s value propositions are:
  • Keep cars healthy;
  • Keep clothes clean and garages tidy;
  • Save customers’ time and help them avoid the hassle of their cars breaking down.

Based on these, the key activities performed at Jiffy can be as follows;

  • Change the oil of cars;
  • Perform other maintenance work;
  • Promote their services to customers through upselling and other marketing activities.

Such organizations will have detailed records on repair work done on the automobiles of their repeat customers and will be able to handle the car with full knowledge of its history, much like a doctor with a regular patient.

  1. Platform/ network

A business model where the platform is a key resource usually has platform or network-related key activities. Networks, brands, and software can all be a part of a platform or network-related business.

Otlob works as a medium between customers and food vendors.

  • Agile and available when needed by customers;
  • In the cloud;
  • Efficient and effective;

Based on these the key activities for this organization are;

  • Cloud-based ordering food as a service;
  • Cloud-based software as a service;
  • Frequent checks for the restaurants’ menus to make sure it is up to date.

CASE STUDY: value proposition + key activities

LINKEDIN

LinkedIn is one of the world’s premier business networking websites.

The value propositions are as follows;

  • Manage professional profile and build a robust professional network;
  • Target and reach the right talent;
  • Communicate with the right audience;
  • Access to LinkedIn database through API’s and widgets.

As you can see LinkedIn is a platform/ network-based company characterized by a high focus on providing sharing capabilities to its customers.

The Key Activities performed at LinkedIn would then be;

  • Platform Development

Hence, LinkedIn spends a majority of its budget and time in ensuring that its platform remains scalable and usable as the consumer base grows rapidly.

Distribution channels:

They are the medium through which an organization can educate its chosen customer segments about the products and services it provides as well as selling them.

Types of channels:

  1. Own Channels: A direct channel will include your sales force that would go after your customer segment and bring them in.

Examples: Website, Stores

  1. Partner Channels:This is an indirect channel. In this case, the company will sell to the customer through an intermediary such as  placing their products or making their services available at a partner store (wholesalers for example).

Example:  Otlob.com, Aramex, Virgin Megastores, supermarkets.

Case study: Apple’s channels:

Apple store, Apple website, mobile networks( vodafone, orange, etisalat), retail chains.

Key Resources:

Are the main inputs that your company uses to create its value proposition, service its customer segment and deliver the product to the customer. Key resources define the kind of materials, equipment, and employees you need. This aspect plays a direct role in bringing your value proposition to life for your chosen customer segment and defines the minimum you need to have to deliver to your customers.

Types of key resources:

  1. Physical resources: tangible resources that a company uses to create its value proposition such as: equipment, inventory, buildings, manufacturing plants and distribution networks that enable the business to function.
  2. Intellectual resources: non-physical, intangible resources like brand, patents,  customer lists, and customer knowledge represent a form of intellectual resource.
  3. Human resources: Employees are often the most important and yet the most easily overlooked assets of an organization. Specifically for companies in the service industries or require a great deal of creativity and an extensive knowledge pool
  4. Financial resources: includes cash, lines of credit and the ability to have stock option plans for employees.

Key questions to ask yourself when building your BMC:

Value Proposition:

​- What customer problems do we solve & what needs do we meet?

– ​What are the products & services we put in place to accomplish this?

​- What value or benefits do we create for customers?

​- Does our current business model meet our customers’ needs fully?

– What can make a customer change its minds and go with competition or substitute solutions?

 

Customer Segments:

– What customer segments do we mainly serve?

– ​Who are our most important customers?

​- Will the same people be here for the next ten years?

 

Customer Relationship:

– What kinds of relationships do our customers expect & how do we maintain them?

​- What relationships do our competitors have with their customers? is it the same as ours?

​- What type of relationships creates the most value for our customers?

 

Channels:

​- Through which Channels do our Customer Segments want to be reached?

​- How are our Channels integrated?

– ​Which ones work best?

– Which ones are most cost-efficient?

​- How are we integrating them with customer routines?

​ – How do we raise awareness about our company’s products and services?

– How do we allow customers to purchase specific products and services?

– How we provide post-purchase customer support?

 

Key Activities:

​- How do we produce our offerings?

– What competencies and key activities do we need?

 

Key Resources:

​- What key resources are behind our offerings and value proposition in terms of: IT system? Human Resources? Tangible equipment? Localization?

 

Key Partners:

– What do we bring them and what do they bring us?

– What is their relation to our business?

– Who are our most important partners?

– Who influences our customers (opinion leaders, stakeholders, users)?

 

Cost structure:

– What does it generate cost?

– Can our value chain be optimized without reducing the perceived value of our customers?

 

Revenue Streams:

– What are the revenue streams?

– Why does it generate profits?

– What are customers willing to pay for?