The business model canvas is a one-pager that showcases the most important details of your business model. It is widely used at startups and hackathons to iterate on business models on paper. Each of the sections of the canvas is related to another, and small changes can have great effects and discover unthought-of opportunities. In this post, I tell you more about the business model canvas, how to use it effectively, and what other tools can be used to power it up.
Why use a business model canvas?
I see your question and I send another question back at you: Why spend weeks crafting a well-written business plan when your startup idea will change in time as you get additional partners, obtain funding or receive feedback from your first customers? Many people are pushed back by the idea of writing a business plan, and most of them don’t know where to begin. A simple canvas is better than a forgotten idea and they make great wall deco.
The canvas helps you map a business model by collecting your customers, channels, products, resources, revenue streams… in one view in which you can analyze relationships and identify pros and cons.
Alex Osterwalder’s Business Model Canvas
Some years ago Alex Osterwalder revolutionised the world of business development with his business model canvas. He offered teams an easy and complete tool for product and service modeling and wrote a book in which he explained the method in plain English and with strong visuals.
His model is used by entrepreneurs of all kinds and taught in many universities around the world.
Ok, now how do I use the canvas?
You have two options: You can either print out a canvas and fill it in with post-its and markers or you can use a virtual business model canvas and do this on your screen. None of these solutions is the best one, as always it depends on the context. If you are doing this in a room with all your stakeholders, paper and pen is warmer and avoids distractions. If you are collaborating with people remotely, an online canvas is an obvious solution.
Notice I mentioned post-its and markers for paper-based canvas exercises. In many hackathons, I see teams use pens directly in A3 print outs of the canvas. There are two issues to this: One, you can write really tiny with a pen so you risk being too verbose or getting into too many details. A marker is a much better solution as they force you to spare your words and use keywords only. Two, if you write directly on the canvas you will resist changes, and iteration and pivoting is all the business canvas is about. Using post-its makes changes as easy as replacing notes by one another. As an added benefit, you can stack as many post-its as you need to expand your writing surface. Sweet.
How do I fill it in?
I almost forget the important part. You know how to fill in the canvas, but how do you really fill it in? The canvas is pretty much self-explanatory, but I can give you a quick walkthrough and some advice.
The central part of the canvas, the Value Proposition, is central for a reason. It is the most important part of a business model and the first one you need to fill in. Keep your value proposition as simple as possible. Some business models have different value propositions for different users, and this is OK. Add them to the canvas in different colors, so that you can color-code relationships with the other blocks in the canvas for clarity.
Keep the number of value propositions short (if you need a number, 3 is a good one). Even if your idea will benefit the whole planet, there may be one or two effects on one or two sets of users that are especially remarkable, and in the early stages of your project focus is an advantage.
Once you have defined your Value Proposition(s) it is time to list the Customer Segments. a lot could be said about this section of the canvas, but I think the most important one is that Customer Segments should be detailed enough to feed an initial User Persona template for your solution. “Mobile phone users” or “People who order food online” are not valid Customer Segments.
The more we know our users the better we can adjust our solution to their needs, and the more users will be willing to pay us more of their money to become our customers. When you think you have detailed your Customer Segments too much, give it another minute to refine it. You’ll be surprised about how hard it is to get this section of the canvas right. As a fun example, can you guess who’d fit this Customer Segment description:
Male. Born in 1948. Grew up in England. Has been married twice. Has two sons. He is successful in business. Spends holidays in The Alps. Loves dogs.
This user persona, perhaps the perfect client for a dog spa surrounded by snow, matches both Prince Charles and Ozzy Osbourne. I’d be amused to see both of them greet in the hall as their dogs bark at each other. I wonder what music line the complex selected for the breakfast room and the elevator.
Different business models have different relationships with their clients. In businesses with more than one Value Propositions and more than one Customer Segment, multiple relationships may coexist. Some of the questions you need to ask your self at this stage are: How do customers find me? How do we interact, and how often?
A business based on email relationships and delivery of digital packages every few weeks for a large sum of money can’t be compared to a business like a coffee shop where we will be delivering a broader customer experience (with smells, sounds, and customer service) with more recurrence and smaller transactions that depends on a heavier cost structure.
Based on this you can discover different relationship patterns, from subscriptions to pay-as-you-go to freemium to one-time retail relationships. These further define your business models, help define channels, and structure costs and revenue streams.
Customer channels are the means you use to establish relationships with your customers. Think of shops, customer service offices, phone lines, websites, social media profiles, sales representatives over the phone, drivers while on a trip…
Mapping your channels early on represents an advantage when you map your value chain later on or while you map a customer’s journey. Some businesses innovate on channels and manage to reduce their costs tremendously: think of DHL delivery lockers, that reduced the needs for drivers, allowing to reduce the cost of shipments and increasing their market share.
You will need help to deliver the value in which your business is made. From your suppliers to your employees, your business depends on a number of partners that you need to map early on in your business modelling process.
What will your relationship with these partners be? List all of the different relationships and dedicate them some thought, as a lot of opportunities can be unveiled in this part of the process.
What resources do you need to develop your business model? Which ones are generated internally? Which are sourced from third parties and standard supply sources? What do partners contribute with? Having an inventory of internal and external resources you depend on can bring on ideas on how to optimize the delivery of the value or how to diversity your activities to save on these resources, and is an information you will need in order to define the Cost Structure section.
Knowing your partners and the key resources you can write a list of your key activities. Depending on your business model your list may include words like designing, fabrication, shipping… or be closer to briefing, software development and software maintenance. As above don’t go into too many detail vertically, but try to cover all the horizontal categories. This will be super helpful when drawing your value chain and you can use that exercise to define each activity area further.
Write down a list of your cost sources and then a rough estimate for Capital Expenses and Operational Expenses: what you need to invest in to get started and what the ongoing cost is, often linked to size. Your list should contain things like personnel costs, workspace and related bills, production costs, marketing and distribution costs, and taxes… I don’t like to go much deeper than this at this point of the process.
I like mapping Revenue in the last place. Now that I have all the information in sight I can write a good revenue function that I can reuse as I iterate on my business model. My two cents when putting together this section: be extensive when listing your revenue streams and don’t try to make very precise estimates, keep numbers in a range and round figures to speed up the process. This is not the time to do accounting.
Alex Osterwalder about the canvas
Alex Osterwalder published a video in collaboration with Stanford about the Business Model Canvas and there are plenty other resources you can find in the Internet if you want to dig deeper into this tool for business modelling.
Spend at least 30m of your life checking the Business Model Generation book by Alex Osterwalder, and get it in Amazon if you are a book person. I don’t think a lot of people have read it word by word, but it is a beautiful collection of business models that can help you get inspired to adjust and improve yours. I bought it a few years ago and I go back to it often.
My recommendation is to first do a business model canvas to land your idea, then design some slides to build a pitch deck and finally go to a detailed business plan when you have validated your initial idea and the demand. The canvas and the slides should not be too separated in time as you may forget details. Overall, we want to keep only keywords on the canvas, so the details that round up the business model should be organized in a presentation or document in the following days or, better, hours.
Creating a pitch deck is an art on itself. I have a blog post about this topic in mind, but there’s a book for that: Get Backed, by Evan Baehr and Evan Loomis (here’s the Amazon link), is a collection of decks and information about their funding rounds.