What is a business model canvas?

You can download a PDF of this article from:  What is a business model canvas?

The purpose of this article:

This article outlines what should be in your documented business model canvas. The business model is the story of who your customer is, why they buy from you, and how you make a profit. The story consists of both narrative text and numbers.

The documented business model canvas is valuable because it helps:

  • Founders figure out how to create a successful startup.
  • Leaders of successful companies focus all the employees on success by communicating what makes the company successful.
  • Leaders figure out why and how to change their company for continued success.

Execution plans are derived from the future state and current state business framework and business model canvas.

You can have more than one business model canvas, representing different points in time.  An early stage startup may have a single business model canvas outlining the future 3-9 months out.

The business model canvas I use is based on “MaRS Business Model Design, Workbook 2” https://learn.marsdd.com/wp-content/uploads/2012/12/Business-Model-Design-WorkbookGuide.pdf .

A business model canvas is only 1 of the 10 components of a business framework (See Further Reading “The Startup Business Framework has 10 sets of components”)

Each of the nine sections of the business model has 4 pieces

  • Definition: of what this section is.
  • Assumptions: What you believe is necessary in the section (both narrative and numbers)
  • Facts: These are the facts (both narrative and numbers)
  • Next steps: includes what you need to do to validate the assumptions.

A What is a business model canvas?

MaRS Definition:

“A business model describes the value an organization offers its customers and illustrates the capabilities and resources required to create, market, and deliver this value and to generate profitable, sustainable revenue streams.”1

B The business model canvas has nine components.

The nine components of the business model canvas are all inter-related.

#1 Customer Segments

Definition

These are the target customers.  Each customer segment will have its own value proposition.

Questions to answer include:

  • Who exactly will you be creating value for?
  • Who will pay you? Who achieves value and who pays you may be different – think of Google.
  • How will they recognize themselves?
  • Who will be your most important customers?

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#2 Customer Value Proposition

My definition of a value proposition

A value proposition is the customers perception of value.

This perception can be influenced by: facts, emotions, family & friends, social media, etc.

The value proposition = (All the customer achieved benefits) / (All the customer incurred costs)

All the customer achieved benefits can include both financial and non-financial (e.g. time savings, convenience, status, etc.)

All the customer incurred costs can include financial (purchase costs, costs to switch to your company, other adoption costs, and ongoing costs) and non-financial (time, inconvenience, loss of status, etc.)

The value proposition also needs to be competitively differentiated.

Questions to answer include:

  • The critical question for early stage startup is: do you have a MVP (Minimum Viable Product)? Do you have some satisfied customers providing some revenue and who would recommend you. An MVP is only a partial solution.
  • The critical question for all established companies and startups who believe they are ready to scale is: Do you have product/market fit? It is clear that there is a large market with a demand for your solution.  A key metric to assess product/market fit is NPS (Net Promoter Score).   See Further Reading “Do you have product/market fit?”
  • What value will the customers perceive they will achieve? This is very different from you opinion as to what value you will deliver.
  • What problems do your customers think you will solve?
  • What customer needs will be fulfilled?
  • Why does the customer believe the value of your solution is better than the status-quo or the competition?
  • What does the customer believe will be the impact of your solution? E.g. 10 times improvement in something?
  • What product or service will each customer segment perceive?

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#3 Customer Relationships

Definition

What type of customer relationship do your customers expect to have with you?

Questions to answer include:

  • How will customers be acquired, kept, and grown?
  • Why type of relationship does each customer segment expect you to establish and maintain?
  • What types of relationships have you already established?
  • What is the cost of each type of customer relationship?
  • What is CAC – customer acquisition cost?
  • How many customers are we losing – churn rate?
  • What is LTV – lifetime customer value? In the initial startup stages, LTV will be less than CAC, because of the need to obtain an initial pool of customers by doing inefficient things that don’t scale.  As the startup is getting ready to scale, it will have figured out how to make LTV exceed CAC.

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#4 Channels

Definition

Channels are how to connect the value proposition to the target customer.  There are three different types of channels:

  • Communications – used to communicate with potential customers. There may be many communications channels.
  • Sales – where customers and sellers agree on the transaction. Usually there are fewer sales channels than communications channels.
  • Logistics – how to deliver the solution to the customers.

Questions to answer include:

  • Through what types of channels do the customers want to be reached? In other words, what channels are most effective? E.g. website, app. Social media, face-to-face, marketplaces, etc.
  • What channels already exist?
  • Which channels are most cost efficient?
  • Which channels are integrated with customer processes?

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#5 Key Partners

Definition

A partner may also be a channel, if the answer is “yes” to one of the following questions:2

  • Is the partner a leading entity with a brand and market position that adds to your credibility?
  • Does the partner add expertise and resources to your product solution in a way that increases the value of the product for the end customer?
  • Is the partner (and their brand/expertise/resources) required to land contract with the key target customers?

Questions to answer include:

  • Who are the key partners?
  • Who are the key suppliers?
  • What key activities, supporting your value propositions, to your partners perform?
  • How effective are your current partners and suppliers?
  • What types of partners and suppliers do you need?

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#6 Key Resources

Definition

“….resources mean any relevant intellectual property (IP), technical expertise, human resources, financial and physical

assets, key contracts and relationships. In other words, resources refer to anything within your control that can be leveraged to create and market your value proposition (e.g., a patent pertaining to your value proposition, key contacts within the industry).”3

Questions to answer include:

  • What resources are necessary to:
    1. Enable the customer to achieve their value proposition?
    2. Maintain channels and partnerships?
    3. Build relationships with customers?
    4. Build revenue?
  • What resources exist today?
  • How effective are they?

Assumptions

  • TBD

Facts

  • TBD

 Next steps

  • TBD

#7 Key Activities

Definition

“…the key processes that are required to weave together your resources with those offered by your partners to deliver the value proposition, manage channels and relationships, and generate revenue. Examples of key activities include R&D, production, marketing, sales and customer service”4

Questions to answer include:

  • What key activities are necessary to:
    1. Enable the customer to achieve their value proposition?
    2. Maintain channels and partnerships?
    3. Build relationships with customers?
    4. Build revenue?
  • What activities exist today?
  • How effective are the current activities?

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#8 Cost structure

Definition

“…the cost of delivering the value proposition, including the resources needed and key activities involved. We want to answer the following key question:

Does the cost structure provide a reasonable profit?”5

Questions to answer include:

  • What are the largest costs in the business model canvas?
  • What are the fixed costs and variable costs?
  • What activities are the costliest?
  • What resources are the costliest?
  • What is the burn rate? (i.e. excess of costs minus revenue)?
  • What are the most important number for the startup to survive?

Assumptions

  • TBD

Facts

  • TBD

Next steps

  • TBD

#9 Revenue Streams

Definition

What will you charge your customers and how will you charge your customers?

Questions to answer include:

  • What is the specific value the customers are willing to pay for?
  • What is the value the customers are willing to pay for?
  • How much are they paying today?
  • What is the pricing model? Subscription, one-time, freemium, advertising, etc.
  • How are they paying today? Cheque, credit card, etc.

Assumptions

  • TBD

Facts

  • TBD

Tom’s observations and questions

  • There is no mention of carry.

Next steps

  • TBD

C Further Reading

 The Startup Business Framework has 10 sets of components.

When a company is first launched, some components may not exist, or may be very simple. Successful growth results in the evolution of the framework, with components being created and modified

The 10 components of the business framework are all inter-related( e.g., every component requires talent).  The following article provides more detail.

https://koorandassociates.org/further-reading/2328-2/

 

Do you have product/market fit?

  • Do your customers love your solution?
  • What is the size of the pool of customers who will pay for your solution?
  • Will your solution make money?

The following article provides further detail.

 https://koorandassociates.org/points-of-view/creating-business-value/do-you-have-product-market-fit/

D Footnotes:

[1] Page 5 MaRS Business Model Design, Workbook 2

2 Page 10, MaRS Business Model Design, Workbook 2

3 Page 9, MaRS Business Model Design, Workbook 2

4 Page 11, MaRS Business Model Design, Workbook 2

5 Page 11, MaRS Business Model Design, Workbook 2

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