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From 0 to startup in 5 episodes. Lesson #4: the business model

Here we are, at the fourth step towards the realization of our startup. Remember where we started from? Let’s make a brief summary. Our starting point was the problem. We then analyzed the need, found an idea and moved on to the prototyping phase. And now?

We need to figure out the best way to create, distribute and capture value and monetize our idea. How do we do it? Thanks to Business Model Canvas. 

The Business Model Canvas (BMC) is a strategic  Business Design tool that uses visual language to create and develop innovative, high value business models.

It is useful to define the main aspects of the organization of an innovative startup, keeping an eye on all the elements that together constitute the business activity of the company. Conceived and proposed for the first time by Alexander Osterwalder, it has had great success in the startup world and is also widely used in the context of SMEs, large companies, incubators, consulting firms, and training organizations. BMC comes to the rescue whenever it is necessary, in a company (startup or big company), to introduce innovation through a product or service, or to change its business model. 

It is a very effective method to represent graphically, in a single image (therefore in extreme synthesis), all the important components of a business model, without being at the expense of clarity and effectiveness; on the contrary, it helps the people involved in the definition of the model to reorder their ideas, to understand more deeply how to innovate, to understand how the company works and how to actually create value for customers. In addition, it can be used to work as a team, facilitating discussion, creativity and everyone’s contribution.

More in-depth, the classic business model canvas is a “one-pager” kind of framework divided into the following 9 blocks: key partners, key activities, key resources, value propositions, customer relationship, channels, customer segments, cost structure, revenue streams.

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Il framework Business Model Canvas

To get the most out of a BMC teamwork is fundamental. To work on it in team it actually get the most out of the BMC; it is precisely in this way that its full potential is exploited: by getting people to work together, by stimulating, involving and generating ideas and creativity. It is therefore necessary to create dedicated moments, in spaces suitable to accommodate multiple people, a large table where to place a printed BMC in large format, or a blackboard on which to write, and have available sticky notes and markers. Many people suggest not to write directly on the canvas (because of the continuous changes) and use a pen and paper rather than templates on a computer. You may need at least one experienced person with the BMC to direct the tasks, and you can of course process more than one BMC to get a wide range of possibilities and assumptions.

Let’s analyze the 9 blocks, together.

Customer segments: these are the groups of people, or organizations, that may be interested in the business proposal: they represent the reference market. It is a block that interacts directly with the value proposition, which is declined differently according to the customer segment to which it is addressed. This is why it is very important to identify and profile potential customers, based on their behavior, needs, age, income, geography, lifestyle, business or private, etc..

Value proposition: this is the central block of the BMC, and it is the ‘value’ that the company brings to the market. Basically, it represents the unique solutions (product or service) proposed that can solve the problem encountered by the customer, or that can create value for it. The value that we are going to provide should be described in a more analytical way: it can be a question of a lower price compared to a competitor, the innovative ease of use, how it effectively solve a problem, the novelty, the ability to transfer intangible values (think of fashion brands), the ability to act on our well-being or to transmit emotions.

Channels: channels are the distribution system, i.e. how the product or service can be purchased by the customer; online or offline. The channels can be website, applications, social networks, physical stores, pop-up stores, etc..

Customer Relationship: identifies which type of relationship you want to establish with each segment of possible customers identified, even communicative. There are different types of customer relationships:

– personal assistance: interaction in person, via e-mail, or through telephone calls

– dedicated personal assistance: you assign a single customer service representative to an individual customer

– self-service: in this case, the information and “tools” are provided directly to the customer, without the need for direct contact

– automated services: these include automated processes to support the customer (eg: chat bots)

– communities (communities): are online communities where customers can support each other in relation to our product or service.

– Co-creation: here, we include the customer in the design or development of a product or service

Revenue streams: the mission of each company is to generate revenue. This is where the company’s success is measured. In this block you have to indicate how you sell and earn, payment methods, price and strategy. For example, the possibility to buy the product with a single payment solution or “grant” it for rent with a subscription; offer a service with monthly fee or pay-per-use model; consider other ancillary services to the main one from which you get additional revenue. The price, therefore, may be fixed or dynamic.

Key resources: these are the main “inputs” needed for core activities. They can be physical assets (points of sale, plants, technologies, machinery); non-physical assets but of great value such as know-how, patents, trademarks, copyrights, developed projects; human resources, i.e. strategic professional profiles for the company; financial resources, i.e. capital available to the company to go ahead or to be allocated to a project.

Key activity: this is the block in which the strategic and operational activities must be included in order to carry out the business model, satisfy the value proposition, and reach and maintain clients. Examples of key activities are: production (designing, producing and distributing the product in sufficient quantities); problem-solving (finding new solutions to problems encountered by customers); platform/network (optimizing the website or platform used to sell/distribute the product).

Key partners: every company is part of a wider economic system, within which it must integrate, collaborate, find synergies, develop economies of scale, find sales channels, and defend itself from competition, in order to operate at its best and grow. The key partners are the other companies, the strategic partners with whom it is beneficial to establish agreements to make the company’s business develops: these are suppliers, retailers, professionals, competitors, partners who can take care of some activities thanks to which the company can focus on its core activities.

Cost structure: it represents all those costs related to the functioning of the business. First, there is a differentiation between cost driven business models (where we tend to minimize costs where possible, think of Ryanair); and value driven business models (where we tend to maximize value for customers, think of fashion brands). The costs for a company are multiple: there are fixed costs represented by rents, salaries, production facilities, technologies; variable costs, which vary according to the volumes of goods and services produced (e.g. raw materials used or web service), or which vary in relation to strategic choices (such as marketing and PR or staff training). In the block you must also represent what can be the economies of scale and economies of scope. Let’s say that the cost structure must reflect what we have established in the block key resources, partners and activities: if a key resource for our company is people, we cannot not invest in their training.

Looking at the framework, the value proposition divides the BMC into two parts, on the right there is everything about the customer side (segments, relationship, channels), on the left there is everything about the assumptions and tools needed by the company to realize its value proposition. Logic wants that you start compiling from the value proposition, which is an excellent approach for a startup, but this is not always the best or sufficient way: in any case, the relationship between these two blocks can generate many evolutions, to which it is useful to give the right space. Starting, for example, from the customer segments reflecting on what these categories may want, allows you to better develop the value proposal related to their needs, then moving to complete all the other blocks related to the customer: relationship, channels and revenues.

At this point, you can move on to fill in the blocks regarding everything you need to do to give an innovative product to our customers, establish a lasting relationship with them and earn money. The cost structure will be the last block to fill in as it depends on all the logic and structure of the business model.

Once completed, you can continue working on the BMC to improve some parts, streamline it or fill it where it lacks. The BMC should be considered a living document, to which you have to return several times, you do not have to complete it necessarily in an afternoon and it is never definitive, it can also be considered as a management tool with which to monitor the progress of a business.

Many large companies use the BMC regularly and successfully. In addition to the already highlighted advantage in facilitating the creation of new business models and value, BMC is a tool that develops creativity, involves participants, is formative, creates cohesion. Its use is also faster than the creation of a business plan, as it is simple and intuitive to understand and therefore easily shared in a collective work. Other advantages lie for example in the simplicity with which the canvas can be modified in the development of a portfolio of ideas, and in its “customer-centric” setting.

Here are two examples of BMC: the first is related to the automotive sector: in this example a hypothetical company is focused on security, reliability and style. They could be brands like Toyota or Honda:

We have come to the end of this chapter, but our journey towards the creation of a startup does not end here. Don’t miss the last episode of the Fail Forward section and subscribe to our newsletter here.

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