The business model canvas is a great tool to help you understand a business model in a straightforward, structured way. Using this canvas will lead to insights about the customers you serve, what value propositions are offered through what channels, and how your company makes money.

You can also use the business model canvas to understand your own business model or that of a competitor! The Business Model Canvas was created by Alexander Osterwalder, of Strategyzer.

• Business Model Canvas Explained
• What Should be Included in a Business Model Canvas?
• What Are The 9 Parts of a Business Model?
• Is The Business Model Canvas Free?
• What is a Business Canvas Example?
• What Are The Benefits of Business Model Canvas?
• What is a Business Model Example?
• What is Cost Structure in Business Model Canvas?
• How do I Start my Own Business Model?
• What Are Key Activities in Business Model Canvas?
• How do You Read a Business Model Canvas?
• Who Would Use Business Model Canvas?
• What is The Difference Between Business Model and Business Model Canvas?
• How Does Business Model Canvas Help Launch a Startup?
• Why do You Need a Business Model Canvas?

Business Model Canvas Explained

The Business Model Canvas (BMC) is a strategic management tool to quickly and easily define and communicate a business idea or concept.

Read Also: Business Plan Template

It is a one-page document that works through the fundamental elements of a business or product, structuring an idea in a coherent way.

The right side of the BMC focuses on the customer (external), while, the left side of the canvas focuses on the business (internal).

Both external and internal factors meet around the value proposition, which is the exchange of value between your business and your customer/clients.

What Should be Included in a Business Model Canvas?

The categories or buckets contained in a canvas can be customized. But most will look similar to the one here—covering such key areas as:

• The product’s value propositions (what it does and promises)
• Customer segments (who it’s for)
• Key activities (the steps the team must complete to make it successful)
• Key resources (what personnel, tools, and budget the team will have access to)
• Channels (how the organization will market and sell it)
• Customer relationships (how the team will support and work with its customer base)
• Key partners (how third parties will fit into the plan)
• Cost structure (what it costs to build the product as well as how to sell and support it)
• Revenue streams (how the product will make money)

What Are The 9 Parts of a Business Model?

There are nine building blocks that describe and assess a business model: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.

1. Customer segments: Without customers, businesses cannot survive. Businesses must identify and understand their customers, and they can group these customers into segments with common characteristics.

2. Value propositions: A company creates value, or benefits, for customers by solving a problem or satisfying a need. The value proposition is the reason that customers choose one option over another when deciding what to buy. Although certainly not an exhaustive list, customers may value: newness, performance, customization, design, brand, price, cost reduction, risk reduction, accessibility, and convenience.

3. Channels: Channels bring the value proposition to the customers through communication, distribution, and sales. Companies can reach their customer segments through a mix of channels, both direct (e.g., through sales force and web sales) and indirect (e.g., through own stores, partner stores, and wholesalers), to raise awareness, allow for purchase and delivery, provide customer support, and support other important functions of the business.

4. Customer relationships: Companies need to maintain relationships with their customers to acquire and retain customers and boost sales. Strong customer relationships can significantly impact overall customer experience. There are many categories of customer relationships including personal assistance, self-service, automated service, user communities, and cocreation.

5. Revenue streams: There are two types of revenue stream: revenues from one-time customers and revenues from ongoing payments. Revenue pricing mechanisms vary from fixed (e.g., predefined prices based on static variables) to dynamic (e.g., price changes based on market conditions). Revenue streams can be generated through asset sales (e.g., selling a physical product), usage fees, subscription fees, licensing, brokerage fees, advertising, and temporarily selling the use of a particular asset (e.g., lending, renting, or leasing).

6. Key resources: Any business needs resources—physical, financial, intellectual, and/or human—to function. These resources enable the company to provide their products or services to their customers.

7. Key activities: Key activities are the critical tasks that a company does to succeed and operate successfully. Different companies focus on different activities in categories such as production, problem-solving, and platform/network.

8. Key partnerships: Companies build partnerships to optimize their business, reduce risk, or gain resources. There are four main types of partnerships: strategic alliances between noncompetitors, coopetition—strategic alliances between competitors, joint ventures, and buyer-supplier relationships.

9. Cost structure: All businesses incur costs through operation, whether fixed or variable. They may also face economies of scale and scope. Companies consider their cost structures in two strategies—cost-driven, where all costs are reduced wherever possible, and value-driven, where the focus is on greater value creation. Cost structures will often consider fixed costs, variable costs, economies of scale, and economies of scope.

Is The Business Model Canvas Free?

A well-developed business model canvas will help streamline planning, development, and execution across your business. It should align everyone’s objectives and eliminate inconsistencies between the various people who contribute to your business objectives. You can use Xtensio’s free template to create your own without needing a professional designer!

What is a Business Canvas Example?

The following are some business model canvas examples for different businesses and industries:

1. Automobile Company Example

The first of these business model canvas examples is for an automobile company. The company that is portrayed in this example is a company with a focus on safety, reliability, style, and mass appeal. For example, a company like Honda or Toyota would fit the description of this business.

2. Amazon Example

The second of these business model canvas examples is for an e-commerce company. This business model canvas example will be a simple look at Amazon, one of the largest e-commerce companies in the world.

What Are The Benefits of Business Model Canvas?

Here are 5 key benefits of the business model canvas:

1. Business Model Canvas is focused:

Enterprises need a definition of how to get their products to their customers and the business model canvas helps you define them. It also gives you the competitive edge to launch a profitable business not only through product innovation but also through designing your business correctly.

2. BMC is clear and concise:

It helps you document your startup journey so you can easily modify it as you go along. Imagine doing that to a 100-page document! The business model is a blueprint that defines your business initially and you later expand on it. It is useful for easy communication with your team, investors, partners as well as employees to come on board with your vision.

3. Target customer needs:

The biggest reason for startup failure is “Product/Market fit” and not the product itself. Too often we forget this and direct our energy on building an awesome product. “Build and they will come” is a dying mantra. The business model canvas forces you to think beyond your product.

When you envision how you will sell your product, what type of resources you need as well the different customer segments you can serve, the business becomes lucid. Documenting it gives you the clarity when you talk to your customers.

4. Reduces the risk of failure:

The business model canvas helps you with the execution steps requirement to take your idea to market. Connecting the dots between your value proposition + customer segments + revenue streams, is a good input to your marketing strategy, positioning statement as well as your Sales strategy. You have the edge over your competitors who are immersed in the lengthy pages of the business plan.

5. Scientific framework that works:

Business model canvas is a tried and tested methodology not only for startups but also for innovating in large enterprises. Nespresso, a fully owned daughter company of Nestlé, is a great example of a powerful business model. It changed the face of the coffee industry by turning a transactional business (selling coffee through retail) into one with recurring revenues (selling proprietary pods through direct channels).

What is a Business Model Example?

The term business model refers to a company’s plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses. Business models are important for both new and established businesses.

They help new, developing companies attract investment, recruit talent, and motivate management and staff. Established businesses should regularly update their business plans or they’ll fail to anticipate trends and challenges ahead. Business plans help investors evaluate companies that interest them.

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition. This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise’s business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy, a review of the competition, and projections of revenues and expenses.

The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands.

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company’s business model. Admittedly, the business model may not tell you everything about a company’s prospects. But the investor who understands the business model can make better sense of the financial data.

What is Cost Structure in Business Model Canvas?

The Business Model Canvas cost structure describes the costs that business occurs through its operations. These include employees, infrastructure, costs associated with all activities as well as sourcing through key partnerships.

The cost structure building block presents all the costs that you incur as a business. 90% of new businesses fail in the first 3 years because they fail to understand their costs or what it will take to create the goods and services they have promised in their value propositions.

When reviewing the cost structure block you need to recognise where your main costs will be:

• Key Activities
• Key Partnerships
• Customer Relationships
• Channels

When doing an analysis of your business model, it is vital to ask the following questions when filling in the Cost Structure building block of the business model canvas:

1. What are the fundamental costs derived from my business model?
2. Which Key Resources represent a significant expense to the business?
3. Which Key Activities represent a significant expense to the business?
4. How do your Key activities drive costs?
5. Are the above-mentioned activities matched to the Value Propositions for your business?
6. By exploring different permutations of your business model, do the costs remain fixed or become variable?
7. Is your business more values-driven or cost-driven?

How do I Start my Own Business Model?

Creating a business model isn’t simply about completing your business plan or determining which products to pursue. It’s about mapping out how you will create ongoing value for your customers.

Where will your business idea start, how should it progress, and when will you know you’ve been successful? How will you create value for customers? Follow these simple steps to securing a strong business model.

1. Identify your specific audience.

Targeting a wide audience won’t allow your business to hone in on customers who truly need and want your product or service. Instead,  when creating your business model, narrow your audience down to two or three detailed buyer personas.

Outline each persona’s demographics, common challenges and the solutions your company will offer. As an example, Home Depot might appeal to everyone or carry a product the average person needs, but the company’s primary target market is homeowners and builders.

2. Establish business processes.

Before your business can go live, you need to have an understanding of the activities required to make your business model work. Determine key business activities by first identifying the core aspect of your business’s offering.

Are you responsible for providing a service, shipping a product or offering consulting? In the case of Ticketbis, an online ticket exchange marketplace, key business processes include marketing and product delivery management.

3. Record key business resources.

What does your company need to carry out daily processes, find new customers and reach business goals? Document essential business resources to ensure your business model is adequately prepared to sustain the needs of your business. Common resource examples may include a website, capital, warehouses, intellectual property and customer lists.

4. Develop a strong value proposition.

How will your company stand out among the competition? Do you provide an innovative service, revolutionary product or a new twist on an old favorite? Establishing exactly what your business offers and why it’s better than competitors is the beginning of a strong value proposition.

Once you’ve got a few value propositions defined, link each one to a service or product delivery system to determine how you will remain valuable to customers over time.

5. Determine key business partners.

No business can function properly (let alone reach established goals) without key partners that contribute to the business’s ability to serve customers. When creating a business model, select key partners, like suppliers, strategic alliances or advertising partners. Using the previous example of Home Depot, key business partners may be lumber suppliers, parts wholesalers and logistics companies.

6. Create a demand generation strategy.

Unless you’re taking a radical approach to launching your company, you’ll need a strategy that builds interest in your business, generates leads and is designed to close sales. How will customers find you? More importantly, what should they do once they become aware of your brand?

Developing a demand generation strategy creates a blueprint of the customer’s journey while documenting the key motivators for taking action.

7. Leave room for innovation.

When launching a company and developing a business model, your business plan is based on many assumptions. After all, until you begin to welcome paying customers, you don’t truly know if your business model will meet their ongoing needs.

For this reason, it’s important to leave room for future innovations. Don’t make a critical mistake by thinking your initial plan is a static document. Instead, review it often and implement changes as needed.

Keeping these seven tips in mind will lead to the creation of a solid business plan capable of fueling your startup’s success.

What Are Key Activities in Business Model Canvas?

While Key Resources in the Business Model Canvas are about what you have, Key Activities are about what you do. And often the two work together. The most important thing to ask yourself is this: what activities does our value proposition need?

Your activities must be focused on unique value creation. But you’ll also want to ask yourself what activities your channels, customers, revenue streams, and Key Partners call for.

The core issues of Key Activities are these:

• Production: Marketing, designing, producing.
• Problem solving: Training, studying metrics, improving.
• Platforms: Website updating, promotion, IT.
• Networks: Primarily people networks.
• Financial: Securing a merchant account, shop management, ecommerce.

All of these things are incredibly important. Yet they happen behind the scenes. But for growth to happen, your Key Activities need to be running. Starting a hole-in-the-wall coffee shop?

Then make sure you are developing your Key Activities: menu creation, client-happiness observation, pulling in regulars, social media. Your thinking process needs to be this: What am I doing in that Key Activity with my Key Resources to make this whole business function?

Two major types of Key Activities are Supply Chain Management and Software Development.

• Supply Chain Management—I’m not talking about your physical supply chain here. Typically your supply chain comes in two places: Key Partners and Key Resources. And typically Key Resources are helping you manage your Key Partners, which are part of your supply chain. But if you’re in manufacturing or have a product to produce, then supply chain management will certainly become one of your Key Activities. Even if you’re jobbing it out, it needs to be a Key Activity because you want to make sure you’re working closely with your Key Partner to produce the best product in the best way possible.
• Software Development—Software is here to stay. Almost all business systems have been moved into software processes. Now you have computer software that helps you mange all of the pieces of a business that need to operate and run. For example in nonprofits, if one of your channels is dealing with a lot of clients, you can use a software like SalesForce.com. Salesforce.com helps you manage customers and clients. No matter what your business, someone has probably created a software for you to begin working with. Find it, and develop it.

A lot of times businesses fail because the entrepreneur, or the manager, is in the heart of the machine doing the wrong thing and pulling the wrong levers.

How do You Read a Business Model Canvas?

The Business Model Canvas is a business tool used to visualise all the building blocks when you want to start a business, including customers, route to market, value proposition and finance.  You could also try the Lean Canvas, a 20min, 1-page business plan template that helps you pull apart your idea. It is adapted from Alex Osterwalder’s Business Model Canvas.

The blocks on the BMC are:

Customer Segments: Who are the customers? What do they think? See? Feel? Do?
Value Propositions: What’s compelling about the proposition? Why do customers buy, use?
Channels: How are these propositions promoted, sold and delivered? Why? Is it working?
Customer Relationships: How do you interact with the customer through their ‘journey’?
Revenue Streams: How does the business earn revenue from the value propositions?

Key Activities: What uniquely strategic things does the business do to deliver its proposition?
Key Resources: What unique strategic assets must the business have to compete?
Key Partnerships: What can the company not do so it can focus on its Key Activities?
Cost Structure: What are the business’ major cost drivers? How are they linked to revenue?

Each of these blocks needs to be accurately filled in, and revisited regularly to ensure the business model is still accurate – its a good thing to do before you register a business.

Who Would Use Business Model Canvas?

Starting a small business is a monumental task. It seems like there are a million things you have to take care of before you can make your first dollar. You need to register your business, set up your website, work out your budget, figure out your marketing plan, test your products, and establish good relationships with your manufacturers and suppliers.

You also need to create your business plan and your business model. So much to do.

You know what a business plan is. It’s your step-by-step guide on how your business will achieve its objectives. What you might not fully understand is you business model.

A business model is simply a design for the successful operation of a business. It’s how you create value for yourself (e.g. make money) while delivering products or services to your customers.

There are numerous types of business models, and they can all be mapped onto physical chart called the “business model canvas”.

The business model canvas and was developed by Alex Osterwalder, and if you don’t have a business model canvas it’s a great tool to use to improve the focus and clarity of what your business is trying to achieve.

It eliminates all of the fluff from the traditional business plan and lets you zero in on what’s important.

What is The Difference Between Business Model and Business Model Canvas?

Think of a business model and the first thing that comes to your mind is a large boring chunk of a document that you only write when you are seeking investment from an investor.

But on a second thought, a business model should not be that hard. Your plan just a page or a little bit more, or you called start out with a business model canvas that simplifies everything on just one page.

A business model is simply a written description of your business future. It contains your business mission, vision, goals, aspiration, market, value proposition and few others. It doesn’t have to be a long boring document. If one page answers all the questions we have listed below, then it good enough.

A business model canvas is somewhat a pictorial diagram that helps you answer questions about your new business. It helps you to crystallize and clarify your idea or conceive one if you are thinking of lunching out.

Difference Between a business plan and a business model canvas

A business plan is more like a writing document that’s shown in detail the mission, vision, goals of a startup or company while a business canvas is a simple pictorial representation of questions that assist you in clarifying your idea. You create a business model, then a business plan.

What to know before creating a business model

Before creating a business model you should have the following questions already answered. I mean like done and dusted. But if you don’t then it’s time for you and your time to start brainstorming and putting the pieces together so as to have a great business.

• Who are my key partners, where’s my help coming from

• What do you intend doing

• Who do you intend helping or selling to/customer segmentation

• what will your business cost

• what do you need to kick start your business

• how do you intend to reach your distribution channel

• how do you intend to interact with your customers?

How Does Business Model Canvas Help Launch a Startup?

A Business Model Canvas is a simple yet powerful tool for those who are planning to develop their first startup, as well as for experienced business people that are creating a new business branch. The BMC approach has lots of advantages: 

• It requires minimal time to create your own Business Model Canvas (especially compared to a classic business plan).

• BMC helps to structure your project vision and share it with your team. As a result, you can start discussing the general concept of your startup immediately and get team feedback. You can also build a startup pitch around your BMC.    

• You can focus on a relevant value proposition and link it with the required resources, necessary business activities, and other aspects of your potential startup.

• A Business Model Canvas will help you to understand your startup idea better, find mistakes at the early stages, and clarify what you need to do next. 

• A BMC document is easy to keep and share. If you find that you are not ready to implement your idea right away, you can keep the document until the time is right to develop your vision, network, or basic resources.  

Since you already know how to create a business model, you are ready to practice using it for various purposes. There are at least 4 situations when it is extremely helpful: 

• Startup pitching preparation

Use a BMC document as a guiding star. 

• Finding partners 

Business Model Canvas will help you to visualize the business connections you require most. 

• Checking sustainability and livability (viability) of your idea 

You should build your business around the value propositions you’ve found while working on your full-size business plan. Find the key and bottleneck functions of your product and evaluate your ability to maintain such a product. 

• Changing and advancing other products 

With knowledge of how to create a business model for a startup, you can easily evaluate existing businesses. This skill will help you stay flexible in crisis periods and capture new competitive niches. 

• Team meetings and employee onboarding 

Use a BCD document to provide others with a clear understanding of your business processes and priorities.

Why do You Need a Business Model Canvas?

Here are a few of the benefits of using a business model canvas to think through product strategies:

1. You can use a business model canvas to roadmap quickly.

You can use this canvas approach in just a few hours (and as Jim says, you can even do it with sticky-notes).

This way, rather than trying to write out every detail about your product plan beforehand, you can just document the highlights—and then you can get rolling translating the canvas into your product roadmap.

2. A business model canvas will be more agile.

One problem with the old structure of documenting a business model—the traditional business plan—was that it was almost always inaccurate as soon as the author finished drafting it.

These meaty plans included detailed cost estimates, revenue projections going years into the future, and long-term plans for growing the staff. How could any of that remain accurate for long?

In product terms, you can think of the business plan as resembling an MRD (Market Requirements Document). It’s long, detailed, and probably mostly untrue by the time it’s done.

Read Also: How to create a Business Plan

But because you can put a canvas together so quickly, it will much more accurately reflect your strategic thinking and your company’s current reality. And if things change, it’ll be easier than a long and detailed plan to adjust. This brings us to Jim’s third benefit…

3. Business model canvas roadmaps allow you to pivot as needed.

If you build a business model canvas to guide your business roadmap, and something happens that forces you to re-prioritize or pivot your product, it will be a lot easier to update this short, high-level document than it would be if you had some monster MRD or business plan to tear apart and edit.

With a one-page business model canvas acting as the strategic undergirding for your roadmap, you’ll always be able to quickly spot any items or plans that need updating whenever priorities change or new realities demand that you adjust your approach.

Finally

Using a tool like the Business Model Canvas can serve to unite your company under a clear visualization of where your organization sits today and where it can be tomorrow (and how it will get there).

The Business Model Canvas moves innovation out of the ‘in-theory’ stage and into the planning stage. See clearly, for example, what your strongest revenue streams are and how they can complement each other.

Or, more closely examine your value propositions and discover better ways to position your product or service to customers. Use customer segments to find out exactly who you’re talking to and how to approach them more effectively.

Your company’s future is hidden in the details. Find it and you’ll be ready to innovate successfully.