In this article we’ll examine the nine steps needed to create your first business model and we’ll look at some examples (Google, Skype, Gillette business model canvases) to bring the theory to life. But before we jump in and look at the canvas, let’s just take a brief moment to define what we mean when we use the phrase business model.
What is Business Model
A business model is defined as, a plan for the successful operation of a business identifying sources of revenue, the target customer base, products, and details of any financing.
Essentially it tells us how the key drivers of a business fit together.
If you think about writing all this down in a document such as a word document then it’s obviously going to require multiple pages to capture all of that information.
If you think about trying to get all that information you’ve just captured into your brain and playing with this in your brain then it’s a really complicated and confusing task and it’s really easy to see why people get overwhelmed when thinking about business models.
That’s where the business model canvas comes in. It gives you a way to create a pretty clear business model using just a single sheet of paper when you want to start your business professionally. What is great about it is that it can be used to describe any company from the largest company in the world to a startup with just a single employee.
Why Entrepreneurs Use a Business Model Canvas
Nowadays, many online business/dropshipping entrepreneurs dive into e-commerce blindly. To avoid that, entrepreneurs should create a business model canvas before start a business.
Here are the 6 reasons that show the importance of using business model canvas with dropshipping.
- Easy to understand
It can describe a business model in a single a single sheet of paper and that’s the first point here
It removes all the fluff that might have been present in a traditional business model. It’s all killer no filler.
It’s quick and easy to make changes to your model and sketch out new ideas.
- Customer Focused
It forces you to think about the value you’re providing to your customers and only then what it takes to deliver that value.
- Shows Connections
The single page and graphical nature of the canvas shows how the different parts of the model in to relate to each other. That’s something that’s really hard to understand from a traditional business plan.
- Easy to Communicate
The canvas is so easy to understand, you’ll be able to share and explain it easily with your team. Making it easier for them to get on board with your vision.
In this diagram, you can see a blank business model canvas. That canvas is made up of nine building blocks.
- Customer Segments
Answers who are your customers.
- Value Proposition
Answers why do customers buy from you. What is the gain that you provide or the need that you satisfy.
Answers how are your products and services delivered to the market.
- Customer Relationships
Answers how do you get keep and grow your customers.
- Revenue Streams
Answers how does your business earn money.
- Key Resources
Answers what unique strategic resources does your business have, or does it need.
- Key Activities
Answers what unique strategic activities does your business perform to deliver your value proposition.
- Key Partnership
Answers what non key activities can you outsource to enable you to focus more on your key activities.
- Cost Structure
Answers what are the major costs incurred by your business.
Before we take deeper into each of these elements, there is one thing you should be aware of. We can say that elements on the left-hand side of the business model canvas represent costs to the business. Similarly elements on the right-hand side of the can this represents revenue for the business or they generate revenue for the business. So with that let’s dig into each of those building blocks in a little bit more detail.
1. Customer Segments
In this building block you enter the different customer segments you will serve. One really important point to get across here is that customers don’t exist for you, but rather you exist to serve your customers. Many business will serve just one customer segment, but not all.
For example, Google serves two customer segments obviously. It serves people who perform searches, but it also serves advertisers.
2. Value Proposition
It describes the value that you deliver to each customer segment —what problems do you solve for each segment, what needs do you satisfy. Value proposition answers the question, why will customers buy from us.
Common value propositions:
- High performance
- Ability to customize
- Cost reduction
These refer to how your products or services are sold to customers. Ask yourself, how do customers want to be reached or even how are you reaching them right now. You can either have your own channels or you can partner with someone else who has a channel.
Your own channel include any combination of things like stores you own, a sales force you employ, or even your website.
4. Customer Relationships
This answers the question how do you get, keep, and grow customers.
Get: How do customers find out about you, and make their initial purchase decision? For example, you could advertise through Facebook.
Keep: How do you keep customers once you’ve got them? For example, excellent customer service might help you to keep your existing customers.
Grow: How do we get your customers to spend more. For example you could set a monthly newsletter strategy to keep them informed about your latest products or your latest services.
Easiest way to define all this is to walk through the entire customer journey in detail. That is to define you know how do customers find out about you, how do they decide whether to investigate your product, how do they buy your product, and then how are they managed after they’ve made the purchase.
5. Revenue Streams
Where does the money come from? This might sound really super simple, but it isn’t. So, what you’re actually trying to figure out is what strategy you’ll use to capture the most value from your customers.
In a practical sense there’s a bunch of ways you could do this. So will customers pay a one-time fee, will you have a monthly subscription fee, perhaps you give away your product for free like Skype does and hope that some portion of your customers upgrade to your premium product.
Take a Step Back
So let’s just take a step back for a moment. If you look at what we’ve done so far, we’ve filled in our value proposition and all the building blocks to the right of it.
In a nutshell, we’ve developed our understanding of everything that relates to our customers.
But now what we need to do is obviously fill out the left side of the business model canvas. We need to build our infrastructure. So that we’re able to provide the value proposition to customers.
6. Key Resources
This building block describes your most important strategic assets that are required to make your business model work.
Typically a combination of:
Buildings vehicles machines.
Brands,specialist knowledge you have, patents and copyrights.
In creative industries human can be a resource.
Lines of credit, or cash balances.
7. Key Activities
These are the most important strategic things you must do to make your business model work. Key activities should be directly related to your value proposition. If they’re not, then something is wrong. Because, the activities that you view as being most important in your business aren’t actually delivering any value to your customers.
8. Key Partners
In this block, you list the tasks and activities that are important but which you’re not going to do yourself. Instead, you’ll use suppliers and partners to make your business model work.
For example, Spotify’s key activity is probably updating their platform. However, as it doesn’t produce its own music, one of the key partnerships of Spotify will be the deals that it strikes with record labels and publishing houses. Without those deals, there literally wouldn’t be any music in Spotify.
9. Cost Structure
The final block of the business model canvas is cost structure. This is where we map key activities to costs. We want to ensure that costs are aligned with our value proposition.
It should be straightforward to determine your most important costs and your most expensive costs after you’ve defined your key resources, your key activities, and your key partnership. That’s the theory of the business model canvas out of the way but let’s take a look at some real examples.
Google’s Business Model Canvas
First example we’re going to look at is Google. First thing you should know about Google’s business model is that it’s multi-sided. That means that it brings together two distinct but related customers. In Google’s case, it’s people who use the service for free —people who perform searches, and people who pay to use Google searches to advertise.
From the diagram, we can see that Google makes money from the advertiser customer segment whose ads appear either in search results or on webpages. We can see that that money subsidizes a free offering to the other two customer segments those of search users and content owners.
Now, the key strategic activities that Google must perform are obviously managing its existing platform including a really large infrastructure which is needed to support that platform.
Its key partners are content owners from which a large part of its revenue is generated that’s indirectly, obviously advertisers generate the revenue but they wouldn’t make that revenue without the content owners. Other partners our OEMs or original equipment equipment manufacturers. OMS are companies who produce mobile handsets to whom Google provides its Android operating system free of charge.
In return, when users of these handsets search the internet, they use the Google search engine by default just bringing more users into the ecosystem, and generating even more revenue.
Skype’s Business Model Canvas
Second business model canvas that we’re going to look at is that of Skype. From the business model canvas you can see that Skype has two key value propositions. First is the ability to make calls over the Internet including video calls for free. The second is the ability to make calls to phones cheaply.
Skype operates what’s known as a freemium business model and that just means that the majority of skypes users use the service for free to make calls over the internet with just about 10% users signing up for the premium prepaid service.
We can see from the customer relationship building block that customers typically have a helped them self relationship with Skype. Typically, this means they’re using their support website the channels Skype uses to reach its customers are its website Skype.com. And partnerships with headset brands.
If we look at key partnerships, key activities, and key resources together, the main thing to notice collectively about these things is that Skype is able to support its business model of offering cheap and free calls because it doesn’t have to maintain its own telecommunications network like a traditional telecoms provider would have to.
Skype doesn’t need that much infrastructure at all. Just back-end software and the servers hosting user accounts and that’s how come it’s able to offer this unique value proposition to the customer segments that it serves.
Gillette‘s Business Model Canvas
The third example we’re going to look at is that if Gillette. Gillette business model is based on the bait and hook business model pattern. That pattern is characterized by an attractive, inexpensive, or even free initial offer that encourages ongoing future purchases of related products or services.
Within this business model the base is often provided at a loss subsidized eventually by the hook.
In Gillette case, they offer an inexpensive razor handle and that’s the bait, and then continued purchases of the blades represent the hook.
So this business model is also very popular in SAS (software-as-a-service) businesses where typically a free initial month leads to a monthly subscription.
In the diagram here you can see that we’ve used the thickness of the arrows to indicate where the revenue is coming from. As you can see here, all revenues are generated by just a single customer segment customers. But within that, the vast majority of revenues come from frequent blade replacements with just minor revenues coming from the purchase of handles.
If you look at the left hand side of Gillette’s business model canvas, you will notice now all major costs are aligned with delivering the value proposition. For example marketing costs help to build Gillette’s strong brand, and R&D costs help to ensure that the blade and handle technology is unique and proprietary.
The business model canvas provides a way to show the key elements of any business model on a single sheet of paper.
The canvas is based on nine building blocks and the interrelationships between them. Through the examples that we looked at you should be able to see just how easy it is to represent the complete business model of any company on just one single sheet of paper.
Also, if you would like to start an online business today, I highly recommend you to check this e-commerce business blueprint.
So that’s it. I really hope you enjoyed it and I‘d be appreciated if you share the article with your entrepreneur community.