This is a summary on how to craft a Business Model for (BMC) your next enterprise. The content is based off Alexander Osterwalder's "Business Model Generation".
Business Model Canvas
The following is a Business Model Canvas. It comprises 9 basic building blocks that show the logic of how a company intends to make money.
The 9 building blocks of a BMC cover the 4 main areas of business: customers, offer, infrastructure, and financial viability.
The BMC is analogous to a blueprint for a strategy to be implemented through organizational structures, processes and systems.
Let's begin by explaining each building block.
1. Customer Segments
What is a business without profitable customers? To better satisfy customers, a business may group its customers into segments based on similar traits and make a conscious decision on which groups to satisfy and which to ignore.
Some examples of Customer segments are:
- Mass Market
- Niche Market - E.g. many car part manufacturers depend heavily on purchases from major automobile manufacturers
- Segmented - E.g. Credit Suisse bank has 2 types of customers, a larger group possessing assets of up to US $100,000, and a smaller group possessing over $500,000. Each has a different values proposition (Customer product)
- Diversified - unrelated Customer Segments, E.g. In 2006, Amazon decided to diversify its retail business by selling "cloud computing services", catering to a totally different Customer segment - Web companies - with a totally different values proposition
- Multi-sided platforms - Some organizations serve two or more interdependent Customer Segments. For example, an enterprise offering a free newspaper needs a large reader base to attract advertisers, but it also needs advertisers to finance production and distribution
2. Values Proposition
What bundles of products are we offering to customers? What customer need or problem are we solving? The Values Proposition is the company product(s) which benefit the customers. Values may be quantitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience).
Some examples of Values Propositions are:
- Newness - Satisfying an entirely new need that customers never perceived, e.g. cellphones
- Performance - Improving a product or service that has traditionally brought benefits to customers, e.g. PCs were updated the years to increase disk storage, bringing more powerful machines to the market
- Customization - Tailoring products to suit the unique needs of customers
- "Getting the job done" - E.g. Rolls Royce provides jet engines to airline companies, who in turn, pay Rolls Royce every hour the engine runs
- Design - In the fashion or electronics industry, a product may stand out because of its design, e.g. minimalistic phone screen, embroidered gowns
- Brand/Status - Customers may find value in displaying a brand, e.g. Carrying a Prada bag indicates wealth
- Price - Providing a similar product but at a lower price
- Cost reduction - Offering a similar product at a discounted price - E.g. Value dollar shops, whole sale markets,
- Risk reduction - E.g. A one year service guarantee reduces the risk of post-purchase breakdowns
- Accessibility - making a product/services accessible to customers who previously lacked access to them
- Convenience - Making things more convenient, E.g. Apple's invention of iPod and iTunes gave customers convenience when buying and downloading digital music
How do we raise awareness about our product?
--- Channel types
- Sales force
- Web sales
- Own stores
- Partner stores
--- Channel Phases
- Awareness - raise awareness about company's product and services
- Evaluation - help customers evaluate Values Proposition
- Purchase - How to allow customers to purchase the product/service
- Delivery - Deliver product to customers
- After sales - Provide post-purchase customer support
4. Customer Relationships
How do we build rapport with our customers?
- Personal Assistance - Customer can communicate with a real customer representative to receive assistance
- Dedicated Personal Assistance - private services specifically to an indivudal client
- Self-service - provides all necessary means for customers to help themselves
- Automated services - self-service with automated process, e.g. online check-out systems
- Communities - Establish community of product users that allow users to exchange knowledge and solve each others problems
- Co-creation - Companies allow its users to co-create its products, e.g. YouTube gives its users autonomy to create videos
5. Revenue Streams
How do we generate cash from our Customer segments? A business model can involve 2 types of streams - Transaction revenues (One-time customer payments) and Recurring revenues (ongoing payments by customers)
There are several ways to generate Revenue Streams:
- Asset Sale - Selling ownership rights to a physical product, e.g. Amazon sells books, music and cosumer electronics
- Usage fee - the more a service is used, the more the customer pays, e.g. a hotel charges customers for the number of nights the rooms are used
- Subscription fees -selling continuous access to a service, e.g. a gym sells its members monthly or yearly subscriptions in exchange for access to exercise facilities
- Lending/Renting/Leasing - temporaryily granting someone the exclusive right to use a particular asset for a fixed period of time, e.g. landords earn money by leasing an apartment to a client, or Zipcar earns money by renting cars to customers
- Licensing - giving customers permission to use protected intellectual property in exchange for licensing fees
- Brokerage fees - intermediation services, e.g. Credit card providers earn revenues by taking percentage of the value each sales trasaction executed between credit card merchants and customers
- Advertising - fees for advertising a particular product, service, or brand
What kind of pricing mechanisms are available for customers?
6. Key Resources
What resources do we need to make our business model work? Key resources can be physical, financial, intellectual, or human.
- Physical - manufacturing facilities, buildings, vehicles, machines, systems
- Intellectual - brands, proprietary knowledge, patents and copyrights, partnerships and customer databases
- Human - crucial in knowledge-intensive and creative industries, e.g. Novartis relies on an army of experienced scientists and a large and skilled sales force
- Financial - companies may borrow funds from banks and capital markets, then use a portion of the proceeds to provide vendor financing to equip customers,
7. Key Activities
What are the most important actions a company must take to operate successful? Software development? Supply chain management?
- Production - designing, making and delivering a product in substantial qualities, dominates the business models of manufacturing firms
- Problem Solving - coming up with solutions to solve customer problems, e.g. consultancies, hospitals
- Platform/network - platform or network related Key Activities, e.g.Microsoft's business model requires managing the interface between other vendor's software and its Windows operating system platform
8. Key Partnerships
Who are the network of suppliers and partners that make the business model work? Companies may form partnerships to reduce risk or acquire resources
Examples of partnerships:
- Strategic alliances between non-competitors
- Coopetition: strategic partnerships between competitiors - e.g. the German-Soviet Non-Agression pack between Hitler and Stalin
- Joint ventures to develop new businesses
- Buyer-supplier relationships to assure reliable supplies
Why do companies seek partnerships?
- Optimization and economy of scale - illogical for a company to own all resources/perform every activity by itself, reduce costs, outsourcing or sharing infrastructure
- Reduction of risk and uncertainty - competitors form a strategic alliance, e.g. Blu-ray was jointly developed by a group of world leading consumer electronic manufacturers, but, the individual companies still compete in selling their own Blu-ray products
- Acquisition of particular resources and activities - companies may extend their own capabilities by relying on other firms to perform certain activities, e.g. an insurer may choose to rely on independent brokers to sell its policites rather than develop its own sales force
9. Cost Structure
How do we describe all costs incurred when operating the business model?
- Cost-driven - focus on minimizing costs wherever possible, leanest possible cost structure using low price Value Propositions, maximum automation, and extensive outsourcing, e.g. Budget airlines such as Southwest
- Value-driven - less concerned with cost implications but focus on value creation, e.g. Luxury hotels with lavish facilities and personalized services
- Fixed costs - Costs that remain the same despite the volume of goods or services produced, e.g. salaries, rents