Business Model Generation

A business model is the way a company makes money. A simple, visual, and handy tool to describe business models is the canvas provided by Alexander Osterwalder and Yves Pigneur in their book Business Model Generation. The canvas has 9 blocks that covers 4 main business areas:  1) customers, 2) offer, 3) infrastructure, and 4) financial viability. The  blocks are: 1) customer segments (CS), 2) value proposition (VP), 3) channels (CH), 4) customer relationships (CR), 5) revenue streams (RS), 6) key resources (KR), 7) key activities (KA), 8) key partnerships (KP), 9) cost structure (CS). Following some detailed information about the 9 blocks:

  • CS: this block defines the different groups of people or organizations an enterprise aims to reach and serve. Useful questions to find your CS are: 1) for whom we are creating value, 2) who are our most important customers. Here are some answers:
    • Mass market
    • Niche market
    • Segmented
    • Diversified
    • Multisided-platforms/markets
  • VP: this block describes the bundle of products and services that create value for a specific customer segment. Useful questions to find your VP are: 1) what value we deliver to the customer, 2) which one of our customer’s problems are we helping to solve, 3) which customer needs are we satisfying, 4) what bundles of products and services are we offering to each customer segment. Here are some answers:
    • Newness
    • Performance
    • Customization
    • Getting the job done
    • Design
    • Brand/Status
    • Price
    • Cost reduction
    • Risk reduction
    • Accessibility
    • Convenience/Usability
  • CH: this block describes how companies communicate with and reach its customers. Useful questions to find your CH are: 1) through which channels do our customer segments want to be reached, 2) how are we reaching them now, 3) how are our channels integrated, 4) which ones work best, 5) which one are most cost efficient, 6) how are we integrating them with customer routines. Channels have 5 distinct phases: awareness, evaluation, purchase, delivery, after sales. We can distinguish between direct channels and indirect ones, as well between owned channels and partner channels. Here are some channel types:
    • Sales force: direct and owned
    • Web sales: direct and owned
    • Own stores: indirect  and owned
    • Partner store: indirect and partner
    • Wholesaler: indirect and partner
  • CR: this block describes the types of relations a company creates with specific customer segments. Useful questions to find your CR are: 1) what type of relationship does each of our customer segments expect us to establish and maintain with them, 3) which ones have we established, 4) how costly are they, 5) how are they integrated with the rest of our business model. Here are some customer relationships categories:
    • Personal assistance
    • Dedicated personal assistance
    • Self-service
    • Automated services
    • Communities
    • Co-creation
  • RS: this block represents the cash the company generates from each customer segment. Useful questions to find your RS are: 1) for what value are our customers really willing to pay, 2) for what they currently pay, 3) how are they currently paying, 5) how they would prefer to pay, 6) how much each revenue stream contribute to overall revenues.  The revenues of a company depend on the price and quantities of product/service sold. The pricing can be based on 2 mechanisms: 1) Fixed menu pricing (list price, product feature dependent, customer segment dependent, volume dependent) and 2) dynamic pricing (negotiation, yield management, real-time-market, auctions). Here are some way to generate revenues streams:
    • Asset sale
    • Usage fee
    • Subscription fees
    • Lending/Renting/Leasing
    • Licensing
    • Brokerage fees
    • Advertising
  • KR: this block describes the most important assets required to make a business model work. Useful questions to find your KR are: 1) what key resources do our value propositions require, 2) our distribution channels, 3) customer relationship, 4) revenue stream.  Here are some categories:
    • Physical
    • Intellectual
    • Human
    • Financial
  • KA: this block describes the most important things a company must do to make the business model work. Useful questions to find your KA are: 1) what key activities do our value propositions require, 2) our distribution channels, 3) customer relationship, 4) revenue stream.  Here are some categories:
    • Production
    • Problem solving
    • Platform/Network
  • KP: this block describes the network of suppliers and partners that make a business model work. Useful questions to find your KP are: 1) who are key partners, 2) who are key suppliers, 3) which key resources are we acquiring from partners, 4) which key activities do partner perform. Some types of partnerships are:
    • Strategic alliances between non competitors
    • Coopetition: strategic alliances between competitors
    • Join ventures to develop new business

Some motivations behind partnerships are: 1) Optimization and economy of scale, 2) Reduction of risk and uncertainty, 3) Acquisition of particular resources and activities

  • CS: this block describes all costs incurred to operate a business model. Useful questions to find your CS are: 1) what are the most important costs inherent in our business model, 2) which key resources are most expensive, 3) which key activities are most expensive. Costs should be minimized in every business model, but in some the low costs structures are more important for this reason we can differentiate between 2  cost business models:
    • Cost driven
    • Value driven

Cost structures can have the following characteristics: 1) Fixed costs, 2) Variable costs, 3) Economies of scale, 4) Economies of scope.

The canvas is a great tool to draw a company business model. It represents the starting point for the analysis of potential evolutions considering the external market, macroeconomics, and industry forces. Some initial questions to assess the business model are provided from the following post: 1) how much do switching costs prevent your customers from churning, 2) how scalable is your business model, 3) does your business model produce recurring revenues, 4) do you earn before you spend, 5) how much do you get others to do the work, 6) does your business model provide built-in protection from competition, 7) is your business model based on a game changing cost structure, 8) how does your business model design perform.

If you are interested in the topic, additional material can be found at:

Now that you know the blocks of the canvas, which business model are you going to build?

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