This blog was written by Isaac Jeffries, an associate of TDi.
The Business Model Canvas is a tool that helps create and assess business ideas. It’s free to use – all you need to do is print one out, or grab a whiteboard or sketch one out on a sheet of paper. You can download one at strategyzer.com/canvas.
A canvas is a visual description of your idea, creating clarity for your team, your investors and yourself. It won’t magically make your idea profitable, and it won’t do the work for you. Instead, it makes you ask good questions, and good questions enable great ideas.
For example, it will ask you why you hold your current assumptions.
- It will ask you if there are other people who could be your customers.
- It will ask if there are other reasons behind why people buy from you.
- It will ask if there are other ways of structuring your team.
- It will ask if you’re charging the right amount.
Most importantly, it will keep you accountable: all the little comforting lies we tell ourselves are hard to ignore when they’re out on a single page.
The canvas is made up of nine boxes, which we’ll briefly look at here.
What is a customer?
A customer is somebody who you need to persuade and delight, because they are the person who is making a purchase decision. In every business that’s having social impact, there are three types of people:
A Customer – who makes the decision and pays us money.
An End User – who ends up experiencing our product/service
A Beneficiary – the person or group who are better off because of our product/service.
For your business, these might all be the same person, or it could be three different people. We can describe customers through Demographics and Psychographics. Demographics are the kind of thing you’d fill in on a census. Descriptors like age, gender, height, race, location, wealth, maybe even occupation.
e.g. “We’re selling to 45-year-old women who live in the outer suburbs”
Psychographics are invisible and powerful – attitudes, world views and beliefs. This could be who our customer votes for, how they feel about homelessness, how conscious they are about their “footprint”, what sort of ideas they value and how they make tradeoffs.
e.g. “We’re selling to environmentally conscious consumers who enjoy herbal tea and minimalist design”
There’s an old expression in marketing: People don’t buy products and services; they buy enhanced states of being.
Put more simply, people don’t buy ¼ inch drill bits, they buy ¼ inch holes.
The first thing we need to do is create a unique value proposition for each customer segment. Several people can buy the same product at the same time for completely different reasons, and we need to understand each of them.
Our customer has positive things they want to achieve (Gains), and negative things they wish to avoid (Pains).
Value Proposition is a neat description of how our business creates these gains or relieves these pains.
Louis Vuitton sell leather goods, but what do they really sell?
Status. Success. Elegance. A symbol of the elite.
You can buy a fake Louis in Bali, but it won’t give you the same feeling. The real value proposition is the story we tell ourselves and the image we project to the world.
The Big Issue sell a magazine, but what do customers really buy?
A warm feeling. A genuine, meaningful interaction. The feeling of giving a hand-up.
In fact, if you ask The Big Issue’s customers about their purchase, they mostly don’t care for the magazine itself. It’s a means to an end; a non-confrontational way of helping a person in need.
None of these are right or wrong, but they do need to match our customer and value proposition.
This box is our chance to identify:
- Is this a short term or long term engagement?
- Is this a personal or automated relationship?
- Are we focused on acquiring customers or retaining customers?
- What tone do we use when talking to our customers?
There are two types of channel to consider for your business.
The first one is your acquisition channel – how you first encounter and entice your customers.
The second is your delivery channel – how you physically provide the benefits to your customers.
It could be online, via word of mouth, over the phone, a retail space on a busy street, etc.
You won’t have to invent a new channel – instead you’re choosing the most appropriate channel for your customer and their desired value proposition.
These irreplaceable elements are Key Resources, the vital ingredients and components that are required for your Value Proposition to exist.
It could be a person, like the founder or a vital team member.
It could be a special building or location.
It could be your equipment and machinery.
It could be your intellectual property, like a trade secret or a unique recipe.
It could be a patent, that stops imitators.
It could be your brand, a name customers recognise and trust over the rest of the market.
We want to identify our Key Resources, so that we can protect them. Our model should be reinforced, so that one person leaving the company doesn’t shut down the business, or so that we don’t make decisions that harm our value proposition.
- Chasing customers?
- Manufacturing a product?
- Delivering a service?
- Managing a network of contractors?
- Delivering stock to other stores?
- Operating your own sales channels?
- Partnership brokering?
- Recruiting new team members?
Which activities can’t be easily substituted? Every company does some accounting, but accounting isn’t generally a key activity – unless you’re an accounting firm.
The same goes for recruitment, cleaning, advertising and running events.
The things to list are the activities that must be done to a 5-star standard in order for your value proposition to be possible.
For example, someone else might create the raw ingredients that your company combines into something special.
Maybe you’re borrowing some retail space from a larger organisation, or you’re stocking your product in other people’s stores.
Perhaps you have people who refer you a lot of customers, or have an advertising platform that helps people discover your business.
Maybe you require permission from a regulator, someone who isn’t paying you but who can make your life miserable if they get upset.
Partners are great. A good partnership can transform your sales – by either increasing your traffic, or doing something better than you could do it yourself. Dependencies are dangerous, because they present significant risk. If we have a key partner who could sink our business with a single decision, then we either need to find a backup or create a retention strategy.
By identifying these dependencies early, we can find ways of defending against disaster.
That’s why it’s so important to understand our cost structure – it tells us the total amount we’re due to spend, but also the format in which we spend it.
For example, we need to know which costs are one-offs, and which are ongoing.
We also need to understand which costs are fixed, and which costs are variable.
There are two rough principles worth noting here:
Fixed costs are generally more economical than variable costs.
Variable costs reduce your breakeven point.
If you’re a large company, moving to own your own methods of production can save serious cash. It can also be a huge distraction, or assets you don’t want on your balance sheet. If you’re a small company, moving production to a partner creates variable costs, which is a much safer way of operating. It also makes you reliant on that partner, which can get tricky.
It’s easy to let invisible costs sneak up on us; things like the cost of acquiring a new customer, or the cost of retaining an existing customer.
By understanding how much these things cost, we may discover that some customer segments just aren’t worth chasing – we spend more on keeping them than the revenue they generate. This is the benefit of knowing our key financial metrics – the numbers than indicate the health of the business. Much like our own health, early detection of a problem gives us the best possible chance of survival.
Now we need to support those claims.vIt’s not enough to simply list value propositions that sound good, they have to be worth something to our customer.
We’re looking to understand three things:
- What does each customer segment buy?
- How much does each customer spend per transaction?
- How many purchases do they eventually make?
Armed with this knowledge, we can build a rough financial model and start making decisions about which customers are worth pursuing.
Those are the nine boxes; grab a canvas and have a go at mapping out your business model.
Next we’ll be looking at ways of testing and strengthening your enterprise.