Business Model Canvas explained
A practical guide to understanding and applying the Business Model Canvas for building stronger strategies and sustainable businesses.
Discover how the Business Model Canvas helps visualize, design, and improve business models by aligning value, customers, operations, and revenues.
One of the key questions to address when starting or running a business is the question about the business model. The term is widely used in this century, where the purpose of a business is not necessarily to sell a tangible product for an agreed price. But what is a business model? Michael Lewis gives a very compact definition in his 1999 book “The New, New Thing”: “All it really meant was how you planned to make money”. Joan Magretta expands on that thought in her 2002 Harvard Business Review Article “Why Business Models Matter”: “A good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”.
Some standard approaches have been defined to develop a business model answering all these relevant questions. One of the most widely used ones is the business model canvas, proposed by Alexander Osterwalder in his PhD thesis “The business model ontology: A proposition in a design science approach.” (2004).
Index
Business model canvas
Osterwalder puts the business model elements in context on his canvas (Figure 1).
In the following sections, we will walk through the canvas based on its underlying structure (Figure 2). Positioned around the value proposition, the upper part of the canvas represents the delivery of the value proposition (from left to right), while the lower part explains the flow of cash (from right to left).
Cash focus
Fundamentally, a business model is about how to make money. Therefore, the canvas’s fundament is related to revenues and costs. The revenue side, which generates the cash to cover the cost, is related to the customer side of the canvas, the customers who pay for the offering. The cost side is then funding the operations required to deliver the offering.
Revenue streams
This section describes how you get money. For what are customers paying (asset, service, information)? How are they paying for it (once, recurring)? Who pays for it (user, channel partner)? Examples are:
- one-time purchase of a tangible asset or a service
- rental/leasing agreements
- service agreement
- recurring subscription payment
- Franchise/license payment
The revenue streams are linked to the fields in the customer focus section. Revenue estimates in these sections (e.g. customer segment size, channel partner margin, relation type) can then be used to calculate a business case.
Cost structure
This section lists the costs to deliver the value to the market. This section is correspondingly related to the fields in the operations focus section of the canvas.
- What are the costs of the production infrastructure (key resources)? These are typical capital expenditures (CAPEX) and fixed costs.
- What is the cost of the delivery activities (key activities, operations, staff)? These are primarily operational expenditures (OPEX) and variable costs.
- What do we purchase externally (key partners, suppliers)? These are predominantly the costs of goods sold.
Customer focus
The critical question in any business model is: who is the customer? This is the party that sees value in the value proposition. The customer focus section not only identifies who the customers are but also how they are reached.
Customer segments
Here, we identify who the customers are. Who are we designing the value proposition for? Who sees a value in our offering? Apart from the basic distinction between consumer and business customers, industry verticals, company sizes, price segments, or geographical reach may be an aspect of segmentation.
Customer relationships
The customer relationship defines how the company interacts with the customers. Is the customer buying a product anonymously? Does the sale or delivery (e.g., installation) require personal interaction? How is the delivery of the value proposition structured over time (consulting, training, support, maintenance services)?
Channels
How does the value proposition reach the customer? This may be through a website, own or external logistics, retail partners, direct interaction with staff, etc. Some channels may be company-owned; some through dedicated partners (e.g., installers or integrators) or a longer-range supply chain (e.g., retailers). Different aspects of customer relationships may require different channels (e.g., product delivery vs. maintenance services), and some channels may be specific to particular customer segments.
Operations focus
The left side of the canvas lists the areas required to implement the value proposition. Anything needed in the process, from development to sales or production, is listed here. As mentioned before, this should reflect the complete cost base of the business model.
Key activities
Those are things to be done to create the offering. This may include research and development (i.e., creating intellectual property), production, sales, marketing, support, service personnel, etc. These activities may be executed by the company’s resources (key resources) or can be outsourced (and listed as key partners).
Key resources
The key resources execute the tasks described before. In production, this comprises production equipment, machinery, and operational staff. Other infrastructures, such as cloud computing capabilities, data repositories (and the data contained therein), algorithms, tools, etc., are also listed here. Finally, regarding human resources, critical staff profiles are also part of this section.
Key partners
Not everything listed in the activities or resources is owned by the company. For some services or sub-assemblies, partners are better suited to deliver the needed component. In the case of the activities, those can be executed by a 3rd party service provider; in the case of the resources, they may be accessed externally (e.g., rental).
Value proposition
The core of the business model canvas describes the value proposition, i.e., how you will deliver value to the customers (identified in the ‘customer segments’ section). It is worth noting that this question of ‘how to deliver value’ has two important aspects: ‘how’ and ‘value’.
The value proposition explains the reason why a customer would buy the offering. This is best formulated by
- Explain the offering. What is it the customer would pay money for (the ‘how’)
- How does this offering create value for the customer (the ‘value’)
In this description, the focus is often only on the first part. Businesses describe what they offer but are very thin on the value that creates for the customer, as seen by the customer.
The central role of the value proposition and its importance in generating a successful business has led Osterwalder to create a specific canvas for developing the value proposition, the ‘Value Proposition Canvas’. It links the customer’s needs with the offering’s capabilities. Properly addressing the intricacies of creating a value proposition led us to write a separate post on the value proposition canvas alone.
Business model canvas discussion
The business model canvas gives a good overview of the business model but does not cover broader aspects of defining a company. When defining a business model, some elements that need to be addressed to succeed are still missing on the canvas.
Context
An essential missing aspect is a broader context beyond partners and customers. An excellent approach to analyzing this is given in the 5 C of marketing: company, competitors, customers, collaborators, and climate. While customers and collaborators (partners) are on the canvas, and ‘company’ is described in activities, resources, and value proposition, two are prominently missing: competitors and climate.
Competitors
No value proposition can be defined without being aware of competition. A vital aspect of any business is its differentiation in the market. That requires knowledge of the alternatives: competitors’ solutions and the customer’s current state-of-the-art. A complete competitive analysis would need to be executed outside the canvas framework. The results may then be incorporated into the value proposition statement by explaining the unique selling proposition as part of the solution description: how does the solution better address the customer’s needs than the competition?
Climate
Other external factors, such as environmental, social, and governance (ESG), regulatory, economic, political, ethical, demographic, or technological aspects, are essential in creating a sustainable business model. Since the business model canvas does not describe a company’s strategy, such analyses must be present when formulating the business model.
Time
It is not only the analysis of the external (climate) factors at the point of definition; a successful strategy also looks into the trends and projections and possibly analyzes different scenarios. The business model canvas also does not cover the development of an offering (from the minimum viable product (MVP) to the maximum viable product (MaxVP) as described in this article xx) over time. Therefore, developing the business model along a roadmap must be defined in a series of evolving business models.
Network
When creating the business model and the value proposition, it is essential to recognize that other players referred to on the canvas may have their own business models. This is the case for the partners and the customers. To fully understand their needs, it helps to understand their business model.
Being aware of the customer’s business model helps in understanding their value proposition towards their customers. The own value proposition can then be formulated such that it supports the customer’s success towards their customers.
The situation is reversed with the partners listed on the left side of the canvas: how can the partners best support my customers? This opens the door to co-innovation and co-creation.
There is possibly a third external player on the map: in the ‘channels’ section. If that section contains channel partners, they also have a business model worth observing. This analysis may result in opportunities to offer services to them, which in turn makes their business more successful. This creates a network of loyal, successful partners along the downstream channels.
Conclusions
The business model canvas is a helpful tool to develop, visualize, and communicate a company’s business model. Its compact formulation may not allow for a full-text description of all aspects, but together with supporting documentation, it provides an excellent overview to stakeholders.
Supporting activities (such as competitive analysis and ecosystem scenarios) that go beyond what is represented on the canvas are required to fill the canvas.
The business model canvas is an excellent tool to support business model design. Still, it does not relieve you from the creative design work required to develop a sound, innovative business model.
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