Using Business Model Canvas to Launch a Technology Startup or Improve Established Operating Model
Back in 2004, business theorist Alexander Osterwalder’s PhD dissertation topic was The Business Model Ontology. The thesis, created along with his professor at the University of Lausanne Yves Pigneur, was a blueprint for his most ambitious project. Osterwalder suggested a business model design that could replace cumbersome business plans.
An approach that was soon named the Business Model Canvas (BMC) has since acquired a respectable number of loyal practitioners. Not only startups employed the approach, but also such giants as Microsoft, SAP, and General Electric. Let’s find out what the Business Model Canvas is and explore the ways a software company can leverage this method to drive success.
The Business Model Canvas is a visual template for identifying and organizing different elements of your business model. Osterwalder divides the canvas into nine sections, each responsible for the most vital business elements of every organization.
Numerous adaptations of the methodology can be found. For instance, there’s a Lean Startup Canvas, designed specifically for startups. Even though it’s not approved by the BMC creators, many organizations find it useful. Tom Hulme’s Business Model Framework, in addition to nine building blocks, also covers growth and competitive strategy.
One interpretation that Osterwalder and Pigneur consider acceptable is called Business Model Theatre. For you visual types, watch a 1.5-minute video right here. For the rest of you, here’s a quick recap: Just like in a theater, a business has a front stage and a backstage (as you can see, we marked backstage with blue and front stage with yellow on the picture above). Even though the audience can’t see what happens behind the curtains, it’s what makes a front stage work. Your revenue comes from the front, but only the backstage with its resources and actions can make the magic on the front stage happen.
But today we’re going to focus on the original canvas since this tool has been tested by many more entrepreneurs and businesses and has been subjected to nearly ten years of research and development.
With the abundance of methodologies for building a business model, there must be something really special about the Business Model Canvas that has earned it a place among the classic tools.
Not so long ago, businesses had to rely on a number of established tools to build their models and strategies and organize innovation. The use of a business plan as we know it today started to decline in the 1980s and 1990s due to its complexity and time consuming research process. This has aligned with the high-tech boom and the startup culture of Silicon Valley. Back then, a business plan was an integral part of any organization that wanted to be associated with innovation. However, does it still mean the same? Despite, or maybe due to, its age and the conventional status, business plans take time, effort, engagement of top consultancies, and financial resources to compile.
Today startups, especially technological ones, cannot afford such a luxury. To keep up with competitors, grow rapidly, and develop innovations, they require a truly agile technique, a mind map of sorts that’s easy to write, edit, and comprehend. The Business Model Canvas became such tool – a methodology for business alignment that allows entrepreneurs to quickly develop and test propositions, introduce new concepts on the go, and engage the whole team, instead of struggling with bulky documents in a private office.
So, let’s get down in the weeds.
1. Customer Segments
Your customers are going to dictate how your business operates every day. By knowing and understanding your customers, you’ll be able to define the core of your business – the Value Proposition.
If you are a software company, your customer segments can vary from private individuals to global organizations, and they all require different types of relationships, distribution channels, and payment options. Previously, we explained how to create a Buyer Persona for a SaaS business. In terms of BMC, the concept is similar.
Besides segmentation principles that we touched on in the article, there are some customer groups that should be considered for a software business:
- Device type
With mobile traffic overtaking desktop traffic, it’s crucial to know the devices your customers most frequently use. That will let you know how clients with different devices experience your product and you’ll be able to tailor your content specifically to their needs.
- Top purchases
It’s no secret that half of freemium game revenue comes from 0.19 percent of mobile gamers. Despite the majority of users keeping up with their free plans, a freemium model still allows companies to drive revenue. Make sure you know the motivations of the people who are bringing you the biggest value but don’t overlook those who don’t spend a penny but watch your ads and contribute to the overall traffic.
- Visitor tiers
Users behave differently depending on how many times they’ve already used your product. Just like with the device type, you can customize personal experience depending on whether they explore your product via guest mode or log in.
2. Value Propositions
The Value Proposition is the reason for a customer to buy your product. A good Value Proposition is a unique combination of features that will either solve a customer’s problem or bring them additional value.
The Value Proposition should be short. Make sure both you and your users can read it in less than 5 seconds and clearly understand what your product is all about. Drop vague descriptions and jargon.
Here are a few great examples of Value Propositions that work:
Trainer-led audio workouts for a fraction of the price of a live trainer. (Aaptiv)
Free, fast, detailed and entirely offline maps with turn-by-turn navigation – trusted by over 65 million travelers worldwide. (Maps.me)
Bookmate is the perfect way to enjoy books — whenever, wherever. (Bookmate)
Collect all the songs you discover online. (Playmoss)
The world’s best companies use InVision to design the products you love. (Invision)
We help big brands scale WordPress. (Pagely)
Please note: You should have different Value Propositions for each Customer Segment.
The Channels element reflects how a company aims at delivering Value Proposition to its Customer Segments. But that isn’t the only function of Channels; they can also create brand awareness and provide post-purchase customer support.
In the book Business Model Generation, Osterwalder and Pigneur highlight five phases of channels development. Each channel can cover more than one of these phases.
Raising awareness. You can let your potential users know about your product through a wide range of channels. Currently, blogging and social media are the easiest ways to reach those who want to listen. Content marketing takes considerable effort, especially if you want to deliver quality content regularly, but it makes people engage and share content willingly. The awareness method that brings the most relevant and inclined-to-buy audience is word of mouth. However, it is also the hardest to scale.
Evaluating your Value Proposition. How can customers find your proposition helpful? They need hands-on experience. The try-before-you-buy technique, for instance, does just that. Don’t forget to guide them through a product to make sure they received the desired value or realized its potentials. Case studies and reviews could be another way to help customers understand the value before taking their wallets out.
Purchasing methods. Since we’re talking about software, your users will definitely be buying your product online. If you’re developing a mobile app, people should be able to find you in either the App Store or Play Market. If you distribute the app through another platform, make sure that users know that the payment process is safe and that they agree with the terms and conditions.
Delivering the product. Although a software product doesn’t require logistics and a complicated delivery process, you still have to make sure that your app has been installed correctly and runs the way it’s supposed to.
Post-purchase support. This is the phase that customers care a lot about. What is the cancellation policy? How do they contact you with a problem or a question? What is the onboarding process? Nowadays, many software providers use chatbots or a simulation as one of their post-purchase channel. (You can read our article about designing chatbots to learn more.) Also, you can send out customer surveys, track reviews and questions on social media, or create personal recommendations based on user activity.
4. Customer Relationships
According to Business Model Generation, there are five possible cases of Customer Relationships:
Personal assistance. Make sure your customer can contact you at any time prior to or after the purchase and make the contact channels diverse and accessible: via e-mail, phone, or chatbot. A specific approach to customer relationship is dedicated client care workers. They can be involved to deal with SaaS customers.
Self-service. This type of relationship is often maintained for the B2C client model. Except for automated updates and onboarding guidance, you don’t usually communicate with your users in this case.
Automated service. This is how Netflix and Spotify maintain relationships with their customers. By providing AI-powered recommendations of movies and playlists, the services imitate human interaction and keep customers engaged.
Communities. To better understand customers’ struggles and facilitate connections between users, a company can create a community around a product or a brand where users can exchange knowledge. Have a look at Oracle. Their community with half a million active participants helps customers find advice among fellow users.
Co-creation. User-generated content is a feature of the modern web. Anyone who’s uploaded a video to YouTube has contributed a service. The role of the company, in this case, is to precisely match content creators and content consumers. Another good example is HiNative that allows people around the world to contribute questions and answers about their languages on the same platform.
5. Revenue Streams
Depending on the product or service you are trying to sell, you need to have a clear understanding of the ways you’re going to drive revenue from each Customer Segment.
A strategy that goes into identifying and managing your Revenue Streams is called a Revenue Model. Here are some of the revenue models that may work for you.
Advertising. Such platforms as YouTube, Twitter, Google, and Facebook, along with many other free-to-download apps and services have grown mostly thanks to advertising. Yes, Internet users tend to block ads, but organizations find ways to keep advertisements, from simply asking for AdBlock to be disabled to curating highly relevant ads.
Affiliate Marketing. This strategy is based on making commissions by referring other products and services to your audience. The key here is to select merchants in the same industry as you and recommend only the products you actually find beneficial to your users.
Subscriptions. This model would be the best match for your SaaS, PaaS, or IaaS business. It also applies to on-demand streaming services, such as Netflix, Spotify, or any online publishers, such as HuffPost.
Sponsorship. If you’re a small team of developers providing a useful, engaging, and preferably unique service, donations may be a way to go. Paint.NET is a free Photoshop analog that survives both by ads and donations. Include a PayPal donate button or kindly ask users to buy your team coffee or beer.
Freemium. It’s a no-brainer why this model is so extensively used by a number of web services. By attracting an audience to the basic set of features, you provide the paying customers (another Customer Segment) premium features.
6. Key Activities
Key Activities are what a company should do to make its business model work. For a pizza delivery service, it would be getting the freshest ingredients for the best price, preparing meals, organizing a call-center or a web-site, hiring couriers, etc. But in case you’ve developed an app that just gathers and transfers pizza requests, you have another set of actions such as supporting an app, organizing fast and seamless connections with partners, automatically updating menus, etc.
According to Business Model Generation, you can unite all your activities into three main categories:
Most software providers fall into the third category. Key activities for them are directly related to the platform. Consequently, the lion’s share of your budget will be spent on supporting the system and scaling it up as the customer base grows.
7. Key Resources
Key resources play a direct role in creating your Value Proposition, delivering a service to your Customer Segments, and supporting Customer Relationships.
Resources are typically categorized into four assets: physical, intellectual, human, and financial.
Buildings, facilities, and vehicles, as well as any other tangible resource such as hardware or cooling system falls into the physical category. In the case of a software product, it also depends on what kind of delivery asset your product requires: whether you need to own hardware assets or they are sourced from a cloud provider.
For a software business, core resources will likely be human and intellectual assets. Intangible (intellectual) resources include patents, copyrights, licenses, and customer knowledge. The on-premise or cloud services you may be using for your business is also a form of intellectual resource.
As for human resources, all your software engineers, marketing specialists, and customer service representatives are valuable assets of any service-based business. However, it’s the costliest one as well. Consider outsourcing the services you can and remember to include accounting and legal consultants.
There are several ways that startups can get their financial resource, including bank loans, advances from strategic customers, and venture capital investors. In case your business revolves around an important cause, you can request a grant or start a crowdfunding campaign online. Of course, the majority of startups nowadays are self-funded (although, these typically receive the least press mentions). This process is also referred to as bootstrapping a business. Though, it is likely the hardest way to start a venture as it takes time to save money, bootstrapping allows you to have full control over your venture.
When evaluating your Key Resources, ignore those that would be common for any business, but pay attention to the ones that are strategically important to you. For Amazon Prime, Key Resources would be licensed rights to stream films and TV shows. For Microsoft, Adobe, or Google, it would be numerous patents. And insurance and banking organizations can’t survive without financial resources.
8. Key Partnerships
This building block defines your network of partners and suppliers that make your business model work. Bear in mind that not all your partners are your Key Partners. There are four categories of partners you can identify.
Buyer-supplier is the most common type of business relationship that implies exchange of desired goods for both sides. It means a reliable source of supplies for you and a confirmed buyer of their products or your partners’.
Strategy alliances between non-competitors. The idea behind this partnership is to leverage each other’s resources. As a startup, you can collaborate with many different suppliers until you decide which ones support your business model best. When it comes to a mature business, you have a lot to risk and therefore need reliable and long-term relationships.
Joint-ventures are created when you need to fill the gap that only another business can fill, for instance, sell your product to a new niche. When you’re partnering with a company that has a missing element you require, it helps you grow your audience and increase sales. The affiliate plan we discussed earlier could be considered a joint-venture as well. Just like enhancing someone’s SaaS product with your API (or vice versa) or offering your customer upsells from a third-party.
Coopetition is a partnership between competitors. It usually happens when both companies are struggling to launch a product and want to spread the risks to achieve common revenue. For example, when Apple launched an iPad, the tablet became the biggest competitor to Amazon’s Kindle. So, the rivals cooperated to sell Amazon books via the iOS Kindle app, which helped Amazon to extend its e-book market and established iPad as a viable reading device. Sometimes coopetition partnerships lead to mergers. PayPal, for instance, was born from the merger of two competing financial companies.
9. Cost Structure
Delivering Value, maintaining Customer Relationships, and buying Resources all incur costs.
For a typical product development software company, the major operational expenses usually include research and development (R&D) costs, sales and marketing activities, and support costs. Let’s break them down:
- According to MarketRealist, only 10 to 20 percent of costs in the software industry go for research and development, only 5 percent of that sum is actually spent on innovation, and the rest goes to testing.
- Due to the large competition in the market, marketing expenses of software companies usually surpass R&D costs, which is why about 25 percent of revenue is spent on marketing and sales. Depending on the product, this number can vary.
- Support costs are related to handling customer requests and retaining your audience. Since it’s difficult to retain customers of a software product, a big chunk of expenses goes to Customer Success Management and churn prevention.
Apart from operational costs, your Cost Structure should include:
- Capital costs – investments that go into acquiring or upgrading physical resources, such as buildings and computers.
- Overhead costs – the general operational costs that have no direct impact on delivering a product, such as electricity, or a processing time for installation and testing software.
- Staff costs – resources spent on hiring, training, and retaining employees.
The benefits of using the Business Model Canvas
- Visible connections
The design of the canvas directly illustrates the way elements are connected and provides a clear understanding of the impact the building blocks have on each other. That’s why it’s important to follow the specific order to fill in your business model.
- Changing and advancing
While many business strategy enthusiasts compare the BMC to a traditional business plan, these two methods have fundamentally different approaches. Business plans are heavy 100+-page documents that take time to write, read, and edit. The BMC is meant to be a living document that’s always changing and evolving. Thus, you and your team can make immediate decisions and add changes on the go.
- Value Propositions are always at the core
If you have another look at the canvas, you will notice that one element – Value Propositions – is placed at the very center of the canvas. It’s a backbone, a bearing wall that separates the front stage and backstage of your business theater.
- Speaking the same language
Eventually, the BMC makes your crew members understand each other better. By using the same definitions for reference, you provide a transparent communication among people and teams. You can take your BMC sheet to a meeting, brainstorm, use sticky notes to outline your new ideas, and later place the canvas directly on the wall, making it easier for ideas to be seen and adjusted.
What the BMC excludes and why it shouldn’t bother you
By looking at the model and even after starting to work with it, many entrepreneurs argue that it excludes a lot of key factors for creating a thriving business. Executives are bothered by the lack of external factors. What about competitors? And why not include the organization’s mission and priorities?
The short answer is: Because that’s not what the BMC is for.
But let’s provide a broader explanation.
- The main purpose of the BMC is to visually represent how you intend to build or develop a successful business. It’s a simple scheme aimed at defining the pathway in the constantly changing market and providing a concise overview of how your operational processes link up with one another.
- Just as you can’t include profit as a resource, an external impact is more of an outcome than a building block of your business. Thus, instead of trying to fit those elements into the canvas, you can adjust the internal processes when complications arise.
- Imagination is the key. You can’t make the model work for you unless you want to work on it as well. It’s not a silver bullet and it’s not meant to apply to each individual situation. So, don’t make the approach restrictive. Stay creative and inventive when working with the canvas. Combine it with other tools, such as a Value Proposition Canvas from the creators of the BMC, or consider the ways other companies are successfully implementing this method.
How the Business Model Canvas can help established businesses
You may now be thinking, “Okay, all this sounds great, but isn’t it another startup tool? What if I want to take a fresh look at my established company and see how I can make it better?”
The tool’s versatility allows you to apply it in many different ways. You can strategize a logic behind a new initiative (like Amazon’s decision to allow its Prime users stream movies for free). Or even analyze the leaders’ successful stories and learn to apply them to your business (see LEGO’s reinventing experience presented on a canvas). Osterwalder says, “Everybody needs to understand how to use this and use this as a shared language.”
Here are just some of the reasons to use the Business Model Canvas for your established business.
- Detect opportunity gaps and find new perspectives.
- Create your competitors’ business models and compare them to yours.
- Keep track of external changes in each building block.
- Pitch investors using a visual representation that others can understand.
- Test new business models.
- Map out potential changes.
- Align your team’s goals and actions.
- Look at the business from a customer’s perspective.
- Analyze new opportunities, partners, and channels.
Remember that you aren’t using the BMC to confirm what you already know about your organization, but rather to find flaws and pinpoint the ways to make your business processes more effective, and after evaluating the changes, act upon them.
What now? Life after the Business Model Canvas
The BMC is not a tool that you use once or twice and forget about it till the next evaluation of your company. It was designed and invented to become a part of every business’ day-to-day life, a map to guide your ship between rocks and shallows. So, what happens after you’ve laid out your business model?
Dashboard. Use the BMC to track the changes in your building blocks and the level of satisfaction of these changes. Color-code the most complex elements to focus on them more and attract the team’s attention to the current problems.
Meetings. Use the BMC as a brainstorming instrument at meetings to unify new ideas and manage them later in your work.
Understanding customers. You don’t have to create the BMC for companies only. Try understanding your customer by creating their own business models. For instance, SAP, the German software giant, uses the BMC in their pre-sales process. The SAP sales teams sketch the customer’s business model to prepare for sales meetings.
Onboarding. When hiring new talent, especially top management, you can use the BMC to give them an immediate understanding of where your company stands and help them join the team smoothly.
“The same products, services or technologies can fail or succeed depending on the business model you choose. Exploring the possibilities is critical to finding a successful business model. Settling on first ideas risks the possibility of missing potential that can only be discovered by prototyping and testing different alternatives,” said Alex Osterwalder, creator of the Business Model Canvas.
No business plan works out the way you intend it to. The only way to be prepared and effective in the ever-changing market is to stay dynamic and ready to act. Instead of spending months or even years developing a strategy that may not even materialize in the end, you can adjust your processes on the go in the existing environment and surpass competitors while you’re still growing. Moreover, you will stay connected to your team with the power of co-creation and be sure that you’re on the same page with every party involved.