Business Model Canvas
Business Model Canvas (BMC) is a framework which has been widely used to exhibit new or existing business models.
Let’s look at the market side of the BMC first. In the center of BMC, ‘Value Proposition’ is located, which proposes to deliver specific value to customers. And the value proposed by a company should be differentiated from those delivered by other companies, i.e., competitors.
For example, let’s assume that you are an owner of a local pizza restaurant. Let’s say your place offers pizza with the best taste and fresh ingredients. More than likely, other local restaurants would say the same things, and customers will have no specific reason to choose your place over other restaurants.
Domino Pizza tried something different. They said “30 minutes or free,” emphasizing its fast delivery. If you are hungry, where are you going to order? If you prefer hot pizza upon delivery (as most customers do), which store are you going to call?
Your value proposition should be differentiated from your customer’s perspective. But you cannot satisfy various needs of diverse customers all at once. Instead, you may want to focus on a specific ‘Customer Segments’ (i.e., a specific group of customers who share certain characteristics such as demographics, psychographics, and/or purchase patterns), which is called target customers.
Now you need to think about how to access to your target customers, which is called ‘Channel’. You can sell your products (goods, services, ideas) to your customers through offline channels (e.g., department store, discount store) and/or online channels (e.g., Amazon.com, your own website/app).
Once your target customers buy your products, you need to think about how to build a long-term relationship with them, which is called ‘Customer Relationship Management (CRM)’. You can think of various strategies such as a loyalty program to lock in your customers, transforming them into your friends/fans.
You also need to think about your ‘Revenue Stream’. You can choose from diverse pricing options. You can charge per order. Or you can offer a subscription system or a membership model. Then your cash-inflows will be generated.
So far we have discussed the market side of the BM (business model). Now let’s think about the operation side of the BM. Note that your value proposition is a promise to your customers. To keep your promise, you need to think about your ‘Key Activities’. For example, you need to think about important activities such as sourcing the raw materials, hiring people, making products, managing inventories, delivering products to your customers, providing A/S, managing complaints, and so on.
To perform such activities, you need ‘Key Resources’. These include financial, human, and technological resources. As a venture, you usually don’t have all the resources needed to perform key activities. Therefore, you need ‘Key Partners’ who will provide you with necessary resources, making a bigger pie to be shared among partners.
When you use up such resources by yourself or with your partners, it will incur cash outflows, i.e. costs. By looking at ‘Cost Structure’, you can figure out where you can save some money and where you should spend your resources to make your customers happy about their purchases.
By considering both the market side (Revenue Streams) and the operation side (Cost Structure), you (and your investors) can predict and/or evaluate your performance because your profit can be computed by deducting cost from revenue. Investors will assess your profit potential and decide whether they will invest in your business. Indeed your other stakeholders such as employees or partners will also take a look at your financial value proposition (i.e., profit potential) to decide whether they will work with you or not.
© Hyun Shin, Hanyang University