A business model is a description of the value that a business or a company offers to it’s clients or customers and how the company or business makes profit while offering that value. In a nut shell, it’s an explanation of how you deliver value to your customers at an appropriate cost.
The process of business model construction and modification is usually referred to business model innovation and this forms a part of your business strategy.
In recent times, most tech companies are using the “bait and hook business model”. They use some form of bait to get their customers and then and then uses their hook to continue making money off their customers in the long run.
For example, the business model of most telecom companies is to sell to your their sim cards at a very cheap price and sometimes some of them even give it for free, but their major way of making money from you in the long run ( the customers ) is from air time purchases.
Also manufactures of software development companies offer versions of their software in order to get you to buy the premium version after you have seen that the premium version has more properties.
A company that manufactures printers sells their printers to you for a relatively low cost, however, their major strategy of getting money from you in the long run is from the periodic purchase of ink cartridges. Again, the printer is the bait and the ink cartridge is the hook.
Therefore, as a prospective or existing business owner, you need to seat down and define your business model in order to ensure that the business is giving value to people and that the business is profitable.
Every member of your team (All members of your management team and employees) needs to be fully aware of your business model so they can all work together to achieve it.
In the world of business, there are many business model development tools.
However, the most popular and the most used model tool is called the Business Model Canvas, BMC.
What is Business Model Canvas?
The business model canvas is a strategic tool used by prospective and existing business owners and managers to illustrate and develop their business model. The business model canvas clearly identifies the key elements that make up a business.
The BMC was developed by Alexander Osterwalder in 2004 when he released his thesis, “ The Business Model ontology – A Proposition in Science Design Approach”. Ever since, the BMC has been included in the curriculum of most business schools around the world.
Why you need a business model canvas for your new or existing business
Understanding the Business Model Canvas and applying it’s principles to your start up or even existing business will give you a good understanding of your business idea and enable your to articulate all that you need to make the idea a success.
If your BMC is correct, and well followed, you are on the path of success in that business and you are most likely to be able to convince prospective investors and partners to support your business.
Difference between a business plan and a business model canvas
While your business plan gives a detail of your business road map in several pages of documents, the BMC gives a summary of your business idea and the strategy for achieving the business plan, in a nut shell and in a one page document.
Most times your BMC serves as executive summary of your business plan. Your BMC simplifies your business plan into a condensed form.
In fact, if you want some investors or partners to invest in your business, most times the most experienced among them will demand to see your BMC before even asking to see your business plan. Many big time investors are buddy people, so most times they won’t have the time to go through the multiple pages of your business plan. Therefore, they would rather ask to see your BMC.
How to develop your business model canvas
In order to develop a winning business model canvas, we need to see the structure or components of a BMC. Sometimes these components are referred to as the 9 building blocks of a BMC and they are listed below:
- Value Propositions
- Customer Segments
- Customer Relationships
- Key Activities
- Key Resources
- Key Partners
- Cost Structure
- Revenue Streams
The BMC is usually depicted using block diagrams to show the 9 building blocks of the BMC. As you can see in the attached picture:
All the above 9 components work together and they should be harnessed together in order to help you to build a successful business.
It’s is worthy of mentioning that block 1 is the center of the model, while blocks on the right ( 2,3 and 4) are external business factors and blocks on the left ( 5, 6 and 7 ) are internal business factors. The block son the base ( 8 and 9 ) are financial factors.
Now we are going to explain each of these 9 components or building blocks and give you examples about how you can use them to develop your own business model:
1. Value propositions
Note that this the central part of the business model canvas and it is perhaps the most import part of your business model. The reason is because it determines the other aspects of your business model.
Your value proposition shows the value your business intends to provide to your customers or the needs that the business intends to solve.
To write your business proposition, you can ask yourself the following questions:
- What value is my business or company actually trying to provide to customers?
- What needs or problems have I identified, which my business intends to provide solutions to in such a way that other businesses are not doing?
We shall be using setting up a nursery and primary school as an example in explaining the various blocks of a business model canvas.
So, for a private nursery and primary school our value proposition could be the following:
To provide top notch basic education of pupils.
- To provide both moral and academic education to children between the ages of 1 to 10 years old.
- Online learning incorporated to school teaching program.
- Conducive learning environment.
- ICT enhanced learning.
2. Customer segments
In this section you need to identify the group and class of people you target to satisfy their needs. You can not effectively meet the needs of everybody. Therefore you need to narrow down your market niche. That’s the class, sector, age group, societal status, and other applicable classification of people you wish to use your products to satisfy their needs.
To write your customer segments, you can ask yourself the following questions:
- Who is my business creating value for?
- Who are my different customers?
- Who are my most important customers? What do they enjoy, what do they live? What are their age grades? What is their economic or educational or financial status?
- Is my business targeting a large community or a small niche community?
- Are we targeting only males or females or both genders?
Now using our example of a private nursery and primary school, our customer segments could include:
- Patents that are looking for an enhanced and conducive learning environment for their children.
- Parents looking for academic as well as moral education for their children.
- Average to wealthy parents who are able to enroll their children in private schools.
- Children aged 2 to 11 years old.
3. Customer Relationships
In this section you need to consider how your business will interact with its customers.
To write your customer relationships, you can ask yourself the following questions:
- Do you intend to meet with your customers in person or online or on phone?
- How do you intend to get, keep and grow your customers?
- Will my business require frequent or periodic communication with my customers?
- Will my business require a dedicated assistance to customers or will they have to self-service their needs?
Now using our example of a private nursery and primary school, our customer relationships could include:
- Periodic emails and SMS messages to parents about school programs and schedules.
- School website where parents can get notice and updates about the school programs and also enroll their children for each session.
- Parent – Teachers Meetings, PTA meetings.
- Paper memos given to pupils to give to their parents.
This section basically highlights your marketing plan. Here you consider the various a avenues through which your target customers will get attracted to your business and eventually become part of your sales cycle.
Examples of channels include: social media marketing, trade shows, content marketing, offline marketing ( TV , radio, bill boards, flyers ), email marketing, search engine marketing, SEM, search engine optimization, SEO, blogs etc.
To write your channels, you can ask yourself the following questions:
- Who are my customers?
- Where best can I meet them? Online at social media or over the radio or at conferences, events or clubs?
- What are the most effective ways I can get my customers?
- What are the cost efficient ways I can reach my customers?
Now using our example of a private nursery and primary school, our channels could include:
- Radio adverts
- Social media adverts
- Distributing flyers at religious places, markets places, events, conferences etc.
- Positioning bill boards and sign boards at strategic locations within the vicinity of the school and 1 km radius of the school.
5. Key Activities
This refers to the key operational activities that your business needs to undertake in order to deliver the value proposition or satisfy the needs your customers.
To write your key activities, you can ask yourself the following questions:
- What key activities are needed to meet our value proposition?
- What extra activities can our business provide which our competitors are not providing?
- Do we need to purchase additional resources that would enhance what we offer to our customers?
- Do we need to streamline our operations in order to reduce prices and cost?
Now using our example of a private nursery and primary school, our key activities could include:
- Teaching using Montessori style of learning
- Teaching using visual aids
- Carrying pupils for excursions or field trips in order to enhance their learning.
- Provision of practical learning in our science and ICT laboratories.
- Provision of extramural classes.
- Provision of computer based testing for our students.
6. Key Resources
The key resources of your business are assets necessary to deliver on your value propositions. These might include human and material assets. They are the things you need to practically carry out the activities of your business. Examples include: computer, office space, your staff, vehicle, electricity, internet connection, production machine.
To write your key resources, you can ask yourself the following questions:
- What resources do I need to satisfy my customers and to deliver on my value propositions?
- What resources are needed to maintain customer relationship and satisfaction?
Now using our example of a private nursery and primary school, our key resources could include:
- Well built and spacious and conducive class rooms.
- School buses.
- School playing ground.
- School clinic.
- Well equipped science laboratories and ICT labs for enhanced learning through practicals.
- Comfortable staff rooms.
- Standard toilets facilities.
- Experienced staff.
- Internet connectivity.
7. Key Partners
These are a list of other external businesses, companies, organizations, establishments, people, you need to carry out your key activities and deliver your value propositions to your customers.
To write your key partners, you can ask yourself the following questions:
- What activities that are needed to satisfy my customers whom I need other people to help me provide?
- What key resources do my company receive from these external partners?
- What key activities do these external businesses provide to my company?
- Are there other people that can provide the needed services effectively and cheaper apart from the current people I am using or wish to use?
Now using our example of a private nursery and primary school, our key partners could include:
- Book publishers and suppliers
- Teaching aids ( board markers, white boards suppliers ) suppliers
- Ministry of education
- Tailors for school uniforms
- Website designers and managers
8. Cost Structure
This section considers the financial cost of running your business. It looks into the various expenses that you as the business owner needs to spend in order to provide the goods or services that you provide in order to meet your customers needs.
To write your cost structure, you can ask yourself the following questions:
- What are your business key operating costs?
- What proportions of your costs are fixed or variable?
- Is your company more cost optimization oriented or value oriented?
- Is your business effectively applying the principles of economies of scale?
Now using our example of a private nursery and primary school, our cost structure could include:
- Staff salaries
- Cost of fuel for generator ( electricity )
- Annual payments to regulatory authorities and membership boards
- Cost of purchase of teaching aids
- Cost of assets maintenance
9. Revenue Streams
This section simply considers the various avenues through which your business generates revenue or income.
To write your revenue streams, you can ask yourself the following questions:
- Does your company have multiple methods of generating income?
- What is the pricing strategy for the products offered by your company?
- Through what channels do your customers pay? (Cash or POS or bank transfers or etc.)?
- Does your company offer multiple forms of payment (up-front, payment plans, financing, etc.)?
Now using our example of a private nursery and primary school, our revenue streams could include:
- Income from tuition fees from parents of pupils
- Income from payments for extramural classes
- Income from payments for Inter house sports
- Income from sales of school uniforms
- Income from sales of customized students note books and text books
- Income from payments for excursions
The images below shows in summary what each block of your business model canvas should contain and provide a short guide for you:
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