Business Model Canvas to be scalable and profitable
Table of Contents
Business Model Canvas: what is it?
In the article of the Business Plan Part One, we have already briefly introduced the concept of business model and the choice to use the Business Model Canvas as a framework to work and find the best solution for your startup.
In this article, however, we want to go into more details on the Business Model Canvas to help you better understand the tool and guide you in its practical compilation.
We also want to reiterate here that finding the right Business Model for your startup is really fundamental and that, only after having found it, you can create a sustainable Business Plan for your startup.
Business Model Canvas: let’s start from the basics
The Business Model Canvas is one of the main Business Design tools used to innovate the Business Model of companies in a very simple and intuitive way and is divided into 9 quadrants which represent the main aspects to be considered.
From this representation, an empty tableau was created in which to insert your ideas. The ideal is to print a large one, put it on the wall and use post-its to add, move and remove your ideas. It is conceived to be used in brainstorming with other people to obtain more points of view.
Here are the 9 quadrants:
- Customer Segments
- Offer – Value Proposition
- Channels
- Customer Relationships
- Revenue Streams
- Key Resources
- Key Activities
- Key Partners
- Cost Structure
Let’s see them in detail.
Business Model Canvas: Customer Segments
Customer segments represent the different groups of people to which a company directs its value proposition. When choosing customer segments, it is important to define whether the company will offer its products or services to the mass market, a niche market, or a local market. You can create a profile of the members of each group to get to know them better, satisfy their needs and optimize communication. To make a full report, you can also match them to the type of product or service they are willing to pay for and calculate how much sales are for this group:
- Segmentation: divide the market into smaller market segments.
- Targeting: choose the segment or segments to which to propose the products and services that the company offers.
- Positioning: choose the positioning that the products and services offered by the company will occupy in the minds of consumers.
Business Model Canvas: Offer – Value Proposition
The value proposition is the added value you offer to the market, therefore to current and potential customers, through the products and service you provide. You can describe your competitive advantage and divide the different levels of product or service into groups to link to the corresponding customer segments. The added value consists in satisfying customer needs in an innovative way.
There are two types of innovation:
Radical innovation: it consists of introducing on the market something that represents a break with the past, determines the need to redefine the economic activities that involve and open new spaces for research.
Incremental innovations: these involve a gradual improvement to existing products and processes. These improvements may be of little value if taken individually, but when put together they involve major changes in each market.
Please also note that innovation is not only related to a new product, but also to new business model.
In other words, what is the problem that your product or service solves? The value offered is the solution to an existing problem or need, it is the reason why the identified customer segments (target) should prefer the company over the competition and, therefore, determines its competitive strength.
Business Model Canvas: Channels
The section related to channels describes how the company wants to distribute the products and services it offers. Analyse which channels you have available and which ones are more suitable for the different groups as well as the different stages and shopping experiences. The choice of how to distribute the products or services involves the decision to use a short or long channel, to sell the products online or through a reseller.
For example, in the eCommerce field, the “ecommerce platform” will be indicated as direct channel. Instead, “marketplaces” such as eBay, Amazon, ePRICE, etc will be indicated as indirect channels.
Business Model Canvas: Customer Relationships
This part defines the type of relationship that the company intends to establish with customers. Enhance the customer experience with the product and simultaneously with the corporate image and reputation.
How will you communicate with your customers and prospects? What will be the means and methods to communicate with customers and, above all, to pass on your message? The purpose, in this case, will be both to get in touch with new customers and to consolidate relationships. It is therefore the marketing strategy that you want to carry on.
Business Model Canvas: Revenue Streams
Here will be described the revenue streams that the company obtains from the sale of products and services. The revenue stream should be higher than the costs that the company incurs, to ensure profitability for the company. Analyse payment terms and conditions as well as revenue trends, identify the different groups and the general trends and decide the optimal price based on this observation and costs.
What are the revenue streams that arise from successfully delivering value to customers? What are the “Revenue Streams” that the “Customer Segments” will pay for the “Value Offered”? The variables to be considered are the prices that can be fixed or dynamic and the payment methods by calculating the transaction costs (this is a part of the income statement of the business plan).
Business Model Canvas: Key Resources
Key resources include the resources (physical assets, human capital, financial resources) that the company needs to carry out its business. Compile a list of key assets and match them to the value they generate.
What are the resources needed to offer and distribute the goods and services described above? They are all the key resources and owned assets that the company needs to make its business model work. Strategic assets include:
- human resources (workforce),
- physical resources (stores, plants, machinery),
- intellectual resources (software, user licensed, copyrights)
- financial resources (loans, credit lines, cash)
The most useful and effective resources must be identified to implement and distribute what has been defined in the previous points.
Business Model Canvas: Key Activities
The key activities must be performed to create the value proposition, reach customers, maintain relationships with them and generate revenues. Compile a list of key activities and match them to the value they produce.
What are the activities required to manage and use key resources? They are all the activities essential for the realization of a value proposition.
Business Model Canvas: Key Partners
The key partners are the suppliers and partners necessary for the company to implement its business model. You can analyse which activities to delegate to others or who to collaborate with. To make sure these partnerships are profitable, you can analyse whether there is a reduction in competitive costs and risks and an increase in knowledge, access to other customers and channels and benefits.
What activities are outsourced? They are the network of suppliers and partners with which the company collaborates to create, distribute, and manage the value it wants to offer its customers.
Business Model Canvas: Cost Structure
The cost structure defines the costs that the company will have to incur to carry out its business. The cost structure must consider fixed costs and variable costs and whether economies of scale or scope will be pursued.
It is part of the income statement of the business plan in which costs are extrapolated, therefore for example: personal, rent, goods purchases, energy utilities, advertising, etc. Analyse the type of costs and nature and identify which are fixed and which are variable.
Practical application of the Business Model Canvas to the Ikea Business Model
Let’s make a practical example of a business model, using the IKEA business model. Obviously, this will be a quick simplification, which then needs to be articulated and expanded, but it will offer you an overview of the departments and their purposes.
Ikea’s customer segments
Individuals and companies that are sensitive to the cost of products, but eager for beautiful and modern products. Main targets: young people of both sexes and young couples.
The value offered by Ikea Business Model
Very low price of the products, without penalizing the design. Possibility of choice and immediate collection without waiting weeks or months for delivery.
Ikea’s channels
- The main channel are the warehouses located in key points and easy to access,
- Direct collection in the warehouse of the product packed in easy-to-handle cartons,
- Online shop,
- Paper catalogue delivered to homes within 30 km of the nearest warehouse.
Ikea’s customer relationships
- Use of Ikea Family card,
- Support staff within the store, with electronic help to search for products or configure furnishings,
- Reception area,
- Kindergarten for children with games and babysitters,
- Coffee corner with low-cost dishes and free coffee with the Ikea Family card,
- Support staff in the warehouse to assist visitors,
- Delivery and assembly service for a fee,
- Post installation support with free or paid spare parts,
- Transport vehicle rental service.
Ikea’s revenue streams
The revenues will be given by the sale of:
- Furniture,
- Accessories,
- Food,
- Services.
Ikea’s key resources
- Physical resources: stores with warehouse, goods, distribution.
- Human resources: reception staff, support staff, warehouse staff, food department staff, delivery staff, administration staff.
- Other: brand, designer, capital.
Ikea’s key activities
- Design,
- Marketing in the store, catalogues, TV and online,
- Frequent exhibition variations and youthful settings,
- Low-cost productions.
Ikea’s key partners
Low-cost furniture and accessories manufacturers, vehicle ranting companies.
Ikea’s channels
Products, production, warehouse, fixed assets, staff, marketing, distribution, merchandising.
Where did Ikea innovate in its business model?
As shown above, the point on which Ikea has differentiated itself from the competition by innovating is the section related to distribution: the number 3 related to channels.
Its innovation consisted in skipping the step of delivery and assembly, allowing the customer to take the desired product directly from the warehouse and then assemble it. It even managed to pass this off as a value.
By eliminating delivery and assembly, it has managed to drastically lower costs and make the furniture immediately available, without the long waits typical of traditional furniture manufacturers.
Analysing the entire business model, you can perceive that the only concrete innovation was this one but is it the one that made it a success.
When starting a business, it is essential to innovate and differentiate your company in some of the points of the Business Model by clearly trying to offer a concrete advantage to the buyer.
Conclusions on the Business Model Canvas
In this article, we have tried to deepen the Business Model Canvas, explaining in detail the 9 quadrants and how to fill them in correctly through examples, but if you want to know more watch the video below!
We know that 60% of people are “visual thinkers” or people who use the sense of sight as an element of thought and memorization of information (source Deza 2009 – Encyclopedia of Distances).
The importance of the Business Model Canvas is in its application within the everyday working life and in the analysis, approach based on images or visual elements such as maps or graphs. This is why the Business Model Canvas is very popular.
One of the main objectives of the Business Model Canvas is the ability to offer an overview of the interconnections present within the model as well as a quick representation of the main elements that make up a business model. The model can be easily reproduced using any tool you consider the most suitable. For example, if you were to use a sheet of paper, enriched using post-it, you might think about hanging the “board” in a room and keeping it updated according to the changes that an enterprise crosses. By doing so, the people or the manager alone could begin the process of discussion and analysis that derives from the observation of this company overview. The tool, used in this way, helps the discussion, analysis and understanding of the current business and evaluates it according to the changes in the market and the corporate mission and vision, becoming, with a systematic approach, an element of facilitation to conversation about real problems.
If you want to learn more about this topic, we recommend that you also visit the page Validate your startup idea.