Business Model Canvas - Building Blocks - Summary

The 9 business model Building Blocks form the basis for a handy tool, which we call the Business Model Canvas.

This tool represents the painters canvas - preformatted with the 9 blocks - which allow you to paint pictures of new or existing business models. The Business model canvas works best when printed out on a large surface so groups of people can jointly start sketching and discussing business model elements with Post-it notes or board markers.

It is a hands-on tool that fosters:

• understanding, 
• discussion, 
• creativity and 
• analysis.

Below is a slightly different business model used by lean startup guys:

Additional References:

• https://www.quora.com/What-should-everyone-know-about-the-Business-Model-Canvas
• http://diytoolkit.org/tools/business-model-canvas/

Business Model Canvas - Building Blocks - 09 - Cost Structure

Cost Structure = all costs incurred to operate a business model

Some business models, though, are more cost-driven than others. So-called "no frills" airlines, have built business models entirely around low Cost Structures.

Questions to ask ourselves while thinking about Cost Structure:

• Which are the most important costs inherent in our business model?
• Which key resources are the most expensive?
• Which Key Activities are the most expensive?

It is useful to distinguish between two broad classes of business model Cost Structures:

• cost driven
• value driven

Many business models fall in between these two extremes:

1. Cost Driven:
• focus on minimizing costs wherever possible.
• This approach aims at creating and maintaining the leanest possible cost structure.
• No frills airlines, such as SpiceJet and Indigo typify cost driven business models.
2. Value Driven:
• Some companies are less concerned with the cost implications of a particular business model design and instead focus on value creation.
  
• Premium value propositions and a high degree of personalized service usually characterize value driven business models.
  
• Luxury hotels, with their lavish facilities and exclusive services, fall into this category.

Cost Structures can have the following characteristics:

• Fixed Costs:
• Costs that remain the same despite the volume of goods or services produced.
• Examples include salaries, rents, and physical manufacturing faciliites.
• Some businesses such as, manufacturing companies are characterized by a high proportion of fixed costs.
• Variable Costs:
• Costs that vary proportionally with the volume of goods or services produced.
• Some businesses such as - music festivals are characterized by a high proportion of variable costs.
• Economies of Scale:
• Cost advantages that a business enjoys as its output expands.
• Larger companies, for instance, benefit from lower bulk purchase rates.
• This and other factors cause average cost per unit to fall as output rises.
• Economies of Scope:
• Cost advantages that a business enjoys due to a larger scope of operations.
• In a large enterprise, for example, the same marketing activities or Distribution Channels may support multiple products.

Business Model Canvas - Building Blocks - 08 - Key Partnerships

Key Partnerships = network of suppliers and partners that make the business model work.

Companies create alliances to:

• optimize their business models
• reduce risk
• acquire resources

We can distinguish between four different types of partnerships:

1. Strategic alliances between non-competitors 
2. Competition: strategic partnerships between competitors 
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies

Questions to ask ourselves while thinking about Key Relationships:

• Who are our Key Partners?
• Who are our Key Suppliers?
• Which Key Resources are we acquiring from partners?
• Which Key Activities do partners perform?

It can be useful to distinguish between three motivations for creating partnerships:

1. Optimization and Economies of Scale:
• The most basic form of partnership or buyer-seller relationship is designed to optimize the allocation of resources and activities.
• It is illogical for a company to own all resources or perform every activity by itself.
• Optimization and economy of scale partnerships are usually formed to reduce costs, and often involve outsourcing or sharing infrastructure.
2. Reduction of Risk and Uncertainity:
• Partnerships can help reduce risk in a competitive environment characterized by uncertainity.
• It is not unusual for competitors to form a strategic alliance in one area while competing in another.
• Blu-ray for example, is an optical disk format jointly developed by a group of the world's leading consumer electronics, personal computer and media manufacturers. The group cooperated to bring Blu-ray technology to market, yet individual members compete in selling their own Blu-ray products.
3. Acquisition of particular resources and activities:
• Few companies own all the resources or perform all the activities described by their business models. Rather, they extend their own capabilities by relying on other firms to furnish particular resources or perform certain activities.
  
• Such partnerships can be motivated by needs to acquire knowledge, licenses or access to customers.
  
• A mobile phone manufacturer, for example, may license an operating system for its handsets rather than developing one in-house.
  
• An insurer may choose to rely on independent brokers to sell its policies rather than develop its own sales force.

Business Model Canvas - Building Blocks - 07 - Key Activities

Key Activities = Most important things a company must do to make its business model work

Company	Business Model	Key Activity
Microsoft	Software Maker	Software Development
Dell	PC Manufacturer	Supply Chain Management
McKinsey	Consultancy	Problem Solving

 Questions to ask ourselves while thinking about Key Activities:

• Our Value Propositions require what type of Key Activities?
• Our Distribution Channels require what type of Key Activities?
• Our Customer Relationships require what type of Key Activities?
• Our Revenue Streams require what type of Key Activities?

These are some ways to categorize Key Activities:

• Production:
• Example: Activities like: Designing, Making and Delivering a Product in substantial quantities or of superior quality.
• Production activity dominates the business model of manufacturing firms.
• Problem Solving:
  
• Activities include - coming up with new solutions to individual customer problems.
• Example: operations of consultancies, hospitals and other service organizations are typically dominated by problem solving activities.
• Their business models call for activities like: knowledge management and continuous training.
• Platform / Network:
  
• Business models designed with a platform as a key resource are dominated by platform or network related key activities.
• Networks, matchmaking platforms, software and even brands can function as a platform.
  
• eBay's business model requires that the company continually develop and maintain its platform: the website at eBay.com.
• Visa's business model requires activities related to its Visa credit card transaction platform for merchants, customers and banks.
• Microsoft's business model requires managing the interface between other vendor's software and its Windows operating system platform.
  
• Key activities in this category relate to platform management, service provisioning and platform promotion.

Business Model Canvas - Building Blocks - 06 - Key Resources

Key Resources = most important assets required to make a business model work

The Key Resources of a Business allow an enterprise to:

• create and offer a Value Proposition
• reach markets
• maintain relationships with Customer Segments 
• earn revenues

Depending on the type of business model we need different kind of Key Resources. For example:

• Microchip manufacturer requires: capital intensive production facilities
• Microchip designer focusses more on: human resources.

Key Resources can be:

• Owned or,
• Leased by the company or,
• Acquired from Key Partners

Questions to ask ourselves while thinking about Key Resources:

• Our Value Propositions require what type of Key Resources?
• Our Distribution Channels require what type of Key Resources?
• Our Customer Relationships require what type of Key Resources?
• Our Revenue Streams require what type of Key Resources?

These are some ways to categorize Key Resources:

• Physical:
• Key resources are physical like: manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems and distribution networks.
• Retailers like Walmart and Amazon.com rely heavily on physical resources, which are often capital intensive.
• Walmart has an enormous global network of stores and related logistics infrastructure.
• Amazon.com has an extensive IT, warehouse and logistics infrastructure.
• Intellectual:
• Intellectual Resources are like: Brands, Proprietary Knowledge, Patents and Copyrights, Partnerships, and Customer Databases
• These are increasingly important components of a strong business model.
• Intellectual resources are difficult to develop but when successfully created may offer substantial value.
  
• Consumer goods companies such as Nike and Sony rely heavily on Brand as a Key Resource.
• Microsoft and SAP depend on software and related intellectual property developed over many years.
• Qualcomm - a designer and supplier of chipsets for broadband mobile devices, built its business model around patented microchip designs that earn the company substantial licensing fees.
  
• Human:
  
• Every enterprise requires human resources, but people are particularly prominent in certain business models.
  
• Example: Knowledge intensive and creative industries.
• Pharmaceutical company like Novartis relies heavily on Human Resources. Its business model is predicated on an army of experienced scientists and a large and skilled sales force.
  
• Financial:
• Some business models call for financial resources and/or financial guarantees, such as cash, lines of credit, or a stock option pool for hiring key employees.
  
• Ericsson, the telecom manufacturer provides an example of financial resource leverage within a business model.
  
• Ericsson may opt to borrow funds from banks and capital markets, then use a portion of the proceeds to provide vendor financing to equipment customers, thus ensuring that the orders are placed with Ericsson rather than competitors.

Business Model Canvas - Building Blocks - 05 - Revenue Streams

Revenue Streams = How much money the company makes from each customer segment ?

Note: Costs must be subtracted from revenues to create earnings)

If,

 customers = heart of business model

then,

 revenue = arteries.

The question a company must ask itself, for what value is each customer segment truly willing to pay? Successfully, answering this question allows the firm to generate one or more revenue streams from each customer segment. 

Each revenue stream may have different pricing mechanisms, such as:

• fixed list prices
• bargaining
• auctioning
• market dependent
• volume dependent
• yield management

A business model can involve two different types of revenue streams:

1. Transaction revenues resulting from one time customer payments.
2. Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support.

Questions to ask ourselves while thinking about Revenue Streams:

• For what value proposition are our customers truly willing to pay?
• For what do they currently pay?
• How are they currently paying?
• How would they prefer to pay?
• How much does each Revenue Stream contribute to overall revenues?

These are some ways to generate Revenue Streams:

• Asset Sale:
  
• This is the most widely understood Revenue Stream.
  
• It derives from selling ownership rights to a physical product.
  
• Example: Maruti sells automobiles, which buyers are free to drive, resell, or even destroy.
• Usage Fee:
  
• This Revenue Stream is generated by use of a particular service. The more a service is used, the more the customer pays.
  
• Example: BSNL/MTNL may charge customers for the number of minutes spent on the phone.
  
• Ginger hotel charges its customers for the number of night roooms used.
  
• DTDC package delivery charges customers for the delivery of a parcel from one location to another.
• Subscription Fees:
  
• This Revenue Stream is generated by selling continuous access to a service.
  
• Example: A fitness club provides access to its facilites in exchange for monthly or yearly subscriptions.
  
• JustBooks is a library which allows users to access reading unlimited  books in exchange for monthly subscription fees.
• Lending/Renting/Leasing:
  
• Make money by temporarily granting someone the exclusive right to use a particular asset for a fixed period in return for a fee.
  
• Example: Ramesh Tours and Travels - allows customers to rent luxurious cars by the hour in Bangalore. Ramesh Babu's service has led many people to decide to rent rather than purchase automobiles.
• Licensing:
  
• This revenue stream is generated by giving customers permission to use protected intellectual property in exchange for licensing fees.
•  Licensing is common in media industry and technology sectors.
• Brokerage Fees:
  
• Generated by Inter-mediation services performed on behalf of two or more parties.
  
• Example: Real Estate agents
• Advertising:
  
• Results from fees for advertising a particular product, service or brand.
  
• Example: In recent years, software and services, have started relying on advertising revenues.

Each Revenue streams can have a different pricing mechanisms. The type of pricing mechanism chosen can make a big difference in terms of revenues generated. 

There are two main types of pricing mechanism: 

• fixed pricing
• dynamic pricing

1. Fixed Pricing - Predefined prices are based on static variables
• List Price - Fixed price of individual products, services or other value propositions.
• Product Feature Dependent - Price dependent on the number or quality of value propositions features.
• Customer segment dependent - Price dependent on the type of the customer segment.
• Volume Dependent - Price as the function of the quantity purchased.
2. Dynamic Pricing: Prices change based on market conditions
• Negotiation (bargaining) - Price negotiated between two or more partners depending on negotiation power and negotiation skills.
• Yield management - Price depends on inventory and time of purchase (normally used for perishable resources such as hotel rooms or airline seats.)
• Real-time market - Price is established dynamically based on supply and demand.
• Auctions - Price determined by outcome of competitive bidding.

Business Model Canvas - Building Blocks - 04 - Customer Relationships

Customer Relationships = Company's relationships with each specific customer Segment

A company should clarify the type of relationship it wants to establish with each customer segment.

Relationship can be:

• personal
• automated

Customer relationships may be driven by the following motivations:

• Customer acquisition
• Customer retention
• Boosting sales (upselling)

Example: In its early days, Reliance Jio mobile network provider is providing free services as part of its aggressive customer acquisition strategy. Once it reaches its limit of customers, it will focus on customer retention and increasing average revenue per customer.

The customer relationships mentioned in the company's business model deeply influences the overall customer experience.

Questions to ask ourselves when thinking about - Customer Relationships:

• What relationship each of our Customer Segments expects us to establish and maintain with them?
• Which ones have we already established?
• How costly is it to maintain the customer relationship?
• How is it integrated with the rest of the business model?

We can distinguish between several categories of customer relationships, which may co-exist in a company's relationship with a particular customer segment:

• Self Service: 
• Company maintains no direct relationship with the customer.
• Personal Assistance: 
• Example: Through Call centeres, Point of Sale, Email.
• Dedicated Personal Assistance: 
• In private banking services, dedicated bankers serve high net worth individuals. 
• Key Account Managers maintain personal relationships with important customers.
• Automated Services: 
• Can recognize individual customers and their characteristics and provide information related to orders or transactions. 
• At best, automated services can simulate a personal relationship (example: offering a book or movie recommendations)
• Communities: 
• Many companies maintain online communites that allow users to exchange knowledge and solve each other's problems. 
• Example: GlaxoSmithKline launched a private online community when it introduced alli, a new prescription free weight loss product.
• Co-creation: 
• Amazon.in invites customers to write reviews and thus create value for other book lovers. 
• Youtube.com solicit customers to create content for public consumption.

Business Model Canvas Example: Gillette 

Business Model Canvas - Building Blocks - 03 - Channels

Channels (Building Block) = how a company reaches its customer segments to deliver Value Propositions

Company's interface with customers:

• communication channels
• distribution channels
• sales channels

Channels are customer touch points which play a crucial role in customer experience. The several functions of channels are:
Raises awareness about company's products and services.
helps customer to judge a company's value proposition
allows customers to purchase specific goods (products and services)
providing customer support - post purchase

Questions to ask ourselves while thinking about channels:

• which channels will our customer segment use to reach us?
• through which channel are we reaching our customer segments now?
• in which ways are our various channels integrated?
• which channels work best?
• which channels are the most cost efficient?
• how are we integrating them (Here, them means - rest of the business model) with customer routines?

There are 5 distinct phases to channels. Each channel can cover some or all of these phases. 

Channels can be distinguished as:

• Direct Channels
• Indirect channels

Channels can also be distinguished as:

• Owned channels
• Partner channels

Finding the right mix of channels is crucial in taking the Value Proposition to market. 

• Partner channels lead to lower margins but they allow an organization to expand its reach and benefit from partner strength.
• Owned Channels and particularly direct ones have higher margins, but can be costly to put in place and to operate. 

The trick is to find the right balance between the different types of channels, to integrate them in a way to create a great customer experience, and to maximize revenues.

Channel Types			Channel Phases
Own	Direct	Sales force	Awareness	Evaluation	Purchase	Delivery	After Sales
		Web sales	how to raise awareness of our products ?	How to help customer evaluate our value proposition ?	How to allow customer to purchase specific products and services ?	How to deliver our Value Proposition ?	How to provide post purchase customer support?
	Indirect	Own stores
Partner		Partner stores
		wholesaler

Business Model Canvas - Building Blocks - 02 - Value Propositions

Value Proposition = Bundle of Products / Services / Benefits which satisfies the needs of a specific customer segment.

Value Proposition is what attracts customers towards a company.
It is the reason for loyalty shift of customers.
Value Proposition is the solution to customers problem.

Value Proposition maybe:

• Innovative and Disruptive in terms of offerings to customers.
• Value addition to existing offerings in the market like: additional features and attributes.

Values maybe:
Quantitative: Price , Speed of Service
Qualitative: Design, Customer Experience


Questions to ask while thinking about value Propositions:

• What value is being delivered to the customer?
• Which particular customer problem are we addressing?
• Which needs of the customer are we fulfilling?
• What Bundle of Products is being offered by us to each Customer Segment?

Handy Tips for that can contribute to customer value creation:

1. Newness
• Satisfy entirely new set of needs. Not always Technology
• Example: Technology: Cell Phones
• Example: Non-Technology: Ethical Investment Funds
  
2. Performance
• Most common way to create value
• Example: PC sector - new machines more powerful than previous ones.
• It has limits: faster PCs, more disk storage, better graphics have failed to produce growth in demand.
  
3. Customization
• Tailoring products to suit customer (individual / segment) needs creates value.
• Mass Customization and Customer co-creation have gained importance.
4. "Getting the Job Done"
• Simply by helping certain jobs of customer to be done.
• Example: Airline customers rely entirely on Rolls-Royce to manufacture and service their jet engines. This arrangement allows the customer to focus on running their airlines. Rolls Royce is paid for every hour the engine runs.
  
5. Design
• Difficult to measure Design.
  
• A product may stand out due to superior design.
• Example: Fashion and Consumer Electronics.
  
6. Brand / Status
• Simple act of using and displaying specific brands.
• Example: Wearing a Rolex.
  
7. Price
• Similar value offered at lower price - meets the need of price-sensitive customer segments.
• Example: Reliance Jio, Air Deccan
• Example: Tata Nano - makes automobile affordable to a whole new segment of Indian population.
  
8. Cost Reduction
• Help customers to reduce their costs.
• Example: salesforce.com sells a hosted CRM application. Relieves operating and maintenance costs for customers.
  
9. Risk Reduction
• Customers value reducing the risks
• Example: One year guarantee for used car buyers reduces the risk of post purchase breakdowns.
  
10. Accessibility
• Making products / services available to customer segments who previously lacked them - creates value.
• This is result of: BusinessConvenience / Usability Model Innovation, Technology , Both
• Example: Mutual Funds - made it possible even for those with modest wealth to build diversified investment portfolios.
  
11. Convenience / Usability
• Make things convinient / easier to use - creates value.
• Example: iPod and iTunes - apple offered customers unprecedented convenience searching, buying, downloading and listening to digital music.
  

Slack - Value Proposition Canvas:

Business Model Canvas - Building Blocks - 01 - Customer Segments

Customers: Organizations or People your business aims to reach and serve.

"For whom are we creating value? 

Who are our most important customers ? "

Notes:

• Without Customers no company can survive. Customers can be segmented (grouped):
• common needs - and require a different types of relationships
• common behaviors
• reached through common distribution channels
• based on profitability
• willingness to pay for different aspects of the offer.
• Conscious decision must be taken - which segments to serve and which segments to ignore.
• After this business model is carefully designed around strong understanding of specific customer needs.

Examples of different types of customer segments:

• Mass Market - These business models don't distinguish between customers.
• Example: consumer electronics sector. Samsung, LG
  
• Niche Market - They cater to specialized customer segments - all tailored to specific requirements of a niche market.
• Example: many car part manufactureres depend heavily on major automobile manufacturers.
• Segmented - Some business models distinguish between market segments with slightly different needs and problems.
• Example: HDFC Bank may distinguish between large group of customers possessing assets exceeding 1 crore rupees and smaller group of affluent clients exceeding 10 crore rupees. Both segments have similar but varying needs and problems. This has implications on other building blocks of HDFC Bank's business model, such as:
• Value Propositions
• Distribution Channels
• Customer Relationships and,
• Revenue Streams
• Diversified -Serves two unrelated Customer Segments with very different needs and problems.
• Example: In 2006, Amazon.com decided to diversify its retail business by selling "cloud computing" services: online storage space and on-demand server usage. This is a totally different customer segment : Web companies - with a totally different:
•  Value Propositions
• Multi-sided platforms (or multi-sided markets) -Some companies serve two or more interdependent customer segments.
• Example 1: A credit card company need large base of credit card holders and large base of merchants who accept those credit cards. State Bank of India
  
• Example 2: A newspaper company offering free news - need large base of readers and large base to attract advertisers. Both segments are needed for the business model to work.

Canvas - The 9 Building Blocks of a Business Model

What is a business model?

A business model describes - how a organization:

• Creates Value
• Delivers Value
• Captures Value

Notes:

• Starting Point of Discussion / Meeting / Workshop - shared understanding of what a business model actually is.
• The concept should be so simple that it helps to facilitate discussion.
• Without this shared language it is difficult to challenge our assumptions and innovate successfully.
• Consider a Business Model as a blueprint for the strategy to be implemented through the business.

The 9 Building Blocks of a Business Model

#	BB	Building Blocks	Meaning
1	CS	Customer Segments	Customers served by the Organization?
2	VP	Value Propositions	Which customer needs are being met by the value proposition by the Business?
3	CH	Channels	Which are the Distribution, Communication and sales channels used for bringing the value propositions to the end customers ?
4	CR	Customer Relationships	how is it being maintained with each customer segment?
5	RS	Revenue Streams	revenue streams from the value propositions being offered?
6	KR	Key Resources	They are the assets required to offer and deliver the elements described above
7	KA	Key Activities	these are important activities performed
8	KP	Key Partnerships	outsourced activities ? acquired resources outside the enterprise?
9	CS	Cost Structure	Cost of the elements in our business model ?

Example: Pokemon Go

Example: iTunes