The Business Model Canvas Explained

(The material contained in this handout is taken from the book Business Model Generation by Alex Osterwalder & Yves Pigneur)
Customer Segments Questions to be Answered:
Defines the different groups of people or organizations an enterprise aims to • For whom are we creating value?
reach and serve. • Who are our most important customers?

Customers comprise the heart of any business model. Without (profitable) Notes
customers, no company can survive for long.
In order to better satisfy customers, a company may group them into distinct
segments with common needs, common behaviors, or other attributes. A
business model may define one or several large or small Customer Segments.
An organization must make a conscious decision about which segments to serve
and which segments to ignore. Once this decision is made, a business model can
be carefully designed around a strong understanding of specific customer needs.

Customer groups represent separate segments if:

• Their needs require and justify a distinct offer
• They are reached through different Distribution Channels
• They require different types of relationships
• They have substantially different profitabilities
• They are willing to pay for different aspects of the offer
Value Propositions Questions to be Answered:
Describes the bundle of products and services that create value for a specific • What value do we deliver to the customer?
Customer Segment. • Which one of our customer’s problems are we helping to solve? Which
customer needs are we satisfying?
The Value Proposition is the reason why customers turn to one company over • What bundles of products and services are we offering to each
another. It solves a customer problem or satisfies a customer need. Each Value Customer Segment?
Proposition consists of a selected bundle of products and/or services that caters
to the requirements of a specific Customer Segment. In this sense, the Value Notes
Proposition is an aggregation, or bundle, of benefits that a company offers
customers. Some Value Propositions may be innovative and represent a new or
disruptive offer. Others may be similar to existing market offers, but with added
features and attributes.
Channels Questions to be Answered:
Describes how a company communicates with and reaches its Customer • Through which Channels do our Customer Segments want to be
Segments to deliver a Value Proposition. reached?
• How are we reaching them now?
Communication, distribution, and sales Channels comprise a company's • How are our Channels integrated?
interface with customers. Channels are customer touch points that play an • Which ones work best?
important role in the customer experience. • Which ones are most cost-efficient? How are we integrating them with
customer routines?
Channels serve several functions, including:
• Raising awareness among customers about a company’s Notes
• products and services
• Helping customers evaluate a company’s Value Proposition
• Allowing customers to purchase specific products and services
• Delivering a Value Proposition to customers
• Providing post-purchase customer support
Customer Relationships Questions to be Answered:
Describes the types of relationships a company establishes with specific • What type of relationship does each of our Customer
Customer Segments. • Segments expect us to establish and maintain with them?
• Which ones have we established? How costly are they?
A company should clarify the type of relationship it wants to establish with each • How are they integrated with the rest of our business model?
Customer Segment. Relationships can range from personal to automated.
Notes
Customer relationships may be driven by the following motivations:
• Customer acquisition
• Customer retention
Boosting sales (upselling)
Key Resources Questions to be Answered:
Describes the most important assets required to make a business model work. • What Key Resources do our Value Propositions require?
• What Key Resources do our Distribution Channels require?
Every business model requires Key Resources. These resources allow an • What Key Resources do our Customer Relationships require?
enterprise to create and offer a Value Proposition, reach markets, maintain • What Key Resources do our Revenue Streams require?
relationships with Customer Segments, and earn revenues.
Notes
Different Key Resources are needed depending on the type of business model.
A microchip manufacturer requires capital-intensive production facilities,
whereas a microchip designer focuses more on human resources. Key resources
can be physical, financial, intellectual, or human. Key resources can be owned
or leased by the company or acquired from key partners.
Key Activities Questions to be Answered:
Describes the most important things a company must do to make its business • What Key Activities do our Value Propositions require?
model work. • Our Distribution Channels?
• Customer Relationships?
Every business model calls for a number of Key Activities. These are the most • Revenue streams?
important actions a company must take to operate successfully. Like Key
Resources, they are required to create and offer a Value Proposition, reach Notes
markets, maintain Customer Relationships, and earn revenues. And like Key
Resources, Key Activities differ depending on business model type. For
software maker Microsoft, Key Activities include software development. For
PC manufacturer Dell, Key Activities include supply chain management. For
consultancy McKinsey, Key Activities include problem solving.
Key Partnerships Questions to be Answered:
Describes the network of suppliers and partners that make the business model • Who are our Key Partners?
work. • Who are our key suppliers?
• Which Key Resources are we acquiring from partners?
Companies forge partnerships for many reasons, and partnerships are becoming • Which Key Activities do partners perform?
a cornerstone of many business models. Companies create alliances to optimize
their business models, reduce risk, or acquire resources. Notes

We can distinguish between four different types of partnerships:

• Strategic alliances between non-competitors
• Competition: strategic partnerships between competitors
• Joint ventures to develop new businesses
Cost Structure Questions to be Answered:
Describes all costs incurred to operate a business model. • What are the most important costs inherent in our business model?
• Which Key Resources are most expensive?
This building block describes the most important costs incurred while operating • Which Key Activities are most expensive?
under a particular business model. Creating and delivering value, maintaining
Customer Relationships, and generating revenue all incur costs. Such costs can Notes
be calculated relatively easily after defining Key Resources, Key Activities, and
Key Partnerships. Some business models, though, are more cost-driven than
others. So-called “no frills” airlines, for instance, have built business models
entirely around low Cost Structures.

Revenue Streams Questions to be Answered:

Represents the cash a company generates from each Customer Segment (costs • For what value are our customers really willing to pay?
must be subtracted from revenues to create earnings). • For what do they currently pay?
• How are they currently paying?
If customers comprise the heart of a business model, Revenue Streams are its • How would they prefer to pay?
arteries. A company must ask itself, For what value is each Customer Segment • How much does each Revenue Stream contribute to overall revenues?
truly willing to pay? Successfully answering that question allows the firm to
generate one or more Revenue Streams from each Customer Segment. Each Notes
Revenue Stream may have different pricing mechanisms, such as fixed list
prices, bargaining, auctioning, market dependent, volume dependent, or yield
management.

A business model can involve two different types of Revenue Streams:

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