Do you want to create a startup Business model but don’t know how or what tools to use? If YES, here are 7 smart steps to create a business model canvas.
Table of Content
- What is a Business Model Canvas?
- 1. Customer Segments
- 2. Value Propositions
- 3. Distribution Channels
- 4. Customer Relationships
- 5. Revenue Streams
- 6. Key Activities
- 7. Key Resources
- 8. Key Partnerships
- 9. Cost Structure
- Advantages of Having a Business Model Canvas
- How a Business Model Canvas is Different From a Traditional Business Plan
What is a Business Model Canvas?
The business model canvas can be described as a strategic management and entrepreneurial tool that allows you to describe, design, challenge, invent and pivot your business model. Business model canvas is the pinnacle when it comes to startups because of the cradle-help it provides for a business.
A business model canvas can be created and changed as often as the entrepreneur wants, or as often as the business model evolves. The first version of a business model canvas that a business creates is usually the starting point where an entrepreneur lists the guesses about his or her business. These guesses are assumptions that need to be proven through interaction with customers.
As customers respond to the products, the business model canvas becomes a scorecard. Instead of just posting the guesses about the business like is done in a business plan, a business model canvas allows entrepreneur to revise the guesses as they gather facts to further improve their product and customers.
A business model canvas helps a business figure out how to make changes. It can keep track of alternatives to the current business model and show how the business model needs to change. Every time a change is required, they can draw a new canvas that shows the changes. Over time, the startup model canvas will become a “flip book” that shows how the startup stated and evolved.
Below are listed the standard processes to go through if you want to create a business model canvas for your startup.
How to Create a Business Model Canvas for a Startup
The business model canvas has nine elements, and these elements give a very succinct view of the key drivers of a startup business. They include;
1. Customer Segments
A great product will fade away if no one wants it. After coming up with a viable product or service idea, it is necessary to define the target market. It is also important to actively find the geography, demographics, lifestyle and profession of customers who would readily buy your products and quantify this target market.
In order to understand your customers, you need to understand several facets of your target segment. Is your customer segment a single or multi-sided market? Then you can move deeper to analyze who your individual customers are.
Use our user persona template to create an in-depth analysis of your customer segments. With personas, you can investigate the problems and needs of your customers and use these insights to refine your business model. You can use personas to gain insight into your customer segments by;
- Collecting and displaying information about your customers’ background, lifestyle, and behavioral practices
- Exploring the needs and desires of your customer and what they are using your product or service for
- Documenting the user journey
No product can survive without customers, which makes it essential to determine what your customer segments are. The business model canvas has five customer segments: mass market, niche market, segmented, diversified, and multi-sided platform/market.
- Mass Market: Mass market means your product or service appeals to the widest possible range of people. Think of a product like laundry soap. Pretty much everyone uses it.
- Niche Market: Niche market means your product or services appeals to a specific group of customers, based on their particular needs. For example, only new parents are going to be interested in purchasing a baby booties.
- Segmented: Many companies have multiple markets within their main market. This is called a segmented market. So, for example, you may need to segment out your market based on demographic characteristics like age, gender, or location.
- Diversified: A company that serves more than one market segment has a diversified market.
- Multi-Sided Platform: Some companies have two or more markets that they’re serving simultaneously, with the same business. For example, if your company is a go-between for vendors and buyers — like Amazon is — then you have a multi-sided platform.
2. Value Propositions
What is your business promising to its audience, and how does your product or service stand out? Carefully consider what is unique about your value proposition and why customers would prefer your product or service to alternative options. After doing this, then rank your propositions in relation to the needs of your customers.
This will help you determine which value proposition is the highest priority and align your vision with your customers’ needs. Your UVP statement should:
- Quickly and clearly convey the value of your service or product
- Explain how your product or service is better than the competition
- Talk about the benefits and features that define your product or service
- Avoid superlatives such as “the best” or “world-class”. Instead, include talking points that are carefully defined and factually correct
In order to be successful, your startup needs a variety of resources. “Resources” doesn’t just mean money, though, it refers to everything your startup needs to succeed.
- Find out what financial resources you need?
- Find out what human resources you need?
- Find out what physical resources you need?
- Find out what intellectual resources you need?
3. Distribution Channels
Channels pertain to direct and indirect sales methods. Would it be necessary to hire an extensive sales force, lease a brick and mortar store, or set up eCommerce sites to meet target market sales?
What are the most effective mediums to reach your audience? What are the channels you use to communicate, sell, or provide service for customers? Make a list of the different channels that you plan on building a relationship with customers. Remember to think through the lens of the “customer journey.” The channels with which you grab a customer’s attention will be different from the way you onboard or support them.
Remember that your company won’t survive if you can’t reach your customers — so how are you going to get your product or service to them?
- Are we going to reach our customers directly, through our own channels?
- Are we going to to reach our customers through partner channels, like Amazon or a podcast network or other major distributors?
- Or are we going to use a combination of both?
4. Customer Relationships
First, determine how customers will interact with your business. Do you connect with your customers on the internet, do your customers have a relationship with a personal contact, or will you interact via customer service calls? After establishing the type of relationship, it is important to write down guidelines for creating, maintaining, and growing your customer base.
Startup founders know that customer service is the key to success. Customer relationships can take the form of personal assistance, dedicated personal assistance, self-service, automated service, communities, and co-creation. But whichever method you choose, just make sure it’s excellent.
- How is my company going to interact with customers?
- How am you going to provide that key support and build an ongoing relationship with them?
- How will customers be able to reach us if they need support with our product
- What’s the most cost effective way to still provide great customer service?
5. Revenue Streams
Concentration risk is at its highest when a startup relies on one client or one sales segment for traction and scalability. For continuity, a startup must first set realistic pricing points for customer demands. Take a careful look at your different customer segments and value propositions and mentally map out the patterns that may occur.
For example, Persona 1 may engage with Value Proposition 1 and 2 or Persona 2 may engage with Value Proposition 2 and 3. Carefully look at where your business is driving revenue and whether it aligns with your value propositions. Your startup may have one or many revenue streams, and this is where you’ll identify them.
- What are your customers currently paying for similar products?
- How are they paying for those products?
- Do they like that payment method? Would they prefer a different one?
- How much are they willing to pay you?
- How much does each individual revenue stream contribute to overall revenue of the company?
6. Key Activities
A startup or any business will have a flurry of internal and external activities to handle; finding co-founders and funders, product development, tech and sales team building, team management, and so much more. Key activities pertain to prioritized operations which directly give the customer value.
All activities can be listed. However, focus on honing in on activities such as product development, supply chain logistics, and marketing to name a few. In this regard, these activities help in strengthening customer relationships.
What actions or activities do your value proposition require you to make? Identify the key steps you need to take in order for your business to deliver on its promises and make sure development rolls out smoothly. For a product-driven business, a key activity may be learning about users and how to build a better product. For an infrastructure business, it would be important to maintain that infrastructure and research ways to increase efficiency.
7. Key Resources
Ask yourself what strategic assets do you need to launch and operate your business? Take advantage of these proven frameworks to identify your key resources and find your differentiating factor among your competitors. For product-driven businesses, key resources include specialized talent in critical areas of expertise and intellectual property.
For scope-driven businesses or businesses that create synergy around a particular Customer Segment, it is important that key resources include knowledge about your target audience and a standard set of procedures for interaction and assistance with the group. For infrastructure-driven businesses, strategic assets could include the physical or virtual infrastructure involved with the business.
- What financial resources do we need?
- What human resources do we need?
- What physical resources do we need?
- What intellectual resources do we need?
8. Key Partnerships
The first step of developing your business model is to identify the key partners you need to conduct your business. Who would you like to have as your partners, suppliers, or collaborators on your business idea? It is helpful to target specific examples but it’s also helpful to have general lines of businesses you want to focus on.
Startups need strategic partners to:
- Assist in getting key activities completed. Supply chain vendors fit in wonderfully here.
- Collaborate for ultimate value to the customers. Partnerships between corporate and academia work well as an example.
- Expand business. VCs, corporate VCs, non-profits, B2B clients converted to corporate sponsors count as strategic partners. These partnerships expand the startups’ prestige, visibility, and access to capital.
For the key partners section, you’re trying to determine who else you need in order for your startup to be successful. Who’s going along for this ride with you and your team?
- Who are our key partners?
- Who are your suppliers, if relevant?
- Who are your investors, if relevant?
9. Cost Structure
Now that you’ve worked through the Key Activities, you have a better understanding of the actions your business needs to take. It’s time to carefully consider how your Key Activities drive costs and analyze if these costs are aligned with your value propositions. It is also important to consider the type of costs that your business will be incurring. Are these costs fixed or variable? When scaling your business, will costs be linear or fixed?
In this section, you’re going to explore the different costs and monetary consequences of your model.
- Is your company cost-drive or value-driven?
- What are your fixed costs?
- What are the most important costs for your startup?
- Which Key Resources are most expensive?
- Which Key Activities are most expensive?
- What are your variable costs?
- What are your economies of scale?
- What are your economies of scope?
Advantages of Having a Business Model Canvas
- Ideas are ordered categorically. Business model canvas helps a business to order its ideas in line with its objectives. When you come up with new idea you can easily post the idea where it should be to add more value.
- Helps in ideas generation: When you share your canvas with your team they can contribute in the brainstorming. Innovative ideas are generated when it is collaborated.
- Pictures help: Creativity increases as the pictorial and segregation stimulates your right brain activity, inducing spontaneous flow of thoughts.
- You get to see the big picture early: Canvas model of ideation show a big picture of your idea flow so various possibilities of implementation as well as spin offs that will provide a better result than the previous idea is possible.
- Helps to track work flow: Canvas will greatly help in tracking the flow of the work.
- It makes alterations easier: Customer feedback can be segregated and alterations according to the requirement will be easier if the process is streamlined through a canvas.
How a Business Model Canvas is Different From a Traditional Business Plan
It is a fact that a business model canvas is quite similar to a business plan. In fact, a business model canvas is a miniature version of a business plan. But despite the similarities, a business model canvas is quite different from the traditional business plan.
A traditional business plan can takes months to compose and can run to as many as 100 pages. It’s about mapping out all of the possible contingencies for your business, from your five-year profit forecast to your cash flow, cap table, market size, product, solution. It’s a static document that’s meant to reassure both entrepreneurs and investors that a company will succeed.
A business model canvas, on the other hand, can be created in a day. It’s meant to be a dynamic document that helps provide some structure to a startup, with the understanding that it’s just a starting point. It fits neatly into the lean startup model because it’s all about getting a model created quickly so that entrepreneurs can start testing their assumptions and hypothesis. Small startup focuses on moving quickly and pivoting often if necessary, which a traditional business plan simply doesn’t allow you to do.
Again, a business model canvas is more flexible than the traditional business plan because it is not voluminous and it has provisions for changes to be made easily.