Three Myths about the Business Model Canvas
The Business Model Canvas is used in many companies and has proven its efficiency countless times. Nevertheless, it is still underexploited particularly in German-speaking countries. Before we get into the details of the Business Model Canvas method, we want to clean-up the three most common myths surrounding this tool.
1. I can develop a business model using the Business Model Canvas
If you want to effectively develop a business model, you want to look at the Business Model Canvas (BMC). We love this tool. However, you cannot use it to develop a business model any more than you can use agile project management to code software. For the software, you need programming skills, and for the business model, you need the appropriate economic know-how. So, if this prerequisite is given, the Business Model Canvas is a very effective tool.
2. The Business Model Canvas is a tool for startups only
The method was developed by Alexander Osterwalder and Yves Pigneur to help corporations develop their business models. Corporations, of course, already have the necessary knowledge and strategy offices to develop business models. The advantage of the method is to visualize, develop and implement new business models in a much more agile way. The achievement of A. Osterwalder and Y. Pigneur is thus a unified and actionable definition for a business model and an interdisciplinary visualization tool for agile business model development. All companies with the necessary business knowledge will benefit from this method, including (but by no means limited to) young companies and start-ups.
3. The Business Model Canvas is a poster with nine building blocks
It is true, the Business Model Canvas is actually a poster or a canvas. The name already says that. But the two authors of this tool have not only created a fancy poster in their book "Business Model Generation", but have established an agile method unprecedented in its simplicity. Anyone who reduces the business model canvas method to the poster alone will never bring his or her business model to the maturity level 2 since the better part of the method will then not be used. Unfortunately, we see this happening again and again, and the canvas remains nothing more than a nice memory of the workshop.
So, how does this method work and how to apply it properly?
The Business Model Canvas - a Tool
The Business Model Canvas by A. Osterwalder and Y. Pigneur is a tool that companies can use to develop new and innovative business models. On a canvas or poster, the new business model is presented through nine different building blocks. At the center of the canvas is the value proposition for a particular customer segment. Grouped around this are on the right side the building blocks "customer relationship", "sales channels", "customer segments" and on the left side "key activities", "key resources" and "key partners". At the bottom the building blocks "cost structure" and "revenues" to immediately access profitability. Despite its simplicity, the Business Model Canvas contains all the critical building blocks of a business model on one page.
Although the principle use of the Business Model Canvas (BMC) can be learned in a day without prior knowledge, it has an inner logic that makes it possible to present even complex business models of large corporations simply and to the point. The visualization makes an abstract business model tangible and actionable and allows effective communication within a company.
The 9 building blocks of the BMC. At the center is the value proposition. On the left the company perspective (blue) and on the right the customer perspective (red). Below that, the cost structure and revenue sources.
(Based on Osterwalder's and Pigneur's original version).
Typically, do not directly write on the BMC, but use sticky notes to flexibly try out different ideas. You should use a new canvas for each business model idea so that you can compare different business models. This is a great way to add a competitor's business model on a pin board or to show an evolution of the various business models over time (existing one, next stage, and mid-term projection).
There are some rules to use the canvas, because the goal is not to fill-out every building block, but to develop business model mechanics. We show in the next paragraph some best practices. At the end of a workshop, you prioritize the ideas and select your favorite ones. On those you need to work on more intensively, because at this point we ata talking just about ideas. The real work starts now!
The Business Model Canvas thrives on interdisciplinary collaboration. Teams should be made up of representatives from the various departments and functions. This also gives management the necessary buy-in and can break down silo thinking. You could also say: Anyone who aims at a successful digital transformation must have the Business Model Canvas in their toolbox.
Business Model Generation - the Method
The Business Model Generation method describes how to develop a business model using the Business Model Canvas as a visualization tool. There is an elaborate methodology behind the canvas. To use this tool effectively, there is a whole set of rules and best practices. Below are a few examples:
1. Correct use of key elements
The building blocks are called key customer, key activities, etc., because the underlying rule is, add only elements that are indispensable for the business model. For example, in the Customer Segment field, one lists only the customer segments to which the value proposition is tailored. Often teams map all possible customer segments in this block. By doing so, you have undermined this rule. A value proposition is specifically designed to address a certain customer segment. If this principle is not observed, either the value proposition is too general and fuzzy or you have actually combined several different business models on a single canvas. A nice trick to project a huge market, but in reality the business model will fail, because the value proposition is not really optimal for any of the customer segments.
Best Practice: Use a separate business model canvas with a specific and tailored value proposition for each individual customer segment.
Pivoting. If the current prototype does not work, you have to fundamentally change your business model design again. This is also called "pivoting the business model". The term was coined by Eric Ries.
2. Using stories to present the mechanism of the business model
All nine blocks must be connected with each other in order to work out the mechanism in the business model. HP's business model of offering the printer at a low price (key customer is "customers with a small entry budget") and selling the printer cartridge at a higher price only works, if no low-priced third-party cartridges can be used. To achieve this, HP has to fend off the competition, for example, with a patent (key resource). This is packed into a story. It is not about story telling, but to present your business model mechanism in a crisp, logical way to the team.
Best Practice: connect all key elements with arrows to illustrate the mechanism. If there are too many arrows or none at all, the mechanism is inconclusive and flawed.
3. Why is the business model generation method an agile framework?
Developing and implementing a new business model means planning for investments and when done in parallel to the current business model also to manage risks. Outlining some business model ideas with the Business Model Canvas is a first step in the right direction. But this does not result in a sustainable future business model.
Business model ideas are initially based on assumptions and hypotheses. These must be verified. Do the potential customers really like the value proposition, does the key partner really want to cooperate at an acceptable price? Does the new business model pay off at all? Is the product technically feasible? If these real data have been gathered by talking to customers, doing some experiments in the lab or workshop and the business model idea is still promising, one can speak of a business model prototype, which is refined and improved in the next sessions. Hereby, business model development automatically becomes an iterative process and the prototypes become more and more sophisticated until implementation can begin. The advantage, you start building your model on data, which form the basis for solid decision making.
Best Practice: Test and verify all assumptions of the business model prototype in reality.
In the course of the iterative development, the business model becomes more and more mature and detailed. Behind the sticky notes with keywords are now design drawings, prototypes, processes, tables, and charts. This creates different levels below the BMC allowing to switch back and forth between details and strategic considerations and to communicate effectively within the organization. This makes the method particularly interesting for existing companies, because it can be connected with the existing business processes and functional areas in the company.
In the book "Business Model Generation" by the inventors of the Business Model Canvas, A. Osterwalder and Y. Pigneur, various approaches are described for identifying customer needs, developing IP strategies, aligning marketing channels with the value proposition, etc. We take up the topic of value proposition design as an example.
Value Proposition Design
"Watching movies anytime and anywhere" is Netflix's value proposition. So it's not simply that Netflix offers "video-streaming." A value proposition solves a problem for the customer or satisfies a specific need. In former days, it was the annoying trip to the video store and even the penalty fee if you return the Blue-ray too late. For some people, this sounds like hair splitting. However, this value proposition has been so successful that there are no more video stores today.
Let's take a brief trip back to the days of video stores. For the customer, it wouldn't have made much difference whether he or she rented a video tape or downloaded the movie. A value proposition, videos to stream, would not really be an added value - it would not resonate. What is the point? But what will be interesting for the customer is saving the trip to the video store, and especially to avoid the disappointment when the movie is just out of stock. Who would not have had several membership cards? "Movies anytime and anywhere" sounds much more attractive and has set the stage of today's user behavior in movie renting.
To ensure that this value proposition is actually delivered to the customer, Netflix had to fundamentally reorganize its exsisting business model, a video rental company with a delivery service. The following figure shows a section of the (at that time) new business model.
The insulin pen from Novo Nordisk is a well-known example from medicine of how a value proposition can change the market. With the improved production methods, the problem for diabetes patients was no longer getting high-purity insulin, but daily injections. Novo Nordisk found the right solution with the Insulin pen.
Customers must be able to watch the desired film at "any time". This can be achieved neither with a delivery service (time to deliver) nor with 24/7 video stores (out of stock). The customer relationship must become convenient, automated and "self-serviced". Since thousands of customers can then watch a particular film at the same time, the platform and the Internet service provider must be able to cope with this heavy demand. The technical requirements are therefore correspondingly extensive (Netflix has worked with Internet service providers to tackle this challenge). To put its clever value proposition into practice, Netflix has digitally transformed itself and created a digital business model.
At this point, it becomes clear that the value proposition cannot be worked out in the marketing department alone, but that other departments must also be involved in the discussions. As shown above, it is very easy to communicate across functions via the Business Model Canvas. And that is an important advantage, because the business model can only be successful if it is jointly developed with all the departments involved.
There is a good reason, why the building block "Value Proposition" is at the center of the Business Model Canvas. It emphasizes the user-centric approach - a key prerequisite of digital transformation. A. Osterwalder has therefore dedicated a special book to the development of a sound value proposition, which we recommend: "Value Proposition Design".
Comparison with Other Methods
There are a number of variations of the Business Model Canvas, such as the Lean Canvas, which is simpler and well suited for certain startups. The Lean Canvas has a similar design, but certain buildings have been exchanged. For example, the Key Partner and Key Activity blocks are replaced by "Problem" and "Solution" which puts more focus on the product concept. The idea behind the Lean Canvas is to force the team to solve real customer problems with superior products. Other variants add another building block such as "corporate culture". Depending on the specific application, it may make sense to adapt the original BMC.
Another recommended method is the St. Gallen Business Model Navigator by Oliver Gassmann. This uses 55+ index cards that contain different examples of business model patterns or parts of it. This can simplify the start for inexperienced teams.
In our view, however, the danger of this method is that you just add features to your current business model rather than fundamentally rethinking the mechanism. It is not a matter of replicating a known business model pattern with one's own products, such as switching from a software product to a software-as-a-service model, or adding an online store. That hardly leads to a competitive advantage. Working out your own business model is much more in-depth, and strategic elements will make the difference between success and failure. An example, it is often observed that among competitors with very similar offerings, only one competitor prevails, such as Google over Yahoo and other search engine providers. Google had the better business model with a superior mechanism (the well-known freemium model).
If you have questions around establishing a new business model or would like to see the Business Model Generation method in action and use it to innovate your new business model, check out our offer.
Learn the Business Model Generation method in our in house workshop.
Introduction to the Business Model Generation method
Analysis of your current business model with the BMC
Design of first prototypes for an improved business model
We adapt the workshop to your specific needs
Value Proposition Design
We develop the right value proposition with you.
Analysis of customer needs using primary and secondary market research techniques.
Definition of the requirements profile for the corresponding offer
Use of Design Thinking
techniques to establish the optimal product-market-fit
Formulation of the value proposition
Testing of the new value proposition