Business Models

A business model tells you how a company makes money. More formally, a business model describes the rationale of how an organization creates, delivers and captures value. Alexander Osterwalder and Yves Pigneur have proposed a business model canvas, a shared language for describing, visualizing, assessing and changing business models. The canvas identifies nine building blocks of a business model.

Business Model Canvas by Osterwalder & Pigneur

My team used this canvas for analyzing one of our businesses, and found it very useful  in galvanizing a vibrant discussion. I recommend it highly. To know more about the business model canvas, visit their web site.

Here is a quick primer on the 9 building blocks:


1. Customer Segments
Who are the people or organizations that you aim to reach and serve? How would you group them into segments with common needs, behaviors, buying habits, etc.? Different segments may require different offers, channels or relationships. They may have different profitability and willingness-to-pay.

2. Value Propositions
What product-service offerings do you have and why do you think they create value for a specific customer segment? The value proposition is the reason to buy from you, not the company next door. Are your offerings new, better-performing, customized, cost-effective, well designed, status-enhancing,  risk-free, accessible, convenient? What is your value proposition?

3. Channels
How does your company communicate with and reach the customer segments to deliver the value proposition? This includes channels for communication, distribution, sales and support. Channels raise awareness, help customers in evaluating value proposition, allow purchase, deliver value proposition and post-sale support.

4. Customer Relationships
What type of relationship does the company establish with specific customer segments? Answer could vary: dedicated, personal, self-service, automated,  communities, co-creation etc.

5. Revenue Streams
What kind of transactions result in generating net cash for the company from each customer segment? What value are they willing to pay? Though what pricing mechanism?  One time or recurring or both? There are several ways to generate revenue streams: product sale, usage fee, subscription, leasing, licensing, commission, advertising etc.

6. Key Resources
What are the most important assets you must have to make the business model work? This includes physical, intellectual, human and financial resources.

7. Key Activities
What are the most important things a company must do to make its business model work? The answers could vary from technology R&D to supply chain management and from product sales to brand management.

8. Key partnerships
What network of suppliers and partners would be critical to make the business model work? What kind of partnerships would you pursue? Strategic alliances, JV, buyer-supplier relationship or even competition?

9. Cost Structure
What are the costs incurred to operate a business model? Are they largely fixed or variable? Are their economies of scale or scope?

For those of you contemplating start-ups, as well as those responsible for sustaining and growing  existing businesses, I highly recommend asking these questions Osterwalder and Pigneur have proposed.