This revolutionary way of looking at your business has become the preferred methodology used by investors and entrepreneurs alike to assess financial potential
Anyone looking to start (or revamp) a business would do well to follow the model developed by Alexander Osterwalder – The Business Model Canvas (BMC). This tried and tested approach to describing a business has replaced the document most requested by investors and other stakeholders – the Business Plan. Whereas the business plan explains how to set up and run a business from an operational perspective, the business model explains how the business will make money. And making money is what investors expect a business to do.
The BMC breaks down the business model into nine cores: five relating to income and four relating to cost. In part one of this series, we will look at the income side and in part two we will consider the costs and what the overall model tells a business owner about how successful the business will be.
Running a profitable business simply means the costs of delivering the products or services and overheads must be less than the income from selling those products or services. Costs are generally quite easy to assess but calculating the income from sales is a much harder task.
When starting to use the BMC, the first area to be considered in relation to income is Customer Segmentation. Who are your customers? Are they all similar? If not, what are the differences? Where are they located (physically or online)? Are you selling to other businesses or to consumers, or both?
For some businesses you will have a single customer type. You know their profile very well and you know how to reach them. But even in this scenario, it is probably worth spending some time confirming this. By brainstorming with colleagues, existing customers and others not directly involved in your business, might help you identify new opportunities.
Defining your customer segments is fundamental to how you develop all the following parts of the canvas as each segment probably requires a different marketing and sales approach. Segmentation also allows you to track the most profitable areas of your business and therefore optimise your profitability.
For example, imagine you are a small catering business (not very high-tech, but most businesses aren’t). You could have take-out customers, dine-in customers, and outside catering customers. Each of these segments requires a different approach, which brings us on to the second area of the canvas – the Value Proposition.
The value proposition is how you describe – specifically to each customer segment – what value your product or service will bring to that customer. In our catering company example, the value proposition for each segment could be as follows. For the take-out customer the core value proposition would be speed and convenience (with price being a consideration). For the dine-in customer, the ambience of the restaurant would be key, together with the range and quality of the menu. Price is less of an issue. Outside catering customers would want to be sure of your quality, timeliness, fixed-price per head options, on-site service. As you can see, all three customer types have different expectations and value different aspects of your business.
Once you know your customers and know how to present your product or service, you need to be able to communicate with them. Under the Channels part of the canvas, you need to understand how your customers want to be reached. Note, this is not how you want to reach your customers. Channels can be direct or indirect, and they can be owned by you or by a partner. To reach take-out customers a sign on the road might be enough. For the dine-in customer, good reviews on Tripadvisor and Google maps might be required. And for outside catering, word of mouth recommendations could be the most powerful channel. (Word of mouth is actually a very important channel for almost any sales activity.)
Once you have customers, you need to begin the process of building and maintaining Customer Relationships. Repeat business is usually much easier to get than acquiring new customers. Again the customer relationship has to fit with how the customer segments expect and want the relationship, and it will vary by segment. At one end, customers might expect a simple self-service relationship where speed and convenience is paramount. At the other end, very personal direct assistance could be required to close a large deal. When selling online, a simple to use semi-automated website or app could be relevant. Or developing online communities of interest around your product or service might build a strong relationship with your business.
For our catering company take-out customers, a good way to build and maintain the relationships could be with a simple loyalty card. For every 10 or 12 purchases, one is free. For small local businesses, getting to know the names of regular customers could be advantageous. Offering new menu items at a discount for loyal customers can also maintain the relationship. For dine-in customers, having the greeter remember regulars or remembering their favourite drinks will make customers feel special and ‘at home’. Building relationships for outside catering would take more time, with a dedicated salesperson likely to be required, and possibly offering tastings. Having a regularly changing menu or allowing customers to request specific dishes increases the likelihood of repeat business. As you can see, all the relationships are different, require different skills and relate to different sizes of sales.
To understand the Revenue of the business as a whole (the final part of the canvas income model), the size of each customer segment needs to be estimated along with the number of sales per customer, and the value of each sale. The size of the segment may grow over time, or it may have a theoretical maximum. In recent years a focus on the TAM (Total Available Market), the SAM (Serviceable Available Market) and the SOM Serviceable Obtainable Market) has become a popular way of assessing the opportunity. Sales per customer per month, and average value of each go into calculating the overall revenue. And, as mentioned above, you can easily see which segments contribute the most income. To understand which are most profitable, we need to look at the cost side of the canvas, the subject of the second part of this series.
David Tee has over 35 years experience in technology development, entrepreneurship and international consulting. He has founded and worked in Cambridge IT startups, consulted for a Silicon Valley-based advisory firm, and supported the development of innovation-focused incubation services across the world. He is currently on assignment in Turkey, and lives between Europe and India.