The business model canvas is one of the most powerful tools for any startup founder and his team. However, it has not been effectively understood, leading to the underutilization of its power. In this series of articles, I will discuss how entrepreneurs can use the BMC to clarify their business model and find partners for collaboration and innovation.
BMC is popularly understood as a tool that helps a startup define its business model. A business model is how a startup makes money. However, that is a very narrow understanding. A well-defined business model helps a startup redefine how they intend to reach and deliver its value to the target customers. The first step in building your BMC is defining your value proposition.
The value proposition is how a startup/business helps customers reduce pain or enhance a gain. This is not the product/service but the benefit being delivered to the customers. Many startups falter here and think that their product is their business model. Remember, the customer buys the benefits. A business sells the benefits. Your product/service is only a conduit, a vehicle that delivers these benefits!
This intense focus on delivering benefits and solving problems is generally missing in practice. This is also why many entrepreneurs struggle with their elevator pitches, as they are unclear about the benefits they deliver, the problems they solve, and for whom. Many times, social businesses confuse the customers and beneficiaries. No customer has ever bought something because it was made by the marginalized unless he finds value in the product itself.
The next step is clearly defining the customer segments. Rather than just looking at customer personas, use the “Jobs to Be Done” framework, which would further help enhance the value proposition. This way, discovering value propositions and customer segments becomes an iterative, cyclical, ongoing process.
Based on the customer journey used to satisfy his/her need, channels can be identified to deliver value. These channels then present an opportunity to disrupt and innovate. Sometimes we may have to piggyback on them. One of the best examples is selling insurance through banks. If needed, the startup can develop its delivery channel like the food delivery startups.
Customer relations are driven by the customer segment and their preferred way of engagement. This can’t be assumed but tested and finetuned. Millions of dollars are wasted because of a generic spray-and-pray approach. Word of mouth/WhatsApp groups could be a very cost-effective communication channel.
The next step is to identify all the key activities we need to perform to deliver the value proposition through the selected channels and manage customer relations. These would encompass sourcing, manufacturing, distribution, marketing, sales, and after-sales service – essentially all the value chain components. This is essential before going for key resources to perform all these activities.
After identifying the key activities and resources, we identify key partners. We can identify key partners from channels, customer relations, activities, and resources. All the suppliers in each of these boxes can become key partners.
The next step is to identify revenue streams. A revenue stream is an additional value proposition delivered to the same customer base without major capital expenditure. There would be some product-specific operational expenses. These expenses will be added to the cost structure. This is akin to selling additional snack items from a coffee shop. Every startup should have at least three to five revenue streams to ensure sustainability.
Now we are ready for cost structure. All the above items identified will incur costs for implementation. All channel partners will add to the cost of sales. All customer communications would add to the cost of customer acquisition. Activities require physical and people to execute them, machinery, and materials. Partners will add costs to production and other costs.
All these elements provide the necessary inputs and assumptions based on which we have created the business model. This needs to be tested by implementing a minimum viable product to prove the business model and verify the unit economics. This is how the business model canvas can be used to develop and test your business model. The next article will explore how BMC can be used for innovation.
About the Author
Flt. Lt. Sridhar is a Startup Ecosystem Builder, Keynote Speaker, Author, Researcher, and Entrepreneur. Sridhar’s mission is to help Entrepreneurs and startups achieve incredible success through exponential growth. He brings insights and lessons from three decades of hands-on startup and business leadership experience in various verticals. Sridhar uses six different thinking processes, including systems thinking and design thinking, and helps entrepreneurs create breakthrough solutions through his unique coaching process. Sridhar launched and ran four businesses. He is a certified Startup Mentor from the Confederation of Indian Industries.