Understanding your Business Model Canvas

Published: 17 April 2014

According to Investopedia, a business model is a 'plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs.'

In this week's newsletter we look at ways to create a successful business model. There is no one-size-fits-all solution. What works for your business may not work for another. It may also be beneficial to combine a variety of business models to arrive at a unique model.

In order to obtain a better understanding of what a business model entails, there are a few questions you need to ask yourself about your business:

    Who is your target customer?
    What problem are you solving in the market?
    Is your product or service providing value to your consumers?
    How do you plan to obtain and retain customers?
    What is your business' unique selling point?
    Have you developed a cost structure?
    What are your profit margins?

The most critical questions to ask are: How do you expect to make money from your business model? and, When do you expect the profits to come in? Avoid falling into the trap of spending money before a revenue stream begins to flow. You will need to develop a timeline that will assist you to recognise:

    What possible costs you may incur when starting up your business
    Possible sources of reserves to pay for your expenditures
    Expected revenues, and when you expect them to stream in

The Business Model Canvas is a great way to get your business underway. Here are a few key steps to consider when implementing your plan:

1. The value proposition
Clearly document what problem you are solving for your customers. How are you creating value for them? The focus is on elements that define how the value proposition is created, namely: key partners, key activities, key resources and cost structure.

2. Key partners
This part of the model outlines the partners that strengthen your value proposition. This could include strategic partners or suppliers.

3. Key activities
What are the activities that you will need to focus your attention on to create the value proposition – for example manufacturing, training, etc.

4. Key resources
What resources do you need to create the value proposition? This could include aspects like skilled team members, special machinery, etc.

5. Cost structure
Establishing key partnerships, engaging in key activities and acquiring key resources will most likely drive specific costs. This part of the model should capture the detail of the different costs related to the above-mentioned three elements. The focus is on elements that define how the value proposition is delivered, namely customer relationships, customer channels, customer segments and the revenue streams.

6. Customer relationships
This part of the model should document how you plan to build and maintain relationships with your chosen customer segments.

7. Customer channels
How do you plan to deliver the product or service to the customer segments? How can these customer segments access your value proposition? Think: online store, using a team of consultants or sales agents etc.

8. Customer segments
Define the different groups of customers you intend to sell to. Be as specific as possible. For example: 28 to 40-year old females, married individuals, residents of major metropolitan cities, those with a disposable income greater than R5 000, etc. In some instances, your customers may be different from your users. This is similar to Facebook, where users have personal social accounts, while customers are those businesses that choose to advertise to users. It is also useful to understand how big your chosen customer segments are.

9. Revenue streams
How will customers pay for your product or service? Do they pay once-off? Do they pay a subscription? Do they pay-per-use or occurrence? Also, think about how much they will pay.

Social value proposition

As mentioned earlier, creating a value proposition to deliver on customer value is a key part of your business model. For the business model to function, the social value must exist and contribute positively to the community in which it operates. The social value proposition is not based solely on the financial investment, but its real value is in building trust between people and the community.

The aim of the business should be to bring enhancements that add value to the people it serves. It is not just about economic incentives like job creation, but also about creating sustainable development through entrepreneurship.

In conclusion

The Business Model Canvas reflects systematically on your business model, in order for you to factor in all the elements to your real business components. It describes the rationale of how an entrepreneur can create, deliver, and capture value. Even a great business model on paper can fail if you don't have the right people to execute it or the right structures to implement it. The market and customers are the only relevant judges of your business model. There will never be a way to assess upfront, before going to market, whether a business model will be successful or not. The above building blocks are designed to assist entrepreneurs understand their business model better. For the business model to work effectively, entrepreneurs need to outline the business model on paper to make it real.

Awethu Project is a social business incubator, which provides expertise such as business model development for entrepreneurs as well as providing valuable insights on the value and likelihood of success before the business enters the market. Awethu's primary goal is to invest in high-potential entrepreneurs with under-resourced backgrounds. Their business assists entrepreneurs with investment funding and matches talented entrepreneurs with scalable business.

If you require assistance with setting up your Business Model Canvas for your company, you can contact the Head of Business Development: Tinashe Ruzane from the Awethu Project on tinashe@awethuproject.co.za or + 27 (0)11 024 1606.

References:

Contributor: Tinashe Ruzane - Awethu Project

http://www.investopedia.com/terms/b/businessmodel.asp
http://businessmodelalchemist.com/blog/2005/11/what-is-business-model.html
http://www.dummies.com/how-to/content/defining-your-business-model.html
http://hbr.org/2011/01/how-to-design-a-winning-business-model/ar/1
http://www.globalccsinstitute.com/node/16496
- Regenesys

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