A Comprehensive Guide to the Business Model Canvas
The Business Model Canvas (BMC) is a strategic management and entrepreneurial tool designed to help you describe, design, challenge, invent, and pivot your business model. Developed in 2004 by business theorist Alexander Osterwalder and his professor Yves Pigneur, the BMC emerged as an agile alternative to complex and time-consuming traditional business plans, especially for the high-tech boom and Silicon Valley’s startup culture. It provides a shared language and framework essential for effective product management, bridging the gap between high-level strategy and actionable product decisions. While traditional business plans were integral for innovation in the past, their complexity and resource demands led to a decline in their use from the 1980s to 1990s. Today, the BMC has gained a respectable number of loyal practitioners, including startups and giants like Microsoft, SAP, and General Electric, due to its agility and ease of use.
A business model defines the blueprint for how a product generates revenue and achieves long-term objectives. The BMC serves as a visual template for identifying and organizing different elements of your business model. It is a method from the bestselling management book Business Model Generation, applied in leading organizations and startups worldwide.
Key Takeaways
- Product management is a strategic role that bridges customer needs, business goals, and technical feasibility.
- Product managers are responsible for a product’s lifecycle, from ideation to launch and beyond.
- They work closely with cross-functional teams to ensure product success.
- Key responsibilities include defining product strategy, prioritizing features, and conducting market research.
- Effective product management drives innovation and aligns products with business growth.
The Nine Building Blocks of the Business Model Canvas
The Business Model Canvas is divided into nine sections, each representing a vital business element. These sections are designed to provide a comprehensive overview of how a business operates and creates value:
Table of Contents
Customer Segments
This block identifies the specific groups of people or organizations a company aims to reach and serve. Understanding your customers is pivotal as they dictate how your business operates and help define your core value proposition. For a software company, customer segments can range from private individuals to global organizations, each requiring different relationships, channels, and payment options. Specific considerations for software businesses include technographic segmentation (used apps and software), top purchases (identifying high-value customers), and visitor tiers (user behavior based on product usage). Example: Venmo’s customer segments include individuals sharing bills and making easy payments, with new integrations like Uber expanding its reach.
Key Partnerships
This building block defines the network of partners and suppliers that make your business model work. Not all partners are “Key Partners”. There are four main categories of partnerships:
- Buyer-supplier: A common relationship involving the exchange of goods, ensuring reliable supplies for one side and confirmed buyers for the other.
- Strategic alliances between non-competitors: Leveraging each other’s resources, often seen in startups collaborating with various suppliers or mature businesses forming long-term relationships. Example: Venmo integrates with eCommerce stores like Urban Outfitters, Uber, or GrubHub, allowing users to make purchases while providing these sites with an additional payment method.
- Joint-ventures: Created to fill a gap that only another business can provide, helping to grow audiences or increase sales, such as enhancing a SaaS product with an API or offering third-party upsells.
- Coopetition: A partnership between competitors, usually when both companies aim to spread risks for a common revenue goal, like Apple and Amazon cooperating to sell books via the iOS Kindle app.
Key Activities
These are the most important things a company must do to make its business model work. Activities vary greatly depending on the business type; for a pizza delivery app, it involves supporting the app, organizing seamless partner connections, and updating menus. According to Business Model Generation, activities can be united into three main categories: production, problem-solving, and platform. Example: Venmo, like most software providers, falls into the “Platform” category, focusing its budget on system support and scaling as its customer base grows.
Revenue Streams
This block identifies how a company will generate income from each customer segment. A revenue model is the strategy for identifying and managing these streams. Common revenue models include:
- Advertising: Platforms like YouTube, Twitter, Google, and Facebook generate revenue primarily through ads.
- Affiliate Marketing: Earning commissions by referring other products or services to your audience, typically within the same industry.
- Subscriptions: Ideal for SaaS, PaaS, or IaaS businesses, as well as streaming services like Netflix or online publishers.
- Sponsorship/Donations: For small teams providing useful or unique services, voluntary contributions from users can be a revenue source.
- Freemium: Attracting users with a basic set of free features while offering premium features to paying customers.
- Fee-based: Charging a small, often percent-based or flat, fee for valuable services, as seen with Uber or Stripe. Example: Venmo uses a fee-based model and also drives revenue by using stored user financial activity data for personalized suggestions.
Value Propositions
This central element defines the unique combination of features that solves a customer’s problem or brings them additional value, making them choose your product. A good value proposition should be short, clear, and understandable in less than five seconds, avoiding vague descriptions and jargon. It’s crucial to have different value propositions for each customer segment. A helpful official add-on to the BMC, developed by its original creators, is the Value Proposition Canvas. This map helps detail your value propositions and customer segments by outlining customer jobs, pains, and gains (from the customer’s perspective) and products and services, pain relievers, and gain creators (from the company’s perspective). Example: Venmo’s official tagline is “Share payments”, but it also provides additional values through its social feed and eCommerce integrations for different user groups
Channels
This element describes how a company delivers its value proposition to its customer segments. Channels also create brand awareness and provide post-purchase customer support. Osterwalder and Pigneur highlight five phases of channel development:
- Raising awareness: Informing potential users (e.g., through blogging, social media, or word of mouth).
- Evaluating your Value Proposition: Helping customers experience the product’s value (e.g., try-before-you-buy, case studies, reviews).
- Purchasing methods: How users buy the product (e.g., online, app stores).
- Delivering the product: Ensuring correct installation and functionality for software products.
- Post-purchase support: Addressing customer issues, questions, and onboarding (e.g., chatbots, surveys, personal recommendations). Example: Venmo uses standard iOS and Android app markets for distribution, has a website for transaction viewing, and relies on word of mouth and partner relationships for awareness, while providing self-service support via an onboarding guide and Help Center.
Key Resources
These are the assets required to create and deliver a value proposition, reach customer segments, and maintain customer relationships. Resources are typically categorized into four types:
- Physical: Tangible assets like buildings, facilities, vehicles, hardware, or cooling systems.
- Intellectual (Intangible): Patents, copyrights, licences, customer knowledge, and cloud services. For a software business, human and intellectual assets are typically core resources.
- Human: All employees, including engineers, marketing specialists, and customer service representatives.
- Financial: Funding sources such as bank loans, advances from customers, venture capital, grants, crowdfunding, or self-funding (bootstrapping). Example: Venmo’s key resources include its code base, software licences, and human resources like programmers, QA experts, and customer service specialists. When evaluating resources, focus on those strategically important to your business, not just common ones.
Customer Relationships Strategy
This block describes the types of relationships a company establishes with specific customer segments. According to Business Model Generation, five possible cases exist:
- Personal assistance: Direct human interaction, such as via email, phone, chatbot, or dedicated client care workers.
- Self-service: Users help themselves with automated updates and onboarding guidance; communication is minimal. Example: Venmo primarily uses a self-service model, offering an onboarding guide and FAQ-rich Help Center, with direct support available via phone, chat, or email in some cases.
- Automated service: AI-powered recommendations or interactions that mimic human engagement (e.g., Netflix, Spotify).
- Communities: Creating platforms for users to exchange knowledge and connect with each other, fostering understanding of customer struggles.
- Co-creation: Facilitating user-generated content, where the company’s role is to match content creators and consumers (e.g., YouTube, HiNative).
Cost Structure
This outlines all costs incurred to operate a business model, including delivering value, maintaining customer relationships, and acquiring resources. For a typical software development company, major operational expenses include research and development (R&D), sales and marketing activities, and support costs.
- R&D costs: About 10-20% of software industry costs, with only 5% on innovation and the rest on testing.
- Sales and marketing: Often surpass R&D costs due to market competition, accounting for about 25% of revenue.
- Support costs: Related to handling customer requests and retaining the audience, including customer success management and churn prevention.
- Other costs include capital costs (investments in physical resources), overhead costs (general operational costs not directly impacting product delivery, like electricity), and staff costs (hiring, training, and retaining employees). Example: Venmo heavily relies on R&D, with sales and marketing costs, including customer support, coming in second.