How do you generate or refine a business model? In this episode, I introduce the Business Model Generation canvas developed by Alexander Osterwalder and Yves Pigneur.
I describe the nine building blocks and also dive into different types of business models: the long tail, multi-sided platforms, freemium models, and open business models. Finally, I explain the phases of a business model generation process.
Today, we will be talking about business models and more specifically, how you can generate business models or you can analyze them and how you can refine them. It’s a very important part of being a leader.
Welcome to another episode of the Wholegrain Leadership Podcast. My name is Matthias Catón. Welcome to the show. Today we will talk about business model generation. The business model is essentially the master plan of what your organization has to offer. So this is a vital central part of what you [00:01:00] do, and it is a very important part of a leader’s job to make sure that business models are up to date.
They are working, that you can come up with innovation. And we’ll talk a little bit about how you can do that. There is a great book that I will present to you today, or the ideas, the main ideas of that book. It’s called “Business Model Generation”, and the subtitle is: “A Handbook for Visionaries, Game Changers, and Challengers.”
So if you think you could be one of those three envisionary a game changer. Or a challenger, then this will be useful and interesting for you. The book is written by two people, Alexander Osterwalder and Yves Pigneur. They have a very particular approach that I like a lot. They’ve also written other books, so we’ll probably get back to them in other episodes of this [00:02:00] podcast again, but today we want to talk about the business model generation.
The podcast will have different parts, and I’ll go through the main ideas of that book and obviously as usual, you will find the exact link to that book in the show notes. So if you want to go ahead and purchase it, which I think you absolutely should, then you can find the link there. The two office of the book was to Stivarga and Pega.
They work with a design thinking approach. For me, that works very well. I have used this approach myself. I like it. There are obviously other ways you can generate or work on business models. I like it because they approach they’re using is at the same time. Very creative allows for innovative out of the box ideas by this.
Also structured enough to make sure that what comes out of it at the end of the process is [00:03:00] something coherent that you can actually put into practice. The central element of the business model generation process is the business model canvas. You cannot see this in the podcast of course, but if you go to the show notes, you will find.
An image there. It’s a visual representation of your business model. Why does that help? It helps because it allows you to see all the different facets and angles and approaches that you need to take into consideration on one piece of paper and you can really work with it offline. You can also use some tools that are out there where you can fill in the canvas electronically, send it around, shared with others.
But it helps you to structure your thinking. And in my view, and I will go through the different elements. It is at the [00:04:00] same time, sufficiently deep to allow a full fledged picture of how your business model could look like. But at the same time, it is also easy enough for basically anybody to comprehend.
So it’s a great tool, not just for the generation, but also. To use it to explain your idea to others that are may be stakeholders. You need to get them on board. The business model canvas has nine central building blocks, and each of these looks at one aspect of your business model. Let’s go through these nine blocks quickly to give you an idea of what they’re about.
You can, by the way, start basically everywhere on the canvas. So there is no prescribed path through the development. And the reason is that since everything is kind of connected, you cannot really start at any one point how you do it exactly will [00:05:00] depend a lot on weather. You’re the truly working on a empty, a blank canvas.
You were starting out and you’re trying to develop a new idea. Or maybe you already have a business model because you have an existing business, and what you’re trying to do is to first map it out and then see where you can drive some innovation. Obviously the two things are quite different. So the order in which I will present this does not necessarily have any implications on how you should actually do it.
You can start basically wherever you want, and in my experience, at least what happens is that you work a little bit all over the place, so you start filling out. It’s in this box. Then you go over to another box and then you start seeing some interconnections, which means that you might go back, may go back to inbox that you worked on earlier.
You refine some things, you’ve changed things. So it is a very iterative process and that is also very much in line with the design thinking approach [00:06:00] of all star and . Lots of iterations. You go through the cycle again and again, you’d tinker with things, you change them until finally you are satisfied.
What are the nine building blocks of the business modeling canvas? The first one is called customer segments. And if you have a business, you must have customers. If you don’t have customers, you don’t have a business. Simple as that. And there you define what types of customers you are looking at. Maybe you have different segments, which are they?
Where are they located? Are they big companies, small companies, consumers? What kind of people. Maybe one segment may also be different segments, customer segments that you’re trying to reach with your product or service, and that’s what you define in the customer segments box. The next one is [00:07:00] channels. If you have customers, you have to reach them somehow.
You have to market your offering to them. And in this box in this segment, you define through which channels you want to reach them. Is it online, offline, face to face, through ads, through earned media? What kind of channels are you using? And most likely it will be a mix of channels that you will be using there.
And if you have different customer segments, the channels that you’re using may also differ depending on which. Segment customer segment we’re talking about. The next one is the customer relationship. Once you have customers, how do you interact with them? Is it a very personalized, customized, made to measure experience where maybe every customer has their own dedicated person on your staff?
Or is it basically a completely automated process such as many of [00:08:00] the services that we see online that are dedicated to consumers, where you have very little interaction with human people and most of the stuff is automatized. Is it something in between? Also be the case that you have certain things that are standardized, they run automatically and others where you will bring in dedicated service staff to work with your customers?
That’s the customer relationship segment of the canvas. Then and here we’re getting to one of the key elements, and that is the value proposition. You have certainly heard this term that you need to have a value proposition, and what it basically is is that the explanation of what kind of issue problem you’re solving for your customers, so what kind of value.
Are you providing for your customers? I said earlier, if you don’t have customers, you don’t have a business. And [00:09:00] likewise, if you don’t have the value proposition, you also don’t have a business because you don’t have anything of value to offer to those clients. That is absolutely key, and that’s why if you look at the business modeling canvas, you will find it right in the middle.
These four items that I mentioned are on the right half of the business modeling canvas because they all deal with the customer side. Now we’re moving over to the left side and there we are getting more into your area, the production part of the whole thing. What do you need to deliver, the kind of experience that you are promising to your customers?
And the first part here is key resources. What resources do you need in order to offer your product. This may be stuff and [00:10:00] maybe not just any kind of staff, but certain specializations that you need. It may be physical resources. You may need a building. You may need machines. If you’re producing something, you may need capital.
Of course, depending on what you’re trying to do. This may be more or less capital intensive. Specific knowledge that you might have to buy for consultants and other things. All those things are resources that you need and you define this in the key resources field. From there, you get straight to the key activities segment and that is closely related and it describes basically what kind of activities, what you have to do to deliver the service.
You may have to produce something, you may have to sell it, you may have to provide service and so on and so forth. Everything that you need to do in terms of activities to produce your business, your product, your service goes into the key [00:11:00] activities part.
Next one is key partnerships because in many cases you may not be able to do everything on your own, or it may not be a feasible or make sense. So part of the stuff will be outsourced. You will source products from other partners. Some parts of services may be done by others, and those key partnerships will be defined in a separate segment that is called key partnership.
There are two more blocks that are missing and they have to do with the financial aspect of your business model. Very straight forward, you will have a certain cost structure that depends to a large part on the key activities, the resources and the partnerships that you need. Cost structure may have certain fixed costs.
It may have variable costs. Other kinds of things. And on the other side you will have a, hopefully a revenue stream, which means the income that [00:12:00] you’re expecting to generate from your offerings. And here you will also define not necessarily the numbers per se, that is not the place, but you will define the kind of revenue streams that you’re expecting.
For example, is it recurring? Do we have a kind of a subscription model or something where you expect your customers to purchase your services again and again and again over a prolonged time? Or are these one off purchases? What kind of things you’re, you’re expecting? Is it from sales or is it from services that you are trying to make your revenues?
So that is what you define in that part, the revenue stream and the cost structure. Are at the bottom of the business canvas because they kind of underline everything and ultimately they will decide on whether or not your business model is feasible because then that’s not rocket science. But if the cost structure and the revenue streams, they’re not in in match, so you can’t really [00:13:00] get them to at least balance itself themselves out, then your business model will not be feasible.
The business model generation book also looks at different patterns that businesses can use to develop a business model. And I want to talk a little bit about some of them that I find particularly interesting and also very important and going forward. One business model pattern is the long tail, and what it says is that with technological advances, primarily online sales businesses can afford to sell a huge variety of products, even if a lot of those individually.
Only sell very few items, and this is most obvious with purely digital products. For example, eBooks, which costs virtually nothing to stores. Just a few bits and bytes somewhere in the [00:14:00] cloud. And whether you selling one book or 10 or how many every year, it doesn’t really matter because the cost of storing it is virtually non-existence.
You can offer a lot of books in your virtual bookstore, something that a traditional bookstore could never do. But it goes a little bit further because even with physical products through online shopping, we have removed a lot of the limitations that traditionally existed when most shopping took place offline brick and mortar stores, because the storage costs of physical goods.
In an Amazon warehouse is obviously much lower than having to distribute, produce, distribute, and put on display all those items in traditional Stauss. So we can sell items today that are much more niche oriented. They’d have a much smaller audience, something that in the past. [00:15:00] Was not possible. So whatever you’re trying to achieve, consider the costs of producing the cost of distribution and storage.
And if they are low, you can afford to have products that are relatively niche, or you could also have different variations of the same product tailored to specific needs of sub audiences. Second, very important or very interesting business model pattern is the rise of multi-sided platforms. And what decided platforms are services that have different types of clients and they’re all connected, so you can’t have one without the other.
Traditional example here, our credit card companies, if you are a visa or MasterCard or American express, then you have two types of customers. You have the clients, the people who have the card to make payments, and you have. The [00:16:00] businesses, the businesses that accept your payments in some cases such as visa and MasterCard.
You obviously also have banks involved because they are the ones who issue the cards. But let’s leave this detail aside for the moment. So credit card companies have two customers, the card holders and the merchants. The. Businesses that accept the cards and they cannot have a business without both of them.
You cannot have a credit card business if you only have card holders, but they cannot use the card anywhere. And likewise, there will be no use for a shop to offer credit card payments if nobody had that, this particular card. So you need both of these. To make the platform work, and obviously if you’re starting such a service, you are always in a bit of a chicken and egg situation because the usefulness for the other side is always dependent on how many people are on the [00:17:00] other end of the spectrum.
If I am thinking about getting a credit card, I am interested in having as many possibilities as possible to pay with with that card and as a merchant, if I’m thinking about adding. Another service. Likewise, it only makes sense for me if there is a sufficiently large number of customers and other multi-sided platforms.
Our USO says such as social media sites. Facebook, for example, is such a multi-sided. Platform. Google as well, has moved, decided to services where they are selling ads. So they have the customers who are the ad buyers and they need the users on the other side. People who use Facebook, such as you and I on a daily basis.
And that’s also the reason why a lot of these services. Facebook, for example, is free. If you want to have a Facebook account, you don’t have to pay anything because what’s you’re paying basically is being there [00:18:00] interacting and obviously giving those companies your data. Next is the free option as a business model.
And this is also something that is increasingly common online, that you have a service and there will be some kind of a basic plan that is often quite usable and suitable for many customers, and that plan will be free and only if you need additional options, services, or more volume. Then eventually you have.
To pay, and this works because the scaling costs of purely online services are very low. If you have a service, you have the software, you have everything in place. Then whether you have a thousand customers or 10,000 customers in many cases, not in all, but in many cases, doesn’t make that much of a difference.
So you can afford to offer a free land shoot the majority of your customers, because you [00:19:00] can compensate that. With the few heavy users who then pay the premium models. And finally the open business model. And that is also very common in the online or it world is where you have a certain component of your or the key part of your business and you give it away for free.
Intuitively, it doesn’t make any sense at all, of course. But if you think about it, and if you think about some of the examples, then in fact it starts to make sense. There are lots of open source software operating systems such as Linux learning management platforms such as Moodle and others as well.
And they are open source. So many people that work on that. Many companies also contributed to the development of these platforms and anyone can use them. So they’re there and you can download them, you can install them, you can use them for your purposes without having to pay a fee. How does this work and why does this make sense for [00:20:00] companies who are involved in these things?
Well, because they make money. Off of other related things, generally services, so they will help you to install it, to run the service, to adapt it, to customize it to specific business needs and that through those ancillary services, one could say they are able to generate enough revenue that allows them to give the core component of the business model airway for free.
Finally, I want to talk a little bit about the phases of a business model generation project. And most of our DMP girls, they distinguish five different phases through which you have to go. And the first one is the mobilization phase, where you bring everything together, you generate the buy in from people in your organization.
You. [00:21:00] Look at the people that you need to involve, and you generally get the go from whoever you need to be on board. And this may vary greatly. Of course, if you are a one man, one woman show, a freelancer, there may be very few people, mainly only yourself, that you have to mobilize. In larger organizations, of course, you will need a bit more buy in.
You will have to jump through a few more hoops in order to get it. Running. Then the second phase is the understanding phase, and this is where you engage in a research process. You analyze lots of things. You look at the different elements that you need. You collect information. You may be talk to people inside your organization, outside of your organization, maybe also to some potential customers to find out what their needs are, what works, what doesn’t, what other people have.
Maybe. [00:22:00] Tried out before. Then the third phase, you get into the design part of the business model, and that’s one of the key parts, obviously, where you try to generate. Ideally not one, but many different variations of your model. You start testing some options. You tinker with it, you go through the canvas again and again and again, and you try to bit by bit transform ideas into something that.
At the end is a fully fledged business model canvas that makes sense. And with making sense, I mean that the different elements, the different segments that I’ve described earlier, they have to be connected. What you define as your customer segments has to match the channels that you’re trying to apply.
The customers have to fit the value proposition. The key activities have to make sense in [00:23:00] terms of producing the value proposition and so on and so forth. So it has to be at the end, a coherent lab. And that is the design phase. And that may take many, many, many different rounds. And then you get to the fourth phase, which is the implementation.
While you have one model that you try to implement as a prototype. And remember we are talking about design thinking here. So it is never necessarily the final, final product. The idea is always to get to a prototype, something that you think can be implemented. You think it can fly, and then you try to implement the prototype.
Ideally, not across the board with the large roll out, but you try to test it with one customer, maybe a handful of customers. So see how it goes, and maybe that prototype will work or it will work with just minor adaptions, or it may also not work. You have to go back to the design phase or even to [00:24:00] the understanding phase before, if you feel that you made some fundamental mistakes in understanding the needs of your customers.
If the implementation goes well, you move into the fifth phase, and that is the management phase where you basically go into normal operation. You have a team that continues to deliver that product. You’re leaving the design phase. But remember, the design thinking process never ends. You should still strive to make your offering better, and you can use a business model canvas at any time to map what you’re doing and to see whether there is any potential for improvements.