9 Building Blocks for a Successful Business Model.

Your business and financial models are critical for success.

Unfortunately, the majority of small businesses do not understand the importance of these models, which is a shit storm waiting to happen.

Or maybe a cyclone!

At Grow a Small Business, we love the ‘Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers’ approach developed by Alexander Osterwalder and Yves Pigneur, as part of their ‘Strategyzer’ series.

They start the book by asking these questions and if you answer YES, this is for you:

1. Are you an entrepreneurial spirit?

2. Are you constantly thinking about how to create value and build new businesses, or how to improve or transform your business?

3. Are you trying to find innovative ways of doing business to replace old, outdated ones?

They use the following nine building blocks, which form the basis for their tool they call ‘The Business Model Canvas’.

1. Customer Segments

Customers are the ‘heart’ of your business, so it is critical you understand what segments you focus on, and which ones you ignore.

This is often called your ‘Target market’.

For whom are we creating value, and who are our most important customers?

Once you have clarity on your target market, a business model can be designed to serve your customers efficiently and effectively.

You cannot be everything to everybody as all you are is AVERAGE.

2. Value Propositions

The Value Proposition (VP) is the reason why customers turn to one business over another.

It solves a customer problem, or satisfies a customer need.

Some questions to ask yourself:

What value do you deliver to the customer?
Which one of your customer’s problems are you helping solve?
Which customer needs are we satisfying?
What bundles of products and services are we offering to each customer segment?

Essentially, the VP is a collection of benefits that a business offers customers, that creates value for the customer.

Values are either:

1. Quantitative: price, or speed of service, or

2. Qualitative: design, or customer experience.

TIP: We have had the creator of ‘Jobs To Be Done’ concept for the ‘The Business Model Canvas’ on our podcast three times:

3. Channels

This building block describes how a business communicates with and reaches its customer segments to deliver its Value Proposition.

Channels are customer touch points that play an important role in customer experience.

Finding the right mix of channels to ensure you are reaching your customers as they wish, is critical in bringing a Value Proposition to market for success.

A business can choose between reaching its customers through its own channels (website) or via a partners’ channel (retail site)…or a mix of both.

Some questions to ask yourself:

1. Through which channels do your customer segments want to be reached?

2. How are you reaching them now?

3. How are your channels integrated?

4. Which ones work best?

5. Which ones are most cost-efficient?

6. How are you integrating them with customer routines?

4. Customer Relationships

You need to identify the type of relationship you want with each customer segment.

This can range from personal to automated.

Customer relationships may be driven by the following motivations:

Customer acquisition
Customer retention, or
Upselling.

There are six categories of customer relationships, which may coexist in a businesses relationship with a particular customer segment:

1. Personal assistance: Communication with a ‘real’ person to provide help during the sales process or post-purchase (eg. call centres)

2. Dedicated personal assistance: Dedicating a person to your customer, which is high-touch and an intimate relationship (eg. professional services and account managers)

3. Self-Service: No direct relationship, with customers helping themselves (eg. vending machines, ATMs)

4. Automated services: A sophisticated form of self-service with automation (eg. online bookings)

5. Communities: A great way of becoming more involved with your customers and possibly prospects, and allows connections between the community members. The exchange of knowledge and information to help solve their problems can be very powerful and of value (eg. the Grow A Small Business community), and

6. Co-creation: Creating value in conjunction with your customers (eg. customer reviews).

Some questions to ask yourself:

1. What type of relationship does each of your customer segments expect you to establish and maintain with them?

2. Which relationships have you established?

3. How costly are they?

4. How are they integrated with the rest of your business model?

5. Revenue Streams

These represent the cash businesses generated from each customer segment.

Cash is the oxygen of a business and critical for a successful business model.

A business model can involve two different types of revenue streams:

1. Transaction revenues resulting from one-time customer payments, or

2. Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers, or provide post-purchase customer support.

There can be several ways to generate revenue streams, with two different types of pricing mechanisms:

1. Fixed: Predefined and dependent on the number or quality of Value Proposition features, and the type and characteristic of a customer segment, and

2. Dynamic: Prices change based on market conditions, and dependant on negotiation, or inventory and time of purchase, or supply and demand, or auctions.

Some questions to ask yourself:

1. For what value are our customers willing to pay?

2. For what do they currently pay?

3. How are they currently paying?

4. How much does each revenue stream contribute to overall revenues?

6. Key Resources

These are the most important assets needed to make your business model work.

These resources allow a business to:

Create and offer a Value Proposition
Reach markets
Maintain relationships with customer segments, and
Earn revenues.

There are four categories of key resources:

1. Physical: Assets such as buildings, vehicles, machinery, point-of-sale systems

2. Intellectual: Assets such as brands, proprietary knowledge, patents, copyrights and databases

3. Human: Every business requires people, but are more critical in some business models, such as legal and accounting businesses, and

4. Financial: Some business models need financial resources such as cash, lines of credit or asset loans.

Some questions to ask yourself:

1. What resources do your Value Propositions require?

2. What resources do your distribution channels require?

3. What resources do your customer relationships require?

4. What resources do your revenue streams require?

7. Key Activities

These are the most important things a business must do to make its business model work.

There are three categories of key activities:

1. Production: Designing, making and delivering a product in large quantities and / or superior quality (eg. manufacturing businesses)

2. Problem solving: Finding new solutions to problems of each customer, which requires knowledge management and continuous training (eg. consulting businesses), and

3. Platform / network: Platform management, service provisioning and platform promotion (eg. eBay).

Some questions to ask yourself:

1. What key activities do your Value Propositions require?

2. What key activities do your distribution channels require?

3. What key activities do your revenue streams require?

8. Key Partnerships

This is the network of suppliers and partners that make your business model work.

There are four types of partnerships:

1. Strategic alliances between non-competitors

2. Strategic partnerships between competitors

3. Joint ventures to develop new businesses, and

4. Buyer - supplier relationships to enable reliable supplies.

Some questions to ask yourself:

1. Who are our key partners?

2. Who are our key suppliers?

3. Which key resources are we acquiring from partners?

4. Which key activities do partners perform?

9. Cost Structure

This is all the costs incurred to operate a business.

There are two broad classes of business model cost structures:

1. Cost driven, and

2. Value driven

and many fall in between these extremes.

1. Cost driven: Focus on minimising costs, using low price Value Propositions, maximising automation and extensive outsourcing (eg. no frills airlines), and

2. Value driven: Focus on value creation, with premium value propositions and a high degree of personalised service (eg. luxury hotels).

The above cost structures can have the following characteristics:

1. Fixed costs: Remain the same regardless of the amount of goods or services produced (eg. rent)

2. Variable costs: Vary proportionally with the amount of goods and services produced (eg. wages, albeit can be partly fixed)

3. Economies of scale: Cost advantages a business enjoys as its output expands (eg. bulk product purchases with reduced costs as a result), and

4. Economies of scope: Cost advantages a business enjoys due to a larger scope of operations (eg. the same distribution channels supporting multiple products).

Some questions to ask yourself:

1. What are the most important costs inherent in your business model?

2. Which key resources are most expensive?

3. Which key activities are most expensive?

We unpack your business model in our ‘Business Transformation Program’, and create a 10 year complex financial model with you. We only open the Program four times a year, to groups of eight business owners so join the Program waitlist to learn more.

Categories