Developing a business idea is not enough to achieve economic success. Rather, you are now faced with the task of finding out how your idea can be used in the most economical way, taking into account the available resources and market potential. For this purpose, it is advisable to develop a concept for a business model that shows the economic viability at least in broad outlines.
Objective
A business model is generally understood to be a simplified and condensed representation of which resources flow into the company and how these can be converted into marketable products or services through an internal service creation process. The business model should answer the following basic questions: [1]
- Which value proposition does the future company have for customers and strategic partners?
- How should this benefit be generated for the customer (value creation architecture)?
- From which sources should the company generate its income and expenses (revenue and cost model)?
Various approaches can be found in the technical literature as to how to such a business model can be developed in a practical way. In the following, the Business Model Canvas method developed by Alexander Osterwalder and Yves Pigneur will be examined in more detail; it has been developed parallel to the Lean Startup method and has become widely accepted in practice [2].
Business Model Canvas
The goal of a business model canvas is to present the individual areas of a company in a structured way on a single page (the canvas). This allows you to see at a glance how they influence each other and how their relationships can be optimized.
To create the canvas you need a large sheet of paper, we recommend DIN A0 format. On this sheet, a square is drawn with nine equal fields representing the main company divisions (the so-called key factors). The canvas focuses on the value proposition for the customer. To the left of this are the company-related key factors, namely:
- key partner (Schlüsselpartner),
- Key activities (Schlüsselaktivitäten),
- Key resources (Schlüsselressourcen),
- Cost structure (Kostenstruktur).
The market-related key factors are shown on the right:
- Customer relationship,
- Customer segment,
- Marketing channels,
- Sources of income.
As soon as the canvas is finished, ideas for each key factor are developed – preferably in an interdisciplinary team – and written on pieces of paper. These ideas are assigned to the key factors thematically and sorted into the relevant fields of the canvas. The canvas functions like a construction kit that allows the individual aspects of the company to be viewed, moved and reassembled until a marketable business model is created.
When creating the canvas, core questions must be answered for each individual key factor. These are described in more detail below.
Customer segment
The starting point for the analysis are the customer segments. It is important to be clear which customer groups are suitable for the product (goods or services). It is also important to analyze how large these groups are, what their values are, and how their decision-making processes work. It is also determined to what extent potential customers should be differentiated according to their needs and problems (“segmentation”), as this affects the other components of the business model. If the company’s focus is on so-called niche markets, a high degree of specification of the customer segment is regularly required. If, on the other hand, the company tends to focus on a “mass market”, a detailed differentiation of the individual customer segments is not necessary.
Important
Who is the target group?
Value proposition
Then the product (goods or service) is considered. It is important to work out which value proposition is associated with it. Only if the product satisfies a customer need or serves to solve a specific problem, it can establish itself on the market.
The value propositions can be of different nature. For example, they can be characterized by the fact that they arouse a customer need in the first place due to their novelty. However, the value added for the customer can also be increased by improving existing products, making work easier, lowering costs or making them more user-friendly. Last but not least, the value for customers can consist in the mere design.
Important
What are the benefits for customers when they purchase the product?
Marketing channels
Once a company has identified its target groups and the product benefits for them, it examines which communication and sales channels are suitable for making the product known and available to potential customers. It is therefore necessary to consider how and where to advertise the product and at what points of sale it should be offered, for example, in wholesale or retail or in online stores.
According to Osterwald and Pigneur, there are five channel phases and five main channel types, which can be classified as direct or indirect, on the one hand, and as own and partner channels, on the other hand, including sales department, internet sales, own branch, partner branch or wholesaler. The challenge for a company is to align the channels with the regular phases of attention, evaluation, purchase, referral and after-sales in such a way that the customer experience is excellent and sales are maximized.
Important
How do customers learn about the offer and how do they get it?
Customer relationship
The next step is to determine how the customer relations are to be structured. The expectations of the customers are decisive for this. Some markets require the development of personal relationships and trust – this is particularly true for freelancers such as lawyers, tax consultants or management consultants – while in other markets, interaction with the customer is almost completely automated, for example with smartphone applications.
Important
How to win and retain the targeted customers?
Sources of income
The revenue streams in the business model are also being considered. At this stage, the aim is not to formulate concrete revenue expectations, but to determine the revenue structure. It should be designed in such a way that it lowers the hurdle of entering into a business relationship from the customer’s perspective. For example, the question is whether the customer can only acquire a product by paying a one-off purchase price or whether he should also be offered other financing options such as rent or leasing. Similarly, a service can be compensated by a flat fee or can be invoiced on an hourly basis.
Important
Where does the money come from?
Schlüsselressourcen
After a detailed examination of the product and the market, it is examined whether and to what extent the company is able to offer the product. For this purpose, it is first determined which key resources it has. These include all intellectual, physical, human and financial factors that are absolutely necessary for the production of a product or the provision of a service, for example know-how, business premises, personnel and investment capital.
Important
Which resources are indispensable?
Key activities
Key activities include the most important actions of a company that contribute to the success of the business model. It is these actions that make it possible to create and offer a product. During the analysis, the aspects that play a role in terms of value proposition, channels and revenue sources are identified.
Important
What needs to be done to realize the business model?
Key partner
Furthermore, it should be considered whether and to what extent relationships with key partners should be involved. These include suppliers and partners that are necessary for a business model to work. Alliances are primarily formed to optimize business models, minimize risks and/or gain access to essential resources.
Important
Who can be considered as a partner?
Costs structure
Finally, an analysis of the cost structure is required, because in addition to revenues, costs have an essential influence on profits. For this purpose, all costs incurred in the operation of the business model are first recorded and then structured. The cost structure can result from a division into fixed and variable costs or from the distinction between cost-oriented and value-oriented business models.
In cost-oriented business models, especially when striving for price leadership, the focus is on minimizing costs. Accordingly, these are primarily assessed according to whether they can be reduced or even eliminated. In contrast, the focus in value-oriented business models is on increasing the value added to differentiate from competitors. Here, costs are primarily assessed based on whether and to what extent they are necessary to increase value.
Important
What are the most important expenses without which the business model would not work?
[1] Vgl. Stähler (2001).
[2] Vgl. Osterwalder, Pigneur (2011); BMWi: Business Model Canvas.