The Business Model Canvas is a strategic management and entrepreneurial tool that allows you to describe, design, challenge, invent, and pivot your business model. It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.

The Business Model Canvas was initially proposed by Alexander Osterwalder based on his earlier work on Business Model Ontology. Since the release of Osterwalder's work around 2008, new canvases for specific niches have appeared.

Components of the Business Model Canvas

The Business Model Canvas is composed of nine building blocks. Each block pertains to a specific aspect of the business and holds a unique role in the overall business model. Understanding each component is crucial to the effective application of the Business Model Canvas.

The nine components are: Key Partnerships, Key Activities, Key Resources, Value Propositions, Customer Relationships, Channels, Customer Segments, Cost Structure, and Revenue Streams. Each of these components is interconnected and plays a vital role in making the business model work.

Key Partnerships

Key Partnerships are the network of suppliers and partners that make the business model work. These are the relationships that your business fosters to ensure efficiency, reduce risk, or acquire resources. Partnerships are formed with key suppliers, for instance, to ensure a steady supply of essential materials.

Other partnerships may be strategic alliances between non-competitors, strategic partnerships between competitors, joint ventures, and buyer-supplier relationships to assure reliable supplies.

Key Activities

Key Activities are the most important actions a company must take to operate successfully. For instance, a company would need to design and develop its products, manage its supply chain, and market its products or services.

These activities are crucial in the creation of the company's Value Proposition, in reaching markets, maintaining Customer Relationships, and earning revenues.

Key Resources

Key Resources are the assets that are necessary to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. They are the infrastructure of the business and are classified as either physical, intellectual, human, or financial.

Physical resources may include buildings, vehicles, machines, systems, point-of-sales systems. Intellectual resources may include brands, proprietary knowledge, patents and copyrights, partnerships. Human resources are the employees and their skills. Financial resources include cash, lines of credit, or stock options.

Value Propositions

Value Propositions are the bundle of products and services that create value for a specific Customer Segment. It is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need.

Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers.

Customer Relationships

Customer Relationships are established and maintained with each Customer Segment. Companies may establish relationships with Customer Segments based on customer acquisition, customer retention, and boosting sales – in other words, upselling.

The type of relationship that a company establishes with its specific Customer Segments can range from personal to automated. Customer relationships may be driven by the following motivations: Customer acquisition, Customer retention, Boosting sales (upselling).

Channels

Channels are the company's interface with the customers. They are customer touch points that play an important role in the customer experience. Channels serve several functions, including raising awareness among the customers about the company's products and services, selling the products and services, delivering the value proposition, and providing post-purchase customer support.

Channels are distinct phases a product or service goes through during its lifecycle, from the company to the end user. They can be direct or indirect, and they can be owned or partnered. Channels have five distinct phases: Awareness, Evaluation, Purchase, Delivery, and After Sales.

Customer Segments

Customer Segments are the different groups of people or organizations an enterprise aims to reach and serve. In order to better meet the needs of its various customer segments, a company may group them into distinct categories with common needs, behaviors, or other attributes.

A company may cater to one or several large or small Customer Segments. A business model may define one or several large or small Customer Segments. A company must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.

Cost Structure

The Cost Structure describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model. Costs incurred while operating under a particular business model.

Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively accurately after defining Key Resources, Key Activities, and Key Partnerships. Two cost-driven business models are: Cost-driven and Value-driven.

Revenue Streams

Revenue Streams are the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings). If customers comprise the heart of a business model, Revenue Streams are its arteries.

Each Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management. A company must ask itself, for what value are our customers really willing to pay? This is what they are willing to hand over their hard-earned cash for.

Applying the Business Model Canvas

The Business Model Canvas can be printed out on a large surface so groups of people can jointly start sketching and discussing business model elements with post-it note or board markers. It is a hands-on tool that fosters understanding, discussion, creativity, and analysis.

It is distributed under a Creative Commons license from Strategyzer AG and can be used without any restrictions for modeling businesses. The Business Model Canvas is also available in web-based software format.

Benefits of Using the Business Model Canvas

The Business Model Canvas helps organizations to align their activities by illustrating potential trade-offs. The right side of the canvas focuses on the customer (external), while the left side of the canvas focuses on the business (internal). Both external and internal factors meet around the value proposition, which is the exchange of value between your business and your customer/clients.

Using the Business Model Canvas, companies can easily describe and manipulate their business models to create a successful strategy. It provides a clear view of the business and allows for quick changes as the business environment evolves.

Limitations of the Business Model Canvas

While the Business Model Canvas is a great tool for businesses, it does have its limitations. It does not cover all aspects of a business and some important aspects might be ignored. For instance, it does not provide detailed insights into the competitive environment, regulatory issues, or macroeconomic conditions.

Furthermore, the Business Model Canvas does not provide a detailed financial analysis or a detailed operational plan. It is a strategic tool for understanding and designing business models, but it does not replace detailed business planning and does not guarantee success.

Conclusion

The Business Model Canvas is a powerful tool that allows managers and entrepreneurs to conceptualize their business model in a structured way. It helps to visualize the current state, to design a future state, and to test and change the business model.

While it does have its limitations, the Business Model Canvas is a great starting point for any business to understand their business model in a structured and methodical way. It is a tool that fosters understanding, discussion, creativity, and analysis, and is widely used in organizations across the globe.