This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.
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Do you have a business idea in mind? What are the key business aspects you need to consider when building a business model?
Starting a business requires a business model which defines how the different elements of your business will function together to make a profit. If you are a beginner entrepreneur, you’re likely at a loss: Where do you even start? Fortunately, there is a simple framework designed specifically for building a coherent business model from scratch.
In this article, you’ll learn how to build a business model from scratch using the Business Model Canvas framework by Osterwalder and Pigneur.
Business Model Canvas
Business innovation Alexander Osterwalder and Yves Pigneur developed a flexible template that they refer to as the “Business Model Canvas” to help entrepreneurs put together a functional business model. The template consists of nine elements: 1) customer groups, 2) customer touchpoints, 3) customer interactions, 4) value proposition, 5) key resources, 6) network, 7) key activities, 8) revenue streams, 9) expenses.
These elements are interdependent components that impact the effectiveness of the other elements. So, changes to one element can reduce or amplify the effects of other elements. Therefore, as you work on your business models, consider how you can leverage all of your elements to work together.
When building a business model, consider how you can leverage all of your elements to work together.
Element 1: Define Your Customer Groups
Define the different groups of customers your business intends to target—Osterwalder and Pigneur refer to this element as “Customer Segments.” You may serve one group of customers or several groups of customers depending on the needs you intend to fulfill.
Element 2: Define Your Touchpoints
Define your touchpoints, how you’ll communicate with your customers and deliver your products and services—Osterwalder and Pigneur refer to this element as “Channels.” For your communication, sales, and distribution, you have the option of using your own touchpoints (assets under your direct control such as your website or your store), or partner-owned touchpoints (external touchpoints that result from cooperation with marketing agencies or distribution partners), or a mix of both. In addition, the authors also make a distinction between direct touchpoints (communication you control such as your blog), and indirect touchpoints (communication you can’t control such as user reviews).
Touchpoints and Interactions (Element 3) are closely linked—consider the level of interaction you want to have with your customers when defining your touchpoints.
Element 3: Define Your Interactions
Define the type of interactions you want to establish for each of your customer groups—Osterwalder and Pigneur refer to this element as “Customer Relationships.” The authors advise that you consider what your motivations are for communicating with your customers as your approach will differ depending on whether you intend to acquire new customers, retain existing customers, or upsell to existing customers.
Element 4: Define Your Value Offer
Define how you intend to offer value to these customers—Osterwalder and Pigneur refer to this element as “Value Propositions.” Your value offer outlines the benefits you intend to provide in the form of products and services. The authors state that successful value offers align with the needs of your customers and differentiate themselves from existing solutions.
Element 5: Define Your Resources
Define what resources you need to create and deliver your products and services to your customer—Osterwalder and Pigneur refer to this element as “Key Resources.” According to the authors, you can own, lease, or acquire the resources you need. All resources fall into the following categories: material, monetary, intellectual, and human.
Element 6: Define Your Network
Define the alliances you need to form to optimize your business model and increase market share, acquire resources, or reduce risk—Osterwalder and Pigneur refer to this element as “Key Partnerships.” In other words, what alliances will provide you with a sustainable competitive advantage and help you to grow quickly?
Element 7: Define Your Critical Actions
Define the core actions you need to take to operate successfully and meet customer demands—Osterwalder and Pigneur refer to this element as “Key Activities.” The authors state that your actions will fall into the following categories: production (designing, manufacturing, and delivering products), troubleshooting (finding solutions to problems), and infrastructure management (managing interactions between multiple applications and parties).
Element 8: Define Your Profit Sources
Define how you intend to profit from the value you provide to your customers—Osterwalder and Pigneur refer to this element as “Revenue Streams.” The authors state that there are two types of income streams to consider: profits from single transactions and profits from ongoing payments such as subscriptions. You may have multiple income streams for each of your customer groups. Further, each of these income streams may involve different pricing mechanisms depending on whether you choose to set a fixed or variable price for your products and services.
Element 9: Define Your Expenses
Define the expenses of operating all of the elements you’ve defined in your business model—Osterwalder and Pigneur refer to this element as “Cost Structure.” Your expenses will vary depending on whether you choose to minimize costs and offer an inexpensive product or service, or if you choose to create premium-priced products and services. The authors state that your cost structures will include at least one of the following characteristics: fixed costs (salaries, rent), variable costs (costs that vary in proportion to the volume of goods or services produced), economies of scale (bulk purchase rates lessen cost per unit), and economies of scope (a single resource or activity supports multiple operations or services).
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Here's what you'll find in our full Business Model Generation summary :
- The nine elements that make up any successful business model
- Different ways you can combine these elements to create business model patterns
- Techniques you can use to generate innovative ideas
