Osterwalder and Pigneur believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, offer, infrastructure and financial viability.
- Customer segments – define different groups or people or organisations an entrepreneur aims to reach. A company may group its customers into distinct segments with common needs, common behaviours or some other attributes. It must decide which segments it will service and which it will ignore. Once this decision is made, a business model can be designed around a strong understanding of specific customer needs.
- Customer relationships – describe the type of relationships a business establishes with its specific customer segments. Relationships can range from personal to automated, and can be motivated by customer acquisition, customer retention, or boosting sales (upselling). These relationships can change over time, as well as over different stages of business growth.
- Channels – describe how a business communicates and reaches its customers to deliver its value proposition. Company’s interface with customers is comprised of communication, distribution, and sales channels. They all play an important role in the overall customer experience.
- Value propositions – describe the bundle of products and services that create value for a specific customer segment. It is the reason why customers choose one business rather than another. It solves a customer problem or satisfies a customer need. The value proposition is an aggregation of benefits that a company offers all its customers put together. It creates value for a customer, which may be quantitative (for example, price or speed of service) or qualitative (for example, design or customer experience).
- Revenue streams – represent the cash a business generates from each customer segment. If customers are the heart of the 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.
- Key activities – describe the most important things a business must do to make its business model work. Every business calls for a number of key activities. They are required to create and offer a value proposition, reach markets, maintain customer relationships and earn revenue. They will be different in different business models.
- Key resources – describe the most important assets required to make a business model work. Every business model needs resources to allow it to create and offer a value proposition, reach markets, maintain relationships with customer segments and earn revenues. They may be physical, intellectual, or financial.
- Key partnerships – describe the network of suppliers and partners that make the business model work. Businesses forge partnerships for many reasons. They create alliances to optimise their business models, reduce risk, or acquire resources.
- Cost structure – describes all costs incurred to operate a business model. Creating and delivering value, maintaining customer relationships and generating revenue all incur costs. Those can be calculated relatively easily after defining key resources, key activities and key partnerships. Some business models are more cost driven than others.
We have prepared an informative case study of the Business Model Canvas for LinkedIn, which is one of the most successful social networks. You can find this case study in the fourth part of the Learner Handbook for module 9.