Business Modeling: 9 Building Blocks

Build a common language for founders participating in our startup ecosystem

• What’s the difference between business transition or change management? Not much but if we have to determine that we are speaking about the same topic we are wasting time. That is why a common vocabulary is important.
• Using a common language we can facilitate discussion with ease.
• Without a shared language:
• It is difficult to systematically challenge assumptions.
• It is difficult to innovate successfully.

So, what is a Business Model?

“A Business Model describes the rationale of how an organization creates, delivers, and captures value.” – Business Model Generation by Alex Osterwalder and Yves Pigneur.

#1: The Customers

Customer Groups Represent Different Segments if:

• Their needs require and justify a distinct offer
• They are reached through different Distribution Channels
• They require different types of relationships
• They have substantially different profitability
• They are willing to pay for different aspects of the offer Mass Segments include:
• Mass – Don’t Distinguish; All Focus on One Large Group; Consumer Electronics
• Niche – All aspects of distribution, relationship, value etc are tailored to the specific
• Segmented – Slightly different needs and problems in market segments; Banking: Private Client Groups cater to those with $500,000 or more vs general consumer banking
• Diversified – Serve two totally unrelated market segments; Amazon is in retail but also is selling infrastructure
• Multi-Sided – Serve two more interdependent segments; Credit card companies need both a large base of card holder and a large base of merchants; News Paper – readership and advertisers
• For whom are we creating value?
• Who are our most important customers?

#2: Value Proposition

• Why customers chose your company over others
• Solves problem or satisfies a need
• Caters specifically to the customer segment
• What value do we deliver to the customer?
• Which problem are we solving?
• Which needs are we satisfying?
• What are we offering?

The answers include:

• Newness – New set of needs that customers previously didn’t perceive because there was no similar offering
• Performance – Improving product or service performance: PC sector used to rely on this factor to bring more and more powerful machines to market. Recently failed to produce customer demand
• Customization – Tailoring products or services to specific needs/problems
• Getting the Job Done
• Design
• Brand/Status
• Price
• Cost reduction
• Risk reduction
• Accessibility
• Convenience/Usability – Customer co-creation, mass customization

#3: Channels

• Which channels do our customers want to be reached on?
• Which channels work best?
• Which ones cost less?
• How are they integrated into customer routines?
  • Direct vs Indirect
  • Salesforce vs. Wholesale
• Partner vs Own
  • Partner Stores vs Own Stores
  • Where does Web Sales Fall – Own and Direct

Channel Phases

• Awareness – How do we raise awareness about our company?
• Evaluation – How do we help customers evaluate our organization’s Value Proposition?
• Purchase – How do we allow customers to purchase specific products and services?
• Delivery – How do we deliver a Value Proposition to customers?
• After Sales – How do we provide post-purchase support?

#4: Customer Relationships

• For Customer Acquisition
• Customer Retention
• Boosting Sales
• What type of relation is established and maintained?
• How costly are they?
• How do they integrate with Business Model?

#5: Revenue Streams

• For what value is each customer segment truly willing to pay?
• What do they currently pay?
• How are they paying?
• What would they prefer?
• Transaction vs Recurring
• Fixed vs Dynamic

#6: Key Resources

• What Key Resources do our Value Propositions require?
  • Physical – Buildings, Machines, POS, Trucks
  • Intellectual – Brand, patents, microchip design
  • Human – Pharma needs scientists; Pharma needs skilled salesforce
  • Financial – Cash, lines of credit, stock option pool; Borrow funds from bank to provide vendor financing to downstream customers.
• Our Distribution Channels?
• Customer Relationships?
• Revenue Streams?

#7: Key Activities

• What Key Activities do our Value Propositions require?
• Distribution Channels? Relationships?
• Revenue Streams?
• Production
  • Design, making, delivering
  • Manufacturing
• Problem Solving
  • Come up with solutions to individual customer problems
  • Knowledge management and training
• Platform/Network
  • Match Making
  • Platform Promotion, Service, Management

#8: Key Partnerships

• Strategic Alliances between Non-Competitors
• Coopetition: Alliances between Competitors
• Joint ventures to develop new business
• Buyer-supplier relationships to assure reliability
• Who are our Key Partners?
• Who are our Key Suppliers?
• Which Key Resources are we acquiring?
• Which Key Activities do others perform?

#9: Cost Structure 

• Important costs incurred by while operating
• What are the important costs inherent to our business model?
  • Cost-Driven – Minimize cost; No Frills Airlines
  • Value Driven – Premium Value Propositions; Luxury hotels
  • Fixed Costs – Remain the same despite changes in volume of goods or services produced; Physical plant
  • Variable Costs – Vary proportionally with the volume of goods or services produced; Ticketing
• Which Key Resources are most expensive?
• Which Key Activities are most expensive?
• Economies of Scale
  • As output expands cost advantages arrive
  • Bulk purchases
• Economies of Scope
  • Cost advantages due to larger scope of operation
  • Use the same distribution channel for multiple products