How to Shape Business Opportunities through Business Model Generation

How to Shape Business Opportunities through Business Model Generation

Designing an effective business model can be the difference between success and failure — at the very least, it indicates strong leadership and effective planning. This article will explore how to shape business opportunities and generate a robust business model that drive your venture forward.

Just a side note, before I dive in, I purposely designed Blixo to handle multiple business models as I’ve started and ran e-commerce, SaaS, and professional services businesses. No matter if you charge for services or physical products, on a recurring subscription basis, usage-based or metered billing, or one-off invoices, Blixo will work for you. Don’t have a business model yet? I wrote this article to help you learn how to shape opportunities. If you still don’t have an idea yet, you can read this article on recognizing business opportunities for help with that.

What is a Business Model?

The business model is your blueprint for how you create, deliver, and capture value. It should answer the following questions:

  • What differentiates your business from your competitors?
  • What resources and capabilities do you need in order to execute successfully?
  • What are the most interesting benefits of your product and services for your ideal customer?

How Can I Create a Business Model?

As an entrepreneur, my preferred tool for designing business models is the Business Model Canvas by . This framework, outlined in the book “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers ,” allows for a comprehensive and systematic approach to crafting your business model. This book goes into much more detail than my high-level explanations below. I read this book in 2012 and a lot of what I wrote below is based on my notes from my initial reading, coupled with my real-world experiences starting and running businesses since then. If you purchase the Business Model Generation book from the Amazon link in this article, I may receive a small commission.

The Business Model Canvas is composed of nine components:

  1. Customer Segments: Who are the people or organizations your business wants to serve?
  2. Value Propositions: Why should customers choose your company over others?
  3. Channels: How will you reach your customers?
  4. Customer Relationships: What type of relationships will you establish and maintain with your customers?
  5. Revenue Streams: How will your business earn money?
  6. Key Resources: What assets does your business need to operate effectively?
  7. Key Activities: What are the main tasks your business needs to perform to succeed?
  8. Key Partnerships: Who are your allies in this business journey?
  9. Cost Structure: What are the financial implications of operating your business?

Let’s delve into each of these sections in detail.

1. Customer Segments

Customer segments are groups of customers who share similar characteristics, needs, or preferences. They help businesses tailor their products, services, and marketing strategies to different customers. Identifying and understanding your customer segments is vital. Different customer groups might have varying needs and consequently justify distinct offers.

Consider the following questions when defining your customer segments:

  • Who benefits the most from what you offer?
  • Do different customer needs warrant unique offers?
  • Which segments bring the most profit?
  • Will they pay separately for different aspects of your offer?
  • Do you have different value propositions for different customer groups?

Let’s explore some key customer segments from the Business Model Canvas perspective:

  • Mass Market: Focus is on one large group of customers with broadly similar needs and problems (e.g. consumer electronics).
  • Niche Market: Depends on and caters to a specific need or requirement of a niche market (e.g. car parts for particular manufacturers and other supplier-buyer relationships).
  • Segmented: Distinguishes between segments with slightly different needs and problems (e.g. bank with affluent and average clients or manufacturing company with clients in different sectors). Needs are similar, but value prop may be different.
  • Diversified: Serves two or more unrelated segments (e.g., Amazon offering AWS on top of e-commerce).
  • Multi-sided Platforms: Serves two or more interdependent segments (e.g., credit card companies, newspapers, auction companies, and other marketplace businesses). Must balance supply and demand.

Here are other effective ways to segment customers taken from Customer Segmentation: The Ultimate Guide — Forbes Advisor and Customer Segmentation: How to Segment Users & Clients Effectively — HubSpot :

  • Geographic Segmentation: This groups customers based on their location, such as Starbucks changing its menu items and promotions according to local tastes and cultures.
  • Demographic Segmentation: This divides customers based on observable characteristics like age, gender, income, education, and occupation, much like Netflix personalizing their content or my previous company FabFitFun personalizing their subscription boxes.
  • Psychographic Segmentation: This classifies customers based on psychological aspects like personality, values, attitudes, interests, and lifestyles. Nike, for instance, segments its customers based on fitness goals and motivations.
  • Behavioral Segmentation: This categorizes customers according to their actions or behaviors, including purchase history, usage frequency, loyalty status, and preferences. Amazon uses behavioral segmentation to offer personalized recommendations and discounts.
  • Needs-based Segmentation: This type groups customers based on specific problems or goals they want to solve or achieve with a product or service. An educational platform may segment its customers based on their learning objectives.
  • Value-based Segmentation: This categorizes customers based on the perceived value or benefit they get from a product or service. Luxury brands often use this type of segmentation, focusing on customers who value exclusivity and high-quality craftsmanship.

Your understanding of customer segments is paramount to the delivery of personalized and relevant solutions. This not only heightens the customer experience, but also promotes loyalty, retention, and revenue. Focus on the customer segments that most closely align with your business strategy and ethos.

2. Value Proposition

Your value proposition is the unique value you offer to customers. It is the reason customers choose your company over another. It is a statement that communicates the unique value that your product or service delivers to a specific customer relative to their needs and pains. A value proposition is not a generic description of your features and benefits, but a customized message that addresses the customer’s situation and challenges.

To define your value proposition, ask yourself:

  • What value do I deliver to the customer?
  • What problem or pain do I solve for them?
  • What needs do I satisfy?
  • What are the measurable benefits or outcomes that the customer can expect?
  • What products or services do I offer them that addresses these questions?

Business Model Canvas value propositions include:

  • Newness (e.g., the smart phone)
  • Performance (e.g., faster computers)
  • Customization (e.g., personalization)
  • Design (e.g., Apple)
  • Brand/Status (e.g., Rolex and Prada)
  • Price (e.g., budget airlines)
  • Cost Reduction (e.g., outsourcing and automation)
  • Risk Reduction (e.g., warranties and insurance)
  • Accessibility (e.g., crowdfunding)
  • Convenience/Usability (e.g., DoorDash and Instacart)

Other popular value propositions include:

  • Quality: Emphasize the high standards or excellence of your product or service. For example, Red Wing Shoes’s high quality American-made goodyear welted shoes and boots.
  • Social Proof: Highlight the popularity or credibility of your product or service based on customer reviews, ratings, testimonials, endorsements, etc. (e.g., many of the DTC brands you see advertising on social media)
  • Innovation: Showcase the novelty or uniqueness of your product or service that sets it apart from the competition (i.e., Tesla’s electric cars vs gas guzzlers).
  • Sustainability: Demonstrate the environmental or social benefits of your product or service that align with your customers’ values. For example, Patagonia’s value proposition is part of their mission statement to “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”

Here are some ways to refine your value propositions from the book, “Sandler Enterprise Selling: Winning, Growing, and Retaining Major Accounts ”:

  • Territory Value Propositions: Broad statements describing the value your company delivers to a specific market segment or industry, based on market research and SWOT analysis . Example: “We provide manufacturing companies with innovative automation solutions to reduce operational costs and improve quality standards.”
  • Account Value Propositions: Specific statements illustrating the value your company delivers to a particular account or client, based on KARE analysis and account planning. Example: “Our customized automation solutions help ABC Manufacturing reduce energy consumption and waste production by 30%.”
  • Opportunity Value Propositions: Highly customized statements describing the value your company delivers to a specific opportunity or deal within an account, based on opportunity planning and qualification. Example: “Our solution for ABC Manufacturing automates their assembly line for product X, increasing production capacity by 50% and reducing defect rate by 20%.”

Understanding and articulating your value proposition requires continual refinement and validation based on customer feedback and market trends. Remain agile, listen to your customers, and be ready to iterate. By doing so, your business will not only survive but thrive, creating value that genuinely resonates with your target customer segments.

Remember, a value proposition is not merely a static statement or a catchy slogan. It’s a promise of the value that you and your business are delivering to customers. Let your value proposition be your guidepost, informing every aspect of your business strategy and decision-making process. By aligning your actions with your value proposition, you pave the way for sustainable success, fostering loyal customers.

3. Channels

Channels refer to how you reach your customers (e.g., communication, distribution, and sales). Business model channel types and phases are concepts that help you communicate with and reach your customer segments to deliver your value proposition.

Some questions to keep in mind as you read on:

  • Which ones work best?
  • Which ones have the best ROI?
  • Which ones fit best with your value prop?
  • Which ones are the most differentiated?
  • Which ones are the most consistent?

Channel Types: These are different routes your organization uses to reach customers.

  • Direct Channels: Owned and controlled by the organization (e.g., in-house sales force, a website, your own retail store, or catalog). They offer higher margins but can be costly to set up and operate.
  • Indirect Channels: Involve intermediaries or partners who distribute or sell products or services (e.g. wholesalers, retailers, agents, marketplace, partner-owned website). They can expand reach and leverage partner strengths but offer lower margins and less control.
  • Hybrid Channels: Combine both direct and indirect elements. For example, selling products on your website and through someone else’s retail store, respectively.

Channel Phases: These are steps in the customer journey that you use to communicate and deliver your value proposition.

  • Awareness: Raising awareness about products and services (e.g., advertising, social media, word of mouth, etc.).
  • Evaluation: Assisting customers to evaluate the value proposition (e.g., reviews, testimonials, demos, etc.).
  • Purchase: Enabling customers to buy products and services (e.g., online store, physical store, phone orders, etc.).
  • Delivery: Delivering the value proposition to customers (e.g., shipping, downloading, installation, etc.).
  • After Sales: Providing post-purchase customer support (e.g., warranty, refunds, feedback, etc.).

4. Customer Relationships

Customer relationships refer to the connections your company forms and maintains with your customers, which can affect satisfaction, loyalty, retention, and advocacy. Your customer relationships may range from personal to automated. This decision will significantly affect your costs and might be driven by motivations such as customer acquisition, customer retention, or upselling.

Business Model Canvas customer relationship types include:

  • Personal Assistance (e.g. onsite, call center, email, chat, etc.)
  • Dedicated Personal Assistance (e.g. account manager, rep, private banker, etc.)
  • Self-service (e.g. website or kiosk)
  • Automated services (e.g. auto-detect account based on phone number)
  • Communities (e.g. private online social network or offline meetups)
  • Co-creation (e.g. user-generated content like on YouTube)

Here’s another way to categorize these customer relationship types:

  • Transactional: A superficial relationship where customers interact with the company only to solve an issue (e.g., buying a product from a vending machine).
  • Business: Involves a standing contract or deal with regular interactions, typically with an assigned account manager (e.g., maintaining a long-term subscription with a company).
  • Brand and Community: Focuses on creating a sense of belonging and identity for customers through platforms such as social media, events, and forums (e.g., following a brand on Instagram).
  • Service: Centers around providing assistance and support to customers during or after the purchase process (e.g., calling a helpline or interacting with online support).
  • Ambassador: Aims at transforming customers into advocates and promoters of the company, often rewarding referrals, reviews, etc. (e.g., a customer receiving a discount for inviting a friend).
  • Consultant: Primarily based on providing expert advice and guidance to customers, addressing their specific needs (e.g., hiring a personal trainer or financial planner).

Different types of relationships suit different customer segments and value propositions. You should choose relationship types that best align with your customer expectations and needs. It’s crucial for you to measure and improve your customer relationships to enhance their overall experience and loyalty.

5. Revenue Streams

Your revenue streams show how your business will earn money. Determine which of your potential revenue streams is the most promising and explore whether your customers will pay for it.

To determine what your primary revenue stream should be, ask yourself:

  • For what value are my customers willing to pay?
  • What do they currently pay for?
  • How do they pay?
  • Which of these revenue streams is the largest?

Business Model Canvas revenue streams include:

  • Asset Sale (e.g., physical product sales)
  • Usage Fee (e.g., hotel stays, data plans, shipping carriers, web hosting, etc.)
  • Subscription (e.g., gyms, MMO games, subscription boxes, SaaS, etc.)
  • Lending/Renting/Leasing (e.g., bank loans, car rentals, coworking spaces, etc.)
  • Licensing (e.g. DC or Marvel license their IP to create merchandise, movies, games, etc.)
  • Brokerage Fee (e.g., commissions charged by real estate agents, online marketplaces, travel agencies, etc.)
  • Advertising (e.g. social media apps, TV shows, news websites, and podcasts that sell ad space)

Note: Each revenue stream might have different pricing mechanisms. Think carefully if fixed or dynamic pricing works best for you. The “Business Model Generation ” book has some really interesting information about revenue stream pricing mechanisms.

Here are some common types of revenue streams:

  • Transactional: This comes from onetime payments made by customers for a product or service. Picture a customer buying a book from your online store or a ticket for a concert you’ve organized.
  • Project: This type of revenue arises from singular projects with existing or new customers. An example would be a client hiring your firm to renovate their house, or a company commissioning you to develop an app.
  • Service: This stream is tied to providing a service to customers, often calculated based on time. Think about a client paying an hourly rate for your legal consultation or a company paying a monthly fee for your accounting services.
  • Recurring (my favorite): This type of revenue comes from ongoing payments for your continuing services or after-sale services to customers. Imagine a customer paying a monthly subscription for your streaming service or a company paying an annual maintenance fee for a software license you provide.

Keep in mind, different revenue streams have different pros and cons. For instance, transactional revenue might offer high margins but result in lower customer loyalty, while recurring revenue might have lower margins but result in high customer retention and predictable revenue.

You should choose the type of revenue stream that aligns best with your value proposition and the needs of your customers. Also, think about logical revenue expansion opportunities that build off your value proposition.

6. Key Resources

Key resources are the assets your business needs to function effectively. As you build your business, it’s essential to understand your key resources — the assets that enable you to offer value to your customers.

These resources, which you can own, lease, or acquire from partners, come in various forms:

  • Physical Resources: Tangible assets, such as buildings, vehicles, machinery, equipment, and inventory, play a crucial role in product creation and service delivery.
  • Financial Resources: These include cash, credit lines, and stock options for attracting key employees. Vital for operating and growing your business.
  • Intellectual Resources: Your intangible assets like patents, trademarks, copyrights, trade secrets, and customer databases create a competitive edge and protect your innovations.
  • Human Resources: The skills and efforts of your employees, managers, consultants, and partners drive your business activities and value delivery.

The type and quantity of your key resources hinge on your value proposition, customer segments, channels, revenue streams, and cost structure. Different business types require different resources:

  • Product-driven businesses: Apple and Tesla focus on creating and marketing unique products. Intellectual and human resources are vital here.
  • Scope-driven businesses: Walmart and IKEA offer diverse products or services to a specific customer segment or niche, necessitating physical and financial resources.
  • Infrastructure-driven businesses: Amazon and eBay both provide a platform enabling transactions between parties, requiring physical and intellectual resources.

Recognize your key resources and ensure their availability, reliability, and scalability. Leverage these assets to stand out from competitors, creating a sustainable competitive advantage. After all, your key resources enable you to generate revenue by creating value for your customers.

7. Key Activities

These are the vital actions your business must take to operate successfully and bring your value proposition to life. These activities vary widely based on your business type and can span several areas. Let’s break them down:

  • Production: The designing, sourcing, assembling, testing, packaging, and shipping of your product or service in substantial quantities or of superior quality. Imagine a car manufacturer, where physical and human resources are used to produce cars.
  • Problem Solving: You address specific customer problems or needs. For example, you could be an outside consultant solving key business problems for a client.
  • Platform/Network Management: Develop and maintain a platform or network that facilitates transactions. Consider social media companies; they manage platforms connecting users, using physical and intellectual resources.
  • Research and Development (R&D): Create new products or services through experimenting, testing, and prototyping. Pharmaceutical companies are an example, using intellectual and human resources to create new drugs.
  • Marketing: To raise awareness and generate demand for your product or service, you research, advertise, and brand. A fashion company might leverage human and digital resources for marketing its products.
  • Sales: Sell your product or service to customers. A software company, for instance, would use human and digital resources to sell its products.
  • Customer Service: In this activity, you provide support to customers at all stages of their journey — before, during, and after purchase. A phone company, for example, would use human and digital resources to offer customer service.

Your key activities are the engine of your business, driving value creation for your customers and revenue growth for your business. Identify these activities and align them with your value proposition and customer segments.

8. Key Partnerships

Partnerships can optimize your business model, reduce risk and uncertainty, and help acquire resources. In your business, key partnerships are the strategic relationships you form with other entities, integral to making your business model effective. They are the lifeline that connects you with suppliers, manufacturers, distributors, customers, competitors, and other organizations, offering resources, capabilities, or advantages.

Depending on your unique goals and needs, these key partnerships take on different roles. Here are some common reasons to form partnerships:

  • Optimizing the Value Proposition: Partnerships can help you deliver more value to your customers by improving your offerings, adding complementary benefits, or granting access to new capabilities or resources. For instance, a coffee shop might partner with a local bakery to provide customers with fresh pastries.
  • Reduce Risk and Uncertainty: Partnerships can help mitigate the risks and uncertainties tied to your business model, like market volatility, technological shifts, regulatory changes, or competition. As an example, a software company might partner with a cloud provider to guarantee secure and reliable data storage and backup.
  • Outsourcing Non-Core Activities: Partnerships can help you concentrate on your core competencies while outsourcing non-essential or non-strategic tasks. A clothing brand, for instance, might partner with a manufacturer to produce garments, allowing the brand to focus on design and marketing.
  • Accessing New Markets and Customers: Partnerships can help expand your reach and customer base by leveraging your partners’ networks, channels, or reputation. A local restaurant might partner with a food delivery platform to offer online ordering and delivery to a wider customer base.

Now let’s look at various types of key partnerships:

  • Strategic Alliances: These partnerships bring together non-competitors to achieve shared objectives or combine complementary strengths. Consider a car manufacturer teaming up with a battery producer to innovate electric vehicles.
  • Coopetition: A unique type of partnership where competitors collaborate in some areas while competing in others, such as two airlines code-sharing flights but competing on ticket prices.
  • Joint Ventures: These partnerships lead to the birth of a new entity aiming at a specific opportunity. An example is a media company forming an alliance with a telecom company to launch a streaming service.
  • Buyer-supplier Relationships: These partnerships elevate the buyer-supplier bond beyond mere transactions. For instance, a retailer might establish a long-term relationship with a supplier, ensuring consistent quality, reliability, and innovation.

Your key partnerships play a vital role in refining your value proposition, risk management, and expanding your reach. Identify partners that align with your vision and values. It’s essential to manage these partnerships effectively and regularly monitor their performance, ensuring a mutually beneficial relationship.

9. Cost Structure

Cost structure comprises the types and sources of costs (i.e. expenses) that a business incurs in creating and delivering its value proposition to its customers. Understanding your cost structure is essential to manage your financial health.

A couple of questions to ask yourself:

  • Are your costs primarily fixed or variable?
  • Does your business benefit from economies of scale or scope?

Let’s explore some common types of cost structures:

  • Fixed Costs: Fixed costs, such as rent, salaries, and insurance, remain constant, irrespective of output or sales levels. Businesses with high fixed costs often strive to boost sales volume to achieve economies of scale and reduce their average cost per unit.
  • Variable Costs: These costs, including raw materials and commissions, vary in direct proportion to output or sales. Businesses with high variable costs aim to decrease their marginal cost per unit, thereby increasing profit margins.
  • Mixed Costs: Mixed costs incorporate both fixed and variable elements. For instance, a phone bill might include a fixed monthly charge and a variable charge based on usage.
  • Direct Costs: Direct costs can be directly attributed to a specific product, service, or activity. They’re typically variable costs and can be easily measured and allocated.
  • Indirect Costs: These costs cannot be directly attributed to a specific product or service and need to be estimated and allocated using criteria such as sales revenue or direct labor hours.

Understanding your cost structure is vital because it affects profitability, competitiveness, and sustainability. It’s crucial to identify your cost drivers and align your cost structure with your value proposition and customer segments.

In the Business Model Canvas there are two cost structures:

  • Cost-driven: This model aims to minimize costs and offer low prices. Walmart and IKEA exemplify this model, requiring a lean, efficient cost structure with high automation and economies of scale.
  • Value-driven: This model focuses on delivering value through premium offerings tailored to specific customer needs. Apple and Starbucks are examples, requiring a value-based cost structure involving high-quality inputs, innovation, and customization.

Two concepts central to cost reduction are economies of scale and economies of scope:

  • Economies of Scale: This refers to cost advantages achieved by producing more units of a single product or service. Increasing returns to scale concept aligns with economies of scale, where a proportional increase in inputs leads to a more than proportional increase in outputs.
  • Economies of Scope: This refers to cost advantages achieved by producing multiple types of products or services that share some common inputs, processes, or infrastructure. It’s tied to the concept of complementarity in production.

Both economies of scale and scope can enhance profitability, competitiveness, and sustainability, but come with their own limitations. Economies of scale may lead to diminishing returns or even diseconomies of scale beyond a point, potentially affecting product differentiation or quality. On the other hand, economies of scope might lead to trade-offs between variety and efficiency, potentially increasing fixed costs or risks associated with multiple products or services. Understanding these dynamics will allow you to strategically manage your cost structure, which is crucial for long-term success.

Understanding the Business Model

Understanding and carefully designing these nine elements of the Business Model Canvas can significantly shape your business opportunity and increase the likelihood of success. Whether you’re offering a product, a service, or a mix, and whether you’re employing a recurring subscription, usage-based billing, one-off billing, or something else a well-crafted business model will help ensure that your venture is economically viable, customer-centric, and competitive.

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