Two similar products may succeed or fail depending on how each makes money and reaches its customers. This is what we call the business model. In this chapter we present the Business Model Canvas and its nine components, go deeper into the value proposition, and then review common revenue models. We end with one of the most important secrets of outstanding entrepreneurial ventures: a deal where every party wins, meaning a model in which the customer is satisfied and pays an amount that rewards the venture owner and everyone who works with them.
After studying this chapter, you should be able to:
Alexander Osterwalder defines a business model as the logic by which a venture creates value, delivers it to its customers, and captures a return from it. In other words, it answers three connected questions: What value do we offer, and to whom? How do we deliver it to them? And how do we earn enough from it to cover our costs and make a profit?
To see why the business model matters, consider how the same service, "getting around the city," can be offered through completely different business models:
The service is the same, but the way value is created and money is earned differs in each model. That is why researchers say that competition today is often between business models, not just between products.
In Business Model Generation (2010), Osterwalder and Yves Pigneur designed a visual tool that summarizes a venture on a single page, divided into nine blocks. The tool spread through universities and incubators around the world because it forces the team to think about the whole venture and allows it to be revised quickly.
The canvas is read in three parts: one side is about the customer and value (whom we serve and how we reach them), the other side is about operations (what we need in order to deliver the value), and the bottom is about money (where it comes from and where it goes). We will explain each block and apply it to one example that runs through the chapter:
The question: For whom are we creating value? Who are our most important customers?
Here you define the groups the venture serves, with the precision explained in the previous chapter. A venture may serve one segment, or several segments with different needs. The rule is that each segment with a different need requires a different value proposition.
In the example: two segments: (a) households whose air conditioners break down at the peak of the heat, leaving them waiting days for a technician; (b) owners of small shops and offices, who lose customers and staff comfort when the cooling fails.
The question: What problem do we solve for each segment? What benefit do we offer? Why would the customer choose us over the alternatives?
This is the most important block on the canvas, because everything else serves it. A value proposition is not a list of product features but the benefit the customer feels. We expand on it in the fourth section.
In the example: for households: "Your air conditioners are serviced before summer on a fixed date for a fixed annual price, so they don't break down in the worst of the heat." For shops: "Don't lose customers because of a broken air conditioner: regular maintenance, and an emergency visit within hours."
The question: How do customers hear about us? How do they buy? How do we deliver the service? How do we support them after the sale?
Channels are the points of contact between the venture and the customer at every stage of their journey: advertising, sales, delivery and after-sales service. They may be direct (your website, your shop, your team) or indirect (a distributor, a platform, a partner).
In the example: awareness through neighborhood groups, real estate offices and residential compound managers; subscription and payment through a link; delivery through scheduled technician visits; after-sales support through a dedicated breakdown number.
The question: What type of relationship do we build with each segment? How do we win customers, keep them and grow what they buy?
The relationship may be personal (you know the customer by name), automated (an app with no human contact), or community-based (a group where customers interact with one another). Each type has a different cost and effect.
In the example: a reminder before every visit, a photo report after maintenance showing the condition of each unit, priority for subscribers when breakdowns happen, and a discount on renewal.
The question: What does the customer pay for? How do they pay? How much does each stream contribute to total revenue?
Here you set the revenue model (sale, subscription, commission…) and the pricing method. We present revenue models in detail in the fifth section.
In the example: an annual subscription priced by the number of units, payable in installments; spare parts charged separately; and one-off visits for non-subscribers at a higher price.
The question: What are the most important resources the venture cannot work without?
These include physical resources (equipment, premises, a vehicle), human resources (a skilled technician, a programmer), intellectual resources (a method, a technology, a brand) and financial resources (working capital).
In the example: trained, trustworthy technicians, a visit scheduling system, equipped vehicles, and a basic stock of spare parts.
The question: What are the most important things we must do well for our model to succeed?
Not all activities, but the ones that make the difference. In a software company the key activity is development; in a store it is inventory management and marketing; in a restaurant it is cooking quality and speed of service.
In the example: scheduling visits by neighborhood so a technician sees more than one customer in the same area, maintenance quality, fast response to breakdowns, and follow-up for subscription renewal.
The question: Who are the suppliers and partners we depend on? Which resources or activities do we get from them instead of doing them ourselves?
A venture does not need to do everything itself. Smart partnerships reduce costs and risks and provide resources the venture does not own.
In the example: a spare parts supplier at wholesale prices, real estate offices and compound managers who recommend the service for a commission, and a vocational training institute that supplies technicians.
The question: What are the most important costs in our model? Which resources and activities are the most expensive?
Costs here are classified as fixed and variable (detailed in Chapter 9). Some ventures build their model on cutting costs as far as possible; others accept higher costs in exchange for higher value.
In the example: fixed: technicians' salaries, vehicle leases and the scheduling system subscription. Variable: consumables and fuel for each visit. The biggest hidden cost is the technician's time on the road, which is why scheduling is a key activity.
Ash Maurya noticed that early-stage startups do not yet have clear partners or relationships, and that their biggest risk is building a solution to a problem that does not exist. In Running Lean he developed a modified version called the Lean Canvas, replacing four blocks:
| Block in the original canvas | Replaced in the Lean Canvas by | Reason |
|---|---|---|
| Key Partners | Problem: the customer's top three problems, and existing alternatives | Because a startup must begin with the problem |
| Key Activities | Solution: the simplest solution to each problem | Because the solution must connect directly to the problem |
| Key Resources | Key Metrics: the numbers that tell you whether the venture is making progress | Because a startup needs to measure its learning |
| Customer Relationships | Unfair Advantage: what others cannot easily copy or buy | Because a successful idea is copied quickly |
The two tools do not conflict: the Lean Canvas suits the idea and testing stage, and the original Business Model Canvas suits the stage when the model becomes clear and operations begin.
The value proposition is the promise you make to the customer: why should they choose you? It is built by understanding three things about the customer:
You then design your product to be a pain reliever and a gain creator. This is the core of the Value Proposition Canvas, which Osterwalder and colleagues developed as a companion to the Business Model Canvas.
Value usually comes from one or more of these sources:
| Source of value | Example |
|---|---|
| Saving time or effort | The customer does not need to search for a technician or chase them |
| Lowering cost | Regular maintenance is cheaper than repairing major breakdowns |
| Higher quality or performance | Trained technicians and a photo report after every visit |
| Convenience | Visits are scheduled automatically without the customer having to remember |
| Customization | A plan based on the number and type of units |
| Reducing risk | A maintenance guarantee and a fixed price known in advance |
| Social or emotional value | Peace of mind and reassurance about the family in summer |
The revenue model is the way the customer pays. Choosing it affects everything: the price, the relationship with the customer, and cash flow.
The customer pays for the product once and owns it. The simplest and clearest model, but it requires attracting the customer anew each time. (Shops, products.)
The customer pays a recurring amount (weekly, monthly, yearly) for continuing service. For the venture, it makes revenue predictable and regular and eases planning; for the customer, it is often cheaper and easier. But it requires value to stay high constantly, or the customer cancels. (Streaming platforms, gyms, "Baroda.")
A platform connects two sides (seller and buyer, service provider and customer) and takes a share of each transaction. The platform does not need to own inventory or employ service providers, but it needs enough of both sides to work. (Delivery platforms, hotel booking.)
A free basic version attracts a large number of users, and a paid version with extra features is bought by some of them. Its success depends on the free version being useful enough to attract people, and the paid version tempting enough for them to pay. (Cloud storage apps, language learning apps.)
The service is free for the user, and advertisers pay to reach them. It needs a very large number of users to be profitable, so it rarely suits small ventures at the start. (Search engines, social media.)
The customer pays for temporary use instead of ownership. It suits expensive things people need only occasionally. (Equipment rental, travel and camping gear.)
The venture sells the right to use its intellectual property (a brand, a technology, content, a design) to another party for a fee. (Enterprise software, brands.)
More than one model can be combined, as in our example: an annual subscription, plus the sale of spare parts, plus one-off visits for non-subscribers.
This section is among the most important in the book, because it addresses a mistake that recurs often in venture ideas: an idea that is wonderful for the customer, but exhausting or loss-making for whoever delivers it.
When we think about a venture, we usually think about the customer alone: Will they like it? Will they use it? But every real venture has other parties: the entrepreneur, who must earn what their effort and money deserve; the workers, such as the technician, the courier and the driver, who must earn a fair income for their time; and the suppliers and partners, such as the supplier, the shop and the platform, for whom the partnership must be worthwhile. A sustainable venture is one from which every party comes away satisfied, not just by using it, but because the customer pays an amount they see as fair, and that amount rewards the entrepreneur and the other parties properly.
If one party is "unhappy," the venture will not last long: a worker who does not earn enough leaves, a supplier who loses money withdraws, and an entrepreneur who works hard without profit eventually closes the venture, however happy the customers are.
One of the simplest ways to test any idea is to draw a face for each party: a happy face if they gain and are comfortable, and a sad face if they lose or are overburdened. Then look at the faces together: is everyone smiling? Consider these two examples:
| Party | Idea: a mobile barber who comes to the customer's home | Idea: a delivery platform connecting restaurants with customers (like HungerStation) |
|---|---|---|
| Customer | Likes having the barber come to them, but the price asked is too high, so they usually say: "Going to the shop is better for me." | Receives exactly the order they chose, at a known time, without going out |
| Service provider | In the shop the barber serves many customers; going out to customers means fewer of them, higher costs and more scheduling problems | The restaurant owner benefits because the platform markets the restaurant and connects it with customers it could not reach, without hiring couriers |
| Courier | — | Starts work whenever they want, so they keep their freedom, and earn according to their effort |
| Venture owner | Cannot find a price that satisfies both the barber and the customer | The company manages and connects the parties; its effort is small relative to the number of daily orders, so it earns on every order |
| Result | Not everyone is smiling | Balanced, as long as the deal stays fair to each party |
Notice in the second example that the restaurant owner was not obliged to hire full-time couriers and carry their salaries and cars during slow hours, the courier was not bound to fixed working hours, the customer did not have to go anywhere, and the company neither cooked nor owned cars. Each party got what it wanted and gave what it could.
Researchers Adam Brandenburger and Harborne Stuart offer a simple and deep way to understand this, which can be summarized as follows:
Picture this value as a pie divided among the parties: a slice for the customer (the difference between what they were willing to pay and what they actually paid, which is what makes them happy), a slice for the entrepreneur (profit), and a slice for the service provider and suppliers (what exceeds their costs). There are two cases:
Among the ideas students propose most often are the mobile barber, the mobile workshop and mobile car washing. These ideas really are attractive to customers, but let us think about them from the barber's side, with hypothetical numbers for illustration:
Now the question: How much must the barber charge a customer at home to earn what he earns in the shop?
This is where the problem shows: that amount is too high for most customers, so the customer usually says: "Going to the shop is better for me." And if the barber lowers the price so the customer accepts, he earns less than in his shop while working harder. In other words, the pie is small: what the customer will pay is less than the real cost of the barber's time and travel, so not everyone is smiling.
Can the idea be fixed? That is the real entrepreneurial question. The fix is not changing the price but changing the model so the pie grows, for example by bundling orders so the barber serves several people in one visit (a family, an office or a residential compound), or by targeting customers who value home service more and will pay for it (older people, people with disabilities, patients at home, and hotels). One of these solutions may work and it may not; what matters is that you do the calculation before you start.
If you look at entrepreneurial ventures that stand out for a business model that satisfies all its parties, you will find they usually rely on one or more of these secrets:
Even successful models can tip out of balance if one party squeezes another. Delivery platforms, for example, need constant balance: if they raise their commission on restaurants too much, restaurants raise prices and demand falls; if they cut couriers' pay too much, couriers leave, deliveries are late and customers get angry. So the successful entrepreneur keeps asking, not just once at founding: Does every party still see the deal as worth it?
Platforms also face what is called the chicken-and-egg problem: customers will not come unless they find many service providers, and providers will not join unless they find many customers. The common solution is to start in a very small area (one neighborhood, or one group) and offer one side value even before the other side is complete.
Try this in the "Stakeholder Balance" tool in the toolbox.
The answers are on the Answers to Self-Assessment Questions page. On the interactive course page you can answer and check these questions directly, with practical tools linked to the chapter.
Draw the faces map for your venture idea: Who are all the parties? Is everyone smiling? And if one of them is sad, what would you change in the model to make them smile?