In the first section, we started out looking at "the big picture"—what the world of business looks like if you were looking down from outer space.
Now we're going to "zoom in" to look closer at how businesses actually work.
In this section we're really getting to the heart of it—into a much deeper level of detail.
When we were looking at the big picture, we focused on all the ways that businesses are different—size, industry and sector, legal structure.
As we zoom in, we're going to be talking more about characteristics or features shared by all businesses.
The first step is going to be to understand business models.
That's a term many of you are probably already familiar with.
By the end of this class you will be able to understand the business model of virtually any kind of business.
This is an important class.
If you asked me to explain "what is business" to someone in one lesson, I'd use the material we're covering today.
"Business model" is just a fancy way of saying "how a business works."
And every business has a business model.
The way that we're going to better understand business models is by learning about an extremely useful tool.
This tool will give you a mental model—a picture in your head—of how businesses work.
It's very powerful. Because it's quite simple. And because it's so simple, it can be easy to miss just how powerful it is.
So the tool is called the Business Model Canvas.
It's a map of how businesses work.
And once you understand it, you'll be able to apply it to any kind of business.
Or really any kind of organization—for-profit, non-profit, government agency, school, sports team, foundation… you name it.
Now, I didn't invent the Business Model Canvas. These two guys did: Yves Pigneur and Alex Osterwalder.
Osterwalder was a PhD student, and Pigneur was his professor.
They wanted to create a model that could describe any kind of business.
They worked with hundreds of collaborators in dozens of countries.
The result was this book—Business Model Generation—which they published back in 2010.
And if you want to learn more about the canvas, you can go to Strategyzer.com; they have a bunch of good content on there about it.
So today we're going to learn how the canvas works, and how to use it to create a "model" of how a business—any business—works.
The Business Model Canvas is made up of 9 cells, or building blocks.
I've labeled these a little bit differently than the original, but the idea is the same.
We're going to start by looking at a simplified version just to get oriented.
At the simplest level, all businesses are made up of the interaction of 4 things:
- A Team
- Customers
- A product or service Offering
- And of course Money
That's really it.
Before we go on, I want to note one thing: at indie.biz our version of the canvas is color-coded, and we use that color system for all of our course content so you always know what we're talking about in any class.
Ok. So that's the simplified version of the canvas. As we go through each of the sections, we'll add a bit more detail.
Starting out with the Team, you'll see that we have 3 sections:
The Team itself. The Activities carried out by that team. And the Assets used by the team.
The Team is made up of the people that the business relies on to do its work.
So, for example: the business owners, the managers, full-time and part-time employees. These are all people who work inside the business.
Then you also have people who are outside the business, including partners, suppliers, mentors and advisors, consultants.
The people inside and outside the business all need to work together to make things happen—to keep the business operating.
That work—the Activities of those teams—is the day-to-day engine of the business. It's those activities that make the business work.
If you have a bakery, for example, your team has to think about recipes for the things you want to make. They have to wake up in the morning to bake the things you sell. Someone has to sell those baked goods to customers who come into the store. Maybe someone else thinks about how to get your bread into restaurants or supermarkets.
Now, the people on that team, doing their work—they need stuff. They need Assets: the resources they can use to do their jobs.
Some of these assets are going to be physical things. In the case of your bakery, you need an oven, a cash register/POS, maybe a delivery truck, computers and phones, storage containers.
Other things will be intangible—things you can't touch—maybe your grandmother's secret cookie recipe, or your degree from a cooking school.
You also need ingredients: flour, butter, baking soda, chocolate chips.
Ok, let's look at the other side of the canvas: Customers.
Obviously, right? You can't have a business without customers. Customers are what make a business a business.
Like the team, the customer section of the canvas has three parts. You have the Customers themselves.
There are a few key questions we can ask to understand a business's customers:
Who buys from the business? Some businesses sell to individuals and families; some sell to other businesses, to schools, hospitals, governments of various levels.
How many customers does the business have? Some businesses have only 1 or 2 customers—others have literally billions.
Why do customers buy from the business? What needs or wants does the business satisfy for them?
What kind of Relationship do the customers have with the business? How loyal are they? How frequently do they buy?
Sometimes a customer will only buy from a business once—a single transaction, and then the relationship is over. And that doesn't necessarily mean the customer wasn't happy… there are just some things you really only buy once, or once in a while.
Think about replacing a roof with a new roof that should last 30 or 40 years. It's hard for roofers to get a lot of repeat business from those customers—as happy as they might be with their new roof.
In other cases, customers buy extremely frequently—maybe even daily, or multiple times a day. Think about a neighborhood coffee shop with its regular customers who come in for their morning coffee every day. Or maybe it's a product you don't buy very often but you use all the time… maybe even too much (cell phone!).
The Channel is made up of the places where and how customers buy from the business.
The channel could be the business's own store, or someone else's store. It could be an online site or a "brick and mortar" location in the real world.
Some channels just sell the product—they don't do anything to change or enhance it. A supermarket is like that, right? You buy your groceries and it doesn't really matter which store sells them to you.
Other channels add some kind of service to the product—that's more like a car dealership. You buy the car from them, but you also go back to them when something isn't working, or just for regular maintenance.
From the business's perspective, it's important to choose channels that will attract the right customers and serve those customers well. But they also have to consider how much the channel charges—there's a cost associated with the channel, which is why many businesses think about selling directly to customers.
Now you'll have noticed that the section that ties it all together, right at the center of the canvas, is the Value or the Offering that the business creates and sells.
You'll see this referred to as the Value Proposition.
This is where we consider the products and services that carry value to the customer.
There is so much to say about this topic. Understanding value is probably the most important idea in business. It might be one of the most important ideas in life, to be honest.
A company's value proposition is the promise that it makes to its customers. It's the thing that sets it apart from competitors—from other businesses offering similar stuff to customers.
There are many different ways that companies do this. The most successful businesses understand what matters most to their customers, and they work hard to deliver that.
It could be the design of the product, or its special features, or some technological advantage, or the brand, or how much the item costs (is it cheaper or more expensive than alternatives?), or how customized it is, or how convenient it is.
Some of these are quantitative—they can be measured. Others are qualitative—they're experienced by the customer.
Ok, and now we get to the final section of the canvas—the literal "bottom line." Money.
In order for a business to survive, it needs to bring in more money from selling its value than it spends to create that value.
That's called being profitable.
Later in the course, we'll have a whole video about how profitability is measured, but I want to cover it quickly now.
The canvas has two cells in the Money section: Costs and Revenue.
This is where you can start to see the genius of the Business Model Canvas. The canvas itself is structured so that everything on the left side—we can also call it the "supply side": the people, the assets, the work, all the stuff the business does to create value—costs money.
Everything on the other side—we could call it the "demand side"—is associated with revenue, or business income.
The difference between those two things is what determines whether a business can survive, or even grow.
Again, we have a whole video about profitability, so you can check that out.
So that's the Business Model Canvas in a nutshell.
If you look below, you'll see a link to a blank version of the canvas. This is a tool you can use to sketch out business models—of other companies, or maybe even your own.
We covered a ton in this class—thanks for sticking with me for it.
For the next couple of classes, we're going to be referring back to this model as we talk about customers and profits.
