4 Business Models
What is a Business Model?
In standard business usage, a business model is a plan for how a venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a more of a planning document used for such aspects of the business as financing and operations.
Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. Put more simply, you want to address what your idea is, who will use it, why they will use it, and how you will make money from it.
Business Model Canvas
According to Alexander Osterwalder and Yves Pigneur, the authors of Business Model Generation, a business model “describes the rationale of how an organization creates, delivers and captures value.”[1]
A business model canvas is a display that allows users to map out different components of a business models (Videos 4.1 and 4.2). While the business model canvas is often used and discussed in the context of entrepreneurship and starting a business, the business model canvas can be applied in a number of other ways, including strategic planning, understanding competition, understanding customers, and making investment decisions.[2]
Watch Video 4.1: Getting from Business Idea to Business Model to learn about the business model canvas. Closed captioning is available. Click HERE to read a transcript.
Watch Video 4.2: Visualizing your Business Model to learn more about the business model canvas. Closed captioning is available. Click HERE to read a transcript.
As developed by Osterwalder and Pigneur, the business model canvas has nine components. Click on each information icon in the interactive business model canvas below to learn more about each component:
Value propositions: A company creates value, or benefits, for customers by solving a problem or satisfying a need. The value proposition is the reason that customers choose one option over another when deciding what to buy. Although certainly not an exhaustive list, customers may value: newness, performance, customization, design, brand, price, cost reduction, risk reduction, accessibility, and convenience.
The value proposition block of the business model canvas answers questions such as:
- What do we provide our customers?
- What problem are we solving?
- What are we offering to each customer segment?
Customer segments: Without customers, businesses cannot survive. Businesses must identify and understand their customers, and they can group these customers into segments with common characteristics. For example, a business model that focuses on a mass market is focused on a large group of customers with generally similar problems and needs, while a business model that focuses on a niche market is focused on a specific, specialized customer segment with problems or needs that differ from other customer segments.
The customer segments block of the business model canvas answers questions such as:
- Who are our customers?
- For whom are we creating value?
Channels: Channels bring the value proposition to the customers through communication, distribution, and sales. Companies can reach their customer segments through a mix of channels, both direct (e.g., through sales force and web sales) and indirect (e.g., through partner stores), to raise awareness, allow for purchase and delivery, provide customer support, and support other important functions of the business.
The channels block of the business model canvas answers questions such as:
- How will we reach our customer segments?
- How are our channels integrated?
- Which channels are the most efficient?
Customer relationships: Companies need to maintain relationships with their customers to acquire and retain customers and boost sales. Strong customer relationships can significantly impact overall customer experience. There are many categories of customer relationships including personal assistance, self-service, automated service, user communities, and cocreation.
The customer relationships block of the business model canvas answers questions such as:
- What type of relationship does each customer segment want?
- How costly are the relationships?
- How do we integrate them with the rest of our business model?
Revenue streams: Revenue streams can be generated through asset sales (e.g., selling a physical product), usage fees, subscription fees, licensing, brokerage fees, advertising, and temporarily selling the use of a particular asset (e.g., lending, renting, or leasing). Revenue pricing mechanisms vary from fixed (e.g., predefined prices based on static variables) to dynamic (e.g., price changes based on market conditions).
The revenue streams block of the business model canvas answers questions such as:
- What are customers willing to pay?
- What and how do they currently pay?
- How much does each revenue stream contribute to overall revenue?
Key resources: Any business needs resources—physical, financial, intellectual, and/or human—to function. These resources enable the company to provide their products or services to their customers.
The key resources block of the business model canvas answers questions such as:
- What key resources do our value proposition(s), channels, customer relationships, and revenue streams require?
Key activities: Key activities are the critical tasks that a company does to succeed and operate successfully. Different companies focus on different activities in categories such as production, problem-solving, and platform/network.
The key activities block of the business model canvas answers questions such as:
-
What key activities do our value proposition(s), channels, customer relationships, and revenue streams require?
Key partnerships: Companies build partnerships to optimize their business, reduce risk, or gain resources. There are four main types of partnerships: strategic alliances between noncompetitors, coopetition (strategic alliances between competitors), joint ventures, and buyer-supplier relationships.
The key partnerships block of the business model canvas answers questions such as:
- Who are our key partners and suppliers?
- Which key resources are from which partner?
- What key activities are done by partners?
Cost structure: All businesses incur costs through operation, whether fixed or variable. They may also face economies of scale and scope. Companies consider their cost structures in two strategies: cost-driven, where all costs are reduced wherever possible, and value-driven, where the focus is on greater value creation.
The cost structure block of the business model canvas answers questions such as:
- What are the most important costs in our business model?
- Which key activities and key resources are the most expensive?
The Business Model “Theater”
The nine components of the business model canvas can be grouped to represent two distinct aspects of a business: the “front stage,” or the customer-facing side of the business, as well as the “back stage,” or business-facing side (Video 4.3). Both the customer-facing and business-facing sides of a business model need to align in order for a company to be profitable and to best position itself for success in the broader competitive environment.
Watch Video 4.3: The Business Model Theatre to better understand how the components of the business model canvas can be grouped to represent the two key aspects, or “sides,” of any business. Closed captioning is available. Click HERE to read a transcript.
Chapter Review
Optional Resources to Learn More
 |
Articles |
| “A Better Way to Think About Your Business Model” https://hbr.org/2013/05/a-better-way-to-think-about-yo | |
 |
Books |
| Business Model Generation https://www.strategyzer.com/books/business-model-generation | |
| Design a Better Business https://designabetterbusiness.com/ | |
 |
Videos |
| “The Business Model Canvas” https://www.youtube.com/watch?v=IP0cUBWTgpY | |
 |
Websites |
| Business Model Analyst https://businessmodelanalyst.com/business-model-canvas | |
| The Business Model Canvas Building Blocks https://web.archive.org/web/20230514005959/https://www.strategyzer.com/business-model-canvas/building-blocks |
Chapter Attribution
This chapter incorporates material from the following sources:
Chapter 11 of Laverty, M. & Littel, C. (2020). Entrepreneurship. OpenStax. https://openstax.org/books/entrepreneurship/pages/11-introduction. Licensed with CC BY 4.0.
Chapter 19 of Black, J. S. & Bright, D. S. (2019). Organizational behavior. OpenStax. https://openstax.org/books/organizational-behavior/pages/19-3-business-model-canvas. Licensed with CC BY 4.0.
Media Attributions
Video 4.1: Strategyzer. (2013, September 20). Getting from business idea to business model [Video]. YouTube. https://youtu.be/wwShFsSFb-Y
Video 4.2: Strategyzer. (2013, September 20). Visualizing your business model [Video]. YouTube. https://youtu.be/wlKP-BaC0jA
Video 4.3: Strategyzer. (2014, July 28). The business model theater [Video]. YouTube. https://youtu.be/LLKqthJOdN8
- Osterwalder, A., & Pigneur, Y. (2010). Business model generation: A handbook for visionaries, game changers, and challengers. Wiley. ↵
- Garner, B. (2015, March 23). 14 ways to apply the business model canvas. https://www.strategyzer.com/blog/posts/2015/3/23/14-ways-to-apply-the-business-model-canvas ↵
A plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and how income will be generated through this process.
A formal document that typically describes the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives.
Developed by Osterwalder and Pigneur, used to develop a business model for a venture, including nine blocks that are mapped out to address customer segments, customer relationships, channels, revenue streams, value propositions, key partners, key activities, key resources, and cost structure.
One of the nine elements of the business model canvas: the products and services and their attributes that create value for customer segments.
One of the nine elements of the business model canvas: the different groups of people or organizations a company aims to reach and serve.
A large group of customers with generally similar problems and needs.
A specific, specialized customer segment with problems or needs that differ from other customer segments.
One of the nine elements of the business model canvas: how a company communicates with and reaches its customer segments to deliver its value propositions.
One of the nine elements of the business model canvas: the types of relationships a company establishes with its customer segments.
One of the nine elements of the business model canvas: the ways a company generates cash from customer segments.
One of the nine elements of the business model canvas: the most important assets required to make a business model work.
One of the nine elements of the business model canvas: the most important things a company must do to make its business model work.
One of the nine elements of the business model canvas: the network of suppliers and partners that make the business model work.
One of the nine elements of the business model canvas: costs incurred to operate your business model.
Costs that do not change regardless of the level of production.
Costs that increase or decrease based on the level of production.
A situation where producing more of a product (or service) results in a lower per-unit cost, as a result of fixed costs spread over more units, volume discounts, or both.
A situation where producing one product (or service) reduces the cost of producing a different product (or service), as a result of sharing resources or operations.
