business model generation wiki

The Story Behind the Business Model Canvas

by Guillaume Carton

Category: Research Insight Tags: business model canvas history of entrepreneurship strategy tool

The Business Model Canvas (BMC) is certainly one of the best-known strategy tools for conceiving the business model of a start-up or analyzing the business model of an established company. It is a visual chart that takes the shape of 9 boxes focusing on an organization’s value proposition, its customers, its resources and capabilities, and its revenues and expenses. The BMC has been taught in almost every business school around the world, and Business Model Generation – the book that publicized the Canvas – has sold over 4 million copies. Since then, three other books have been published to constitute a series aimed at conceiving and analyzing business models. The brains behind Business Model Canvas – Alexander Osterwalder and Yves Pigneur – have entered the pantheon of management by being recognized since 2015 as two of the 50 best management thinkers, according to the Thinkers 50 ranking.

While BMC has achieved a tremendous success and is known by every business student, consultant, and entrepreneur, what is less known is how this tool came into being. My research project aimed to go behind the scenes of important concepts, which led to the publication of a book written in French that analyzes how 11 management concepts and tools developed. Among them was the BMC,  and I interviewed Osterwalder, Pigneur, and others who have worked with them. I also read their books, Osterwalder’s blog, and publications about the Canvas. The result was the full story of how BMC developed.

While some of you may already know that the Canvas came out of a Swiss PhD dissertation, you may not be aware of how the worldview, or general outlook of its innovators, influenced its development. Let’s go behind the scenes of the BMC to focus on three ideas that were at its inception and have shaped the developmental process of the Canvas all along: the crafting of strategy tools, business model typologies, and business model experimentation. The story of how BMC developed can teach business students, consultants and entrepreneurs much about developing or using management tools, as this story helps showcase the roles of the innovators’ experience, tools experimentation, and time.

Crafting Tools

The first idea involves the making, or “crafting,” of strategy-related tools. When Osterwalder undertook his PhD dissertation under the Pigneur's supervision, he intended to build the foundation for a set of new computer-assisted management tools. In fact, after coming up with a business model ontology that aimed at developing a generic framework to describe and capture any possible business model, the last chapter of his dissertation codifies the ontology using the XML language. And Osterwalder kept this idea throughout the Business Model Canvas journey. After a few years spent in consulting right after defending his dissertation, he created a venture he called Business Model Foundry: as he acknowledges himself, he wanted to become a “blacksmith” specialized in crafting strategy tools. The Foundry was later renamed Strategyzer, which remains an active venture offering BMC-related services. Over time, moreover, the Foundry has not only crafted strategy tools such as the Business Model Canvas, the Value Proposition Canvas, and the Culture Map, but has also offered innovation management software to help corporations sketch out business ideas and test if they are worth pursuing. As Osterwalder argues using the Swiss army knife metaphor: “You don’t want a heart surgeon to turn up for your surgery with a Swiss army knife. You don’t want them to use the wrong tools.”

The second idea is that of developing an exhaustive list of typologies, or types of models, that enable a business to make money. These types include but also go beyond the classic “freemium” business model. In the freemium model, a basic product or service is provided free of charge, but money is charged for additional features (e.g., Dropbox). Another type is the razor-and-blade business model, whereby one item is sold at a low price in order to increase sales of a complementary good, such as consumable supplies (e.g., Nespresso). The development of this list began before Osterwalder’s dissertation. By the end of the 1990s, Pigneur began his academic career at the University of Lausanne as a Professor of Management Information Systems. At this time, he was startled by his students who struggled to conceive of a business plan for their start-up. Inspired by some work he had read during a sabbatical at MIT, Pigneur got the idea of exhaustively characterizing all the possible business models of firms. However, as he found out that the concept of business model lacks clarity, the development of a typology was not as straightforward as he initially thought, and he had to make some detours. However, at the end, the idea of a typology of business models is still found 30 years later in the series of four books that he published on business modelling. The first book, Business Model Generation published in 2010, displays 5 patterns of typical business models that include the freemium business model but also others such as the open business model. Similarly, the last book Invincible Company , which was published years later, offers a guide to the world’s best business models by proposing dozens of business model patterns that readers can pick and apply to enhance new ventures or improve their established business models.

Experimentation

The third key idea underlying the development of BMC is that of business model experimentation. As we have seen, after his PhD and before founding the firm Business Model Foundry, Osterwalder entered consulting. He worked for a nongovernmental organization (NGO) in Thailand and in the financial sector in Switzerland. He used these two field settings to test and apply business model thinking. In the meantime, Pigneur could also test the Canvas with his students at the University of Lausanne. These experimentations led to the current shape of the Canvas, which consists of 9 boxes. Pigneur explains that the idea of business model testing is something he learned during a sabbatical in Vancouver, where he discovered the paradigm of design science, a perspective that holds that science should develop artifacts that can be used to solve management issues. This paradigm is at the core of the Osterwalder’s dissertation and infuses the four books he later published on business modelling, as each book dedicates a chapter to testing.

Following their own advice

Not only have Osterwalder and Pigneur emphasized the idea of business model testing throughout their publications and workshops dedicated to business model thinking, but they have also applied it to their own business. “You can’t write on business model innovation without doing it,” explains Pigneur. To publish Business Model Generation, they compared several publishing business models before choosing to self-publish it. As they received an offer from the publisher Wiley, they finally pivoted their business model. Similarly, in their second book, Value Proposition Design , they used their Value Proposition framework to detail the business book of the future. It looks really close to their own value proposition!

Overall, we can see that throughout the development of the Business Model Canvas and since the inception of their idea, Osterwalder and Pigneur have pursued their worldview and even applied it in developing the Canvas. This is what explains the peculiarities and the success of the Business Model Canvas: not only as an idea but also as a tool that must be tested and enriched with the best business models.

• Tools capture experience. Many management tools reflect the experiences of the people and organizations that developed them. Therefore, when choosing or using a management tool, it may help to pay some attention to the backgrounds of the people who came up with it.
• Keep experimenting, as Osterwalder did in Thailand and Switzerland. Even the most rigorously thought-out tools are living, breathing things that must be tested and tweaked with new knowledge. And entrepreneurs must continuously challenge their assumptions and long-held beliefs as new knowledge emerges. 
• Be patient when developing tools, just as Osterwalder and Pigneur were as they developed the BMC. It took them decades to come up with a 9-box tool and become recognized for it. In a similar vein, be cautious when using tools that might not have been sufficiently tested through experience. There is no quick fix when it comes to business tools. It may help signal that a tool has quality if it has been rigorously vetted through prior applications and/or through a process of academic reviews and refinement.

Carton, G. (2021), Le Business Model Canvas. In Les Coulisses du Management (pp. 89–96). Economica:Paris.

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Cite this Article

Business Model Canvas: Explained with Examples

Got a new business idea, but don’t know how to put it to work? Want to improve your existing business model? Overwhelmed by writing your business plan? There is a one-page technique that can provide you the solution you are looking for, and that’s the business model canvas.

In this guide, you’ll have the Business Model Canvas explained, along with steps on how to create one. All business model canvas examples in the post can be edited online.

What is a Business Model Canvas

A business model is simply a plan describing how a business intends to make money. It explains who your customer base is and how you deliver value to them and the related details of financing. And the business model canvas lets you define these different components on a single page.   

The Business Model Canvas is a strategic management tool that lets you visualize and assess your business idea or concept. It’s a one-page document containing nine boxes that represent different fundamental elements of a business.  

The business model canvas beats the traditional business plan that spans across several pages, by offering a much easier way to understand the different core elements of a business.

The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.

The business model canvas was originally developed by Alex Osterwalder and Yves Pigneur and introduced in their book ‘ Business Model Generation ’ as a visual framework for planning, developing and testing the business model(s) of an organization.

What Are the Benefits of Using a Business Model Canvas

Why do you need a business model canvas? The answer is simple. The business model canvas offers several benefits for businesses and entrepreneurs. It is a valuable tool and provides a visual and structured approach to designing, analyzing, optimizing, and communicating your business model.

• The business model canvas provides a comprehensive overview of a business model’s essential aspects. The BMC provides a quick outline of the business model and is devoid of unnecessary details compared to the traditional business plan.
• The comprehensive overview also ensures that the team considers all required components of their business model and can identify gaps or areas for improvement.
• The BMC allows the team to have a holistic and shared understanding of the business model while enabling them to align and collaborate effectively.
• The visual nature of the business model canvas makes it easier to refer to and understand by anyone. The business model canvas combines all vital business model elements in a single, easy-to-understand canvas.
• The BMC can be considered a strategic analysis tool as it enables you to examine a business model’s strengths, weaknesses, opportunities, and challenges.
• It’s easier to edit and can be easily shared with employees and stakeholders.
• The BMC is a flexible and adaptable tool that can be updated and revised as the business evolves. Keep your business agile and responsive to market changes and customer needs.
• The business model canvas can be used by large corporations and startups with just a few employees.
• The business model canvas effectively facilitates discussions among team members, investors, partners, customers, and other stakeholders. It clarifies how different aspects of the business are related and ensures a shared understanding of the business model.
• You can use a BMC template to facilitate discussions and guide brainstorming brainstorming sessions to generate insights and ideas to refine the business model and make strategic decisions.
• The BMC is action-oriented, encouraging businesses to identify activities and initiatives to improve their business model to drive business growth.
• A business model canvas provides a structured approach for businesses to explore possibilities and experiment with new ideas. This encourages creativity and innovation, which in turn encourages team members to think outside the box.

How to Make a Business Model Canvas

Here’s a step-by-step guide on how to create a business canvas model.

Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.

While you can create a business model canvas with whiteboards, sticky notes, and markers, using an online platform like Creately will ensure that your work can be accessed from anywhere, anytime. Create a workspace in Creately and provide editing/reviewing permission to start.

Step 2: Set the context Clearly define the purpose and the scope of what you want to map out and visualize in the business model canvas. Narrow down the business or idea you want to analyze with the team and its context.

Step 3: Draw the canvas Divide the workspace into nine equal sections to represent the nine building blocks of the business model canvas.

Step 4: Identify the key building blocks Label each section as customer segment, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure.

Step 5: Fill in the canvas Work with your team to fill in each section of the canvas with relevant information. You can use data, keywords, diagrams, and more to represent ideas and concepts.

Step 6: Analyze and iterate Once your team has filled in the business model canvas, analyze the relationships to identify strengths, weaknesses, opportunities, and challenges. Discuss improvements and make adjustments as necessary.

Step 7: Finalize Finalize and use the model as a visual reference to communicate and align your business model with stakeholders. You can also use the model to make informed and strategic decisions and guide your business.

What are the Key Building Blocks of the Business Model Canvas?

There are nine building blocks in the business model canvas and they are:

Customer Segments

Customer relationships, revenue streams, key activities, key resources, key partners, cost structure.

• Value Proposition

When filling out a Business Model Canvas, you will brainstorm and conduct research on each of these elements. The data you collect can be placed in each relevant section of the canvas. So have a business model canvas ready when you start the exercise.  

Let’s look into what the 9 components of the BMC are in more detail.

These are the groups of people or companies that you are trying to target and sell your product or service to.

Segmenting your customers based on similarities such as geographical area, gender, age, behaviors, interests, etc. gives you the opportunity to better serve their needs, specifically by customizing the solution you are providing them.

After a thorough analysis of your customer segments, you can determine who you should serve and ignore. Then create customer personas for each of the selected customer segments.

There are different customer segments a business model can target and they are;

• Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.  
• Niche market: Here the focus is centered on a specific group of people with unique needs and traits. Here the value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
• Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
• Diversified: A diversified market segment includes customers with very different needs.
• Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.

Use STP Model templates for segmenting your market and developing ideal marketing campaigns

Visualize, assess, and update your business model. Collaborate on brainstorming with your team on your next business model innovation.

In this section, you need to establish the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company.

There are several types of customer relationships

• Personal assistance: you interact with the customer in person or by email, through phone call or other means.
• Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.  
• Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
• Automated services: this includes automated processes or machinery that helps customers perform services themselves.
• Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
• Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.

You can understand the kind of relationship your customer has with your company through a customer journey map . It will help you identify the different stages your customers go through when interacting with your company. And it will help you make sense of how to acquire, retain and grow your customers.

This block is to describe how your company will communicate with and reach out to your customers. Channels are the touchpoints that let your customers connect with your company.

Channels play a role in raising awareness of your product or service among customers and delivering your value propositions to them. Channels can also be used to allow customers the avenue to buy products or services and offer post-purchase support.

There are two types of channels

• Owned channels: company website, social media sites, in-house sales, etc.
• Partner channels: partner-owned websites, wholesale distribution, retail, etc.

Revenues streams are the sources from which a company generates money by selling their product or service to the customers. And in this block, you should describe how you will earn revenue from your value propositions.  

A revenue stream can belong to one of the following revenue models,

• Transaction-based revenue: made from customers who make a one-time payment
• Recurring revenue: made from ongoing payments for continuing services or post-sale services

There are several ways you can generate revenue from

• Asset sales: by selling the rights of ownership for a product to a buyer
• Usage fee: by charging the customer for the use of its product or service
• Subscription fee: by charging the customer for using its product regularly and consistently
• Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
• Licensing: customer pays to get permission to use the company’s intellectual property
• Brokerage fees: revenue generated by acting as an intermediary between two or more parties
• Advertising: by charging the customer to advertise a product, service or brand using company platforms

What are the activities/ tasks that need to be completed to fulfill your business purpose? In this section, you should list down all the key activities you need to do to make your business model work.

These key activities should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue.

There are 3 categories of key activities;

• Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
• Problem-solving: finding new solutions to individual problems faced by customers.
• Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.

This is where you list down which key resources or the main inputs you need to carry out your key activities in order to create your value proposition.

There are several types of key resources and they are

• Human (employees)
• Financial (cash, lines of credit, etc.)
• Intellectual (brand, patents, IP, copyright)
• Physical (equipment, inventory, buildings)

Key partners are the external companies or suppliers that will help you carry out your key activities. These partnerships are forged in oder to reduce risks and acquire resources.

Types of partnerships are

• Strategic alliance: partnership between non-competitors
• Coopetition: strategic partnership between partners
• Joint ventures: partners developing a new business
• Buyer-supplier relationships: ensure reliable supplies

In this block, you identify all the costs associated with operating your business model.

You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.  

Businesses can either be cost-driven (focuses on minimizing costs whenever possible) and value-driven (focuses on providing maximum value to the customer).

Value Propositions

This is the building block that is at the heart of the business model canvas. And it represents your unique solution (product or service) for a problem faced by a customer segment, or that creates value for the customer segment.

A value proposition should be unique or should be different from that of your competitors. If you are offering a new product, it should be innovative and disruptive. And if you are offering a product that already exists in the market, it should stand out with new features and attributes.

Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design).

What to Avoid When Creating a Business Model Canvas

One thing to remember when creating a business model canvas is that it is a concise and focused document. It is designed to capture key elements of a business model and, as such, should not include detailed information. Some of the items to avoid include,

• Detailed financial projections such as revenue forecasts, cost breakdowns, and financial ratios. Revenue streams and cost structure should be represented at a high level, providing an overview rather than detailed projections.
• Detailed operational processes such as standard operating procedures of a business. The BMC focuses on the strategic and conceptual aspects.
• Comprehensive marketing or sales strategies. The business model canvas does not provide space for comprehensive marketing or sales strategies. These should be included in marketing or sales plans, which allow you to expand into more details.
• Legal or regulatory details such as intellectual property, licensing agreements, or compliance requirements. As these require more detailed and specialized attention, they are better suited to be addressed in separate legal or regulatory documents.
• Long-term strategic goals or vision statements. While the canvas helps to align the business model with the overall strategy, it should focus on the immediate and tangible aspects.
• Irrelevant or unnecessary information that does not directly relate to the business model. Including extra or unnecessary information can clutter the BMC and make it less effective in communicating the core elements.

What Are Your Thoughts on the Business Model Canvas?

Once you have completed your business model canvas, you can share it with your organization and stakeholders and get their feedback as well. The business model canvas is a living document, therefore after completing it you need to revisit and ensure that it is relevant, updated and accurate.

What best practices do you follow when creating a business model canvas? Do share your tips with us in the comments section below.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

FAQs About the Business Model Canvas

• Use clear and concise language
• Use visual-aids
• Customize for your audience
• Highlight key insights
• Be open to feedback and discussion

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Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

Methods for the Business Model Generation: how #bmgen and #custdev fit perfectly

The Business Model Generation is about people who strive to defy outmoded business models. They are visionaries, game changers, and challengers who want to design tomorrow’s enterprises. To succeed on this journey they will require new tools, such as the Business Model Canvas and Steve Blank's Customer Development. In this post, I outline how they fit together.

This post comes mainly as a reaction to the various attempts by others to adapt and merge the Business Model Canvas with Customer Development for the entrepreneurial context. While it's great and fascinating to see how people are tinkering with Steve's and our method to adapt them for their start-ups, I am also worried that they lead young companies down the wrong path.

Steve and I have both already written about how our methods fit together. However, this time I took some time to sketch out a more detailed start-up process that merges the concepts and tools from Steve's bestselling  The Four Steps to the Epiphany  and our globally bestselling  Business Model Generation - A Handbook for Visionaries, Game Changers, and Challengers . Additional concepts and tools, such as Eric Ries'  Lean Start-up , may be added subsequently.

I will illustrate this process through the fictional story of Dave Sanburn, a former finance type based in Dallas, who decided to launch his own start-up. His entrepreneurial story all started with an unsatisfied customer need that gave him the idea for his start-up.

1. the business idea and initial stress tests

Dave likes wearing tailor-made shirts, but sees shopping as a chore. He used to buy these kinds of shirts during his business trips to London, but was never really satisfied, neither by the experience nor the price.

When Dave realized that it was not so easy to conveniently find and buy tailor-made shirts in Dallas, he wondered if this could be a business idea worth pursuing.

Ideas for a business can have various origins. Sources could be:

• An  unsatisfied customer need  like Dave's. In fact, many successful entrepreneurs launch a start-up because their own personal needs couldn't be satisfied by the market.
• A  technology (innovation)  that allows doing business in a different or more efficient way. Think of how Skype started offering free phone calls because they used the readily available and free Internet as an infrastructure, rather than a proprietary network.
• A  new product or service  that the market hasn't seen yet, or that is offered with a  different or better value proposition . The Nespresso machine is an example of the former, while cheap flights by Southwest, easyJet or Ryanair are an example of the latter.

Let's get back to Dave and help him run a rough stress test of his business idea. Dave should look at four areas: customers, key trends (e.g. technology), competitors, and the macro environment. (These for areas are a simplification of the  Business Model Environment  outlined in Business Model Generation).

 Dave should investigate a series of questions related to each of the four areas:

• Customers:  Who could the customers for the business idea be? What jobs are they really trying to get done? Are there enough potential customers? Do they have buying power? Are they easy to reach?
• Trends:  Could some of the key trends render the business idea obsolete in the future (e.g. tech trends, legal trends, etc.)? Are key trends going to boost the business idea in the future (e.g. socio-economic trends, etc.)?
• Competitors:  Which other companies are already operating in this space? What are the substitute products and services? Which actors (competitors or partners) are key in this space?
• Macro environment:  Which macro-factors must be in place to make the idea a reality (e.g. infrastructure, talented employees, etc.)?

In the graphic below I added four of the concepts from Steve's  The Four Steps to the Epiphany , which I think can be of tremendous help at this stage (additions in red).

Regarding customers (right-hand side), Dave should start sketching out some first rough customer hypotheses and problem hypotheses. Steve's book contains excellent worksheets with questions to develop the hypotheses. Regarding competition (left-hand side), Dave should add a first rough take on the market type hypothesis and competitive hypothesis.

Stress-testing the business idea is part desk-research (thank you Google) and part "getting out of the building", to use Steve Blank's terms. The goal of this phase is to figure out if a business idea is worth pursuing.

2. Business model prototyping - generating alternatives

After some initial research Dave decides to continue investigating his business idea. The question is: how can he offer tailor-made shirts in a viable way and how can he turn this into multi-million dollar business?

At this point, many entrepreneurs fully focus on the product or service they are planning to offer.

Big mistake.

It's far more illuminating to sketch out and think through several alternative business models for a product, service, or technology.

The same product, service, or technology may fail with one business model but succeed with another. For example, few people know that  Nespresso  - today a 2+ billion USD business owned by Nestlé - almost failed in the late 80s because of an unsuccessful business model.

With exactly the same product and technology (Nespresso machines and pods), but a very different business model, Nespresso started its global conquest of the espresso market.

I call this phase  business model prototyping. It's the one that business people and entrepreneurs struggle most with. Rather than sketching out 4-6 potential business model alternatives in 60 minutes, most people feel more comfortable merely discussing ideas or one single business model. Big mistake. It's more valuable to have several business model alternatives on the table so you can discuss their strengths and weaknesses.

To compare the different potential business models you particularly want to play around with ballpark figures for each alternative. You can either do this with a spreadsheet or even more conveniently with our Innovation Platform .

3. Selecting a business model: plan A

After going through several alternatives and comparing them with a set of criteria Dave has selected the one he thinks looks most promising. It's illustrated in the next three images.

This first Business Model Canvas below illustrates the basic model of offering tailor-made shirts that are manufactured in China to white-collar office workers in big US cities. The hundred million-dollar question is of course how to reach them, i.e. through which channels?

This is where Dave's business model becomes special. He plans to operate no stores and no sales force. His intention is to generate sales through independent "style advisers" who will earn commissions of up to 25 percent on clothing they sell.

The second Canvas illustrates the value proposition that shall attract the "style advisers" who will essentially be recruited by other advisers. Like in most direct-sales companies, advisers will get a cut of the sales made by reps they recruit.

The last Canvas shows how Dave's company is different from most other shirt retailers. For example, he operates no stores, no sales force, and only manufactures shirts that have already been sold.

4. Testing the business model - customer development

As attractive as this first business model might look, it's nothing else than a set of guesses. Nobody knows if it's really going to work? This is where the real value of Steve Blank's Customer Development kicks in. Each post-it note in the Canvas should be turned into a hypothesis and then tested. In Steve's 4-step methodology this is the first phase called  Customer Discovery .

Visually this can be represented with three layers. A first (Canvas) layer represents the business model. This is what we just outlined above with Dave's example of a tailor-mode shirt maker. The second (Canvas) layer outlines the underlying hypothesis for each post-it note. The third (Canvas) layer turns each hypothesis into a test, so that it can be verified and measured.

Let's briefly go through these three layers with a simple example that Dave could put in practice:

• Business Model Layer : In the business model Dave might define a price point of 150.- USD for a shirt, because he thinks his shirts need to be about 50% cheaper than a similar shirt sold through traditional retail. The profitability of his business model is calculated based on this price.
• Hypothesis Layer : The underlying hypothesis for this price point is that customers would not buy if the shirts were more expensive, but wouldn't buy many more shirts if they were cheaper (else Dave risks leaving money on the table).
• Test (and Measurement) Layer : A way to test the above hypothesis would be a field trial with different prices. Another way to test the hypothesis would be to set-up a different websites with different prices and analyze customers' response rates.

The challenge for Dave is to develop the three layers for each business model building block and post-it note in the Canvas ranging from customers, over value proposition, all the way to resources, and cost structure.

When Dave tests the business model with customers he is likely to modify it in an iterative fashion every time he learns more from customers. Once he thinks he's got it right, he can continue with the remaining 3 steps of Customer Development, notably Customer Validation, Customer Creation, and Company Building.

About the speakers

Dr. Alexander (Alex) Osterwalder is one of the world’s most influential innovation experts, a leading author, entrepreneur and in-demand speaker whose work has changed the way established companies do business and how new ventures get started.

Download your free copy of this whitepaper now

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How to Design a Winning Business Model

• Ramon Casadesus-Masanell
• Joan E. Ricart

Smart companies’ business models generate cycles that, over time, make them operate more effectively.

Reprint: R1101G

Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.

Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.

Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.

The Idea in Brief

There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.

However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.

Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.

By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.

This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.

Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.

• RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
• JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

• Business Model FAQs

The Bottom Line

Learn to understand a company's profit-making plan

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

• A business model is a company's core strategy for profitably doing business.
• Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
• There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
• The two levers of a business model are pricing and costs.
• When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

Investopedia / Laura Porter

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

• Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
• Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
• Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
• Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
• Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
• Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
• Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

• Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
• Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
• More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

Tools for Business Model Generation [Entire Talk]

Entrepreneur and business model innovator Alexander Osterwalder discusses dynamic, yet simple-to-use tools for visualizing, challenging and re-inventing business models. Osterwalder articulates how to use the visual language of his business model canvas framework, and shares stories of how this approach helps organizations of all sizes to better create, deliver and capture value.

Video clips from: Tools for Business Model Generation [Entire Talk]

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Who was born to work for anyone how to reduce your risk and become an entrepreneur.

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You were not born to do anything. So what do you want to do?

When most people think of entrepreneurship, they believe it’s not for them. Yet, these same people work for companies or people who were/are the entrepreneurs who started that company. So, why is the world not reversed where it feels normal to be an entrepreneur and different if you were just an employee? Great question. Here is a point of view from a great entrepreneur who never felt like he fit in as an employee.

Steve Jobs defined the idea of entrepreneurs not fitting into a traditional working environment as follows:

“When you grow up, you tend to get told that the world is the way it is. Life can be much broader once you discover one simple fact: Everything around you that you call life was made up of people that were no smarter than you. And you can change it, you can influence it. Once you learned that, you’ll never be the same again.”

Entrepreneurs may believe they have certain skills and a point of view about life that does not allow them to fully submit to a boss or leader. They think for themselves and drive for what they think is best. Working under traditional work rules makes them restless and potentially limits their decision-making and creativity. Therefore, they feel they thrive in an environment where they are free to truly excel in their skills, instincts and abilities.

They are not afraid of being held accountable. On the contrary, they expect and embrace it. They honestly feel happy and satisfied working for themselves, rather than working in a company as an employee. They don’t want to be caught up with the organization’s policies, management hierarchy and rules. In fact, in a 2020 article by the U.S Chamber of Commerce , it states several reasons why people strike out to become entrepreneurs.

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They were not born to work. Entrepreneurs do not mind working hard. For themselves. They don’t believe in normal working hours from 9 am to 5 pm with a few minute breaks in between and no work flexibility. Entrepreneurs tend to work focusing more on productivity levels. It is commonly believed that entrepreneurs are free most of the time. That is simply not true. Find an entrepreneur and ask them how many hours they work in the average week. The happy ones will tell you it’s not work if you enjoy what you are doing.

Look forward and embrace change. Entrepreneurs don’t want to work like everyone else, following routine and regular work hours. They are imaginative and think about change all the time. In a competitive marketplace, they are likely to be disruptors, using innovation and change to create a competitive advantage. They want to perform tasks using alternative methods, such as Shopify or PayPal or even Slack before the software was even known or successful. In a normal working environment, new and risky software experiments are avoided, and the employees are told to follow proper rules and policies for years and years. That’s the way it’s always been done. Entrepreneurs cannot abide by this restrictive thinking.

The unconventional is normal. When you are not bound by conventional thinking and rules, you tend to focus more on the real problems and how you can creatively solve those problems. Entrepreneurs are examining and launching unconventional ideas derived from creative brainstorming, getting connecting with customers, conducting research, reading industry and trend reports, and getting insights from industry experts. They don’t follow the general rules in working and create a productive learning environment. They thrive on early chaos. They believe strict guidelines and process driven rules don’t provide an opportunity for creativity and growth.

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