Business Model – How To Get Ahead Of Your Competition
Why Use A Business Model?
Most startups fail because entrepreneurs, and indeed corporate innovators, put too much energy, time and faith into the idea.
They fail to consider the business model. When corporate teams first use the business model process, they often replicate the common business model associated with the industry or market they are in.
Successful new ventures do not go to market with their first idea; instead, the product/ service they go through several iterations before arriving at the final version. Similarly, organizations are more sustainable if they have considered several business models before deciding on a particular one.
I’ve found that some people struggle with the business model process at the beginning simply because they are trying to get to grips with too many things at once.
I’ve been at accelerator programs where often it is assumed that people are familiar with the business model canvas. The problem then arises as they march straight into using it. People start to hesitate often because it’s simply the first time they come across it and they aren’t used to the overall business model generation.
In the first place, they are trying to understand the whole concept of generating a business model. On top of that the overall business model process can be hard if you are not armed with how the section of the canvas work
If you master how to use each section of the business model canvas it will transform how you create and innovate business models.
Get to understand the concepts first and then it becomes a lot easier. This is why I’ve put this guide together.
I’m a visual thinker, yes I write, but I prefer to have diagrams to help me as well.
In this guide, I will illustrate how a business model can be used and applied to create very different types of businesses, one that could even disrupt your market.
This guide is aimed at helping you choose the right business design for your idea, to help you increase and improve your chances of success.
The Business Model Canvas For Beginners
The benefit of using the business model process is that it forces you to look more strategically at how you take your idea and turn it into a viable business.
While you might be obsessing about your business idea and the potential customers, you might be missing the bigger picture of how your business could be designed.
For any business, there is a myriad of options available but sadly only a few that might actually lead to success.
More importantly, some of these options can dramatically transform a market and change the fortunes of you and your business.
Stepping back and analysing how to design your business can make the difference between being a massive success or another startup casualty.
While you might not be crunching numbers yet, it does force you to analyse the profit model and numbers as part of the design process.
The process has three fundamental stages:
- How to produce value – produce something (product or service) that offers value to a customer segment.
- How to deliver value – distribute your product or service – take it to a market and sell it.
- How to capture value – make a net profit after making and selling it.
Something to remember is that value is a relative concept. It is hard to define value in absolute terms. The important thing to remember at this stage is that you are trying to create value for either a business or a person or both (in the case of a platform).
3 Steps To The Business Model
The most famous way to develop a business model is the Business Model Process developed by Osterwalder and Pigneur. However, other approaches exist and I’ll start here by covering a good way to frame your approach.
Step 1. Define Your Idea And Market
Imagine you walk into a conference and there are hundreds of tables each one labelled differently. Each table represents a market, a set of customers that you have the chance to meet and get to know. Which table are you going to choose?
Any market that exists already has customers and businesses selling to those customers. Your idea doesn’t exist in a bubble.
Most organizations and entrepreneurs already have an idea of a market or even a set of potential customers who could buy the product or service. However, the idea is often loose and not very well framed.
The starting point is to give the idea some more structure and define it. This is where you need to do some research, get beyond dreaming about the millions of dollars of revenue your idea will generate, and start to do the hard work of turning your idea into a business.
1. MAP OUT THE MARKET
Identify the top 10 players in the market you are targeting and see how they differ.
Can you break the market up into suppliers, retailers…There are lots of different dimensions you can use. The reason for doing this is that you start to understand the gaps in the market as well as potential partners. If there is a specific set of potential competitors you can also start to assess their business model and how your idea differs and adds value.
The business model process doesn’t sit in isolation, you need to use data to get the best outcome.
2. Pick Out The Key Market Trends
Research the size of the market and the trends in the market.
Free Reports And Data
Some of the top Consultancy companies provide free data and market overviews.
- McKinsey
- Deloitte
- Bain
- PWC
- Forrester
- Gartner
Paid Reports
Step 2. Create A System Map
Before jumping in and using the Business Model Canvas, I often start by mapping interactions and focus on what is being exchanged. Although this is a different business model process than the business model canvas it is useful, particularly for digital platforms and ecosystems.
As an example, I’ve included below the Spotify business model as a systems map.
I started years ago plotting out ideas this way – here is a poor first attempt – Social School App.
Despite, the poorly designed diagram I started to get to grips with how things could work together and how the main pieces connected.
If you’re new to the business model process often creating a map with the main actors and interactions can help you see how the main pieces fit together.
1. Identify The Main Actors
Map out your idea using post-it notes. Use one note for each of the following:
- Partners you need.
- Customer Segments
- Technology and exchanges.
2. List Out What Each Actor Offers And Receives
Place your post-it notes on a board or wall, and then start to join lines so you see the process and main interactions. When you first do this it can get messy so you might need to move things around a lot until they make sense and you start to see the natural connections between the actors.
Sometimes if you place producers on the left and consumers on the right you can start to split the overall system into a natural flow.
3. Organize Into Sections
Reorganize into logical sections so that you can see how the system works. Sections are the logical ways that you can group either activities or the common elements around the main actors in a system. Remember that this is not a process flow diagram. A process flow contains all elements and gets into a lot of detail. To create a system diagram as part of the business model process you want to keep it high level and understand how value is created and exchanged.
Step 3. The Business Model Canvas
The Spotify Business Model Canvas shows the broader elements of the business model process come together. Often, I will use both methods to help review the logic and exchanges within a business model.
In the rest of this article, I will walk you through the main sections of the business model canvas as a start point and then start to look at easy ways to harness the power of recombination.
Customer Segments – How To Identify The Best Customer Segments
The Business Model Canvas Customer Segments
The Spotify Business Model Canvas shows how the broader elements of the business come together. Often, I will use both methods to help review the logic and exchanges within a business model.
In the rest of this article, I will walk you through the main sections of the business model canvas.
Business Model Canvas Customer Segments
What Is A Customer Segment?
This may sound obvious, but your business isn’t a business without customers. Defining your customers is the first and most important part of any business model.
Customer segments are created by segmenting a market into distinct groups of customers that have common characteristics. This can be based on their needs, behaviours, interests, lifestyle choices and other characteristics they share.
Many businesses start off using a simple demographic segmentation such as age, ethnicity, profession, gender, etc and then add-in other data to create a more realistic view. Other data may include factors such as usage, interests and motivations.
As a result of segmenting customers a business can decide which customers to target, either a single group or many cases multiple groups.
Each customer segment will have different needs. Later on, you will match different value propositions to each of your customer segments. The more you connect and meet the needs of each customer segment, the more sales you will make.
A further fundamental consideration is to consider which customer segments are likely to deliver the biggest profits. The ultimate end result of deciding which business model to choose needs to be based at least in part of how you can maximise profits for your business.
Broadly there are six main market segmentation approaches to market segmentation.
Mass Market
Products and services which target the Mass Market segment have a broad appeal and often cover the overall population e.g. soap. The mass-market approach doesn’t rely on any specific segmentation and instead aims to be efficient by treating everyone the same.
In reality, there are very few companies that do this. Most companies apply some level of segmentation. The value propositions, distribution channels and customer relationships are aimed at a general pool of people who have a common problem. As an example, Spotify with its music streaming platform appeals to a mass market of music fans.
Niche Market
A Niche market refers to a customer segment with highly defined characteristics. This segment requires a highly tailored product, custom made to suit their needs. Therefore the value propositions, channels ad customer relationships are tightly defined by the preferences of this particular customer segment.
Niche marketing provides a detailed analysis of this type of customer and how to tailor marketing strategies towards a niche customer segment. Although soap is a mass-market product, a company might focus in on a niche group within the market who are being under-served by the mass-market producers. As a result, a business might decide to provide soaps for people with hyper allergenic skin.
Behavioural
Some businesses choose to provide products and services to customer segments based on how people buy. A company might choose to create different value propositions, channels and customer relationships according to these differences in the customer segments.
As an example, you can segment on behaviours such as:
- How customers use a product or service
- How often they use it
- How much time they spend with it
- What features they use
Diversified
A business that decides to take a diversified approach to customer segmentation will select a wide range of customer groups with very different needs. Often, companies diversify as they migrate to new customers and markets.
Examples include:
- Amazon diversifying into cloud services based on its utilizing its core infrastructure.
- Apple migrating into Apple TV based on its previous development of Apple music.
High-Net Worth
These groups represent less than 1% of the world’s population and are defined as a person or family with liquid assets above a certain figure. High-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs) represent a highly attractive and lucrative audience.
A recent report by professional services firm PwC found that 98% of HNWIs access the internet daily, with affluent consumers spending up to three hours of their personal time online every day. So, employing the right strategies when marketing to high-net-worth individuals can reap dividends.
Multi-Sided Platforms/Markets
Often customer segments are dependent on suppliers. A platform or marketplace facilitates connections and makes it easier to transact.
eBay is an example of a multi-sided platform that connects buyers and sellers. If eBay doesn’t have a sufficient customer base for its sellers, sellers will not be interested in advertising their wares on eBay. Conversely, if the buyers do not have a multitude of sellers to choose from, they may switch to other mediums to fulfil their needs.
Customer segmentation is a major first step in defining who you are customers and what defines them as a group. The more data and details you can use to define your customers the more you will understand them. That, in turn, will help you understand how your product or service fits into why they will buy.
If you already have customer data then a good starting point is to define your customer segments using a marketing persona. The persona canvas helps you quickly hone in on the right mix of data to create a persona to understand the goals, motivations and potential barriers you might face.
If you are just starting out use the Jobs To Be Done framework to help you identify your customer’s needs and develop your value proposition.
How To Create A Business Model Canvas Customer Segment
| Variable | Dimensions | Sample survey question |
| Age | Unidimensional | How old are you? |
| Gender | Unidimensional | Are you female or male? |
| Country of origin | Unidimensional | Where do you live? |
| Prior purchase | Unidimensional | Have you booked a cruise trip before? |
| Benefits sought | Multidimensional | When booking flights online, do you care about • convenience • value for money • speed • ability to compare fares |
| Motives | Multidimensional | When choosing a vacation, do you want to: • rest and relax • explore new things • meet new people • learn about other cultures • get away from everyday routine |
The table above shows you some simple and then more progressive ways of segmenting a customer.
How you decide to segment your customers will depend on:
- to what degree you need to segment based on the business model/idea.
- the availability of existing data.
- budget and time to conduct research.
- level of data that can be usefully implemented in your CRM system and approaches – in other words, if you can’t use the data it’s not worth collecting at this stage of the business.
1. Decide To Segment
Is there an obvious way to segment the market? If you were Uber I suspect that they probably segmented customers based on Cities – simply because they have the highest level of taxis.
2. Aim For The Ideal Target Segment
What would your ideal target segment look like?
Simple rules to follow, the customer segment:
- must be homogeneous; members of the segment must be similar to one another.
- must be distinct; members of the segment must be distinctly different from members of other segments. 34
- must be large enough; the segment must contain enough consumers to make it worthwhile to spend extra money on customising the marketing mix for them.
- must be matching the strengths of the organisation; the organisation must have the capability to satisfy segment members’ needs.
- members of the segment must be identifiable; it must be possible to spot them in the marketplace.
- must be reachable; there has to be a way to get in touch with members of the segment in order to make the customised marketing mix accessible to them.
3. Collect Data
Collect data – usually these all into two categories:
- a segmentation criterion is one single characteristic that represents either a 1 or 0 – e.g 1 for female, 0 for male in the database.
- descriptors represent a description of some sort e.g. benefits sought.
4. Explore Data
Explore data, pre-process if required.
5. Extract Segments
Split consumers into segments using the segmentation variable.
6. Profile Segments
Determine the key features of the extracted market segments.
7. Describe Segments
Describe segments in detail.
8. Select The Target Segment
Evaluate segments and select the target segment(s).
9. Customize Marketing
Develop a customised marketing mix.
10. Evaluate And Monitor
Evaluate success, monitor changes.
Identifying Value Opportunities
The customer segment block of the business model canvas links tightly with the value proposition block. After writing the Business Model Canvas, Alexander Osterwalder and Yves Pigneur went on to create the Value Proposition Canvas. These two blocks are the most important foundations for any business model.
The essence of the canvas is to understand:
- what customers are trying to achieve – their goal(s) – job(s).
- the problems they have in achieving their goal(s) – pains.
- how and what benefits they want to realise by achieving their goals – gains.
In other words:
- Jobs = What your customers want.
- Pains = frustrations/difficulties associated with the journey.
- Gains = motivations for achieving the job.
What you want to achieve when researching your customer segment is to get a prioritized list of job/pains and gains that you can then go on to create your value proposition.
There are lots of different methods for researching jobs, pains and gains. One of the most powerful though is to map a customer journey.
If you want printable pdfs of the customer journey map you can download – click the link.
Outcome
After completing this section of the business model canvas you should have between one to three clearly defined segments (more if you are an established business). For each of these, you will have pulled together existing data you may have and conducted some research.
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