Definition of a Business Model

- A business model is a model that describes the rationale of how an organization creates,
delivers, and captures value
à A business model is like a blueprint for a strategy to be implemented through
organizational structures, processes, and systems
- A business model can best be described through 9 basic building blocks that show the logic of
how a company intends to make money.
à The 9 blocks cover the four main areas of a business:
1) Customers
2) Offer
3) Infrastructure
4) Financial Viability
The 9 Building Blocks
Building Block #1: Customer Segments
The customer segments building block defines the different groups of people or organizations an
enterprise aims to reach and serve
- Customers are the heart of any business model, as without customers, no profit is generated
- Satisfy customers by grouping them into distinct segments with common needs, behaviors, or
attributes à can be one or several large or small customer segments
- In order to create a business model, an organization must make a decision about which
segments to serve and which segments to ignore
- Customer groups represent separate segments if:
à Their needs require and justify a distinct offer
à They are reached through different distribution channels
à They require different types of relationships
à They have substantially different profitabilities
à They are willing to pay for different aspects of the offer
Example: Niche Market
- Business models targeting niche markets cater to specific, specialized customer segments.
Example: Segmented Market
- Some business models distinguish between market segments with slightly different needs and
problems.
Building Block #2: Value Propositions
The value propositions building block describes the bundle of products and services that create
value for a specific customer segment. Values may be quantitative or qualitative
- The reason why customers turn to one company over another
- It solves a customer problem or satisfies a customer need
- Each value proposition consists of a selected bundle of products and/or services that caters to
the requirements of a specific customer segment à an aggregation, or bundle, of benefits that a
company offers to customers
Elements from the non-exhaustive list can contribute to customer value creation:
1) Newness: Some value propositions satisfy an entirely new set of needs that customers
previously didn’t perceive because there was no similar offering (cell phones)
2) Performance: Improving product or service performance creates value
3) Customization: Tailoring products and services to the specific needs of individual
customers or customer segments creates value
4) “Getting the Job Done:” Values can be created by simply helping a customer get
certain jobs done in a timely manner
5) Design: A product may stand out because of superior design, creating value
6) Brand/Status: Customers may find value in the simple act of using and displaying a
specific brand
7) Price: Offering a similar value at a lower price is a common way to satisfy the needs
of price-sensitive customer segments. But low price value propositions have important
implications for the rest of a business model
8) Cost Reduction: Helping customers reduce costs is an important way to create value
9) Risk Reduction: Customers value reducing the risks they incur when purchasing
products or services
10) Accessibility: Making products and services available to customers who previously
lacked access to them is another way to create value
11) Convenience/Usability: Making things more convenient or easier to use can create
substantial value
Building Block #3: Channels
The channel building block describes how a company communicates with and reaches its
customer segments to deliver a value proposition
- Channels are customer touch points that play an important role in the customer experience
- A company’s interface with customers comprises of communication, distribution, and sales
channels
- Channels serve several functions:
à Raising awareness among customers about a company’s products and services
à Helping customers evaluate a company’s value proposition
à Allowing customers to purchase specific products and services
à Delivering a value proposition to customers
à Providing post-purchase customer support
Channels have 5 distinct phases. Each channel can cover some or all of these phases. We can
distinguish between direct and indirect channels, as well as between owned and partner channels
Phase #1: Awareness
- How do we raise awareness about our company’s products and services
Phase #2: Evaluation
- How do we help customers evaluate our organization’s value proposition
Phase #3: Purchase
- How do we allow customers to purchase specific products and services
Phase #4: Delivery
- How do we deliver a value proposition to customers
Phase #5: After Sales
- How do we provide post-purchase customer support/service
Channel Types
Own & Direct Channels: Sales Force, Web Sales, Own Stores
Partner & Indirect Channels: Partner stores, Wholesaler
Building Block #4: Customer Relationships
The customer relationships building block describes the types of relationships a company
establishes with specific customer segments
- A company should clarify the type of relationship it wants to establish with each customer
segment
- Customer relationships may be driven by the following motivations:
- Customer acquisition
- Customer retention
- Boosting sales (upselling)
- Relationships can range from personal to automated
We can distinguish between several categories of customer relationships, which may co-exist in a
company’s relationship with a particular customer segment:
1) Personal Assistance: Based on human interaction. The customer can communicate
with a real customer representative to get help during the sales process or after the sale is
complete
2) Dedicated Personal Assistance: Involves dedicating a customer representative
specifically to an individual client. Represents the deepest and most intimate type of
relationship and normally develops over a long period of time
3) Self-Service: A company maintains no direct relationship with customers. It provides
all the necessary means for customers to help themselves
4) Automated Services: Mixes a more sophisticated form of customer self-service with
automated processes
5) Communities: Companies utilize user communities to become more involved with
customers/prospects and to facilitate connections between community members.
Communities can also help companies better understand their customers
6) Co-Creation: More companies are going beyond the traditional customer-vendor
relationship to co-create value with customers. Some companies engage customers to
assist with the design of new and innovative products, while others solicit customers to
create content for public consumption
Building Block #5: Revenue Streams
The revenue streams building block represents the cash a company generates from each customer
segment
- Since customers make up the heart of a business model, revenue streams are its arteries
- In order for a firm to generate one or more revenue streams from each customer segment, a
company must ask itself, “For what value is each customer segment truly willing to pay?”
- Each revenue stream may have different pricing mechanisms, such as fixed list prices,
bargaining, auctioning, market dependent, volume dependent, or yield management
A business model can involve two different types of revenue streams:
1) Transaction revenues resulting from one-time customer payments
2) Recurring revenues resulting from ongoing payments to either deliver a value
proposition to customers or provide post-purchase customer support
Ways to Generate Revenue Streams
1) Asset Sale: Selling ownership rights to a physical product
2) Usage Fee: Revenue stream is generated by the use of a particular service. The more a
service is used, the more the customer pays
3) Subscription Fees: Selling continuous access to a service
4) Lending/Renting/Leasing: Temporarily granting someone the exclusive right to use a
particular asset for a fixed period in return for a fee
5) Licensing: Giving customers permission to use protected intellectual property in
exchange for licensing fees. Licensing allows rights=holders to generate revenues from
their property without having to manufacture a product or commercialize a service
6) Brokerage Fees: Intermediation services performed on behalf of two or more parties
(credit card providers earn revenues by taking a percentage of the value of each sales
transaction executed between credit card merchants and customers. Commission earned
by brokers and real estate agents)
7) Advertising: Fees from advertising a particular product, service, or brand
Pricing Mechanisms to Generate Revenue
There are two main types of pricing mechanisms:
1) Fixed Menu Pricing: Predefined prices are based on static variables
- List Price: Fixed prices for individual products, services, or other value propositions
- Product Feature Dependent: Price depends on the number or quality of value
proposition features
- Customer Segment Dependent: Price depends on the type and characteristic of a
customer segment
- Volume Dependent: Price as a function of the quantity purchased
2) Dynamic Pricing: Price changes based on market conditions
- Negotiation (Bargaining): Price negotiated between two or more partners depending on
negotiation power and/or negotiation skills
- Yield Management: Price depends on inventory and time of purchase
- Real-Time Market: Price is established dynamically based on supply and demand
- Auctions: Price determined by outcome of competitive bidding
Building Block #6: Key Resources
The key resources building block describes the most important assets required to make a
business model work
- The key resources needed to build a business model allow an enterprise to create and offer a
value proposition, reach markets, maintain relationships with customer segments, and earn
revenues
- Different key resources are needed depending on the type of business model
Types of Key Resources:
1) Physical Resources: Physical assets such as buildings, manufacturing facilities,
vehicles, machinery, and distribution networks
2) Intellectual Resources: Copyright, trademarks, customer databases, and brands
3) Human Resources: Labor work force (workers and employees)
4) Financial Resources: Funds and assets that finance an organization’s activities and
investments (cash, and lines of credit)
Building Block #7: Key Activities
The key activities building block describes the most important things a company must do to
make its business model work
- Key activities are the most important actions a company must take to operate successfully
- These activities are required to create and offer a value proposition, reach markets, maintain
customer relationships, and earn revenues
- Like key resources, key activities differ depending on the type of business model
Categorization of Key Activities
1) Production: Relate to designing, making, and delivering a product in substantial
quantities and/or of superior quality. Production activity dominates the business models
of manufacturing firms
2) Problem Solving: Relate to coming up with new solutions to individual customer
problems. The operation of consultancies, hospitals, and other service organizations are
typically dominated by problem solving activities. Their business models call for
activities such as knowledge management and continuous training
3) Platform/Network: Business models designed with a platform as a key resource are
dominated by platform or network-related key activities. Networks, matchmaking
platforms, software, and even brands can function as a platform.
Building Block #8: Key Partnerships
The key partnerships building block describes the network of suppliers and partners that make
the business model work
- Companies forge alliances to optimize their business models, reduce risk, or acquire resources
We can distinguish between 4 types of partnerships:
1) Strategic alliances between non-competitors
2) Coopetition (Strategic partnerships between competitors)
3) Joint ventures to develop new businesses
4) Buyer-supplier relationships to assure reliable supplies
Types of Motivations for Creating Partnerships
1) Optimization and Economy of Scale
- The most basic form of partnership of buyer-supplier relationship is designed to optimize the
allocation of resources and activities
- It is illogical for a company to own all resources or perform every activity by itself
- Optimization and economy of scale partnerships are usually formed to reduce costs, and often
involve outsourcing or sharing infrastructure
2) Reduction of Risk and Uncertainty
- Partnerships can help reduce risk in a competitive environment characterized by uncertainty
- It is not unusual for competitors to form a strategic alliance in one area while competing in
another
3) Acquisition of Particular Resources and Activities
- Companies that own all the resources or perform all the activities described in their business
model often extend their own capabilities by relying on other firms to furnish particular
resources or perform certain activities
- Such partnerships can be motivated by needs to acquire knowledge, licenses, or access to
customers
Example: A mobile phone manufacturer, may license an operating system for its handsets rather
than developing one in-house
Building Block #9: Cost Structure
The cost structure building block describes the most important costs incurred while operating
under a particular business model
- These costs include costs in creating and delivering value, maintaining customer relationships,
and generating revenue
- Such costs can be calculated relatively easily after defining key resources, key activities, and
key partnerships
- Some business models are more cost-driven while other business models are less cost-driven
- Naturally, costs should be minimized in every business model. But low cost structures are more
important to some business models than to others. Therefore, it can be useful to distinguish
between 2 broad classes of business model cost structures:
1) Cost Driven Structures
- Focus on minimizing costs wherever possible
- Aims at creating and maintaining the leanest possible cost structure, using low price
value propositions, maximum automation, and extensive outsourcing
- Cost driven structures can have fixed costs (costs that remain the same despite the
volume of goods or services produced) and variable costs (costs that vary proportionally
with the volume of goods or services produced)
- Cost driven structures can also have economies of scale and economies of scope.
à Economies of Scale: Cost advantages that a business enjoys as its output
expands (lower cost put increase in output)
à Economies of Scope: Cost advantages that a business enjoys due to a larger
scope of operations (production of one good reduces the cost of producing another
related good)
2) Value-Driven Structures
- Companies that are less concerned with the cost implications of a particular business
model design, and instead focus on value creation
- Premium Value Propositions and a high degree of personalized service usually
characterize value-driven business models
 The Business Model Canvas
The 9 business model building blocks form the basis for the Business Model Canvas

Steps to using the Business Model Canvas for Development of a Business Model
1) Plot the Canvas on a poster
2) Put the poster on the wall
3) Sketch out your business model using Sticky Notes
Process/Sequencing for an Initial Look at a Business Model Canvas
1 – Value Propositions and Customer Segments
2 – Channels
3 – Customer Relationships
4 – Revenue Streams
5 – Key Partnerships
6 – Key Activities
7 – Key Resources
8 – Cost Structures