For decades, the first step in starting a company was writing a business plan. You would sit in a room for weeks and write a forty page document detailing your five year financial projections and your marketing strategy. The problem is that for a startup, these documents are largely fiction. You are guessing about a future that does not exist yet.
To solve this, Alexander Osterwalder developed a better tool. It is called the Business Model Canvas.
The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It collapses those forty pages into a single sheet of paper. It allows you to visualize the entire logic of your business in one view.
For a founder, this is a tool for agility. It acknowledges that your initial idea is just a set of hypotheses that need to be tested, not a master plan that must be followed blindly.
The Nine Building Blocks
#The canvas is divided into nine specific segments that cover the four main areas of business: customers, offer, infrastructure, and financial viability.
- Customer Segments: Who are you creating value for?
- Value Propositions: What problem are you solving for them?
- Channels: How does your product reach the customer?
- Customer Relationships: How do you get, keep, and grow customers?
- Revenue Streams: How does the business make money?
- Key Resources: What assets do you need to deliver the value?
- Key Activities: What are the most important things you must do?
- Key Partnerships: Who are your suppliers and partners?
- Cost Structure: What are the major costs inherent in the business model?
By mapping these out side by side, you can spot disconnects immediately. You might realize that your Cost Structure is too high for your chosen Revenue Stream, or that your Value Proposition does not match your Customer Segment.
Canvas vs. Business Plan
#It is vital to understand the difference between a plan and a canvas. They serve different phases of the lifecycle.
A Business Plan is a execution document. It works well for a known business model, like opening a franchise restaurant. You know the costs. You know the customer. You just need to execute.
A Business Model Canvas is a search document. It is designed for startups that are searching for a repeatable and scalable business model. It assumes that you do not have all the answers yet.
A business plan is static. You write it and file it away. The canvas is dynamic. It changes every week as you learn new things from the market.
The Living Document
#The best way to use a Business Model Canvas is not to frame it, but to use sticky notes.
You fill out the nine blocks with your best guesses. Then, you leave the building. You go talk to users. You try to sell the product.
When you learn that your pricing is wrong, you peel off the sticky note in the Revenue Stream block and replace it. When you learn that your target customer is actually teenagers, not parents, you change the Customer Segment block.
This process turns the abstract art of strategy into a scientific process. You are constantly iterating on the model until all nine blocks reinforce each other.
The Danger of Hallucination
#The trap of the Business Model Canvas is thinking that filling it out is the same as building the business. It is not.
The canvas is just a map of your assumptions. It is a list of things you believe to be true but have not proven yet. A filled out canvas is not a business. It is a hypothesis.
Founders must use the canvas as a scorecard for their experiments. If you cannot validate a block with real world data, it remains a hallucination. The goal is to turn every assumption on that sheet of paper into a fact.