Lesson: Business Model Canvas with Alexander Osterwalder

Step #4 Idea to Biz: A great idea and a great business model are not the same thing

Episode One: Getting from Business Idea to Business Model

Narrator: This is the story of Beth, her friend Carl, and an idea they believed could become a great business. It's the story of how they succeeded. And if you're an entrepreneur, or anyone with a great idea, it could easily be your story, too.

But let's begin at the beginning. See, even if you have a great idea, success is far from assured. That's because for every great idea that has shaped our world, there are thousands of seemingly great ideas that have flopped. In order to succeed, a great business idea needs a great business model, and they're not the same thing.

Once your idea meets the world, it will meet customers. If they don't care about the problem your idea solves for them, it's game over. But even if customers love your value proposition, you can fail if your business model is not scalable and financially sustainable. You'll need to find reliable channels to reach and acquire your customers. You'll need to build an infrastructure that won't collapse as your business begins to grow.

Failing to do just one of these things can mean death to your business, however great your idea is. That's why your first work is to search for the right business model, to map this world of challenges so that it can be tamed and organized, allowing you to explore it, manage it, and plan for it.

What if there was a tool that could help you with this challenge simply and visually? A tool that makes it easier to stress test your ideas, track your progress, and avoid breaking the bank along the way? What if it was possible to design and test business models in a way that gives your idea a better shot at rising to the level of the great businesses that are shaping our world?

It is. And though the journey for these guys, and for you, won't be a walk in a park, all you'll need is your creativity, willingness to work, and passion for your idea. We'll give you the rest.

Episode Two: Visualizing Your Business Model

Narrator: This is the business model canvas. It's just what Beth and Carl will need to craft a powerful business model, and it can do the same for you. Let's dive in and see how it works.

There are nine essential building blocks that make up any business model. When you get all nine blocks working together, you'll have answered the fundamental questions any business model must solve.

We'll start here with customer segments. These are all the people or organizations for which you're creating value.

For each segment, you have a specific value proposition. These are the bundles of products and services that create value for your customers.

Channels describe through which touchpoints you're interacting with customers and delivering value.

The customer relationships outline the types of relationships you're establishing with your customers and how you're acquiring and retaining them.

Pricing mechanisms through which your business model captures value are documented under revenue streams.

The key resources show which assets are indispensable in your business model so you can describe the infrastructure you need to create, deliver, and capture value.

The key activities show which things you need to be able to perform well.

The key partners show who can help you leverage your business model, since you won't own all key resources yourself, nor will you perform all key activities.

Once you understand your business model's infrastructure, you'll also have an idea of its cost structure.

Any business model can be mapped this way: nine building blocks working to reinforce and strengthen each other. But before you make a model for yourself, it helps to see what a breakthrough business model looks like in action, like this one.

Low-cost airlines revolutionized air travel thanks to their disruptive business model. Let's first look at their value proposition. A low-cost airline offers ultra-cheap flights to their main customer segment, budget travelers, by adopting a no-frills policy. And this leads to additional revenue streams, because customers pay for their ticket and additional fees on items like food and drink, priority boarding, and luggage.

The airlines save even more money through their choice of channels, selling only through call centers and the Internet, making for efficient, if not always convenient, customer relationships that are automated and often impersonal.

Okay. That covers the right side of the canvas, the part everyone can see. The left side of the canvas is what's going on backstage, like their choice of key resources. They reduce maintenance and training costs by using a single aircraft model for the whole fleet, and they only fly to cheap airports where it's cost-efficient to land, or where they even get paid to touch down.

Planes that do land have quick turnarounds, so they get back in the air, earning money as quickly as possible. And they form key partnerships with others in the travel industry, like car rental, hotel, and insurance companies. Finally, under cost structures, all maintenance, training, airport, and call center costs are trimmed to their lowest levels.

All of these pieces working together make their fares almost impossible for traditional airlines to compete with. There's nothing superior about these airlines except their business models. They're reaching an entirely new segment of travelers out of reach for traditional airlines.

Cutting out cost is pretty exciting, right? But wait! Just because it's successful for discount airlines doesn't mean it'll work for your idea.

Luckily, the business model canvas allows you to iterate many models and test them quickly. Let's get started with your own business idea.

Episode Three: Prototyping

Narrator: You can think of a business model like a story, a story of how your enterprise will create, deliver, and capture value. And like a story, it can be one you've heard over and over before.

For instance, you can start with what most people are fixated on, the value proposition, travel for retirees, then decide whom you can sell it to. Yup, Boomers. Sketch in how you'll get it to them—okay, a website—and how that will generate revenue. Sure, sales fees. You'll make it easy and automated.

Next, you figure out what key resources you need to offer all that, like a reliable website and brand recognition. Carl's thinking his key activities will be marketing, website, and maintenance, and then partners will do the booking.

And then finally, where your costs will come from. Sales, marketing, platform development—all that will cost you.

There you go. Your first model. But don't expect a medal or a breakthrough. Predictable models can work, but rarely give you a competitive advantage. So don't fall in love with your first idea. To compete in a world where the best model wins, you'll need to think harder and explore alternatives.

For example, prototype a model where you give away your value proposition for free. This will instantly change everything. You might not find this model realistic, but exploring it will force you to think hard about potential alternatives.

As an entrepreneur, you're thinking of your model 24/7. Now you have a tool to structure your ideas as quick prototypes to consider with your team. Who knows, you might wind up with a disruptive model that changes an entire industry, like Skype with its freemium model, or Nespresso, which became a multi-billion dollar business by locking customers into purchasing high-margin espresso capsules.

In fact, understanding innovative or simply successful business models in other industries can be a great place to start getting to your breakthrough.

There's no right or wrong way to do it, just three rules to start with. First, focus on the business model, not just your product, technology, or service. Second, don't fall in love with your first models. The best models are built on clever, unexpected elements, and that comes from creating many less obvious versions.

Which leads to the third rule: iterate rapidly and test your models early in the real world. How do you do that? Don't worry, guys. We're about to learn all about the real world beyond our canvas.

Episode Four: Navigating Your Environment

Narrator: Remember the chaos your idea faced before you made the canvas? Well, you've tamed some of it by mapping the elements that are mostly within your control. But the world out there is full of threats, constraints, and opportunities beyond your control. They create the environment in which you'll design and build your business model, and in which your business will fight for survival every day.

Just because you can't control your factors doesn't mean you can't and shouldn't account for them in your model. Doing so will help prepare your model for threats, ready it for changing legal constraints, and prime it to jump on innovations.

Let's see how mapping the environment will affect the Boomer Travel Agency model. On the right, you'll map market forces, everything related to the customer segments you selected. Ask yourself which other segments are there? Which ones are the most lucrative? Looks like Beth's discovered a segment of Boomers with a range of disposable wealth.

You could ask which segments are growing, and what do they most want, and why might your customers resist? Okay, good. Boomers have trouble adapting to new technology.

Now, above your canvas, map key trends. A new technology is about to undercut your value proposition, or supercharge it. What regulations are coming up? How is society at large shifting? Right, Carl. Rising medical costs could weigh heavily on your customers.

Now to the left, map industry forces. Who are your main competitors? What advantages do their business models provide? Could they crush you? Your industry may already have a dominant competitor, but ask yourself, where are their weaknesses? Can you disrupt them?

What might happen as suppliers and partners evolve or don't? Better to know now that the travel field is crowded and volatile. Right, Carl?

Finally, below your canvas, map macroeconomic forces. How is the global economy doing? Markets may be in a state of rampant uncertainty. How available is capital? Venture capitalists may be taking few risks. How well is the infrastructure developed in the market you are doing business in? Sure, many Boomers are experiencing a decline in living standards.

Now you've mapped your environment, full of threats, opportunities, and constraints. What do you do? Use the map, of course, to make your business model more responsive.

Looking at industry forces on the left side of your canvas, ask, does your model have a competitive edge today? Tomorrow? Good thinking, Beth. That dominant competitor could be a threat.

Looking at key trends on the top of your canvas, ask, is your model prepared for emerging trends? Okay. If rising medical costs encourage overseas treatment, that could be an opportunity for your travel agency.

On the right for market forces, is your model in line with evolving customer needs? Sure, if your customers are resistant to the Internet, you're right to rethink delivery through a website.

And below, for macroeconomic forces, how will your model adjust to macroeconomic shifts? Yes, Beth. Unfortunately, travel is becoming a luxury that a growing number of your customers can't afford.

But don't be overwhelmed by these elements. Asking and answering these questions will help make your business model better suited to its environment and that much more likely to succeed. Now you're ready to start testing your model in the real world.

Episode Five: Proving It

Narrator: All right. You've got your model. You made your best guess. It's time to fail. I know it's hard to hear, but even your most promising prototype is pretty certain to fail. Many of your hypotheses are bound to be wrong. Luckily, the canvas makes it easy to adapt as long as your mistakes are cheap and you act quickly to fix them.

See, the only judge of a business model is your future customer. What you've created so far are just hypotheses, guesses that need to be true for your business model to succeed. You have to test these hypotheses. Fail or succeed, learn, then adjust. This process is known as customer development and lean startup.

Begin by explicitly stating the most important hypotheses underlying your business model. Okay. You believe that Boomers crave custom travel experiences that are tailored to their needs, and that a great brand can overcome a dominant competitive advantage.

Great. Now get out into the world and see if you're right. You can conduct low-cost experiments to test your most important hypotheses. Talk to your distributors, potential partners, and industry experts. But most importantly, talk to your prospective customers. They're likely to have questions and concerns that never crossed your mind.

The idea of overseas travel might be stressful for your customers. Money could be a concern, or there might just be a general lack of interest. Yes, learning that overseas travel is not attractive to many of your customers can feel like a major setback. But what you learn in the field can also lead you to unexpected opportunities, like the fact that retirement is cheaper overseas. And this might lead you to modify your original idea in favor or something new.

As you gain confidence with your model, you should intensify testing. You'll succeed in some ways, but you'll fail in others, because there will always be factors that you can't foresee from your office. If you adapt rapidly and cheaply, you can account for these factors.

Solutions like quality assurance for high standards might be easier to implement through retirement village franchises. The more you test, the more you learn, the more your model matures.

It's time to start thinking about business models in a revolutionary new way. The era of the fixed business plan is over. To compete today, you need an evolving business model. And if you document your evolution, you can play back your canvases like a flipbook, a valuable documentation of your increasingly viable business model.

Now your business model is not just a bunch of guesses. You've tested, adapted, and your business model is now likely to succeed. You're ready for the next step. It's time to pitch your model.

Episode Six: Telling Your Story

Narrator: You've done a lot of great work on your canvas, and the result is a business model that you're ready to pitch. Sharing your work with others for the first time can be intimidating. But remember, you know the model inside out, and I'll help you along the way. So go ahead, pitch it.

Not like that! Showing the model all at once is cognitive murder. There's way too much info there to digest. You wrote it like a story, so tell it like a story, scene by scene. Use sticky notes to fill in the boxes one at a time as you explain them. Go on, try it.

Beth: We're going to match retiring Baby Boomers with overseas retirement communities run by franchisees. These are the two customer segments we're targeting.

Narrator: Good. Now make it even more real for them.

Carl: Ten thousand Boomers are retiring every day, like the Andersons, who can barely scrape by in Florida, but can live like kings in Brazil.

Narrator: Okay. Now continue the story with the next logical box.

Beth: For the retirees, our value proposition is affordable, high-quality retirement. We've taken the guesswork out of finding an overseas location that will be comfortable, affordable, and fun. And for our franchisees, we'll offer customer acquisition through thousands of high-quality leads.

Carl: How will we monetize this? By charging retirees a modest monthly fee and collecting franchising fees. They pay us for both leads and a trusted brand. We already have five letters of intent from potential franchisees, valued at over $1 million.

Narrator: Now reinforce your case by explaining what you learned from your testing. Admitting your failures to investors and partners may seem unorthodox, but it shows your model is stronger for having been real world tested and adapted.

Beth: We also learned from extensive research and some failed pilot offerings that many of our customers aren't just dissatisfied with their retirement options at home. They won't be able to keep up with medical costs, either.

Narrator: You're doing great. Now walk them through the rest of your model.

Carl: Four out of five customers we spoke to don't trust overseas options. By applying a local brand to franchises . . .

Beth: With emerging communications technologies, they'll never feel too far away. Services like Skype and FaceTime make connecting with family as easy as pie.

Carl: . . . continue to grow. And though our revenue numbers may seem ambitious, they're based on over a million dollars in pre-sales to customers.

Beth: By favoring human customer service over services provided through the Internet, we become that much more accessible to Boomers, who . . .

Carl: In conclusion, we've tested, failed, adjusted, and we are now convinced the market potential of this model is enormous.

Beth: And while our idea is compelling, our business model is what makes us ready to compete on the largest stage.

Narrator: And that is the story of how Beth and Carl took a great idea and created a great business model. But their story doesn't end here. As their business begins to grow, the canvas remains a valuable tool, growing and evolving with it. With some determination, hard work, and the right business model, this could easily be your story, too.