What is a Business Model
A business model describes how a startup or product creates, delivers, and captures monetizable value from its customers.
- You create value for customers by solving a problem they want solved.
- You deliver this value to customers through your solution, which gets to them through specific channels (distribution).
- Finally, you capture some of this value back as revenue.
Scientists use models to simplify complex problems to understand them better and make predictions that they validate through experiments.
Entrepreneurship is no different. Entrepreneurs do the same with business models.
All businesses, irrespective of type, have customers. Their behaviors are what we attempt to model and predict by placing them at the center of the model.
How Does a Business Model Work?
For a business model to work, you must create more value (even perceived) for customers than you capture back (what you charge them). This is the essence of a good value proposition.
The difference between the value you capture back (revenue stream) and the cost of value delivery (cost structure) is profit.
You can't get to profit without revenue, and you can't get to revenue without value creation. This is why you must prioritize value creation over the other two business model activities.
Value creation requires you to address a real customer problem worth solving.
How Do You Describe Your Business Model?
Traditionally, business plans have been used for this purpose. But we live in a new world where “speed of learning” has become the new unfair advantage. Business plans take too long to write, and no one even reads them — so you can no longer afford to rely on a static plan when you're going fast under extreme uncertainty. You need something more dynamic.
This is why traditional business plans have fallen out of favor at top startup accelerators and organizations charged with bringing new products to market — replaced with 1-page business model canvases.
What is a Business Model Canvas?
A Business Model Canvas is a 1-page template for capturing an idea's key elements (assumptions and beliefs) on a single page. The Business Model Canvas is popular with entrepreneurs and intrapreneurs for business model innovation.
Alex Osterwalder created the original Business Model Canvas (BMC) and released it under a Creative Commons license, encouraging remixing and spawning many derivative variants.
I cut my teeth on the Business Model Canvas but found it too company-centric versus customer-centric — better suited for consultants than entrepreneurs. So, I tweaked a few boxes and came up with the Lean Canvas.
What is a Lean Canvas?
The Lean Canvas is adapted from Alex Osterwalder's Business Model Canvas and optimized for Lean Startups. My goal wasn’t to create a better version of the Business Model Canvas but something different.
I replaced these boxes: key partnerships, key resources, key activities, and customer relationships with these boxes: problem, solution, key metrics (KPIs), and unfair advantage (a defensible competitive advantage).
Not because these boxes aren’t important but because I found that employing a customer-problem-solution paradigm as the lowest common denominator to describe an idea, especially in the early stages, is far more important toward creating a successful business model.
Problems, not solutions, create space for innovation.
Why use a Business Model Canvas or Lean Canvas?
Because these canvases are designed to fit on a single page, you can sketch an initial business model in under 20 minutes. More importantly, a 1-page constraint forces clarity and allows you to communicate your idea clearly and concisely to key stakeholders.
Next, deconstructing your key assumptions on a single page allows you to follow a systematic (step-by-step) validation strategy that tackles your riskiest assumptions first.
When Should You Create a Business Model?
The ideal time for sketching your business model is during the early stages of your product lifecycle, even before you engage in market research or market strategy. The goal with your initial sketches isn’t aiming for perfection but capturing a snapshot of your current thinking (your Plan A), which you’ll then iteratively refine.
How Does a Lean Canvas Describe a Business Model?
Here’s how a Lean Canvas helps you capture the three core jobs of a business model:
1️ - CREATE VALUE
You create value with your Unique Value Proposition (UVP). To craft a compelling UVP, you must answer:
a. Who's it for?
Break your target customers into specific customer segments.
b. What's broken?
Identify problems, struggles, or pet peeves related to how customers do the job with existing alternatives.
c. What will you do differently?
Define your value proposition as something different that matters to your customers.
2️ - DELIVER VALUE
You deliver value through your Solution. To build the right solution, you must answer:
a. How will you solve the problem?
What new ways will you employ to solve what’s broken for your target customer segment?
b. How will you tell others?
What channels will you employ to help your customers find you?
3️ - CAPTURE VALUE
Value capture is a fancy way of saying how you get paid to do #1 and #2. To build a viable model, you must answer the following:
a. How will you price your value?
What pricing strategies will you employ to capture value from your target customer segments?
b. How will you optimize costs?
How will you drive down your cost structure and maximize profitability?
A Lean Canvas also helps you describe two more essential jobs:
4️ - MEASURE VALUE
You measure the output of these three jobs using your Key Metrics to answer whether your business model is working.
a. Is your business model worth pursuing, i.e., is your target market big enough?
b. Is it working, i.e., are your KPIs on track?
c. If not, what do you need to fix?
Traditionally, Excel forecast spreadsheets have been used for this purpose, but you typically don’t have sufficient data to build accurate forecasts during the early stages.
5️ - DEFEND VALUE
You deter copycats and competitors using your Unfair Advantage (a defensible competitive advantage).
a. What can you build over time that cannot be easily bought or copied?
How to Choose the Perfect Business Model for Your Start-up?
While there are many different business model labels like SaaS, B2B, B2C, freemium, etc., just three basic business model archetypes can be used to describe any business model:
- Direct Business Models
Direct business models are the most basic and widespread type of business model. They are one-actor models where your users become your customers. - Multi-sided Business Models
Unlike a direct business model where your users become your customers, a multisided business is a multi-actor model where your users and customers are different actors (or segments). - Marketplaces
Marketplace models are a more complex variant of the multisided model that warrant their category. Like multisided models, marketplaces are multi-actor models of two different segments: buyers and sellers.
When modeling your idea, start by categorizing it into one of these three archetypes.
Best Lean Canvas Tools
Best Business Modeling Books
- Running Lean by Ash Maurya
- Business Model Generation by Alexander Osterwalder
- The Business Model Navigator by Oliver Gassmann
All Business Modeling Articles
This is a complete list of articles I have written on business models.