The Ultimate Guide on Business Modeling: How to Deconstruct an Idea into Key Assumptions

What is a Business Model

A business model describes how a 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 in order to better understand them and make predictions which they then validate through experiments.

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 need to 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 have to initially prioritize value creation above the other two business model activities.

Value creation requires you to address a real customer problem worth solving.

How Do You Capture Your Business Model?

Traditionally, business plans have been used for this purpose. But business plans take too long to write, and no one even reads them.

See: It’s Time to Fire the Business Plan for Good

When you're going really fast and under conditions of extreme uncertainty, as required for Continuous Innovation, you can’t afford to rely on static plans — you need dynamic models.

The Lean Canvas is one such dynamic model.

Here's what one looks like: 

See: What is a Lean Canvas?

How does a Lean Canvas describe a business model?

There are 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?

b. What's broken?

c. What will you do differently?

2️ - DELIVER VALUE

You deliver value through your Solution. To build the right solution you must answer:

a. How will you solve the problem?

b. How will you tell others?

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:

a. How you will price your value?

b. How you will optimize costs?

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?

b. Is it working?

c. If not, what do you need to fix?

5️ - DEFEND VALUE

You deter copycats and competitors using your Unfair Advantage.

a. What can you build over time that cannot be bought or copied?

Best Lean Canvas Tools

  1. LeanCanvas.com
  2. Miro - Lean Canvas template
  3. Canvanizer

Best Business Modeling Books

All Business Modeling Articles

This is a complete list of articles I have written on business models.

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