Your business model should be one of the first things you map out when starting a company. To give you an idea of a timeline, you shouldn’t be doing this work during the ideation phase or even during the validation phase- but once you’ve nailed down the idea and confirmed that there is demand for your concept, you need to map out your business model.
A business model is different from a business plan. The business plan is a document you create when you’re looking to get funding and is based on the work you put into the business model. The business plan extends beyond the business model as it adds sections for the team, in-depth financials, and scale projections. The business model doesn’t include any of those elements.
The business model is comprised of just 9 parts. Completing the exercise of mapping out each part will give you a 360-degree view of your venture.
The 9 Building Blocks of Your Business Model
To be clear, I did not make up this diagram. It was developed by business strategy masterminds and it’s widely considered to be the gold standard in business creation and operation. Many Venture Capitalists will request a business model canvas instead of a business plan as it provides a quick one-page overview of all the moving parts of your business.
Don’t think you’ve gotten off so easily though- if they’re interested in funding your venture, they’re going to ask for the full business plan so be prepared!
Let’s briefly walk through each “block” on the business model canvas above to get an idea of what needs to go where. Then, I will show you how I organize these blocks with my clients when I’m consulting for new startups.
Contrary to habit, the map actually is read from right to left. You want to start with the customer segments block because you can’t determine anything else until you’re clear about who you’re serving. In this block, you would list any customer segment that is different enough from one another to warrant distinction. This means that it’s up to you whether you want to list your customers in extreme detail or keep it high level.
For example, if I was selling watches online my customer segments block might look like either the left or the right, depending on my target market:
To find your unique customer segments, you really just want to ask yourself: who is my business creating value for?
Once you’ve decided on whom you want to sell to- you can pretty easily determine how you need to sell to them. The “Channels” block refers to the way in which you reach, communicate, and engage with your customers. It’s important to note the distinction between channels and customer relationships which we will talk about soon- but the Channels block meant for you to outline which specific tools and platforms you will use to contact your customers. Ask yourself where they hang out and if that place is where they would look for your service. If it’s not, where would they go if they were searching for a service like yours? Facebook, LinkedIn, Instagram, Google?
These are all channels.
Remember when you answered the question who are you creating value for? It’s now time to answer the question of what value you’re creating. This is less about what you’re actually selling and more about the value you’re providing. Think about what problem you’re solving. What would the customer use/ do if you didn’t exist? At the core- what are you really providing? Peace of mind? Flexibility? Entertainment? Sophistication? Confidence? What is it?
Also, you need to address how the value proposition will change with your different customer segments. If you’re Nest thermostat- you likely provide peace of mind and privacy for your female customers and perhaps provide a level of self-confidence for your male consumers. You will very likely offer your B2B customers a different product or level of services than you offer your B2C customers.
When you successfully offer value to your consumers- they pay you and things they pay you for are your revenue streams.
Evaluating where and how you can get paid is a great way to develop your value proposition so don’t be afraid to move backward as you work through the model. For example, you might think of running ads on your site. This means that the advertisers become one of your customer segments since they’re paying you for something you’re giving them. Because they are now a unique customer segment of yours, they have their own value proposition, their own revenue stream, and their own channel.
See the graph below for a visual representation of the flow of these elements.
When you look at your value proposition across all of your unique customer segments, the key activities block becomes a lot easier to fill in. You simply have to ask yourself: what will it take to deliver on each value proposition? These activities include anything necessary to get your product into the hands of your customers or to get customers using your service.
Manufacturing parts and assembling them may be a key activity if you’re planning to build in-house. If you are going to outsource operations, a key activity will be contracting with a reliable supplier. You need website creation and maintenance. You have to hire a team and invest in accounting and payment processing software.
Any activity that is crucial to the delivery of your product is a “key activity” but don’t get bogged down in the details just yet. In the business plan, it will be important for you to list these out specifically, especially if there are costs associated with them, but for purposes of this business model canvas, you’re just trying to get a general sense of where you need to spend your time doing research and making connections.
If you decide that office space is absolutely necessary for you to be able to run your business effectively- that is a key resource. If you need fabric to make the clothes that you’re planning to sell, that is a key resource. If you need a patent to be approved before you can move forward with the funding operations, that is a key resource.
Key resources are the assets required to offer and deliver your value proposition.
It’s easy to get key resources mixed up with key activities because in some cases they can look the same. For example, is a website a key resource or a key activity? In my opinion, it’s both. The website itself is a lead generation platform and as such it’s a resource just like a paper flyer, but the maintenance of the website is a key activity.
It’s important to just think through these questions (and I like to do this out loud or with another person) because if you do the work of sorting through the elements now- they won’t confuse you later when things begin to get messy as startups tend to do.
Any activities that need the help of outside parties require partnerships. Some of these partnerships are more like service agreements- like your wifi and phone provider- and some are much more partner-oriented. If you would consider the help “strategic” there is a good chance it needs to be listed under Key Partnerships.
In order to find all of the key partnerships you’ll need to get started, the best thing to do is to run through your key activities. Who (or which companies) do you need help from in order to get those activities done?
It’s worth noting that partnerships are two-way agreements and are generally equal. No party should be giving more value to the other. If a scenario arises where you feel like the partnership is less than equal, consider the possibility that the “partner” might actually be a customer or a Key Resource like a distributor.
Lastly, even though it may be uncomfortable, key partnerships should be formalized meaning you shouldn’t just rely on the goodwill of an old friend to help you out. There should be an agreement in place so that everyone is aware of what is expected and what they are (and are not) liable for.
Last but not least, your business model needs to include the cost structure. You outlined your plans for making money in the revenue model block- now you need to budget in your expenses. The business plan that investors will want to see will go into depth on the financials and include a line by line breakdown of all fixed and variable costs but I like to focus on the big picture with this section of the business model.
What costs do you know you’ll have for sure in the first year of business disregarding the development of technology. I like to do this exercise putting aside the tech development cost for two reasons:
1. Tech development can be expensive and it freaks people out to see such a huge number on the balance sheet. They don’t remember that it’s (for the most part) a one time cost and is spread out over the course of a businesses launch- it just looks scary and feels overwhelming and these are not the emotions you want to be feeling when you’re mapping out your awesome new startup plan. Trust me, technology is always less scary than it sounds.Funding covers the cost of tech development most of the time. That’s most often why founders raise money in the first place.
2. Funding also covers things like customer acquisition, market testing, concept validation, and other initial launch activities but funding isn’t something we list within the revenue model block so I tend to leave out the activities that would be covered by funding from the cost structure block.
Basically, you want to list all of the major costs that won’t be covered by funding and that are critical to getting your venture off the ground.
Typical examples of early-stage costs are:
Website building + domain purchase
Software costs (accounting, CRM, Productivity, Slack, LinkedIn…)
Google/ Facebook/ Social Media Ads + Other marketing
Industry-specific permits Coworking/office space
Wifi/ phones/ hardware (laptops/ computers)
If you have a physical product (even if you're selling that product online) you’ll need some initial inventory and, because you’re not buying in huge quantities up-front, this can get expensive.
Just remember to just take a deep breath and keep all of this high-level. You’re doing this work now to get an idea of what you need to start researching. There are resources available for new startup founders and entrepreneurs that ease the cost and burden of starting a new venture and you should use them.
The last thing I will say is to make sure you turn back to the full business model canvas once your done generating the content for each block. You can even print out a clean version of the canvas and re-write (neatly) all of your decisions on it. I can’t tell you how helpful and reassuring it is to see all the pieces of your puzzle in one place and the best part is that once it’s done you can share it with others without fearing that you’ll give too much away or bore them with a really long document.
No matter how confusing and complex the process seems, just take your time crafting one building block after the other.
There’s no need to rush.
You’re doing great!