A traditional business plan is an outdated form for today’s small businesses. Throw it away. Otherwise, it will tangle you in the do-it-yourself trap and prevent the kind of explosive growth you’ve dreamed about.
There’s a revolution afoot in the way that Silicon Valley and elite MBA programs think about start-ups and small-business strategy. It includes a rejection of the traditional business plan and its underlying assumption that the CEO is all-knowing and all-doing.
What every start-up needs isn’t an omniscient CEO. It needs a liberated CEO. The Business Model Canvas is a critical part of that freedom—and it only takes 15 minutes to create one.
Developed by theorist and author Alexander Osterwalder, with the help of 470 co-creators, the power of the BMC lies in its simplicity and flexibility. It boils down a formal business plan—one that used to require dozens, if not hundreds, of pages of text—into a malleable single-page document (plus sticky notes) that allow all key stakeholders to see and visualize the business model at a glance. Plus, it’s easily modified as new information comes to light, and it offers a new view of your business that allows you to ask new questions and to discover new realities.
The BMC is designed for experimentation and allows all components of the plan to work in concert.
Take out a piece of paper. Quickly divide it into boxes like the BMC above, and grab a pad of sticky notes. That’s all you need to start making your business smarter and more efficient than it’s ever been.
Begin your BMC with the section that sits right in the middle: Value Proposition. It’s in the middle because it’s the reason your business exists. Everything else leads into, and follows from, the Value Proposition.
First, consider this little-known fact: the top reason a start-up fails isn’t money, as is widely believed; it’s because the start-up is selling a product nobody wants. So don’t fill in the Value Proposition with a sticky note that says what your company makes or the service it provides. The core of your business is the value your company brings into the world. Think of things like “peace of mind,” “convenience,” “quality,” or even “social connection.”
You must develop and refine your value proposition to ensure you’ve got what’s called “product-market fit.” This means you’ve got a product that actually satisfies a need or a want, and the target market can support your business. This is the single most important part of the process—and a guess isn’t good enough.
Who will judge your company’s Value Proposition? Your customers. You should be able to draw a clear picture of your customer archetype: age, gender, where they live, and so on. And if your customers are businesses, you’ve still got to go through the same line of questioning—businesses are made of people.
As was true with the Value Proposition, the information in this area of the canvas is too important to leave to guesswork. Test your hypotheses and turn them into fact. When your Value Proposition fits perfectly with a need or a pain point for your Customer Segment, you’ve got product-market fit. That’s the foundation upon which successful companies are built.
How do you deliver your value proposition to your customer? A physical storefront? A truck? A website or mobile app? Your answer has many implications for the type of business you’re building, including Cost Structure and Customer Relationships.
How do you plan to attract customers, keep them, and grow your customer base? Everything in this section answers that question (which might really be three questions).
Most small-business owners think customer service keeps them coming back, but that’s not the only way. Other strategies include things like “habit” or “high switching costs.”
Once you’ve established an initial group of customers, how will you expand that base? Will you upsell more features, products, and services in order to extract more money from your existing customers? Can you persuade customers to refer you to their friends?
There are many answers. What’s right for your business?
This is where you make money. With your Value Proposition and Customer Segments on your BMC, this part is fairly clear.
It may not be the case that all of your Customer Segments are going to hand you money but at least one of them must. How much, and how they get it to you, goes on sticky notes in this area of the canvas.
List the most important activities your team must expertly perform to create the value your company exists to provide.
Did you catch that? These are the activities your team needs to excel at—not you. This part of the canvas is what tends to trap small-business owners in the DIY mindset. The BMC is the small-business owner’s road map out of that trap.
Don’t lump too many activities into this part of the canvas or you’ll lose sight of the fact that Key Activities are not the business—the business model is the business.
Don’t get lost in the weeds of the Key Activities. Small-business owners begin spinning their wheels working in the business without ever having time to work on the business. The result is waste and inefficiency, while the quality of the Value Proposition suffers. So in this area of your BMC, hone in on this powerful three-word business plan: Do less, better.
What is the one thing your company can do better than any of its competitors? (OK, maybe two things—sometimes.) Focus on the key activity that’s truly essential to your business model. Bookkeeping and accounting should never be listed here unless you’re an accounting firm. Every small business needs to maintain good books, and that’s why you have an outsourced CFO. But don’t confuse the importance of that particular back-office task with the Key Activities that your in-house team must be expert at in order to make your business model work.
This is a powerful area, especially for small businesses that are outmatched in scale by competitors. The potential gain from forming strong partnerships goes unappreciated far too often. Many small-business owners fall into the DIY trap because they envision themselves alone on their journey, and they flail as they try to handle every aspect of the business themselves. But it’s precisely because small businesses lack size and capital that partnerships are at least as essential as they are for large companies.
You must rely on the expertise of others to build a viable business. So what are the Key Partnerships you need to propel your business beyond the constraints of your limited cash flow?
It’s also the case that the types of partnerships your business may need to survive in its first year could be very different from the ones it will need to thrive in its tenth. There also may be some activities that move from the Key Activities area of your canvas to your Key Partnerships area—and back again.
However, as this process plays out, remember that partnerships are a powerful, and often overlooked, dimension of the business model. Harness their power and you will be able to focus you talents and abilities where they’re needed most.
This is another area on the canvas that often goes underappreciated, and it also can serve as a road out of the DIY trap. What are the essential resources that your business model relies upon in order to deliver its core product? What key assets (equipment, buildings, technology) do you need? How much capital do you need? Do you need a line of credit?
While the No. 1 reason start-ups fail is a lack of product-market fit, the No. 2 reason is money. Far too often, entrepreneurs are wrong about the resources required to get their business off the ground. Lots of start-ups shut down simply because they don’t have enough cash to sustain operations while they’re on their way to becoming profitable. Recognize the risks here, and the importance of being honest with yourself about what you need to make your business a success.
As your business grows and changes, so will the Key Resources. And as you carve out a market niche, you’ll start to think about how to outshine your competitors: What Key Resources will give you a competitive advantage that will make it difficult for anyone to overtake you in the future? Is it a powerful brand? Intellectual capital? Unique partner relationships? A powerful database (like Facebook) or algorithm (like Google)? Whatever it is, this portion of your canvas is as key to your company’s survival in the long term as it is for making it through the first year.
Add up all costs associated with your activities, partnerships, and resources on the left side of the canvas, and what you’ve got is the Cost Structure for operating your business. Like Revenue Streams on the right side of the canvas, Cost Structure is often fairly clear once the rest of the canvas is in place.
Just as we said that bookkeeping and other back-office tasks don’t belong under Key Activities, the expense associated with these tasks don’t belong in Cost Structure. They belong in your detailed budget. Your BMC exists to make the big picture clear and easy to comprehend. So, for now, only include costs that are critical to your business model.
Once you’ve got your sticky notes in place to indicate your central costs, step back and look at your BMC. To the extent that your Cost Structure on the left is less than Revenue Streams on the right, you have yourself a business. To the extent that it’s not, you don’t.
As you move forward, view the BMC holistically, and find new and creative ways to grow your Revenue Streams while also shrinking the Cost Structure. You’ll refine your BMC with scientific experimentation, iterative learning, and measured progress driven by customer feedback. It’s a process that helps small-business owners realize the maximum potential for their business and liberates them from the DIY trap.
To start building out your own Business Model Canvas for your company, grab a copy of our Digital Business Model Canvas Template and start playing today! For more ways to improve your business’s efficiency, contact us about our small business management and strategic consulting services.