A Primer to Live Free or DIY

The Business Model Canvas

Indeed, your new job has less to do with your established area of expertise and everything to do with the creative labor of designing a business model that answers two distinct—and often challenging—questions:

  • 1. CREATE VALUE: How can I create the maximum value possible for my clients?
  • 2. CREATE EFFICIENCY: How can I capture the maximum share of that value for myself?

The moment you struck out on your own and set up shop as a small-business owner, your role shifted from skilled technician to a chief executive who is responsible for answering these questions. Of course, plenty of small-business owners have never explicitly thought about these questions; instead they try to answer them implicitly, by establishing a business they fervently hope will create value for their customers, while also bringing in enough money to fund payroll and make a profit too.

But as you now know, the vast majority of start-ups fail. And you’ll improve your chances for success exponentially if you directly answer these two key questions and then focus on building your business from that foundation.

To understand precisely what I mean, imagine for a second that you’re in the market for a new couch. As a prospective couch buyer, you’re concerned with just a few questions: How much is it going to cost me? How will this new couch look in my living room? Is it going to be comfortable and durable?

At the same time, you’re absolutely not concerned with things like the number of hours a craftsman spent designing and fabricating the couch, or how many alternate patterns and fabrics that craftsman considered and discarded before settling on the final design. That just doesn’t make a difference to you.

In other words, you have just a couple needs you’re looking to address with this purchase. One is functional: You need a comfortable place to sit. Another is aesthetic: You want it to look good (or at least, decent). A third is social: Your friends and family are going to visit your home and see this couch, thus on some level, you want it to match your personality and social status. Of course, you’re not actually thinking in these terms as you shop for a new couch, but nevertheless, you’re trying to meet these various needs, and do so within your budget. Ultimately, the couch you choose will be the one that best satisfies your needs relative to its price tag.

Now consider all the couch companies vying for your business. The winner will be the one that is most successful at the following:

  • 1. Understanding your needs, and thus providing a couch with that perfect blend of comfort and aesthetic appeal; and
  • 2. Controlling back-end expenses such that the cost to produce the couch is less than the price you’re willing to pay for it.

The company that succeeds at those two things is likely well on its way to becoming a highly successful furniture company (think IKEA). Meanwhile, the majority of companies won’t make it for two key reasons:

  • 1. Failure to understand customers’ needs. That might mean, for instance, producing a couch that sacrifices comfort for aesthetics, or the other way around.
  • 2. Failure to create value for customers over and above the price. Even if a company produces a couch with the perfect blend of comfort and looks, that’s irrelevant if the finished product costs more than you’re willing to pay.

Since you’ve likely seen plenty of ugly or overpriced couches in your day, it’s probably not too difficult for you to imagine that many furniture companies have made these mistakes. The underlying reasons aren’t hard to imagine, either. Maybe they never spent enough time trying to understand their market. Maybe their manufacturing operations were just inefficient.

But there might be other reasons that are more complex. Consider an ambitious entrepreneur who sets out to design the “perfect” couch. He may take years developing a couch he believes will set a new standard in terms of both beauty and comfort. But after all those years of R&D, let’s say the cost of actually manufacturing that perfect couch is $100,000. The target customer may well think it’s the best couch out there but she sure won’t be shelling out a hundred grand for a couch any time soon. That entrepreneur is on the fast track to bankruptcy even though he succeeded at designing a great product.

It might seem strange that we’re spending all this time talking about couches, but there’s an important nugget of wisdom here.

The difference between a successful business and one that files for bankruptcy isn’t so much that one makes a good product and the other one doesn’t. Instead, the one that succeeds is the one that’s asking the right customer-centric questions about what makes a product “good.” Any given product or service has value only to the extent that it addresses a customer’s need, and does so at a price that’s equal to, or less than, that customer’s willingness to pay.

In other words, your product is a means to an end; it’s a means of satisfying your customers’ needs or wants. And because it’s a means to an end, it’s important to recognize that your product is not the core of what you do. What is the core of what you do? Your business model.

So now it’s time to map out precisely what that business model is. To do so, we’ll use a process that’s dramatically different from the classic (and tedious) task of writing a formal business plan.

You need a plan—just not a “business plan.”

We spent enough time in the first chapters of this book for you to know that you shouldn’t be doing tasks you consider boring. Because of the efficiency of passion, you’ll do a great job on the stuff you love, and a not-so-good job on anything that bores you to tears. And that’s one of a couple reasons why we’re not going to waste time writing a hundred-page business plan that’s dry as toast and has little or no practical value for the way your business operates in the real world.

And yet, you still need a plan. In fact, developing and maintaining a laser focus on your business model—the essence of a business plan—should be the absolute core of what you do as a small-business CEO. It’s critical to your company’s survival.

And that’s why you’ve got your Business Model Canvas: your new best friend.

The power of the Business Model Canvas lies in its simplicity and flexibility.

In essence, the Business Model Canvas is an effort to boil down a formal business plan—one that used to require dozens, if not hundreds, of pages of static text—into a malleable single-page document (plus sticky notes) that allows all key stakeholders to see and visualize the business model at a single glance, and to easily change it as new information comes to light. The point is to get you to look at your business in entirely new ways, to ask new questions, and to discover new facts.

When you decided to start your own business, you were trying to solve a central problem. Maybe that problem was the need to make a living or the desire to be your own boss. So you developed a hypothesis—just a fancy word for a guess—about the best way to solve that problem through establishing your own business. For example, if you were good at tending bar, you decided to start your own bar as the best means to solve your money/independence problem. Well, that was a hypothesis—a guess—that starting a bar was the best solution to your problem.

And that hypothesis, in turn, relied on a ton of other hypotheses you may or may not have articulated at the time. To name just a few, you were assuming: (1) There is sufficient market demand to support another bar in your area; (2) you have access to sufficient resources to open a bar when and where you want to open it; (3) you will be able to find, keep, and grow a customer base; and (4) you will be able to charge sufficiently high prices, to a sufficiently large customer base, to turn a profit after paying incurred expenses. Those are just a few of the implicit assumptions.

And those might be perfectly reasonable guesses to make as you start out. But since you’ve never actually tried opening a bar at this particular moment in this particular neighborhood, you can’t be certain you’re right about any of those hypotheses.

And although you have a clear vision for how your business is going to look and operate when you first open your doors, the vast majority of the time, reality will look quite different. To quote Mike Tyson, “Everyone has a plan till they get punched in the mouth.” Or, as entrepreneur and academician Steve Blank likes to paraphrase, “No business plan survives first contact with a customer.”

So while we know you need some kind of a plan for your business, what you really need is something that’s designed for experimentation, to test all those guesses and then eventually turn them into fact. You need a tool that allows you to see all the component parts of the plan working in concert with one another, and, in so doing, facilitates building a business that operates like a well-oiled machine.

That tool is the Business Model Canvas—and I say that not as a guess, but after having experimented with lots of small businesses through my work at Agents of Efficiency and in companies I’ve run myself. I’ve taken many small-business owners through a step-by-step process that’s the path to a viable business and a prosperous future. It’s a process that begins with the two key questions introduced at the start of this chapter:

  • 1. CREATE VALUE: How can I create the maximum value possible for my clients?
  • 2. CREATE EFFICIENCY: How can I capture the maximum share of that value for myself?

The first question is about creating value for your customer, and the second is about doing so efficiently. The Business Model Canvas is designed so you see your business through that lens, with the left side of the canvas focusing on efficiency, and the right side, on value.

We’re now going to delve into the components of each side of the canvas, from your Value Proposition all the way to Cost Structure and Revenue Streams, so you can draft the first business model canvas for your company.

Feeling bold? Use our Digital Business Model Canvas Template to start building your company’s business model as you read through the next two chapters. That’s all you need to start making your business smarter and more efficient than it’s ever been.