Why do businesses fail?
According to a study published in Growthlist, blockchain and cryptocurrency startups have a shocking 95% failure rate. Additionally, 80% of startups in the e-commerce industry fail, and the survival rate for tech startups is below 50%.
There are several reasons why businesses fail. One of the primary reasons is that we become too emotionally attached to our ideas. This often leads us to neglect the crucial step of validating whether our idea resonates with potential users, whether there is a sustainable market, or whether it is even feasible to pursue.
Another reason for failure is scaling prematurely (70% of startups fail due to this). We often interpret early traction as a positive signal and rush to take the next steps. This leads us to a hiring spree, where we expand the core team by adding sales, marketing, and HR positions. We spend too much on sales and marketing activities. By the time we realise our mistake, most of the seed funding is already gone.
In my view, we should follow a specific sequence before scaling (for a digital or online product):
- Inception — Generate ideas and identify target users
- Test the idea with a subset of potential users
- Create a low-level prototype
- Gather feedback on the low-fidelity prototype
- Develop high fidelity prototype and get it tested
- Build a functional version that includes essential features (MVP)
- Test the MVP with the larger user base
- Release the product to a larger user base
- Define what success looks like and track the product metrics
- Scale — Expand the product to reach a wider audience
Web Definition: An MVP or minimum viable product refers to a product version that includes features, for customer use and feedback gathering to guide future development efforts allowing developers to skip extensive and unnecessary development work.
According to management guru Steve Blank, A startup is a temporary organization formed to search for a repeatable and scalable business model. In a startup, no facts exist inside the building; there are only opinions.
So, as a new entrepreneur, how can you overcome this? Is there a recipe or a playbook that you can follow/execute? How can you find a business model that always works? The Business Model Canvas (BMC) will help you out.
What is a Business Model Canvas?
Alexander Osterwalder and Yves Pigneur initially proposed the nine “building blocks” of the business model design template that came to be called the Business Model Canvas in 2005. According to them— The Business Model Canvas is a strategic management and entrepreneurial tool. It lets you describe, design, challenge, invent, and pivot your business model.
The nine building blocks of the BMC are as follows:
Customer Segments — As the name suggests, the different groups of people or organisations that your product aims to reach and serve. You may wish to distinguish between niche and mass customer segments.
Value Propositions — Describes the bundle of products and services that create value for a specific customer segment. It covers product features that will address customer pain points.
Channels — This defines how a company will reach the customer segment to deliver a value proposition. We can have direct or indirect channels. Some examples of channels are websites, stores, retail partners, etc.
Customer Relationships — Describes the relationship a company establishes with a customer segment. Premium support, communities, and self-service are examples of customer relationships.
Revenue Streams — Describes the cash a company generates from a customer segment. License fees, asset sales, and subscription fees are known revenue streams.
Key Activities—These are the most critical activities a company must do to make a business model work. Examples of key activities are hiring developers, writing code, seeking user feedback, conducting market research, etc.
Key Resources—These are the resources needed to make a business model work. They could be physical, intellectual, or financial resources.
Key Partnerships—To make the business model work, a company must form relationships with partners and external suppliers.
Cost Structure — This includes all costs incurred to make a business model work. Examples of cost structures are staff salaries, office building rent, logistics, and R&D costs.
The nine blocks can be further grouped (logically) under Desirability, Viability and Feasibility.
Desirability: Will your customer choose to buy the product or service?
Customer Segments, Channels, Value Propositions, and Customer Relationships will be part of Desirability.
Viability: The economics of your business on the bottom make up the viability.
Cost Structure and Revenue Streams together constitute Viability.
Feasibility: How do you create your product/service?
Key Resources, Key Activities, and Key Partners constitute Feasibility.
To foster innovation, one should focus on the sweet spot where three elements intersect (see the picture below).
Example of using BMC for a new business – A new coffee shop
To simplify the concept, let’s consider a real-world example. If I were to open a new coffee shop in the town centre, what business model would I develop? Depending on the nine building blocks of a BMC, there could be several variations. Let’s make some assumptions and come up with a sample one.
Once you finish drafting the initial version, it’s time to validate your assumptions. Go out and test with actual paying customers to see if your initial business model still holds up. If not, make changes until you achieve the product market fit.
For instance, in the above business case, you would like to check whether you can sell pastries alongside coffee; it’s important to get feedback on that. Additionally, consider contacting various food delivery platforms to find the most suitable options for your needs. Evaluate multiple website hosting services and choose the best one for your business.
Similarly, you may check other blocks of the business model canvas and derisk yourself by validating your assumptions.
Tips to create a great business model canvas (BMC)
This is the most crucial section of the story. So, you must pay attention to it. There are five phases to creating and maintaining a business model canvas. These phases are:
Mobilise, Understand, Design, Implement and Manage.
- You start by forming a team and ideating something. This could be a new product idea or an improvement to an existing product or service.
- You must invest time in understanding the environment, competition, target users, and their pain points or needs. At this stage, consider gathering qualitative (interviews) and quantitative(surveys) feedback.
- Next, you start designing the business model using BMC. Remember, it’s a team activity. You can create multiple canvases based on your understanding of the situation. Don’t fall in love with the first model. Experiment with different partnership models, alternate revenue streams, and multiple distribution channels.
- Finally, choose one model to implement. Run quick experiments around nine blocks, gather evidence to update the chosen business model, or select the next variation.
- Remember, creating a business model canvas is not a one-time activity. The Manage phase includes continuously assessing the model and scanning the environment to understand how external factors might affect it over the long term.
Essential Tools for Designing a Business Model Canvas
Empathy Maps — Visualizing user attitudes and behaviors
Visual Tooling — Whiteboard, Drawing and Post-It notes
Storytelling — Pictures, Videos, Cartoon Strips, Roleplay, Personas
Prototypes — On Paper, Low fidelity, High Fidelity (with customer feedback)
Scenario-based questions to explore options within nine key building blocks.
Sample Business Model created for a new GYM in your city
Suggestive Reading
- The Business Model Canvas
- Business Model Canvas: Explained with Examples
- You can also read about the Lean Canvas and the Lean UX Canvas (V2), which are similar to the Business Model Canvas but slightly different.
Conclusion
To sum up, the Business Model Canvas (BMC) is a highly potent tool for anyone in business, from entrepreneurs to startups to well-established companies. It gives you a clear visual space to understand and create the foundation of your business. The BMC divides complex business aspects into nine critical building blocks to help users focus on key areas of their company, spot strong and weak points, and adjust rapidly in a fast-developing market.
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