Every organization’s business model can be described using 9 building blocks. A Business Model describes the foundation of how an organization creates, delivers, and captures the value.
There are 9 building blocks of a business:
1. Customer segments –includes one or many customer segments
2. Value proposition – products and services that create value for each of your customer segments.
3. Channels – the methods/channels of delivering value proposition to the customers
4. Customer relationships- With every customer segment, the relationships are established and maintained called customer relationships
5. Revenue streams – the results of value propositions offered to customers (successfully)
6. Key resources- Assets needed to deliver all the mentioned things
7. Key activities – Activities required to attain the expected results
8. Key partnership –which partners could leverage your business model. Includes outsourced activities and some outside the enterprise.
9. Cost structure- Business model elements result in cost structure
1. Customer Segment:
It means the different groups of people/organizations, a business aims to serve
For the better satisfaction of the customers, a company segments them into different – different segments with their common needs, behaviors or other attributes. A business should decide which customer segment they have to serve and which has to ignore. Keeping these things in mind, a business model can be designed with a storing understanding of a customer’s specific requirements.
There is always a need of separate customers segments if
Their needs required a different offer
The customers are reached through different distribution channels.
They need different type of relationships
They are agreed to pay different aspects of the offer.
They require different types of relationships
They have considerably different profitability
Now the questions are:
• Who are our most important customers?
• For whom, we are creating value?
To answer the above questions we define the different types of customers segments below:
Niche Market: – The business models that target niche market, cater to specialized customer segments according to the niche market e.g. – supplier buyer relationships. Segmented – The business models distinguish the customer segments based on their slightly different needs and problems – e.g. banking sector. Diversified – The business models distinguish the customer segments based on very much different needs and problems – e.g. amazon’s cloud computing services’’ in the past along with its regular services(customer segment was totally different) Multi sided platforms/Markets – Includes two or more independent customer segments
2. Value Propositions:
It means the bundle of products and services that create value for a particular customer segment. Basically it solves a customer’s problem or satisfies a customer’s need.
Now the questions are:
• What value do we deliver to the customer?
• Which one of a customer’s problems, are we helping to solve
• Which customer needs are we satisfying
• What bundle of products/services are we offering to every customer segment
To answer the above questions, we describe the below things that define how many type of value propositions are and how we can use it to satisfy a customer’s need?
The values may be of 2 types – Qualitative & Quantitative
Quantitative relates to price, speed of service etc.
Quantitative relates to design, customer experience etc.
We can deliver a customer value proposition in the following terms:-
Newness: – Fulfilling new set of needs of a customer means no similar offering like that.
Performance: – Improve product’s or service’s performance to add more value for a customer.
Customization: – Tailoring products or services to the specific needs of individual customer segment.
Getting the job done: – Help a customer by getting some jobs done and add the value.
Design: – Difficult to measure but most important part of the value proposition.
Price: – Offering similar value at lower price for the customers.
Cost reduction: – Helping customers reduce costs e.g CRM application given by Salesforce.com
Risk reduction: – Reducing the risks when they purchase products or services e.g one year guarantee of a used car.
Accessibility: – Making products or services available to the customers who lacked access previously.
Convenience/Usability: – Making things convenient/easy to use for customers e.g Apple Ipod
It means how a company communicates or reaches to its customers segments to deliver its value proposition.
Functions of channels:-
Raising awareness among customers about the products and services
Allowing customers to purchase products and services
Helping customers evaluate a customer’s value proposition
Delivering a value proposition to the customers
Providing customers support
There are 5 channel phases:-
Awareness – How do we raise awareness about our company’s products and services
Evaluation: – How do we help customers evaluate our organization’s value proposition
Purchase: – How do we allow customers to purchase specific products and services
Delivery: – How do we deliver value proposition to the customers
After Sales: – How do we provide customer support after a purchase
Now some of the questions arise:-
• Through which channels do our customers segments want to be reached?
• How are we reaching them?
• How are our channels integrated and which one works the best & most efficient?
• How are we integrating them with customers routine?
There are direct and indirect channels that solve each of the questions given above.
4. Customer Relationship
It means the types of relationship, a company establishes with specific customer segments.
Now the questions arise:-
What type of relationship does each of our customer segments expect us to establish and maintain with them?
Which one, a business has established
How costly are they
How are they integrated with rest of the business model
There are below categories Of Customer Relationship:
Personal assistance: Human interaction based relationship. The customer can communicate with a real customer representative to get help during the sales process or after the purchase e.g. through email.
Dedicated Personal assistance: Dedicating a customer representative specifically to an individual client. E.g. key account managers who maintain personal relationships with important customers.
Self Service: – No direct relationship with customers. Company provides all the necessary means for the customers to help themselves.
Automated services: These services recognize individual customers and their characteristics and offer info related to orders or transactions. E.g. special messages on a customer’s number, movie recommendations etc.
Communities: Companies maintain online communities that allow users to exchange knowledge and solve each others’ problems.
Co- creation: – The companies are creating customer –vendor relationship to create value with customers e.g Amazon invites customers to write reviews and create value for other book lovers, similarly YouTube ask customers to create content for public consumptions.
5. Revenue Streams
It means the cash a company generates from each customer segment.
There are 2 diff types of Revenue Streams
Transaction revenue – Comes from one time customer payments
Recurring Revenue – Comes from ongoing payments
Now the questions arise:-
• For what value are our customers really willing to pay
• For what do they pay
• Mode Of payment
To answer these questions, we have many ways that generate revenue streams.
Asset Sales: – Selling ownership rights to a physical products or generate revenue by selling a physical product. E.g. Amazon sells books, electronic etc and generate revenue
Usage Fee: – Generated by the use of a specific service. More a service is used, more the customer pays.e.g. Telecom operation. The customer will have to pay as per the minutes he/she used.
Subscription Fee: – Selling continuous access to a service .e.g. Monthly & yearly subscriptions – a gym provides subscription in exchange to its exercise facility.
Renting or Leasing: – Temporarily granting the right to use a particular asset for fixed time and generate revenue. E.g. ZIpcar.com allows customers to rent cars for hours in USA and earn money.
Brokerage Fees: – Intermediation services performed on behalf of two or more parties.e.g. credit card providers, brokers
Advertising: – Results from fee for advertising a specific product or service.e.g. Media industry, software companies and many more.
Here are two types of pricing mechanisms:-
Fixed Menu Pricing
Dynamic Menu Pricing
List Price – Fix prices for products, services or other value propositions
Product Feature Dependent – Depends on Number/quality of value proposition features
Customer segment dependent – Depends on type and characteristics of Customer segment
Volume Dependent – Depends upon the quantity purchased
Negotiation- price negotiates between two or more parties
Yield Management – Depends on inventory and time of purchase e.g hotel rooms
Real time market – Depends on supply and demand
Auctions- Price determined by outcomes of competitive bidding
6. Key Resources:-
The assets required to make a business model work. Key Resources are always needed based upon the business model. They can be physical, financial, human etc.
There are 4 categories of Key resources:-
Physical – Includes physical assets e.g. buildings, vehicles, machines etc
Intellectual – Includes brands, knowledge, partnerships, customer databases
Human – Includes human resources e.g employees
Financial – Includes Financial Resources e.g. cash, lines of credit
7. Key Activities:-
The activities that a company must do to make its business model work. E.g. for a software, key activity needed – Software development
These can be categorized as follows:-
Production: – Relates to designing, making, delivering a product in quantity
Problem Solving: – Relates to new solutions to individual customer problems e.g hospitals, training etc
Platform/Network:- Match Making, service, management
8. Key Partnership:-
The Network Of Suppliers and partners that make the business model work.
There are three types of partnership
Optimization & Economy of Scale – Buyer-supplier relationship. It’s designed to optimize the allocation of resources and activities because a company cannot perform all the activities itself.
Reduction of Risk and Uncertainty – ??
Acquisitions of particular resources and activities – The partnership motivated by the needs to acquire knowledge, license or access to customers.e.g a mobile phone manufacturer.
9. Cost Structure:-
All the costs incurred to operate a business model.
Now the questions arise:
What are the most important costs inherent in our business model?
Which key resources/key activities are most expensive?
There are two broad classes of business model cost structure
Cost driven – Focus on minimizing cost wherever possible.e.g no frills airlines
Value Driven – Focus on value creation instead of the cost e.g. Luxury hotels