You don’t want to write a 40-page business plan, I get it. But you also want to have some sort of plan. So, how can you find a happy medium between writing a long plan and having no plan at all? Create a Business Model Canvas!
A Business Model Canvas is a great starting point in designing your business model. It gives the founders and potential investors a great idea of what the business is all about. Notice that I highlighted starting point. The Business Model Canvas (BMC) creates a framework around your entire business, but it doesn’t go in-depth as a traditional business plan does.
The BMC contains 9 key sections which should be completed in a particular order to make sure everything flows nicely. Along with explaining the basics of each section, I will create a BMC for Netflix so you can get a good idea of practical application.
1.) Value Proposition
Every business begins with an idea, something that will create value. A value proposition is the core of your business and without it your business is nothing. List reasons why your idea creates value. For example, Netflix has a value proposition of being convenient for everybody, original content production, and a diverse selection of content.
2.) Customer Segments
The next box you should fill in is the customer segment section because you want to identify who benefits from your value proposition. You should look at your value proposition and ask “who benefits from what I am offering?” The more specific you can get is better because you can market your product to those segments which are not only efficient time-wise but also saves money from trial and error.
Netflix looks at its value proposition and decided its target customers are mass-market consumers because quite frankly almost everybody loves watching television and movies, and everybody loves convenience. Netflix also wants to target younger people because they are more technological savvy compared to elders. Do your grandparents have a video game console or computer to stream Netflix?
You have an idea that creates value, and you have a customer you want to target. How do you connect the two? The channel is how your customer will gain access to what you are offering. Will you interact with customers through a website, mobile application, or physical location? My advice is to focus on one or two channels at the start and expand as your business grows.
Netflix began with mail delivery as its primary channel then expanded to a website and applications on video game consoles and other streaming devices.
4.) Customer Relationships
Congratulations, you have a customer! Now the question is, how do you manage that relationship so they keep coming back for more? You can keep personal relationships, or you can stay more distanced by using automation in emails or automated virtual assistants. The type of relationship may depend on the channel, this is a very dynamic part of business models. Do you desire a long-term customer relationship or a short-term relationship? It would be helpful for you to perform a customer lifetime value analysis to determine the acquisition, retention, and switching costs for each customer.
5.) Revenue Streams
The classic component of business, MONEY. How will you generate cash flows and how much is the customer willing to pay? Once again, payment should be linked to the channel in a way that is easy for the customer to pay. If you go to a website wanting to buy something but you have to go through a lot of different screens it is not a pleasant process and can really detract buyers. You could charge a monthly subscription, keep revenue solely transactional, license etc.
Netflix for example is a subscription-based service, plain and simple. As with everything, it’s possible to diversify cash flows in many different ways but it’s best to start simple.
6.) Key Resources
What things do you need in order for your business to survive? Essentially if you didn’t have these resources your business couldn’t exist. Examples include physical stores, strong internet connection, intellectual property, employees with certain capabilities such as marketing specialization. The key here is to think internally about what your business needs, external requirements will come later.
A few key resources for Netflix include good internet quality for streaming, licensing, and algorithms to make the best recommendations for customers.
7.) Key Activities
Key activities are the most important things you must do every single day. This is especially important because you want to do things that create value and are efficient. It’s easy to lose focus on what is important but this section of the BMC will help you visualize your most important actions. What activities will maintain customer relationships? What activities maintain supplier relationships? The key activities should be directly related to the value proposition which will make it come to fruition.
Netflix uses data analytics to optimize content for its customers, engages in content creation, and is researching for the next big production.
8.) Key Partners
No company can go it alone, there are always relationships that must be created for a business to achieve success. The question isn’t just who to establish a relationship with, but how deep do you want to make that connection? Think about the supply chain and where you stand. As you expand and implement vertical integration will you still keep those close relationships or do you have no problem dissolving the relationship? Who can help you reach your goals?
Netflix relies on the postal service, video game console producers, and internet providers to stay in business. Just think about it, if Sony or Microsoft decided not to allow a Netflix application on the consoles do you think Netflix would be where it is today?
9.) Cost Structure
Now it’s time to think about the cost of everything. Start by separating your fixed and variable costs, this will get you off to a good start. Then do your best to calculate the cost it takes to acquire each customer and the retention costs. Another key idea for costing is to decide if your company is cost-driven or value-driven. Cost focuses on minimizing all costs while value-driven will spend more money in hopes that the customer will pay more.
The cost Netflix accrues include customer support, production, licensing, employment salaries etc.
The BMC isn’t too complex, you can start creating one right now. Draw one on a whiteboard, a piece of paper, or download the template. As I mentioned earlier, the BMC is an amazing first step to creating your business because it gives you and investors a rough idea of your plan. After you created your Business Model Canvas the next step is to write an in-depth business plan which you can learn how to do in my article How To Write A Business Plan.