Originally written for Startus Magazine
We all need a compass for success. The Business Model Canvas (BMC) is fantastic for startups of all types to create a structural framework from inception to MVP to market. I found the BMC via Stanford University’s Technology Entrepreneurship program and honestly fell in love with this business modeling tool for its simplicity and effectiveness.
There are two extreme ends of the business planning spectrum to be avoided: doctored pitch decks that are pretty to look at with little substance, or highly technical pitch decks that completely confuse most investors. The BMC especially helps pre-seed startups to avoid such mistakes.
Founders can recreate the BMC in any format (MS Word, MS Excel, Google Docs, the whiteboard!) and begin brainstorming. As we can see, there is no sequential numbering for a beginning point, which is fantastic as it makes founders think even more. From an advising standpoint, we recommend starting with customer components as the customer is always first. If a startup doesn’t have customers, bootstrapping and scaling will be impossible.
Why is the product or service necessary? What need does it fulfill? What is the problem or situation that exists which creates an opportunity for the product or service? Therein we find the value and purpose to customers. Once the value proposition is set, the startup can get to initial prototyping.
A great product will fade away if no one wants it. After coming up with a viable product or service idea, it is necessary to define the target market. The target market is more than the market size. For instance, the market size for innovative sports shoes is enormous. However, it’s important to actively find the geography, demographics, lifestyle, and profession of customers who would readily buy these shoes, and quantify this target market.
Channels pertain to direct and indirect sales methods. Would it be necessary to hire an extensive sales force, lease a brick and mortar store, or set up eCommerce sites to meet target market sales? Sales channels create high variable and fixed costs. However, having sales channels matched to the most defined target market is magic in the making! Financial projections make much more sense when tied to well-planned sales channels.
How does the new sale become a consistent sale? As a startup scales can the sales team handle a tailored relationship with customers through account managers? Or would a more standardized approach work? Is it necessary for the founders to be publically well-known for a differentiation strategy, or would it be sufficient to consistently push the product en masse using cost leadership strategies? These are the brainstorming questions that will help strengthen customer relationships.
A startup or any business will have a flurry of internal and external activities to handle; finding co-founders and funders, product development, tech and sales team building, team management, and so much more. Key activities pertain to prioritized operations which directly give the customer value. All activities can be listed. However, focus on honing in on activities such as product development, supply chain logistics, and marketing to name a few. In this regard, these activities help in strengthening customer relationships.
What resources are needed to ensure that key activities get completed according to the timeline? Does the startup need talent acquisition – a co-founder, a CTO, and/or a developer? Is it time to hire legal counsel? Acquire or lease an office or transportation? Resources will directly correlate with prioritized key activities. It is important to understand the startup’s entire supply chain to link resources and activities with the best channels.
Concentration risk is at its highest when a startup relies on one client or one sales segment for traction and scalability. The customer segment’s perceived value, as well as direct competition for the product or service, will ultimately set the initial price. For continuity, a startup must first set realistic pricing points for customer demands. For instance, one product could be marketed via a ‘freemium’ model, while another product via a full premium model. Quite possibly both marketing channels would be different, and of course, pricing would be different as well.
Total Revenue = Price x Quantity
Total Costs = Variable Costs + Fixed Costs.
The number of key activities and key resources needed to drive a startup’s costs. If the startup determines that it needs brick and mortar centers right away fixed costs will be high. If many hires are needed to scale, variable costs can skyrocket. The revenue and profit motive, as well as the use of VC funds motive, should always stay on point when embarking on the sale! Always consider the marginal costs, which is the cost of adding one additional unit of product or service. When marginal costs spike that’s a sign for the cost structure to be reworked!
Startups need strategic partners to:
Assist in getting key activities completed. Supply chain vendors fit in wonderfully here.
Collaborate for ultimate value to the customers. Partnerships between corporate and academia work well as an example.
Expand business. VCs, corporate VCs, non-profits, B2B clients converted to corporate sponsors count as strategic partners. These partnerships expand the startups’ prestige, visibility, and access to capital.
I am a strong believer in strategic partnerships to add complementary and horizontal business in amazing ways. For instance, an energy drink startup that partners with an NGO walkathon fundraiser gets so much more visibility and access to a strong customer segment than attempting to blindly sell the beverage without an ‘anchor’ partner.
The BMC is a wonderful starting tool for early-stage startups. However, this business modeling tool can help even Fortune 500 companies with business planning. The BMC is very dynamic and is a great agile project management tool that can be used for various projects. My colleague Alex Cowan has an amazing wealth of information on how to map the BMC within Venture Design. I prefer to work with startups that use the BMC before embarking on written business or marketing plans. Early and later stage startups could really benefit from learning and applying these practical business planning and implementing techniques!