Fred Dunayer: Welcome to the SCORE Small Business Success podcast Been There, Done That! To get free mentoring services as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1-800-634-0245. Now, here’s your host, Dennis Zink.
Dennis Zink: Episode number 16, The Business Model Canvas. Fred Dunayer joins me today in our studio as co-host, SCORE mentor, and our audio engineer. Good morning, Fred.
Fred Dunayer: Good morning, Dennis.
Dennis Zink: Our guest today is Richard Randolph. Welcome to Been There, Done That! Richard.
Richard Randolph: Well, good morning, Dennis.
Dennis Zink: Richard Randolph has helped over 2,500 small business owners since 1985. He’s the founder of Florida Creativity Centers. Richard works with small and mid-sized businesses and non-profit organizations to improve their creative impact. He has taught graduate and under-graduate courses for Arizona State University College of Business and others. Richard is here to discuss the Business Model Canvas and show you how to use this creative tool in your business. Richard, let’s start at the beginning, which is a good place to start. What is a Business Model Canvas?
Richard Randolph: That is a good place to start. Actually that’s two questions. The first one is what is a business model? A business model is essentially all those elements that are required to run a business. It’s how you actually conduct business itself. The Business Model Canvas is a one-page summary of all those elements. We’re going to compare that with a business plan where you might have 40 or 60 pages. But by putting it into one single page, you’re able to see it from a high level point of view and see the totality of your business.
Dennis Zink: Where did the Business Model Canvas come from? Who developed it and when was it developed?
Richard Randolph: Actually there’s a new, exciting movement in start-up and new venture proposals. It started in about 2005 with a teacher out of Stanford by the name of Steve Blank. He wrote a book called The Four Steps to the Epiphany and that was essentially the class notes from his course that he was teaching in Stanford. He came out of Silicon Valley and he had tried several venture capital kind of small businesses with great success until the last one which in his words he says, “It left a crater so bad it had it’s own iridium layer.” He started thinking, “We have a really good approach for product development. Why don’t we have a similar approach for small business development?”
That started it. Later on, he had a student in his class by the name of Eric Ries and Eric got so enamored of this approach, he used it in his own business and then wrote a book called The Lean Startup and that’s the one that really got traction. That started everything on this new approach to starting small business. Then, 2 years later in 2013, Business Model Generation was published by Alexander Osterwalder and Yves Pigneur and this is the book that described today’s Business Model Canvas.
Dennis Zink: Well, what exactly is in the Business Model Canvas? What’s it made of?
Richard Randolph: As I said it’s a high level overview all on one page. The Business Model Canvas has 9 cells, or 9 blocks, building blocks for your business. Those 9 blocks are: Number 1, the customer segments. This is your target market. Who is it that you’re trying to reach and convince to buy your products. Number 2, the value proposition. The value proposition is your offer. What is it that you’re going to present to people that they will find of value and be willing to pay for?
Block Number 3 is the channels. This is a 2-part cell. The first part is the communication and outreach. How do you get your message to them? It’s the promotion, the advertising and so on. How do you communicate to them that you have something they want? The other part of channels is how do you deliver? How do you get your product, your service to them? The 4th one is the customer relationships. How do you intend to build your relationship with the customer? Are you going to be warm and friendly and so on or are you going to be distant, cold and transactional in nature?
If you look for example at a grocery store, you can find some grocery stores that you’re happy to be there. They make shopping a pleasure as they say. But you can go into other stores and they think you’re an enemy and all they want is your money. What relationship do you intend to build with your customers? Block Number 5 is the revenue streams. How do you make money? How will you get paid? For example, the World Wrestling Federation has recently changed from a pay-per-view model to a subscription model. That’s a profound change in direction, so how will you get paid?
Now notice that up to this point, the canvas has described that part of the business that faces the customer. That’s the on-stage portion. The next 4 building blocks describe the backstage, the operating, the infrastructure of your business. Block Number 6 is the key resources. What assets, what resources, what tools and equipment will you need to be able to actually deliver your value proposition? Block Number 7 is key activities. We used to call this your core competency. What is it you need to do better than anybody if you’re going to win?
Number 8 is key partnerships. Realize that you can’t do everything by yourself so you have to team up with others who can do what you don’t do. For example, when iTunes was created, they had to partner with all the record producing and labels so that they could get content to offer on iTunes. Then finally, Block Number 9 is the cost structure. What’s all this infrastructure going to cost you and how can you control that so that it’s lower than the revenue stream?
Well, you can see that in each of these building blocks there is countless possibilities for innovation, creativity. One of the barriers I find in small businesses is that when somebody has an idea they also have an image of how that business is done based on what everybody else has always done. That might work and if you’re opening say a corner cleaning store for your clothes and stuff, that’s good because it’s a proven model.
But if you’re starting something that’s fairly innovative, you can’t do that the same way everybody else does because you’ll be another me-too operation. You want to be distinctively different somehow and this is where you find that. Another advantage to this is you can step back and see the whole picture. I like to use the metaphor, it’s like the picture on the outside of the box that that 1000-piece puzzle comes in. It’s something that you get to see where the pieces should go when you put them all together.
Dennis Zink: How adaptable is it to change?
Richard Randolph: That’s the whole purpose of it. You work in the business model essentially in pencil or sticky notes and in general you want to review this about every 6 months or so because what used to work might stop working. You might find an aggressive competitor or you might have a new original idea and be able to look at it and say, “Maybe this will work better than what we’ve been doing.” Now you have a chance to explore some new approach to business.
Dennis Zink: When you put this model together, depending upon the size of the company, how many people are involved in doing this in your opinion or should be? Is it a one person job or do you want your VP of Marketing and your Sales Manager? Who would you assemble, what team to put this canvas together?
Richard Randolph: You don’t ever want to do it alone because you’ll get caught in your own silo. You do want the team. You probably want the whole executive team in. You want your marketing, your finance people, your production, your engineers, your delivery and so on so that each person can contribute to their best potential for success. That’s one of the great values of this. If you do things top down you end up with an enforced way of answering problems or challenges. But when you do it as a team, now you can address a collaboration.
Fred Dunayer: Are you suggesting that this is not an appropriate tool for somebody who’s just looking to start a business, then? This is for ongoing businesses that have a team?
Richard Randolph: I’m suggesting that it’s both. For an existing business, you want to make a profound change, this is a perfect tool. For a brand new business, it’s a great tool as well. In fact, that’s the primary use for it. But rarely do people start with just themselves. They need a team, too. Even SCORE advocates you need a core team, a mentor, a banker, an accountant, an attorney and so on. Those are the kinds of people you want to help you create this.
Dennis Zink: Can you share an example with us of maybe who uses the BMC, the Business Model Canvas?
Richard Randolph: There’s some really good illustrations. For example, back in 1958, Chester Carlson of the company then called Haloid, which became Xerox, invented a revolutionary high speed photocopying machine. It was called the Xerox 914. It could produce over 2,000 copies a day. Well, that was great but the average business at that time would produce between 15 and 30 copies a day. Well, the other issue that Xerox faced was their machine, being as good as it was, cost 8 to 10 times more than any of the other available solutions. How do they bring that to market?
They hired the consultant, Arthur D. Little, to study the question and as you might guess, Arthur D. Little came back and said, “There’s no market. You can’t possibly sell a machine that’s that expensive to do something companies don’t do.” Well, they didn’t use the Business Model Canvas but they addressed the same issues and came up with a different plan. What did they do? They decided to lease the machine for $95 a month and give you 2,000 copies. Over 2,000 copies it was 2 cents a copy.
They were pretty successful at getting placement. But the thing that happened was businesses learned it was pretty good to be able to make quick and easy copies. It wasn’t too long before they were making 2,000 copies a day. In other words, the business used up that first allotment of free copies the first day, and the rest of the month every copy that was made was pure profit back to Xerox. In fact the Xerox 914 became the single most profitable business product of all time. It was based on their business model.
Dennis Zink: Everybody’s making copies or was anyway.
Richard Randolph: So much for the paperless revolution, right?
Dennis Zink: There you go. Now, let’s say I want to construct a Business Model Canvas for a new business. How do I go about doing that?
Richard Randolph: Osterwalder in his book, uses the Business Model Canvas as a metaphor for the way an artist goes about producing a work of art or say an architect would start with an assignment for a new building. You don’t start with chiseling it in stone and actually building your first idea. You sketch it out on paper and refine it and polish it and then prove it, and once you finalize it, then you go build it. The canvas is that same tool. The Business Model Canvas is actually a way to draft, to evaluate and adjust a business model on paper quickly and simply before you start making an investment in infrastructure and so on.
Step 1, pencil in your first draft. You go down the list, all the 9 building blocks one at a time, starting with the customers, then your value proposition, and do your best guess. When you get through all of them, you step back and you look at it for fit, for consistency. How do these things work together? Very often when we’re working on one piece at a time, we come up with a great answer but it doesn’t fit with the other answers, and so we want to be sure that it’s consistent throughout. This allows you the freedom to brainstorm, innovate, reimagine, and test on paper before you start buying assets and resources.
By the way, if your business appeals to more than one customer segment, you want to do a different Business Model Canvas for each customer segment. For example, a newspaper or Google have 2 customer segments. One is the user, the reader. They don’t pay, or maybe they subscribe at a low rate, so that’s one business model. Another business model is for the advertisers, who do pay. You need a different model for them. You don’t want to try to confuse those two customer segments with one business model.
Dennis Zink: Do you start with the 1st block when you begin or can you jump around the canvas? What’s the best way to do that?
Richard Randolph: Better to work in sequence. Start with the customer and then look at the value proposition. What is it you’re going to give the customer that they want? Then you look at Cell 3, which is the channels. How do you communicate your offer to them and then how will you deliver that, and so on.
Fred Dunayer: Richard, do you look at this, or can you look at this as something that you can take to your bank if you’re looking for financing as a business plan overview? Does it serve that role or is it really for internal planning?
Richard Randolph: That’s a really great question. How does that compare for example with a full business plan? The answer to your question would I take it to the banker is yes and no, and I’m firm on that. Yes, I would take it because it’s a way to explain your idea quickly, concisely and with some visualization that you can’t get in a whole business plan. It’s a perfect tool to explain your business to anybody new, new employees, any investors and that sort of thing. You can do it in about 10 minutes by telling the story of your business using the cells of the canvas to work your way through it.
But, if you’re going for a loan or an actual finance, you still have to have the full business plan with all the financials and the details because the canvas does not go into details. It’s a high level overview. I would start with the banker with, “Here’s the Business Model Canvas overview,” and then, “Here’s the business plan with all the rich details that you can study at home tonight.”
Fred Dunayer: I would assume then that the canvas actually can be sort of your template for, an index, table of contents for your actual business plan.
Richard Randolph: That’s the way I would use it. I would create the canvas first and then I would design and build my business plan to be consistent with what I had said in the canvas.
Dennis Zink: You mentioned that you could show it to somebody in 20 minutes or whatever. How long does it take to create one of these?
Richard Randolph: Two answers for that one. The author of the book, Alexander Osterwalder says he can do it in about 15 or 20 minutes. Well, he knows what he’s doing and he knows his businesses better so he can probably do that. My experience with many case studies locally, it takes about 2 hours with a client who’s not familiar with this process because it takes some explanation and then since they’ve never thought in these terms, they have to try to digest and then consolidate their thinking so that they can answer the questions directly, so a couple hours for the first pass-through.
Now, the first pass is never the last pass and so they’re going to come back and redo this. Subsequent passes are much quicker for two reasons. First, now you understand the model and where you’re going with it, but secondly, by the time you get to the second version you’ve had a chance to test some of your assumptions and you have better answers, and so now you can use facts instead of guesses in many of the cells.
Dennis Zink: Assuming you’re going through it and your guesses are incorrect or you realize some of your thinking was not exactly on target. How do you deviate from that and I guess they use the term pivot. Can you explain that a little more?
Richard Randolph: When you draw a canvas up, you put down your best guesses as to how things ought to work, how you want them to work. That never works. As they say, no business model survives first contact with customers. The first thing you have to do in your business model is look at those areas of highest risk. Where could things go wrong first and worst? Create some way to test those assumptions, because that’s all they are after all. They’re just hypotheses. They’re your guesses about how things might work. But you have to find that out for sure and this is the revolution in The Lean Startup.
You want to get out of the building, take a representative product, it’s called a minimum viable product. This is the least you could do that would accurately and relatively clearly convey your business idea. Take that to market. Talk to real customers and ask them to pay you for it and see what happens. If they buy it, good. You have validated your assumption and you can move on. If they don’t, then you have to do one of two things.
You might just marginally change it. Fix this or fix that and then see what they’ll do. If they reject your whole idea, then it’s time to change. The pivot is the term that was introduced in The Lean Canvas and it refers to that move in basketball where the guy with the ball can change direction but has to keep one foot where it’s planted. Well, a pivot in business refers to, “I need to change one of my ideas but I’m keeping the vision alive.” It’s a question of, “How do I execute while keeping my core idea the same?”
Fred Dunayer: For example, just to totally oversimplify, if you’re selling hamburgers and fries and think you got the greatest burger but everybody’s buying the fries, sell the fries, maybe change the burger. Are you saying that basically if you’ve got a lot of aspects to your business and one of those business aspects in your test marketing is working really well, focus on that. If you can make a living and grow a business based on that piece of it that’s really profitable, work in that direction.
Richard Randolph: That’s true. What I find in so many years of working with successful small businesses, most of the time a new startup, if you go back about a year or 18 months later, they’re not doing what they intended to do when they started. They found out that that didn’t work so well, but something else did work, so going back to your fries and hamburger thing. What would not be a pivot is to change the size or specs of the hamburger and maybe add hot sauce or maybe add barbecue sauce or something. That’s a marginal or incremental change.
A pivot would be, “Okay, the fries are selling well. We’re going to start selling hot dogs. We’re not going to sell hamburgers, we’re going to go for hot dogs.” You’ve changed how you do the business. Or what you might say is, “Okay, we’ve had this street corner vendor thing. We’re going to open a retail store.” That’s a pivot.
Dennis Zink: How do I get this canvas? Where do I find it and what does it cost?
Richard Randolph: I have a deal for you today on a free Business Model Canvas. You can go to the website created by the author, Alexander Osterwalder, and view a 2-minute video and download a free Business Model Canvas form at www.businessmodelgeneration.com/canvas.
Dennis Zink: Okay. Thank you for that. You mentioned regular business plans before, 40-page business plans. How do you compare the Business Model Canvas with the traditional, lengthy business plan?
Richard Randolph: If I had to do a metaphor, I would say it would be comparable, the Business Model Canvas would be like taking the SST, Super Sonic Transport, across the country from say New York to Los Angeles at 60,000 feet. It’s a quick journey, you don’t get to see many details. A full business plan would be like taking the train, where you’re stopping at all the stops and you’re seeing all the landscape and every detail in each of the states you go through. It’s the level of detail that’s the big difference.
Dennis Zink: So it doesn’t really replace the business plan per se?
Richard Randolph: You’d need both. But I think you want to start with the canvas to give you that big picture overview so that as you develop the business plan you don’t get lost in the details.
Dennis Zink: We have clients that will go and create a 40-page, 60-page business plan and then they realize the concept didn’t really make sense to begin with. Would a Business Model Canvas kind of save them all that aggravation, time, grief and money?
Richard Randolph: The biggest waste is to produce something nobody wants and to spend all of your time and all your money making that in the first place. The whole approach to lean startup is to avoid that, so using the Business Model Canvas is one of the tools. You would create your original ideas but then the key is to go out and test them early and cheaply. If it’s going to fail, you want it to fail quick so you’re not wasting a lot of time and a lot of money perfecting something nobody’s going to buy.
Fred Dunayer: It also seems like a lot of our clients are intimidated by the business development plan process and perhaps simply by starting out with this Business Model Canvas, it would give them the confidence and the structure to build out that business model.
Richard Randolph: Get into action, exactly right. I’ve found that most successful business plans take somewhere around 2 years to create from start to finish. You can’t wait that long. If we have a great idea and we want first mover advantage, we’ve got to get out there and try it. One of the examples I like to think of is the original iPod. Excuse me, the original iPad. I have one of the version 1s and it’s a minimum viable product. It doesn’t have any bells and whistles, but it proved the concept.
The whole idea was how quickly and how inexpensively can we go to market and let people tell us if this is something they want or don’t want? The version 2 was quite different and now you see it spurred a whole industry. But if it had not sold well, you wouldn’t see any tablets today.
Dennis Zink: When should I consider using the Business Model Canvas?
Richard Randolph: Two situations are perfect. A new business startup as you mentioned, Fred, when I’m looking for something that doesn’t exist and I’m trying to figure out not only how to do it but how to do it competitively and how to do it uniquely well. Business Model Canvas is a great place to begin and then follow the lean startup protocols. The other opportunity would be in an existing business or an existing venture where you want to either introduce a new line or start something completely different.
I’ll give you one example if I might. In Europe, there’s been a profound change in how people drink coffee. The average consumption of coffee in Europe over the past 10 or 15 years has gone up over 800%. How did that happen? Well it started with a near failure. The Nestle company had a product line called Nespresso. They are one of the inventors of the one cup at a time coffee-making machines.
When they came up with this concept, what they did was try to use their existing distribution channels. They went to business to business and said, “Why don’t you buy our machine? You can make one cup at a time.” It was a failure. They almost went bankrupt. They went back and looked at the business model. “How can we sell this thing differently?” Now they sell the machines widely, all the department stores, retail stores and so on you can buy the Nespresso device. But they control distribution of the pods, how you make the coffee.
Originally they had their own stores that are modeled after the Apple stores. High-end just first-class experience and now you can buy them online but what you cannot do is go down to Staples or Walmart and so on to buy the pods. They completely control distribution. When they do that, they make all the revenue from selling the pods instead of sharing that with the distribution channels and they control the quality completely. It’s a revolution.
Dennis Zink: That reminds me. I have to buy my K-cups for my Keurig today. We have to give equal time for the competition.
Richard Randolph: Now that’s a great example. The Keurig in America has taken a completely different attack. You can buy the K-cups anywhere. I’m surprised that I don’t walk out the door and there’s a guy with a cart selling them.
Dennis Zink: There is.
Richard Randolph: Because their business model is different. It’s a great example of two totally different business models for the same technology.
Dennis Zink: How can our listeners learn more about the Business Model Canvas?
Richard Randolph: That’s one of the great things about this innovative new approach. There’s a lot of free resources out there. In addition to the website, you can go to YouTube videos. I would search for the Business Model Canvas, Lean Startup and one of the authors, Steve Blank, that’s B-L-A-N-K. Got some great videos out there that will completely explain the whole thing. In addition, there are some books that the people who get real excited can follow up. One is called Business Model Generation by Alexander Osterwalder. Another is The Lean Startup by Eric Ries and by Steve Blank The Startup Owner’s Manual. Those are great resources for this technology.
Dennis Zink: For ease for our listeners can you spell Osterwalder and Ries?
Richard Randolph: I’ll try. Alexander Osterwalder, O-S-T-E-R-W-A-L-D-E-R. Eric Ries is R-I-E-S.
Dennis Zink: Thanks for that clarification. Well, Richard, is there anything else that you may want to add that we didn’t ask you today about the Business Model Canvas?
Richard Randolph: Like anything, it’s going to be a little challenging when it’s new and you might stumble and fumble and so on, but persist. After you get the 1st one, the 2nd one done, you’ll see that this is potentially transformative. You got to remember that even with the same technology a business venture could succeed or fail based on the business model and so you really want to take a solid look at that instead of just trying the same old things harder and being a me-too that’s spending more money to try and get the same customers.
Dennis Zink: Richard, thank you for being our guest today on Been There, Done That! You really have enlightened our listeners on the whole concept of the Business Model Canvas. How can our listeners reach you?
Richard Randolph: You can reach the Florida Creativity Centers at floridacreativitycenters.com or you can phone us at 941-726-4388. Thank you, Dennis. It’s been a pleasure. Thank you, Fred.
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