Building BUSINESS MODELS

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BUILDING YOUR BUSINESS MODEL

The 9 Building Blocks

1️⃣ CUSTOMER SEGMENT

The Customer Segment defines the different groups of people or organisations that a company aims to reach and serve.

Common needs, behaviour and other attributes allow for segmentation. The company may choose levels of focus from none to high.

Segmentation is usually based on, if customers:

Needs require and justify a distinct offer

Are reached through different distribution channels

Require different types of relationships

Willingness to pay for different aspects of the offer

Here are some examples of Customer Segments:

Mass market - broadly similar needs and problems, usually observed in consumer electronics sector

Niche market - specific and specialised needs, e.g. auto part manufacturers

Segmented - slightly different needs and problems. Think of Micro Precision systems, they cater to the watch, medical and industrial automation sectors - each will be offered a slightly different value proposition

Diversified - unrelated, with very different customer segments. E.g. Cloud Computing: online storage space and on-demand server usage.

Multi-sided platforms or markets - E.g. a Credit Card company needs credit card users and merchants who accept credit cards

Once segments are defined based on a strong understanding of the specific needs, a business model can be carefully crafted.

2️⃣ VALUE PROPOSITION

The Value Proposition describes the distinct mix of product and/or service elements, that create value for the specific customer segment.

The value may be quantitative (price, speed of service) or qualitative (design, customer experience).

Some elements that can contribute to customer value creation are newness, performance, customisation, design, brand/status, price, cost reduction, risk reduction, accessibility, convenience or ease of use, among others.

3️⃣ CHANNELS

Channel describes how a company communicates with and reaches it customer segments to:

raise awareness about products and services,

enable evaluation of the product and/or service,

enable purchase,

deliver the relevant value proposition and

provide post-purchase support.

Finding the right mix of channels that satisfy how customers want to be reached is crucial in getting the value proposition to market. Channels can be own-direct, such as own stores, sales force and/or web sales or partner-indirect, such as partner stores and/or wholesalers.

4️⃣ ENGAGEMENT / CUSTOMER RELATIONSHIPS

Engagement describes the types of relationships a company establishes with specific customer segments, which can range from personal to automated.

The need for engagement is invariably driven by customer acquisition, retention and up-selling. The type of customer engagement selected and executed deeply influence the overall customer experience.

Here are some categories of customer engagement, which may co-exist in a particular customer segment:

Personal assistance

Dedicated relationship manager

Self-service

Automated service

User communities

Co-create for public consumption

and more

5️⃣ REVENUE

This represents the cash a company generates from each customer segment. Cost minus Revenue equals Earnings.

A business model can involve two types of revenue streams:

Transaction revenues resulting from one-time customer payments, such as asset sale (e.g. set-top box, apartment, automobile, etc.)

Recurring revenues resulting from repeat payments, such as usage fees (e.g. hotel rooms, courier service); subscription fees (e.g. dth service, gym membership, online games, etc.); lending/renting/leasing fees (e.g. auto rentals, home rentals, commercial space lease, auto lease, etc.); licensing fee (e.g. copyrights, IPRs, patents, etc.)

Successfully answering the question "What is each customer segment willing to pay?", allows a company to generate one or more revenue streams from each customer segment. Each stream can have different pricing mechanisms, such as fixed, bargain, auction, market dependent, volume based or yield based.

6️⃣ STRUCTURE / KEY

Structure refers to the most important assets or key resources required to create and offer a value proposition, reach markets, maintain relationships with customer segments and earn revenue.

Key Resources can be physical, financial, intellectual or human. They can be owned or leased or acquired.

The Resources required depend on the type of business; e.g. a microchip manufacturer requires capital intensive production facilities; whereas a microchip designer will focus on it human assets.

7️⃣ PROCESS / KEY ACTIVITIES

Process refers to the most important actions or Key Activities the company must undertake to create and offer a value proposition, reach markets, maintain customer relationships and earn revenue.

These Key Activities differ depending on the type of business; e.g. Manufacturing - supply chain management; Consulting - problem solving; Computing - software development.

Process can be categorised as follows:

Production Activities - such as designing, making and delivering a product in substantial quantities and/or superior quality.

Problem Solving Activities - such as coming up with new solutions, knowledge management, continuous training.

Platform/Network Activities that are of a continuous nature.

8️⃣ NETWORK / KEY PARTNERS

Network, refers to the Key Partner and Supplier relationships that are motivated by certain needs...

Optimisation and Economies of Scale - these partnerships are usually formed to reduce costs and often involve outsourcing or sharing infrastructure.

Reduce risk and uncertainty - by forming a strategic alliance in one area while competing in another.

Acquire resources - to extend capabilities. These can include knowledge, licenses or access to customers. E.g. a mobile phone manufacturer may license the OS for its handsets rather than developing it in-house.

We can distinguish between 4 types of partnerships:

Strategic alliances between non-competitors

Strategic alliances between competitors

Joint ventures to develop new businesses

Buyer-Supplier relationships to assure reliable supplies

9️⃣ COST

The Cost Structure describes all costs incurred to operate a business model.

There are two broad classes of cost structures - cost-driven (focus on minimising costs wherever possible, e.g. no frills airlines) and value-driven (premium value propositions, personalised service, e.g. luxury hotels) - though many business models fall in between these two extremes.

Creating and delivering value, maintaining customer relationships and generating revenue incur costs. These costs are relatively easy to calculate once key resources, activities and partners have been defined.

All cost structures have the following characteristics, though proportions may vary:

Fixed costs - those that remain static, irrespective of volume, e.g. salaries, rent, physical facilities.

Variable costs - those that change with volume, e.g. raw material, utilities.

Economies of scale - where average cost per unit reduces and output increases.

Economies of scope - where the same marketing activities or distribution channels support multiple products.

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