Creating, Delivering and Capturing Value

The definition

A business model describes how an organisation creates value for customers, delivers that value to them, and captures part of it as revenue and profit. A business can do the first two brilliantly and fail entirely on the third — which describes a substantial number of failed companies with delighted users.

The building blocks

• Customer segments — who you serve, defined specifically enough to be findable.
• Value proposition — the problem you solve and why your approach is better than the alternatives, including doing nothing.
• Channels — how customers discover, evaluate, buy and receive.
• Customer relationships — how you acquire, serve and retain them, and how much human contact that requires.
• Revenue streams — what customers pay for, how and how often.
• Key resources — what the model depends on: people, technology, data, brand, capital, licences.
• Key activities — what the business must be good at.
• Key partners — what you deliberately do not do yourself.
• Cost structure — where the money goes, and which costs are fixed and which vary with volume.

Coherence matters more than any component

The components must fit each other. A premium value proposition requiring consultative selling cannot be sold through a self-service channel at a low price point. A low-price high-volume model cannot support a lengthy manual onboarding process. Most business model failure is not a bad component; it is components that contradict one another.

The most common mismatch is between price and cost of acquisition: a product priced at a level that cannot possibly recover the cost of the sales effort needed to sell it.

Business model versus product

Two companies can sell essentially the same product with entirely different models and different outcomes — sold outright versus subscribed, direct versus through partners, self-service versus supported, paid by the user versus paid by an advertiser. The product is what it does; the model is how the money works. Competitive advantage frequently lives in the model rather than in the product.

Writing it down

Sketch the whole model on one page and examine the connections. The useful discipline is to identify which components are assumptions rather than facts, and to rank them by how damaging it would be if they were wrong. That ranking is your testing programme.