Do you often think that you should start a business and be your own boss? Are you the one who has many ideas but don’t know which one to implement? If your answer is yes, then read along.
More than 80% of businesses fail within the first 18 months of their launch. Yes, most of them don’t survive. But, why do they fail so early? And, what can we learn from these failures? Let us try to understand.
Most of us have ideas floating around in our head at random times. Some believe they can turn their idea into an actual business while the others actually take the leap to start it. And for those who do not start, there is a reason why they don’t – FEAR OF FAILURE.
Looking at numbers, it is clear that the chances of failure of our new business are high. But, surprisingly, what we don’t realize is that our chances of success are not too low either. And the most important factor that will drive your chances to succeed is your BUSINESS MODEL.
What is a business model?
In simple words, a business model describes the rationale of how an organization creates, delivers, and captures value.
Back in old days, the business model used to be a 50-page document which took days to complete and was difficult to change or refine with time. Moreover, it was not something that was easily visualized and understood by the target audience. Furthermore, companies with traditional business models are finding it difficult to sustain they fail to adapt to changes with time.
With this in mind, we will try to learn a very unique way of writing a business model today. This is a 1-page model, which easily adapts to change, answers all relevant questions to your business & helps you look at your idea from different possible perspectives. This is a BUSINESS MODEL CANVAS where you will paint your idea and gradually turn it into a successful business.
Why use the Business Model Canvas?
It is a shared language for describing, visualizing, assessing and changing business models. As the canvas is a single page model, it is easy to understand and relate things. Thus, people understand your vision clearly.
Sets the Focus
Explaining the Business Model Canvas sets your focus right there on things that matter. This is very easy to explain as compared to explaining your traditional 50–page business model document.
Created by the Masters
It is designed considering the contributed cases, examples, and critical comments of 470 members from the Business Model Innovation Hub from 45 countries. This concept has been applied and tested around the world and is already used in organizations such as IBM, Ericsson, Deloitte, the Public Works and Government Services of Canada, and many more.
It is very easy to change your business model completely or to tweak it as it sits on a single page. You can create multiple versions and finalize on the most refined version of the canvas.
According to this concept, a business model is composed of 9 basic building blocks. For better understanding, I will explain the concepts with an example of Amazon’s business model.
Let’s get started…
The 9 Building Blocks of “Business Model Canvas”
It is important to realize the sequence below to understand the building blocks of “Business Model Canvas” clearly.
Customer Segments – Who are your target customers?
Customer Segments defines the different group of people or organizations an enterprise aims to reach and serve. These are your target customers whom you expect to use your product or service.
Customer Segments – Amazon Business Model
Let’s take a look at customer segments that Amazon targets.
- Individual consumers who wish to buy stuff from Amazon. Some of these are interested in prime video/music.
- Enterprises who buy in bulk from Amazon. (Office tables, chairs, stationary, etc)
- Niche providers like developers & companies who use Amazon Web Services
- Reading enthusiasts who use Amazon Kindle to read a book. This is an elegant, sleek, retina friendly product by Amazon for readers. You get many free ebooks with Kindle with an option to buy other books as well.
Value Propositions – What product/service do you offer as value to your customers?
These are products and services that create value for your Customer Segment. It seeks to solve customer problems and satisfy customer needs with value propositions. The value could be anything like a product or service your offer to solve customer’s problems.
Value Proposition – Amazon Business Model
Amazon offers more than 500 million product options for its consumers. This is incredible!!
- Prices are also very competitive. This means you get the product at the least rate
- Delivery time is something that Amazon takes very seriously. They believe in delivering things in the shortest possible time. They offer 1-day delivery options for prime members. Amazon is also experimenting on same day delivery (2-4 hours) at some locations.
- Amazon also offers their own products like Kindle, Echo, Prime subscription, etc.
Channels – How will you reach your customers to deliver value?
Channels describe how a company communicates with and reaches its Customer Segments to deliver value. Value is delivered to customers through communication, distribution and sales Channels.
Channels – Amazon Business Model
Let us have a look at how Amazon reaches its customers
- Affiliates are external companies/individuals, who partner with Amazon (parent company) to drive sales leads.
- Mobile App and website is the major channel for Amazon to reach its customers. They sell, promote, and deliver products using this medium at large.
- Amazon also provides Developer tools and APIs for the developer community to integrate external business systems with Amazons’.
Customer Relationships – What is your relationship with customers?
Your relationship with your customers throughout their journey with you is an important aspect for any business. Customer Relationships describes the type of relationship a company establishes with its customers. This factor will drive how long your customers will stay with you.
Customer Relationships – Amazon Business Model
- Amazon says they are the “World’s most customer-centric company”.
- They have customer service in form of intelligent chatbots which interacts with humans as if a customer service representative is doing so. This is supported by a 1-1 customer service interaction if needed.
- Amazon.com website & mobile app is an end-to-end self-service system to help you buy/return/sell products of your choice. Users also get smart recommendations and offers specific to them, delivery details, delivery time estimate, tracking, etc.
Revenue Streams – How do you earn money from your target customers segments?
It represents the cash a company generates from each Customer Segment. There can be multiple streams that generate revenue for your company. Revenue results from value propositions successfully offered to customers.
Amazon Business Model – Revenue Streams
How does Amazon earn money?
- Their primary business is to sell goods and earn a small portion of the sales earnings. Many sellers register with Amazon and sell their products through Amazon.com. Amazon keeps a part of the sales revenue and passes on the rest to the registered seller.
- Amazon Prime membership is a premium service offering by Amazon. This enables users for offers and services that are not available to non-Prime members. The services include 1-Day delivery, early notification of offers, Prime video, etc.
- Sales of Amazon’s own products like Alexa, Kindle, etc also earn them revenue.
Key Resources – What are the important assets that make your business work?
This Building Block describes the most important assets required to make a business model work. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments and earn revenues.
Key Resources – Amazon Business Model
What are Amazon’s important resources?
- Goods are stored at physical warehouses and all logistics are managed accordingly. Having storage warehouses is one of the most important resources for Amazon
- Significant IT resources & infrastructure are required to develop and create Amazon.com website and mobile app. Amazon also spends on R&D for future prospects which need quality engineers.
Key Activities – What are important activities to make your business work?
This block describes the most important things a company must do to make its business model work. These are the most important actions a company must take to operate successfully.
Key Activities – Amazon Business Model
Important Activities for Amazon
- Promotion of sales of goods is the primary activity which converts into actual sales. Amazon promotes a variety of product range on their platform to customers.
- They spend their resources on improving the delivery time consistently by improving several factors in the delivery & logistics life cycle.
Key Partnerships – Who are important partners to run your business?
This block describes the network of suppliers and partners that make the business model work.
Some activities are outsourced and some resources are acquired outside the enterprise. Companies create alliances to optimize their business models, reduce risk, or acquire resources.
Key Partnerships – Amazon Business Model
Key Partners of Amazon
Amazon is an e-commerce company but they don’t own the products nor do they own the deliveries. They have partners who do this for them and are managed by Amazon. These partners are
- Sellers who actually own products and sell them on the Amazon platform
- Logistics Partners for delivery to customers
- Affiliates who drive more sales for Amazon by advertising Amazon’s products
- Suppliers or direct Manufacturers who supply goods to Amazon.
Cost Structure – What at the costs incurred to operate your business?
The Cost Structure describes all costs incurred to operate a business. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs to any company. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships.
Cost Structure – Amazon Business Model
Cost Structure for Amazon
- Amazon spends a significant amount on the Infrastructure they own which drives their IT systems, websites, mobile apps, etc. Technology is a significant cost to them
- General and Administrative resources have to be paid off.
- A lot of spends are done on R&D as Amazon believes in thinking years ahead to sustain and be ahead in the game.
- Marketing and sales is another area where most companies have to spend on and Amazon is no different here.
As shown above, there are the 9 building blocks of the Business Model Canvas. Amazon’s Business Model clearly explains them. To summarize, the final business model for Amazon will look as shown below.
Final Version of Amazon Business Model (There is no final version :P)
It is important to understand, that there is no final version of the business model. Businesses have to adapt to changes and change their strategies accordingly. Today many businesses have to be shut down for not being flexible enough adapt to changes. It is for this reason, your business model has to be refined from time to time. Preparing multiple drafts will eventually take you to your most refined version.
Give it a try by creating your own business model for any random idea that comes to your mind. You will be amazed at how your thoughts shape up. You can download the canvas here.
If you wish to learn things in greater detail you can Buy the award-winning book here. I would recommend you all to read this book for better insights.
Thanks for reading!
Please feel free to share your feedback, suggestions or ideas in the comments section below.