How to Create your Business Model with the Lean Canvas – Neos Chronos

How to Create your Business Model with the Lean Canvas.

by Dr. Thomas Papanikolaou on Feb 7, 2020

A business model describes how a company creates, delivers, captures and defends value. While this definition may sound complex, defining and developing a business model does not have to be a daunting task. In this step-by-step guide, we will share with you a proven process to follow, as well as questions and checklists to help you avoid common pitfalls. We will be using the Lean Canvas as our tool, which you can download from our Template Library. Let’s get started!

CHOOSE AN IDEA

Everything starts with your business idea. Your idea may be around a problem that people encounter in daily life and you believe you can solve it. Sometimes, your idea will be about a solution to a problem that is obvious to you, but everyone seems to miss it. In rare cases, your idea will be so unique that it may disrupt an industry. There is no need to write it down separately, it will be depicted on the Lean Canvas. It is helpful to give your business a provisory name and fill this in the appropriate fields at the top of the Lean Canvas.

DEFINE CUSTOMERS AND USERS

As a next step, you should define who are the people that will pay to benefit from your idea, and who are the people that will use products and services related to your idea. These are referred to as Customer Segments. Sometimes customers and users are the same people, e.g. the buyer of a loaf of bread in a bakery. Sometimes customers and users differ. On social media networks, for example, the users are the members, however, the customers are the advertisers that want to reach those members. Write down a short description of customers and users. Think about where they live, how much money they earn, how their daily life looks like and their dreams and aspirations. Start with a short description, and come back every time you learn something more about them. You can use a Customer Personas Canvas for this purpose.

IDENTIFY THE PROBLEM YOU SOLVE

With customers and users clearly defined, the next step is to describe the problem(s) you solve for them. You can do this at the Problem block in the canvas. Use three (3) sentences / bullet points for customers and three (3) for users. This will help you focus on the most important problems.

VALIDATE EXISTING ALTERNATIVES

A problem that is worthwhile solving is one that exists despite existing alternatives customers and users may use today. It is, therefore, good practice to investigate existing alternatives and to reframe the problem(s) you identified to those. Doing so will force you to distill the value such alternatives fail to create and deliver, and this will indicate the business potential of your company’s future products and services. At this point, you will have an initial problem validation, which you can deepen with extra activities like customer interviews, surveys, etc. So go ahead, write a list of product and services users and customers use today to solve the problem(s) you identified.

DESCRIBE POTENTIAL REVENUE STREAMS

You may have found an important problem to solve. To be sure it is appropriate to invest time and effort to solve it, you need to ask and answer the following question: are customers willing to pay for a potential solution to this problem? Fundamentally, customer willingness to pay for a solution is the ultimate validation of a problem’s significance i.e. whether it is a must-solve (very valuable) or nice-to-solve (less valuable). Use the data you have from researching existing alternatives. How much do others charge? How often customers pay? How? It is a well-known fact that the existence of competition is often validation that a market and revenue potential exists. And if customers perceive the problem you identified as a must-solve they will be willing to preorder your future solution. Capture how much, how often and in which ways customers would be willing to pay and note it down in the revenue streams block of the canvas.

FOCUS ON EARLY ADOPTERS

Early adopters are the customers that experience the problem you identified and validated the most. They are grateful and eager to get a solution to the problem as soon as possible. Often, they will be those who are easier to reach e.g. live in the vicinity. In the early stages of any business, focusing on early adopters is invaluable to help get feedback and traction, to further validate the significance of the problem you solve and the business potential. So, go fill in the early adopters’ block and list the specific customers and users that will be your first target. If you know the names of people or companies who will be your early adopters, that is optimal.

DESCRIBE YOUR DIFFERENTIATED SOLUTION

We refrained from defining a solution earlier because it is important to create a context where you can – as objectively as possible – judge if you have found a problem worth solving. With a validated problem set, you can now move – for the first time – into describing your solution. Write one solution per each problem you identified for customers and users in the solution block on the canvas. If you defined problems using the existing alternatives as a reference, your solution will be automatically differentiated, as it will describe how you solve problems that persist despite existing alternatives. If you see the need to describe the differentiation, loop back to the problem block and rework the canvas until this point.

ARTICULATE YOUR UNIQUE VALUE PROPOSITION

A unique value proposition (UVP) is a statement that says to a customer and user why you are different and worth paying attention to. The key here is to focus on the benefits you deliver to customers and users first. It is a good practice to create a list of UVPs and then keep working on refining them for the target segment. To get started you may want to use the following template.

At company name we enable customer segments to achieve list of benefits by offering a solution that solves their list of problems in a differentiated way compared to existing alternatives.

When talking to customers, you may want to stop at benefits. When talking to investors, you may have to use the full version.

CHOOSE YOUR CHANNELS TO MARKET

Equipped with your differentiated solution and value proposition, it is now time to decide how you are going to sell your solution to customers. You should already have initial ideas from your knowledge of how existing alternatives are brought to the market. Or you may want to completely rethink the channels to the market. Typically you want to capture in this block the channel type. Is it direct (customers buy directly from your business) or indirect (you use resellers, distributors)? Is it offline / personal, online / digital or both? Note down the associated keywords e.g. B2B, B2C, inbound, outbound marketing / sales, Resellers, Online Web, Physical store, … As soon as you defined the preferred channel to market, you can work further on identifying the resources, partners, and activities you need to put in place to implement the channel. You can use a Channel Implementation Canvas for this purpose.

PICK KEY METRICS

This canvas block is dedicated to measuring the success of creating your solution and delivering the benefits of your unique value proposition to customers and users. Therefore your success metrics need to be listed in three (3) categories: customer, channel, solution. Together, these impact the overall company performance. Ideally, by listing the key metrics in this manner, you will be able to find one or two metrics that you can use as a meaningful health check of the overall status of the company. Typical values for the customer part is Life Time Value (LTV), and Customer Satisfaction (CSAT). Customer Acquisition Cost (CAC), and Sales Conversion Rates are common for the channel part. Finally, Server Availability and Average Number of Faults per Release are common for the solution part. With no doubt, all of them will impact Monthy Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) for Software-as-a-Service businesses, as well as Profitability and Revenue Growth Rates.

UNDERSTAND THE COST STRUCTURE

The cost structure primarily reflects fixed and variable costs for running the company (General & Administration), developing the solution (Research & Development) and operating the channels to market (Sales & Marketing). It is good practice to create a financial plan to get a feel of the amount of money required monthly to perform all these tasks (Burn Rate) in case you would like to ask for investment to be able to operate for a defined period without depending on revenue (Runway). It is even better to determine the unit economics of your value proposition. That is understanding the revenue as well as the cost associated with the most basic sales object e.g. one item of a physical product, a monthly subscription fee, …, etc. With these you can easily determine: profit per unit, the number of units to be sold to reach positive cash flow (the state where you do not eat up your company’s cash reserves), the number of units to reach break-even, etc. Give yourself some time to do this, and capture your unit economics in this block as well as the block for Revenue Streams.

DETERMINE YOUR UNFAIR ADVANTAGE

As soon as you launch, everyone will know what your business model looks like. Even before you launch people might learn about your plans, and, if your business model is promising, copy them. This canvas block reflects the part of the business model which is about defending the value you create, deliver and aim to capture. It contains those characteristics that are hard to copy, and cannot be easily bought. Exclusive agreements, acclaimed expertise, business model asymmetry, … are good examples of such unfair advantage. Ask yourself what would prevent someone from copying your business model, even if they had access to a full copy of it, and write your answers in this block.

CREATE A HIGH-LEVEL CONCEPT

You have arrived at the last block of the Lean Canvas! The High-Level Concept block is about creating one sentence that summarises the essence of your business model. The primary recommendation is to use an analogy: if you were Youtube, you could say ”We are Flickr for Videos“. If you were AirBnB you could say ”We are Uber for Hotels“. Similarly, LinkedIn could be ”Facebook for Business People“. Write down your analogy and use it when someone asks you about the type of business you are trying to build. Follow up with your unique value proposition and your unfair advantage when they ask for more!

IN SUMMARY

In this step-by-step guide, we shared with you a proven process to follow to create your business model with the Lean Canvas. Adopting our recommendations will help you avoid common pitfalls and progress faster on your entrepreneurial journey.

Good luck!