Lesson: Business Model Canvas with Alexander Osterwalder

Step #2 Canvas: The Business Model Canvas is a practical and visual tool to sketch out your business model

The Business Model Canvas is a very practical and visual tool that allows you to sketch out your business model. It could be a business model that you already have that you're running that works, or it could be a business model that you want to build. This tool helps you to have a shared language to help you better describe business models.

We wanted this to spread, so creative comments license was the best way to get it to spread around the world. Today, there are millions of users using the business model canvas and that's great. The only reason that is happening is because we used the internet and creative comments to get it to spread.

We changed a couple of things to make it more practical. We used to have the block that was called "Core Capabilities." People didn't understand what that was, they needed explanation. So we killed that, and replaced it by "Key Resources" and "Key Activities."

Everybody understands what's a resource is, what's an activity is. A resource is something you need to have and an activity is something you do. So, we wanted to make the canvas ultra-practical so people could start with it without a lot of explanation.

We tried to design the canvas with a great and practical interface, just like you design websites. I think business tools need great interfaces, just like a great website, you have an interaction design, right?

There's no profession called interaction design for business tools, that's why we're not using any of these tools because they suck. But they're going to get better. We consider ourselves tool smiths, business tool smiths, because we spend a lot of energy on making these tools conceptually sound and ultra-practical.

Otherwise, senior executives and entrepreneurs won't use them. This is a crucial issue. If you want tools to be adopted, they need to be practical and very easy to use, otherwise there's going to be huge resistance.

People often ask, "Where do I start?" It doesn't matter because at the end, every building block needs to be right. You need to have a business model where every piece reinforces the other. You can start anywhere.

People say, "Yeah, but we should always start with a customer need." Nonsense. If you have a great patent, well, you're going to have to search for an application for that patent, you can start there as well.

While you don't need to start from customer needs, you always need to end with customer needs, which means that every business model canvas needs to fulfill a real job to be done for a customer but it doesn't have to start there.

At the end what counts is that you have a great business model where you get all nine questions right. It's not just about one block or the other, it's about getting all questions right. Some business models, one block might be more important than another, but it's still all nine blocks that make the difference.

Let me give you an example, a pretty interesting one of this MedTech startup. They were going through a course at that University of Arizona. They had a patent and they came up with a medical device.

They sketched out a business model that would make something like $5 million dollars in revenues and $1 million in profit. The teaching team said, "Are you sure you want to do this? Maybe it's not worth investing your time."

They said, "Maybe you want to redesign the business model and the team came up with something that resembles the Nespresso model where they said, "Okay. What if we had a device and a consumable, and it would be about getting the device into the market but then earn most money from the consumable.

They sketched out that second prototype, and the business model looked much better. In fact, it made 20 times more profit. So, the difference, same device, lightly modified, building a consumable into it- was a huge difference, 20 times more profit. Now they still need to build it and they need to get market proof, but already in the design can make a difference.

It's not just about that product, it's about the right business model to create something that's worthwhile doing. So, that's really important. All the nine blocks together will make the difference between a billion dollar business and a million dollar business.