There are a lot of frameworks out there for launching a business or product ranging from lean startup to design thinking to jobs-to-be-done to the business model canvas and permutations of it such as the lean canvas. To be honest, I find all of these frameworks to be useful in their own way. I don’t think there’s a one-size-fits-all approach to innovation. Try all of them out and cater them to your specific needs.
As I’ve used these frameworks — and mentored students / new entrepreneurs, I’ve observed that there are a few areas of the Business Model Canvas that, if overlooked, make it less useful. Fiona Macaulay, my co-professor at “Launching Entrepreneurial Ventures” at Georgetown University, asked me to share some of the common mistakes entrepreneurs make when filling out the Business Model Canvas during class this week. I thought it might be good to write about them as well. Below you’ll find a quick breakdown of Five Common Mistakes that entrepreneurs make when using the Business Model Canvas.
Mistake #1: Customer Segments
When starting a Business Model Canvas, the Customer Segments section is a great place to start. The number one mistake new entrepreneurs make when describing their customer segments is to define the customer segments either too narrowly or too broad. On the one extreme, they may claim to only have one customer and on the other extreme, they believe everyone and anyone can be their customer. Both extremes are often wrong.
If the entrepreneur believes they have one and only one customer segment, it tends to increase their resistance to acknowledge negative market feedback and pivot accordingly. They tend to gloss over the incompatibility of the solution with the customer problem and think that more funding or marketing will solve the lack of fit.
On the other extreme, if an entrepreneur thinks everyone is their customer, they may end up building a convoluted product or service that tries to please everyone and ends up pleasing no one. Additionally, if they try market their product or service, they’ll struggle with identifying the correct audiences on digital marketing platforms and either see minimal results or waste a lot of money targeting the wrong customers.
Lastly, entrepreneurs often confuse their customer with someone who is a user, a beneficiary, or a stakeholder. A customer is defined as the person who derives value from the product and provides value in return. That value could be money or data or something else. The end user may end up using the product or service, but they might not pay for it or provide something of value to the entrepreneur. As an example, if you are launching a product line for children, the children may be users whereas their parents are the customers because they are actually paying for the product or service. This doesn’t mean one should ignore the users and focus only on the customer. It simply means when putting together a Business Model Canvas, make it clear who is actually going to be handing your business money that you can put into the company bank account.
- Brainstorm up to 50 customer segments.
- Pick the 3–5 best customer segments from your list of 50.
- Conduct customer discovery around those 3–5 segments.
- Be sure not to confuse a customer from other types of people (users, beneficiaries, or stakeholders).
Mistake #2: Pains vs Gains
After entrepreneurs have identified customer segments and defined them clearly enough, it’s best to move on to conducting customer interviews or doing research to get a better understanding of the specific pains or gains they are dealing with around a specific problem. In the Business Model Canvas, you can describe the pains and gains in the Value Proposition section.
Whereas in the customer segments portion we want to think through a lot of possible customer segments and identify about 4–5, in this section, we want to go deep not wide. We want to identify customer pains and really get a sense of how acute the pain is. Entrepreneurs will often sort of skip over this step. You want to make sure you are dealing with a problem whose solution is not a “nice to have” and beyond even a “must have”, to “I cannot live without this solution.”
My friend Marc Steren, the Founding Director of Entrepreneurship at the Universities at Shady Grove, runs the Summer Launch program at Georgetown. He always reminds students to focus on a hair on fire problem when it comes to customers. What’s a hair on fire problem? Imagine if your hair was on fire — imagine the proximity of the fire, the absolute urgency to douse it, and the acute sense of pain or alarm you would have. Now imagine if someone offered you a bucket of water to put it out — would you take it? Absolutely! How would you feel after putting out that fire? Probably a huge sense of relief. That’s hair on fire problem and when you have a customer that has an acute problem, the easier it is to identify a solution.
One piece of advice I give to help gauge a customer problem is to simply ask the customer to rate it on a scale of 1 to 10 like a physician would if you were visiting the emergency room for a major health condition. The key point of identifying a pain or gain using a scale is that you separate a dull pain from an acute pain.
Since entrepreneurs struggle with identifying pains and gains clearly (along with pain relievers and gain creators), the Business Model Canvas has a corresponding canvas called the Value Proposition Canvas.
- Do customer interviews for at least 7–10 people in each customer segment.
- Identify the specific customer pains / gains.
- Rate each pain / gain on a scale of 1–10.
- Collate all of your findings to see if you can establish clustering around a specific acute pain.
- Pay close attention to any gaps within solution or workarounds (past, current, or potential). This tells you about potential competitors and what the gaps or competitive advantages are.
- If you listen carefully enough to enough customers, they’ll basically hand you the outline of a product or service on a platter.
Mistake #3: Balancing Costs and Revenue
If entrepreneurs define the customer segments well and their respective pains and gains, they’ll be able to clearly see what the gap is for those customers and begin to identify the features and benefits of a product or service that solves their problem. Coming up with a product or service is often not the hard part, usually entrepreneurs intuitively have one in mind or can pivot one after some customer discovery. After they’ve come up with a prototype to build it out, the hard part is making it into a business where money goes in and money goes out and there’s (hopefully) some profit left over.
First time entrepreneurs often struggle with identifying the true cost of getting something done. If you’ve got customer-solution fit or product-market fit, you tend to be so overjoyed you that you forget to look at the cost of making the dream a reality. A very common mistake I see is that entrepreneurs forget to count the time and money they themselves are putting into the business. In the Cost Structure section, it’s important to think of not only latent costs but also the hidden costs such as the entrepreneur’s own time (i.e. labor).
On the other extreme, some entrepreneurs focus so much on the product or tech or marketing, they forget to think about how they’ll generate revenue. If your answer to “how will you generate revenue” is “I don’t need revenue, I need a [loan, fundraising, money will fall out of the sky], then your business model is incomplete. The Revenue Streams section of the Business Model Canvas is designed to help you think of all of the ways to generate revenue. Sometimes, you can have one customer segment but multiple revenue streams (i.e. you upsell a service to an existing customer like when Dominoe’s pizza asks you if you want a drink when placing an order for a pizza at checkout). Other times, you may have multiple customer segments but one revenue stream (i.e. Netflix has multiple customer segments but only one revenue stream which is monthly subscriptions). Lastly, you may have multiple customer segments and multiple revenue streams (i.e. Amazon which sells goods, cloud services, livestreaming, and even a marketplace for merchants).
The point of the Cost Structure and Revenue Streams sections is to help you flesh out the underlying economics of the business. It doesn’t have to be perfect (or even profitable). It just means that there has to be a plan for the business to: (a) make money, (b) identify how much money it costs to make that money, and (c) see if there’s any money left over (i.e. profit).
- See if you can find a chart of accounts for a business similar to yours.
- Use it to help flesh out common revenue streams and costs (both latent and hidden).
- Don’t forget to account for yourself as a labor source by calculating your hourly wage and applying the number of hours you plan on working for a time period (i.e. 1 year).
Mistake #4: Being Too Vague
One thing you’ll notice about the Business Model Canvas is that when you first use it, it can be quite challenging. You don’t know that much about your customer or your market or your product or service. You’ll jot down some ideas and then hopefully do some customer discovery to help you fill in the blanks. As you learn more, the canvas will start getting more filled out.
The more specific a proposition is, the easier it is to test out. For example, if your proposition is that your key customer segment is X and it is defined by a specific demographic, geographic, psychographic, or behavioral parameter, you can easily test that proposition through a marketing micro-campaign using Google or Facebook ads. However, if the customer segment is too broad, those ads will reach everyone (i.e. no one) and you’ll have just burned through your marketing budget with minimal conversions. You’ll end up oscillating in doubt between thinking there is no customer or there is a customer.
- Treat every post-it on the Business Model Canvas as a testable proposition. For each proposition, be as specific as possible. Design the proposition in such a way that you can easily validate it through a test.
- One way to see if a customer segment proposition is testable is by using Google Ads Keyword Planner to see if anyone is searching for a problem or by using the Facebook Audience Tool to see how accessible a specific market is.
- When developing a Business Model Canvas, try and presenting it to 4–5 different people and see if they can understand it. If it is unclear, keep iterating until it becomes obvious to someone who has never been exposed to this market or customer or problem set.
Mistake #5: Filling It Out Once and Leaving It Forever
Businesses, technology, and markets don’t stay the same — they change. If your company doesn’t adapt, it dies. Even when a business has product-market fit and starts generating growth, it should never stop scrutinizing it’s customer, it’s business model, and the market(s) it operates within. Sometimes, entrepreneurs will fill out the Business Model Canvas once and then forget about it. Filling it out over and over again ever so often helps you develop new insights or a new hypothesis to test out.
Even if the core business doesn’t change, you will likely need to launch a new product or new service or in a new market for a new customer segment. Getting good at coming up with business ideas fast and executing them is a skill that will last a lifetime. What’s great about the Business Model Canvas is that you can revisit it time and time again.
- If you’ve completed a Business Model Canvas and launched your business, give yourself a calendar reminder to update your canvas each year. See if there are assumptions you had that proved to be false, new insights you learned that can be added, or new ideas that you can test out.
- Additionally, try and pull in your team and have them fill out the Business Model Canvas to see if there are new, unique ways to look at your business with fresh eyes.
The Business Model Canvas is just one innovation model among many, but it’s simplicity and elegance make it easy to use. If you are interested in learning more about the Business Model Canvas, check out the additional resources below:
- [PDF] Business Model Canvass Template https://canvanizer.com/downloads/business_model_canvas_poster.pdf
- [Book]: “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers” by Alexander Osterwalder and Yves Pignuer (Amazon)
- Strategyzer: An online platform created by the author of the Business Model Canvas: https://www.strategyzer.com/
- [Video] “Business Model Canvas Explained” by Strategyzer: https://www.youtube.com/watch?v=QoAOzMTLP5s
If you’ve got questions about launching an entrepreneurial venture or specifically about the Business Model Canvas, feel free to reach out!