Business Model Canvas: design, compare and choose how you earn money

Few business models were ever chosen. They grew: one product, then a service on the side, then a discount for loyal customers. The Business Model Canvas puts that whole model on one page. On its own that is a description. It becomes a strategic tool when you draw two or three alternatives next to the current model and compare them on the same nine questions.

Take a supplier of professional coffee machines. It earns once per machine and then waits years for the next sale, while repair invoices annoy customers who simply want good coffee at a predictable cost. A SWOT analysis does not show that tension. The full model does, as soon as you ask who pays for what, and when.

What is the Business Model Canvas?

The canvas grew out of Alexander Osterwalder's doctoral thesis at the University of Lausanne (2004), supervised by Yves Pigneur. Together they turned it into the book Business Model Generation, co-created by 470 practitioners from 45 countries (source: John Wiley and Sons, August 2010). The canvas describes how a business creates, delivers and captures value in nine building blocks. It helps to read them in four groups.

On the canvas the customer side sits on the right, the efficiency side on the left and the proposition in the middle. Start with segments and proposition, since every other block depends on them, and fill in the finances last: they show whether the rest adds up.

Which business model changes are worth testing?

The real gain comes from changing one or two blocks and following the effect through the rest. These shifts come up again and again.

• From sale to subscription: a recurring fee instead of a one-off price. Revenue becomes predictable; cash arrives later than costs.
• From product to service: the customer pays for the result, such as uptime, kilometres or clean linen, while you keep the asset and the risk.
• From hours to a fixed price: you earn more by working faster, and you carry the risk of underestimating the work.
• From one customer group to two: you connect buyers and sellers, as a platform does, and earn from one side or both.
• From doing it yourself to a partner: lower investment, more dependence.

Recurring revenue also tends to weigh more when a business is valued. If a sale or handover is on the horizon, a shift to contracts can pay off twice; see succession and exit.

Business Model Canvas example: a coffee machine supplier moves to subscriptions

A supplier of professional coffee machines for offices and hospitality has 28 staff. It buys machines from two manufacturers, sells them, repairs them on call and delivers beans. Online sellers press the margin on machines. The team draws the current canvas and one alternative: an all-in subscription per machine.

Fictitious Firmfocus example.

The canvas shows what changes; the numbers show whether it pays. The team compares one machine over four years in both models, leaving out beans, which cost the same in both.

Fictitious Firmfocus example. Payback = cost of the machine / (monthly fee - monthly service cost) = €4,500 / €205 = about 22 months. Amounts in euro; the logic works in any currency.

Per machine the subscription earns more, and the revenue is predictable. The price is cash. If the supplier places 300 machines a year on subscription, it pays €1,350,000 for those machines up front, while they bring in about €432,000 in their first year when placed evenly over the year. That gap has to be financed, which is why a lender appears among the key partners.

The team moves offices first, where use is predictable, while hospitality customers can still buy; after a year it compares cancellations, service costs and the financing need with the plan. Two lessons apply well beyond coffee: define sharply what the fee includes, and expect the first years of a subscription model to look worse in cash than in profit.

How to compare business models in five steps

1. 01

   Draw the current model honestly

   How you really earn money now, including loss-making customers and services you give away.

2. 02

   Design two or three alternatives

   Change one or two blocks at a time, such as the revenue stream or the segment, and follow the effects through the other blocks.

3. 03

   Calculate each alternative

   Revenue, margin and cash over at least three years, including the investment and the cost of the transition. A cash flow forecast shows when the money actually comes in.

4. 04

   Test the weakest assumption first

   Usually whether customers want it and will pay. Talk to customers or run a small pilot before you change the whole firm.

5. 05

   Choose and plan the transition

   Agree the criteria before you compare, such as margin, cash need and risk, and decide which customers move first. See evaluate and choose.

Platform business models: a canvas with two sides

Marshall Van Alstyne, Geoffrey Parker and Sangeet Paul Choudary describe the difference between pipelines and platforms in Harvard Business Review (April 2016). A pipeline business wins by optimising its own value chain. A platform connects producers and consumers and wins through network effects: every extra user on one side makes it more valuable for the other.

On a canvas this means two customer segments, each with its own proposition and channel, and usually one side that pays more than the other. For most small and medium-sized businesses, joining an existing platform is more realistic than building one. The canvas then shows the price: the platform owns part of the customer relationship and sets the fee.

Limits and pitfalls of the Business Model Canvas

• Not a strategy: the canvas shows how the model works, not why customers choose you over a rival. Combine it with Porter's generic strategies or the value disciplines.
• No competitors: you only see your own model. Draw a rival's canvas as well, or start from a competitor analysis.
• A snapshot: the canvas has no time axis. Draw a transition as a series of canvases, one per year.
• No numbers: without figures every alternative looks equally attractive. The finance blocks need real amounts.
• A sticky-note exercise: a wall full of notes that nobody tests is a workshop, not a decision. Mark each note as a fact or an assumption.

Business Model Canvas in a small business and a larger organisation

The canvas answers how you earn money. The page on value proposition and jobs to be done zooms in on the two blocks that carry the rest, and the BCG matrix and portfolio shows which units can pay for a new model. All models for this decision are in strategic choices, part of the strategy overview.