A good business model facilitates description and discussion. You need to start from the same point and talk about the same thing. The challenge is that the concept must be simple, relevant, and intuitively understandable, while not oversimplifying the complexities of how a business functions.
The Business Model Canvas allows you to describe and think through the business model of your small business, your competitors, or any other company. This concept has been applied and tested around the world and used in large organizations, as well as hundreds of thousands of small businesses.
This concept can become a shared language that allows you to easily describe and manipulate business models to create new strategic alternatives. Without such a shared language, it’s difficult to systematically challenge assumptions about your business model and innovate successfully.
At GoForth, we believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: i) Customers; ii) Offer; iii) Infrastructure; and iv) Financial Viability. The business model is like a blueprint for a strategy to be implemented through business structures, processes, and systems.
First, let’s review Customer Segments, which define the different groups of people or organizations a business tries to attract and serve.
Why are Customer Segments important?
Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long.To better satisfy customers, a company may group them into distinct segments with common needs, common behaviours, or other attributes. A business model may define one or several large or small customer segments.
As a small business owner, you must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.
Customer groups represent separate segments if:
- Their needs require and justify a distinct offer
- They are reached through different distribution channels
- They require different types of relationships
- They have substantially different profit capabilities
- They are willing to pay for different aspects of the offer
- For whom are we creating value?
- Who are our most important customers?
Types of Customer Segments
There are different types of customer segments. Here are some examples:
Mass market
Business models focused on mass markets don’t distinguish between different Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships all focus on one large group of customers with broadly similar needs and problems. This type of business model is often found in the consumer electronics sector.
Niche market
Business models targeting niche markets cater to specific, specialized Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific requirements of a niche market. Such business models are often found in supplier-buyer relationships. For example, many car part manufacturers depend heavily on purchases from major automobile manufacturers.
Segmented
Some business models distinguish between market segments with slightly different needs and problems. The retail arm of a bank like Credit Suisse, for example, may distinguish between a large group of customers, each possessing assets of up to USD $100,000, and a smaller group of affluent clients, each of whose net worth exceeds USD $500,000. Both segments have similar but varying needs and problems. This has implications for the other building blocks of Credit Suisse’s business model, such as the Value Proposition, Distribution Channels, Customer Relationships, and Revenue streams.
Diversified
An organization with a diversified customer business model serves two unrelated Customer Segments with very different needs and problems. For example, in 2006 Amazon decided to diversify its retail business by selling “cloud computing” services: online storage space and on-demand server usage. Thus it started catering to a totally different Customer Segment — web companies — with a totally different Value Proposition. The strategic rationale behind this diversification can be found in Amazon.com’s powerful IT infrastructure, which can be shared by its retail sales operations and the new cloud computing service unit.
Multi-sided platforms (or multi-sided markets)
Some organizations serve two or more interdependent Customer Segments. A credit card company, for example, needs a large base of credit card holders and a large base of merchants who accept those credit cards. Similarly, an enterprise offering a free newspaper needs a large reader base to attract advertisers. On the other hand, it also needs advertisers to finance production and distribution. Both segments are required to make the business model work.