Test Your Value Proposition: Supercharge Lean Startup and CustDev Principles

In my last post I described a new business tool, the Value Proposition Designer Canvas. In this post I outline how you can use the tool to not only design Value Propositions, but also to test them. You’ll learn how you can supercharge the already powerful Lean Startup and Customer Development principles to design, test, and build stuff that customers really want.

The Value Proposition Designer Canvas (VP Designer Canvas) allows you to zoom into the details of your Value Proposition and the Customer Segments you target. You can use it as a poster (cf image below) to design better Value Propositions with sticky notes. However, to make sure your customers really want what you design, you'll need to test all the assumptions you make with the VP Designer Canvas.
Value Proposition Canvas
We already now know how to do this kind of designing and testing for business models: by combining the Business Model Canvas with the Customer Development process. Steve Blank has impressively demonstrated this in his work.

We can achieve the same for Value Propositions by combining the VP Designer Canvas with the Lean Startup process. This will help us more systematically work towards achieving what the startup movement calls a product-market fit or problem solution fit. In other words, building/offering stuff that customers really want.

Design, Test, and Build Business Models & Value Propositions
In a nutshell, the Lean Startup process essentially consists of iterating through the “building” of, “measuring” of, and “learning” from product (and service) prototypes. The Lean Startup movement calls these prototypes Minimum Viable Products (MVP).

Supercharge the Lean Startup Process

The VP Designer Canvas can add two crucial things to this process that are currently missing. Adding them to the mix will bring us to a whole new level.

Firstly, the VP Designer Canvas gives you a simple and practical way to rapidly sketch out WHAT you are building and how you believe this will create customer value/benefits, as well as WHY your are building it: which customer jobs, pains, and gains you intend to address.

Doing this BEFORE building an MVP, will help you better track and manage the testing, measuring, and learning process.

Value Proposition Canvas: What and Why

Secondly, the VP Designer Canvas helps you distinguish between Product/VP and Customer assumptions. If you “just” build an MVP to measure and learn, you won’t know if a negative outcome of your experiment is related to your MVP or to a lack of customer interest.

In science such a significant bias would invalidate your results all together. Hence, you need to separate the testing of your product/VP assumptions (i.e. WHAT) and your customer assumptions (i.e. WHY) whenever possible. The latter is something you can observe and investigate even before designing an MVP.

Using the Value Proposition Designer Canvas - Step by Step

Let me walk you through a rough step by step process of how to use the VP Designer Canvas for testing. In reality, of course, these steps will be less sequential and much more messy. You'll also want to adapt this process to your needs and circumstances.

1. Fill Out Your VP Designer Canvas.

Describe the JOBS your customer is trying to get done and outline their PAINS and GAINS. List the PRODUCTS and SERVICES you intend to offer and describe how you believe they will ALLEVIATE your customer’s PAINS and CREATE GAINS. You can use the trigger questions in the poster and in my last blogpost if you need help.

1 - Fill Out VP Canvas

Voilà, you now have a great list of Produc/VP and Customer assumptions. You described who you think customers are and what you think would create value for them. It’s your best guess - but still just your (smart) opinion.

1b - Your Assumptions

2. Test your Customer Assumptions

Now it’s time to “get out of the building” - to use Steve Blank’s terms - in order to verify your customer assumptions. Talk to as many (potential) customers as possible to verify if they really are trying to get those JOBS done that you described in the VP Designer Canvas. Find out if those JOBS are crucial to them or unimportant? Find out if the really have those PAINS you believed they have. Are those PAINS severe or minor? Verify if they really value the GAINS you believed they value.

2 - Test Customer Assumptions

It’s even better if you can test your customer assumptions more rigorously. What I mean with that is going beyond simply talking to customers, but not yet building an MVP. The design professions have several techniques to achieve that.

3. Adjust your Customer Assumptions Based on Insights

Now that you better know who your customers are you should revisit the Customer Profile in your VP Designer Canvas. Ideally you now understand the significance of your customers’ JOBS, the severity of their PAINS and the intensity of their desired GAINS.

3 - Adjust Customer Assumptions

4. Redesign your Value Proposition Based on Insights

Adjust which pains and gains you want to focus on, based on your customer insights. Then redesign your Value Proposition accordingly. Don’t forget that great Value Propositions rarely address all customer PAINS and GAINS. They address a few really well!

4 - Redesign your Value Proposition

This will give you a readjusted VP Designer Canvas.

4b Adjusted VP Canvas

5. Start Testing your Value Proposition

Now it’s time to build your MVP and continuously test and adjust your Value Proposition based on what you learn.

5 - Test with MVP

The VP Designer Canvas will serve as your map to permanently track assumptions and tests, while you're pivoting through the Lean Startup process. The moment this circle ends is when you've achieved a fit between your Value Proposition and what your Customers expect. This is what the startup movement calls product-market fit or problem-solution fit. It's when you build stuff that customers really want!

Lean Startup Process

Don't hesitate to give me your feedback, since this process is just a first suggestion of how to use the Value Proposition Designer Canvas.

The Front- and Backstage of your Business Model Theater

At every talk and workshop I try out something new to see if it sticks with the audience. An image that resonated a lot was describing the Business Model Canvas as a theater with a front stage and a backstage.

What creates value in a theater is the action that takes place on the front stage. It's what people came for and what they are paying for. The backstage, however, is what makes the front stage possible, it enables the front stage. The Business Model Canvas is similar. The right-hand side of the Canvas is the front stage. The left-hand side of the Canvas is the backstage. Check out my little sketch outlining the front stage and back stage of the Business Model Theater:

Drop Your Training Wheels: Competing on Business Models

The Business Model Canvas is continuing to spread across the business world. However, some people and organizations use it in more sophisticated ways than others. So I came up with four levels of strategic mastery as to competing on business models.

At the lowest level of mastery, level 0 strategies, people focus on products, technologies, and value propositions mainly. They aren't even aware that it is often the business model that makes the difference between success and failure. At the highest level of mastery, level 3 strategies, companies disrupt themselves with new and innovative business models, while their existing business models are still successful and make money. I played around with a new video tool, educrations, to outline my thoughts. Check out why focusing on products and technology alone is like competing with training wheels, while you could be riding a Ducati Monster:

In the video I describe four levels of mastery:

  • Level 0 Strategy - The Oblivious: Focus on products/value propositions alone rather than the value proposition AND the business model.
  • Level 1 Strategy - The Beginners: Use the Business Model Canvas as a checklist.
  • Level 2 Strategy - The Masters: Outcompete others with a superior business model where every one of the business model building blocks reinforce each other (e.g. Nintendo Wii, Nespresso, Dell).
  • Level 3 Strategy - The Invincible: Continuously disrupt themselves while their business models are still successful (e.g. Apple, Amazon.com).

Business models that outperform others do so in various ways, for example by...

  • disrupting the existing market (e.g. Dell).
  • creating a hard-to-copy competitive advantage (e.g. Apple appstore ecosystem).
  • establishing game-changing cost and/or profitability structures (e.g. Nintendo Wii)
  • creating entirely new markets (e.g. Nespresso).

As a complement to this post you might also want to have a look at my post on the characteristics of a good business model, 7 Questions to Assess Your Business Model Design .
If you carefully watched the video you probably noticed that I messed up the Gary Kasparov quote, which should have been: "Success is the enemy of future success". Good that I can blame the jet lag from my trip to New Orleans ;-)

7 Questions to Assess Your Business Model Design

Ultimately, customers are the only relevant judges of your business model. However, even before you test your model in the market, you can assess its design with 7 questions that go well beyond the conventional focus on products and market segments.

First things first. In order to assess your business model you should sketch it out on the Business Model Canvas outlined in the video below. If you want to know more about the Canvas and how to use it you can read Business Model Generation of which 70 pages are available for free on our website.

Assessing the basics

Every business model has a product and/or service at its center that focuses on a customer’s job-to-be-done. I call this the Value Proposition. So before even turning to your business model as a whole, you need to ask yourself some basic questions related to your Value Proposition and the Customer Segments that you are targeting.

  • First, ask yourself how well your Value Proposition is getting your target customer’s job done. For example, if a user of a search engine is trying to find and purchase the latest Nike running shoe, the measure of success will be how well the search engine helps the user get this job done.
  • Secondly, ask yourself how many people or companies there are with a similar job-to-be-done. This will give you the market size.
  • Thirdly, ask yourself how important this job really is for the customer and if she actually has a budget to spend on it.

That’s it as to the basics. However, even the greatest products are having an increasingly hard time to achieve a long-term competitive advantage. That is the reason why you need to shift your focus away from a pure product/market segment oriented approach towards a more holistic business model approach. Below are eight questions to assess your business model design. Rank your business model’s performance on a scale of 0 (bad) to 10 (excellent) for each question.

1. How much do switching costs prevent your customers from churning?

The time, effort, or budget a customer has to spend to switch from one product or service provider to another is called “switching costs”. The higher the switching costs, the likelier a customer is to stick to one provider rather than to leave for the products or services of a competitor.

A great example of designing switching costs into a business model is Apple’s introduction of the iPod in 2001. Do you remember how Steve Jobs heralded his new product with the catchphrase “thousand songs in a pocket”? Well, that was more than a product innovation focusing on storage. It was a business model strategy to get customers to copy all their music into iTunes and their iPod, which would make it more difficult for them to switch to competing digital music players. In a time when little more than brand preferences were preventing people from switching from one player to another this was a smart move and laid the foundation for Apple’s subsequent stronghold on music and later innovations.

2. How scalable is your business model?

Scalability describes how easy it is to expand a business model without equally increasing its cost base. Of course software- and Web-based business models are naturally more scalable than those based on bricks and mortar, but even among digital business models there are large differences.

An impressive example of scalability is Facebook. With only a couple of thousand of engineers they create value for hundreds of millions of users. Only few other companies in the world have such a ratio of users per employee. A company that has pushed the limits even further is the social gaming company Zynga. By building games like Farmville or Cityville on the back Facebook, the world’s largest social network, they could benefit from Facebook’s reach (and scale) without having to build it themselves.

A company that quickly learned its lessons regarding scalability was peer-to-peer communication company Skype in its early days. Their customer relationship collapsed under the weight of large numbers, when they were signing up ten thousands of users per day. They quickly had to adapt their business model to become more scalable.

3. Does your business model produce recurring revenues?

Recurring revenues are best explained through a simple example. When a newspaper earns revenues from the sales at a newsstand they are transactional, while revenues from a subscription are recurring. Recurring revenues have two major advantages. Firstly, the costs of sales incur only once for repetitive revenues. Secondly, with recurring revenues you have a better idea of how much you will earn in the future.

A nice example of recurring revenues is Redhat, which provides open source software and support to enterprises based on a continuous subscription basis. In this model clients don’t pay for new software versions because it is continuously updated. In the world of Software as a Service (Saas) these types of subscriptions are now the norm. This contrasts with Microsoft, which sells most of its software in the form of licenses for every major release.

However, there is another aspect to recurring revenues, which are additional revenues generated from an initial sales. For example, when you buy a printer, you continue to spend on cartridges, or when you buy a game console, you’ll continue to spend on games. Or have a look at Apple. While they still earn most of their revenues from hardware sales, the recurring revenues from content and apps is steadily growing.

4. Do you earn before you spend?

This one goes without saying. The more you can earn before spending, the better.

Dell pioneered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed to escape the terrible inventory depreciation costs of the hardware industry. Results showed how powerful it is to earn before spending.

5. How much do you get others to do the work?

This is probably one of the least publicized weapons of mass destruction in business model design. What could be more powerful than getting others to do the work while you earn the money?

In the bricks and mortar world IKEA gets us to assemble the furniture we buy from them. We do the work. They save money. On the web Facebook gets us to post photos, create and participate in conversations, and “like” stuff. That’s the real value of Facebook, entirely created by users, while they simply provide the platform. We do the work. They earn the sky-high valuations of their shares.

Previously mentioned Redhat crafted another smart business model based on other people’s work. Their entire business model is built on top of software developed by the open source software development community. This allowed them to substantially reduce their development costs and compete head-on with larger companies like Microsoft.

A more malicious business model in which others do the work is the one practiced by so-called patent trolls. In this model patents are purchased with the sole intention of suing successful companies to extract payments from them.

6. Does your business model provide built-in protection from competition?

A great business model can provide you with a longer-term protection from competition than just a great product.

Apple’s main competitive advantage arises more from its powerful business model than purely from its innovative products. It’s easier for Samsung, for instance, to copy the iPhone than to build an ecosystem like Apple’s appstore, which caters to developers and users alike and hosts hundred thousands of applications.

7. Is your business model based on a game changing cost structure?

Cutting costs is a long practiced sport in business. Some business models, however, go beyond cost cutting by creating value based on a totally different cost structure.

Skype, for example, provides calls and communication almost like a conventional telecom company, but for free or for a very low cost. They can do this because their business model has a very different cost structure. In fact, Skype’s model is based on the economics of a software company, while a telecom provider’s model is based on the economics of a network company. The former’s costs are mainly people; while the latter’s cost include huge capital expenditures in infrastructure.

Similarly, Bharti Airtel, one of the world’s largest mobile network providers, has substantially modified its cost structure by getting rid of their entire network and IT. By buying in network capacity on a variable cost basis from a consortium around network equipment manufacturer Ericsson and IBM, they can now offer among the lowest prices for mobile telephony globally.

Redhat, which was mentioned previously, also built its business model on a game changing cost structure: by smartly building its own model on top of other people’s work.

How does your business model design perform?

Of course no business model design scores a perfect 10 as to every single one of the above questions. Some might even succeed in the market without scoring well at all. However, by asking yourself these questions and by scoring well on at least some of them you are very likely to substantially increase the long-term competitive advantage of your business.

Now all you need to do is test your business model with the real judge: the market. The best way to do that is by turning to Steve Blank's Customer Development process, which fits perfectly with the Business Model Canvas.

Some more info on my workshops, speaking, and projects.

PS: I will be running a series of workshops you might be interested in. Sign-up or pre-sign-up here. In Paris (French: Sept 27/28), in Boston (Oct 27/28), and in Munich (German: Nov 24/25).

PS2: These days are your last chance to get your name into a book project that I'm involved in: Business Model You. Check it out here.

PS3: I wrote this post as a guest post for the Business of Software conference where I'll be speaking in October.

Business Model Toolbox for iPad #BMTBox

I wrote about Computer Aided Design Tools (CAD) for business people years back in my doctoral dissertation. With the Business Model Toolbox for iPad we now made the first concrete steps towards a whole new breed of computer aided business design tools. The Toolbox combines the speed of a napkin sketch with the smarts of a spreadsheet. It enables you to map, test, and iterate your business ideas — fast.

It always struck me that we have relatively few good software tools in business to think through more strategic issues. We do have sophisticated business analytics tools to make sense of large amounts of quantitative data. We do have spreadsheets to simulate complicated financial scenarios. Yet, what do we have today to design and test strategies and business models? Little. That’s exactly why the team behind the bestselling book Business Model Generation developed the Business Model Toolbox for iPad (V.1.0.) together with Geneva-based development firm Hortis le studio.

Watch my rough and improvised demo. It's filmed with my iPhone in the middle of Berlin where I'm giving a keynote at Process World 2011 - more sophisticated product videos to come soon ;-)


The Toolbox V.1.0. focused on three core activities required to prototype business models:

  • Sketch your business model using the practical methodology from the best-selling book, Business Model Generation.
  • Add ballpark figures for market size, revenue streams, and costs — faster than any spreadsheet.
  • Test the profitability of your ideas with a quick report and breakdowns by offer, customer segments, and costs.

Below are the screenshots of the simple example I sketched out in the video...

Starting a simple business model prototype (without costs)

Adding revenue streams: sales through the app store (and paying a Apple a 30% cut of your sales)

Playing with revenue stream ideas: what about a Web subscription?

Report view of a more complex business model

Obviously, many people asked us why just for the iPad. As soon as we launched they immediately asked for Android and Web versions. From a business perspective it might have indeed been smarter to start with a Web app because of its broader reach. This is particularly true, since we started developing the Toolbox when it was far from clear if anybody would buy an iPad.

The reason we went for the iPad first is because I firmly believe that the touch interface and the relatively large screen of the iPad will allow us to demystify and democratize the prototyping of business models - just like the visual design of the Business Model Generation book helped demystify and democratize business model thinking and thus make it accessible to a larger audience than the usual business book readers.

By going for the iPad first and the Web second we wanted to show what's really possible when it comes to prototyping business models. Using your fingers to pull in virtual sticky notes just feels so much more natural than using a computer mouse, doesn't it? The iPad app allowed us to test and validate this theory.

Today there are about 19 million iPads in the market (read more) and there is no doubt that Apple is currently dominating the tablet market. More interestingly, a majority of the senior executives and entrepreneurs I work with have an iPad. Some of them even bought an iPad just to use the app. For all others we will have good news later this year. The Business Model Foundry will continue to develop breakthrough tools for the Business Model Generation.

Go get the Business Model Toolbox for iPad if you don't have it yet and got curious after reading this post. It will help you build better business models at the price of a lunch. Is a better business model worth it? read more... buy it on the appstore...
PS: Here at Process World 2011 in Berlin where I currently am at I'll give a keynote about bridging the gap between business strategy and processes through the Business Model Canvas. Already, Software AG, one of our partner companies and organizer of Process World, has integrated the Business Model Canvas into ARIS, their business process management tool (read more).

Upcoming Business Model Workshops and Talks

I'm posting a brief schedule of my upcoming workshops and talks during the first semester, because I got a lot of questions about them lately. I try not to post too much self-advertising on my blog, but I need to from time to time so I can support the free content on this site ;-)

My public events are relatively infrequent, since most of my talks and workshops take place inside companies.

  • Keynote Talk, Düsseldorf, Germany (19. March) Creative Summit Nordrhein Westfalen (NRW): Neues Wachstum Durch Neue Business Modelle / in German (website)
  • Workshop (full day), Amsterdam, The Netherlands (23. March): Business Model Innovation - Masterclass (registration)
  • Workshop (half-day), Toronto, Canada (14. April): Exploring Business Model Generation with Alex Osterwalder: A Master Class in Business Model Design (early-bird registration fee)
  • Talk, Toronto, Canada (15. April), Business Model Generation - how to co-create a bestseller guerrilla fashion
  • Workshop (half-day), Gothenburg, Sweden (22. April): Nya grepp om kreativa affärsmodeller / in English (registration)
  • Software Presentation, Geneva, Switzerland (28. April) iPhone Dev Days: Business Model Software for the iPad (website)
  • Special Workshop (full day), London, UK (29. April): London School of Economics: Business Model Design (website)(registration)
  • Workshop (2h) Geneva, Switzerland (5. May) LIFT'10: Business Model Innovation for Start-ups, Corporations and Social Entrepreneurs (website)
  • Workshop (full day), Lausanne, Switzerland (18. May) at the Swiss Gratuduate School of Public Administration (IDHEAP): Reconcevoir vos modèles d'action publique - découverte et application d’une méthode novatrice et pratique / in French (registration)
  • Workshop (full day), Lausanne, Switzerland (19. May) at the Swiss Gratuduate School of Public Administration (IDHEAP): Reconcevoir le management des organisations sportives / in French
  • Keynote, London, UK (14. June) Shine 2010 - Unconference for Social Entrepreneurs (website)

Hope to see you at one of the events!

By the way, on March 17. I'm giving an online interview for the "coaches rising" website (register for free)

Business Model Generation on Amazon.com Now

The first print-run of Business Model Generation was sold out after a few weeks only. We couldn't keep up with demand and were out of stock for a while. Now the book is available again. You can get it directly on Amazon.com in a deluxe or portable version.

Business Model Generation has been selling phenomenally well - and that without a publisher and 0 marketing budget. Last week it even ranked #2 in sales of management books on Amazon.com. For this second print-run we decided to produce two slightly different versions: a deluxe version for your office and a portable version for the road. Deluxe Version

The particularity of the deluxe version is its beautiful cardboard cover and special binding, which allows you to lay it flat open on a table. Yet, it's not only attractive, but also offers you the perfect working experience that you would expect from a hands-on and practical book. However, be careful: deluxe versions are objects of envy - it's not unheard of that copies get stolen when you leave them unsupervised on your desk.

buy now

Portable Version

We introduced the portable version in order to offer you a lighter and more portable copy at a lower price. The content is the same, but its format (perfect bound and softcover) is designed for taking it on the road. Business Model warriors will likely own both versions. One to show off at their office and one to take with them anywhere they go.

buy now

Caveat

Unfortunately, Amazon.com currently restricts us from offering a top-notch service to some customer segments. Readers outside the US cannot benefit from expedited shipping. Also, Amazon.com does not ship the book to Canada, due to internal restrictions. Hopefully, we can find a way around those limitations in the future.

Mapping Business Models (a Knowledge Game)

Mapping out a business model with a group of people is like playing a game. That's what I came to realize when my friend and leading visual thinker, Dave Gray, introduced me to his new project called Knowledge Games.

I was instantly fascinated by the project, because it is extremely relevant for anybody who wants to understand how creative work is starting to be organized in today's organizations. Yet, most interestingly, the Knowledge Games project is utterly practical, since it aims to outline a series of games designed to help you get more innovative, creative results in your work. The authors of the project, Dave Gray, Sunni Brown, and James Macanufo are on the best path towards creating the next reference guide for the creative business professional and business innovator. The metaphor of games refers to the most natural of human mechanisms of exploring the world: games & play. And what could be more important than exploration when it comes to defining strategy and business models in a competitive environment characterized by volatility, unknowns and constant change:

Games come naturally to human beings. Playing a game is a way of exploring the world, a form of structured play, a natural learning activity that’s deeply tied to growth. Games can be fun and entertaining, but games can have practical benefits too.

When Dave asked me to formulate the usage of the Business Model Canvas as a Knowledge Game I was immediately hooked. Here is the blogpost I wrote for the Knowledge Games project (check out the original post):

Objective of Play: Visualize a business model idea or an organization's current and/or future business model in order to create a shared understanding and highlight key drivers.

Number of Players: 1-6 (depending on the objective). Works well individually to quickly sketch out and think through a business model idea or an interesting business portrayed in the press. To map an organization's existing and/or future business model you should work in groups. The more diverse the group of players (marketing, operations, finance, IT, etc.), the more accurate the picture of the business model will be.

Duration of Play: Anywhere between 15 minutes for individual play (napkin sketch of a business model idea), half a day (to map an organization's existing business model), and two days (to develop a future business model or start-up business model, including business case).

Material required: Mapping business models works best when players work on a poster on the wall. To run a good session you will need the following:

  • A very large print of a Business Canvas Poster. Ideally B0 format (1000mm × 1414mm or 39.4in × 55.7in)
  • Tons of sticky notes (i.e. post-it® notes) of different colors
  • Flip chart markers
  • Camera to capture results
  • The facilitator of the game might want to read an outline of the Business Model Canvas (free 72 page preview of Business Model Generation



How to Play: There are several games and variations you can play with the Business Model Canvas Poster. Here we describe the most basic game, which is the mapping of an organization's existing business model (steps 1-3), it's assessment (step 4), and the formulation of improved or potential new business models (step 5). The game can easily be adapted to the objectives of the players.

  1. A good way to start mapping your business model is by letting players begin to describe the different customer segments your organization serves. Players should put up different color sticky notes on the Canvas Poster for each type of segment. A group of customers represents a distinct segment if they have distinct needs and you offer them distinct value propositions (e.g. a newspapers serves readers and advertisers), or if they require different channels, customer relationships, or revenue streams.
  2. Subsequently, players should map out the value propositions your organization offers each customer segment. Players should use same color sticky notes for value propositions and customer segments that go together. If a value proposition targets two very different customer segments, the sticky note colors of both segments should be used.
  3. Then players should map out all the remaining building blocks of your organization's business model with sticky notes. They should always try to use the colors of the related customer segment.
  4. When the players mapped out the whole business model they can start assessing its strength and weaknesses by putting up green (strength) and red (weakness) sticky notes alongside the strong and weak elements of the mapped business model. Alternatively, sticky notes marked with a "+" and "-" can be used rather than colors.
  5. Based on the visualization of your organization's business model, which players mapped out in steps 1-4, they can now either try to improve the existing business model or generate totally new alternative business models. Ideally players use one or several additional Business Model Canvas Posters to map out improved business models or new alternatives.

Strategy: This is a very powerful game to start discussing an organization's or a department's business model. Because the players visualize the business model together they develop a very strong shared understanding of what their business model really is about. One would think the business model is clear to most people in an organization. Yet, it is not uncommon that mapping out an organization's business model leads to very intense and deep discussions among the players to arrive at a consensus on what an organization's business model really is.

The mapping of an organization's existing business model, including its strengths and weaknesses, is an essential starting point to improve the current business model and/or develop new future business models. At the very least the game leads to a refined and shared understanding of an organization's business model. At its best it helps players develop strategic directions for the future by outlining new and/or improved business models for the organization.

Variations: The Business Model Canvas Tool can be the basis of several other games, such as games to:

  • generate a business model for a start-up organization
  • develop a business model for a new product and/or service
  • map out the business models of competitors, particularly insurgents with new business models
  • map out and understand innovative business models in other industries as a source of inspiration
  • communicate business models across an organization or to investors (e.g. for start-ups)

Interviews on Music Industry Business Models

I admit, I have been posting about the music industry too much recently. However, by studying it we can learn a lot about business model innovation in general (or a lack of it).

After my keynote at the Eurosonic Noorderslag music industry event I gave a short interview. Check it out and don't miss out on the interview with Niklas Ivarsson of Spotify (promise: my next blogpost will certainly not be about the music industry - I will explain how to use the Business Model Canvas to play a game).

Spotify is one of the hot start-ups in the music industry. I portrayed the company's business model in my keynote by sketching it out with the Canvas. Niklas Ivarsson, their global head of licensing, outlines the services of his company in the interview below. Interestingly, he also explains how many users prefer using Spotify rather than relying on piracy for music.

The Music Industry (part II) – two of the new models

It was fun to give a keynote on business model innovation at Eurosonic Noorderslag, Europe’s most important live music industry conference. The music industry is more or less a playground (and battlefield) of new business models

In this second blogpost (read part I) on the music industry I present two of the examples of innovative business models in this area, which I presented during my keynote talk: Sellaband and Spotify. Both companies were actually present during my presentation.

While in the past the music industry was characterized by one dominant business model design (the one of the major recording companies), the future will be characterized by multiple competing business models.

There was also an interesting discussion in the panel after my talk, which hosted Nokia, Spotify and rights holding company Buma/Stemra. One of the elements pointed out was a the competition between business models based on ownership of music (e.g. download) versus access to music (e.g. streaming).

Check out my slides for an illustration of Sellaband's and Spotify's business model:

The Music Industry (part I) - what's broken

Next week I'm giving a keynote on business model innovation at Eurosonic Noorderslag, Europe’s most important live music industry conference and showcase festival for new talent.

While the music industry provides sufficient material for a whole book on business model innovation, I will simply package some thoughts in two blogposts. The first part is on "what's broken". The second part will be on the fact that

Today's music industry is a business model playground - and to a certain extent battleground

It is quite a particular industry because of its high concentration of power. 85% of the recording industry, the most important subset of the music industry, is controlled by only four players, Sony Music Entertainment, Universal Music Group, Warner Music Group, and EMI (source 1, 2). That didn't prevent them to screw up when it comes to business model innovation. In fact, it probably is one of the root problems.

Check out the slides below for a brief outline of the "old" recording industry business model and an assessment of where it is broken. After reacting only slowly to the external pressures on their "old" business model the major record companies are now slowly experimenting more seriously with new models (topic of part II of this blogpost).

Although the major record companies are engaging in new business models, I don't think they are aware of the extent of flaws in their "old" model. Some points that their executives should keep in mind when they brainstorm on new models:

  • Recording companies are fighting piracy, while that won't win them "the battle".
  • Albums sales are out in the digital world - they are unbundled into single songs (e.g. iTunes).
  • The price of albums and songs (not necessarily music in general - e.g. services) will inevitably move towards ZERO.
  • Distribution has become a commodity because of the Internet, attention is the new scarcity.
  • Talent and hits will be discovered by other mechanisms than those that the majors have in place - social networks are what drive music sales today.
  • The old model carries an outmoded legacy cost structure (talent discovery/marketing), which is unsustainable.
  • The balance of power between recording companies and artists is inevitably moving towards artists.
  • The future of music is all about hits AND the Long Tail of music.

Business Model Management - a defining topic for the next decade

Business Model Innovation is on the agenda of many CEOs of incumbent organizations and in the DNA of countless insurgent start-ups. Yet, executives and entrepreneurs should already look beyond "mere" innovation towards managing business models.

Staying ahead of competition requires more than an impressive one-time business model innovation stunt. It requires the careful evaluation and improvement of one's more established business model (cash cows), while proactively playing with a portfolio of new business models. This can be presented as a spectrum ranging from "improving business models" to "disrupting/inventing business models". Managing Business Models

Improve: Continuously assess and improve your more established business models, notably through incremental innovation.

Disrupt, Invent: Pro-actively develop and manage a portfolio of disruptive and entirely new business models that will allow you to maintain a competitive advantage in the future. In some cases these new business models may cannibalize your existing business model in others they may be complimentary. Some companies my prefer an acquisition rather than a development strategy of new business models. However, it still requires a deep understanding of the new and emerging models.

Companies that have failed to manage the entire spectrum of business model management include Xerox who has popularized the dominating photocopying business model in the 60s (see Henry Chesbrough's work for details) or Dell, which has popularized direct sales of PCs through the web. Both have introduced new business models and come to dominate their field, but failed to reinvent themselves.

Managing Business Models - examples

Companies that seem to be managing the entire spectrum of business model management include, for example, Amazon and Daimler. The former is constantly improving it's online retailing business, while building new business models with large growth potential (e.g. Amazon Web Services that allow renting storage space and computing power). The latter is improving it's core business (after some painful merger adventures), while exploring new complementary business models invented by it's Business Innovation Department. In 2009 that department experimented with Car2Go, an interesting mobility concept that allows people to rent and drop-off cars on the fly anywhere in a city. With this concept Daimler intends to exploit the continuing trend of urbanization and problems of congestion and individual transport.