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Entrepreneurs with Denis Oakley

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Beginners Guide to the Business Model Canvas: Part 2 – Customer Segments

Yesterday we started off sketching out our business model canvases. Today we’re focusing on customers in the business model canvas. The goal is to quickly and easily extract the essence of your business into a business model. Use that to focus your attention on where you are, and then how to change to where you need to be.

If you missed yesterdays post – it’s here.

At the end of yesterday we had a business model canvas – almost totally blank, but we’d added the main problems that you are solving. I left it there because I wanted you to let your subconscious work on them overnight.

We added the problems that we are solving to the business model canvas to keep us non the straight and narrow. So making solutions for non-existent problems
We added the problems that we are solving to the business model canvas to keep us non the straight and narrow. So making solutions for non-existent problems

Often we think about solutions, not problems. It’s a classic trap that many engineers and logical people jump into. Powerful business models are built around customers. When we solve their problems we do better. Selling our solutions is always harder, especially if they are not solutions to real or important problems.

Have a look at the problems you wrote down. Are they real problems? Do have evidence for them? Real hard numbers, or just stuff inside your head. Think about it a bit more.

Now let’s get started for the day.

Customers in the Business Model Canvas

Starting with customers

We’re going to head over to the right side of the canvas and think about customers. You may have one group of customers. You may have a number.

The business model canvas works well when the value you create for each customer is similar and done in similar ways. This also includes platform designs where one group of customers has synergies with another.

If you are selling petrol to consumers and armoured vehicles to customers, these are too different to go on one sheet of paper. Create two. If you are in doubt just do one business model for each customer segment to start. Simplification is everything. The smaller steps everything is broken down into, the easier it is to understand and manipulate.

If you go-to simple, that’s ok. It’s easy to add more detail. If you have too much detail it’s also ok, you just spend a bit more time being confused and trapped in thorns. You can’t get it wrong.

Who are our customer segments in the business model

Let’s choose our target customers.

If we remember – the problems that I am solving are

Old business models are not working for lots of companies in many industries because of the pace of change – technological and environmental (used broadly)

New Ventures need business models to stand out from all the other startups chasing the same opportunities.

So who are my customers?

Adding customers onto the business model canvas.
Adding customers onto the business model canvas.

The people who have problems with a changing competitive landscape are SME owners (lump in directors and CxOs). The people who see opportunity in a changing competitive landscape are entrepreneurs.

At this stage, the customers should be able to say ‘I have this problem’. Here’s an example

The CEO of the Columbus Dispatch says the paper’s longstanding business model just isn’t working anymore

Colombus Business First

Can your customers say that they have the problem you think they have? If not, change problems or change customers, or change the way that you say it.

The other thing to look at is how large your customers are.

‘Mums’ or ‘Working women’ are huge segments. I haven’t looked up ILO data but I’d imagine the first is about 3 billion people and the second isn’t a lot less. That’s including everyone from New York, to Kyrgyzstan, to Kuala Lumpur, across dozens of cultures, social classes, religions and mindsets.

Do all of them care about the problem? Probably not. Or at least to a greater or lesser degree. Who has the problem more? Can you narrow down the focus on them? The fewer you are targeting the more resources you’ll have to solve each one’s problem (and persuade them that you can.)

We've now added customer segments to the business model canvas and shown how they relate to the problems they have
We’ve now added customer segments to the business model canvas and shown how they relate to the problems they have

Better Definition of Customer Segments

So let’s reformulate my answer because I made this mistake as well.

SME owners in the UK Midlands who have undifferentiated business models in at threat industries.

Global technology English speaking entrepreneurs pre Series A with a TAM greater than $1billion.

I’ll highlight what’s on the canvas – because that’s way too much text to clutter it with.

A useful tip is to always put what you write on the canvas in bubbles. It seems to act as a focus and allow you to absorb and manipulate information faster. If that works for you – let’s do it now.

Here we've added examples of customers to the business model canvas and circled them to make them stand out a little better
Here we’ve added examples of customers to the business model canvas and circled them to make them stand out a little better

At the end of today’s little exercise, you should have

  • checked that your problems are real
  • selected your customer segments
  • checked your customer segments againt the problems you are solving.

We’ll carry on tomorrow and start looking at the solution.

Bonus Tip

Bonus tip: At this point, it’s always worth trying to size your market. To do that you figure out how many customers there are in the segment. Then consider how much money they have. In the case of the SME’s, I’d go to the Office of National Statistics (ONS) in the UK and see how many SME businesses there are in the Midlands. Then I’d filter that down by the SIC (NAICS) codes that I am interested in. Then figure out their turnover. It can take a couple of hours. The maths is usually easy, finding the data requires a bit of imagination 😉

Go back to yesterdays post and start from the beginning

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Using the Lean Canvas – Part 1

This week we are going to start with our lean experiment using Ash Maurya’s Running Lean book. So starting off with Chapter 1 we start by documenting the vision and producing our first lean canvas

From experience with hundreds of entrepreneurs we know that every entrepreneur has an idea. To get from idea, to execution, to results requires turning it into a plan. To start with most ideas are pretty vague. They may focus on a problem, or a solution or perhaps even a customer segment which has particularly attractive characteristics.

Now lean, and the whole startup ecosystem has borrowed heavily from the stuff that we were taught in Chemistry class. That is we must have a hypothesis before we start, we must develop an experiment to test the hypothesis, we get some reliable results and then we decide whether our hypothesis is right.

So in the Chemistry lab our hypothesis may be that when we put sodium in water and it catches fire that the remaining liquid will be acidic. As it’s been a while since I’ve done any chemistry experiments I have no idea what the result is. I have an opinion but it may be wrong. Opinions – in lean – suck. We want data. So we pop the sodium into the water. Step back and watch it bang and fizzle and burn. Then we give the remaining liquid a good stir and add a piece of litmus paper. Litmus paper detects whether a liquid is acid or alkali and that gives us the answer.

Chemistry is easy when put that way. An entrepreneur’s idea is somewhat harder. So a good first step is to use something called the lean canvas. You can use the business model canvas which we have done a great deal of. The difference between the lean canvas and the business model canvas is that the business model canvas gives you a picture of the whole business and allows you to see how it should work. It’s an abstraction that lets you quickly and easily understand how all the parts relate to each other – and then play with the different parts of the business to make it more competitive or better or….

The Lean Canvas – First Draft

The lean canvas, in contrast, focuses far more on looking at the problem and finding a path to solutions that work and are profitable. They are complementary strategic tools and generally I will produce both when working with a startup.

Problems

So we started off when Leander noticed that in Malaysia it’s really difficult to get business cards simply and easily. Finding a designer, a printer and getting delivery of the cards are all much slower and difficult than in his native Netherlands.

So the first step was to map out the hypothesis on a lean canvas. this gives a bunch of structure and allows us to analyse the idea and this was the first draft

If we look at the lean canvas we can see that there are some clear problems.

There’s a great video (and podcast) at Stanford Ecorner that addresses problems.

Bernard Roth talks about reframing problems. What is the real problem here?

The real problem is that people don’t have time, that there is no standardised process for purchasing business cards in their company, or it is the first time they’ve done it. Think about it. Producing a business card is relatively complex and requires a lot of tasks to be done in a relatively short time – and especially for a single person the costs can’t be spread over 100 sales people who all need very similar business cards.

So we can frame the problem then a business cards are disproportionately difficult to get.

Customer Segments

The question then is for who?

For the CEO of Google business cards just appear on his desk. It’s not a problem. The Queen of England doesn;t really care. She’s meta-business card and almost everyone in the world knows her address.

One of the approaches that Ash suggests is to think of problems and segments simultaneously. What we did on this lean canvas is to express one persons problems (Leander’s as he tried to get business cards printed for Business Model Guru) generalise it into a hypothesis and then look at a range of possible segments.

Fairly quickly we can see, given the reframed problem, that the key characteristics of segments is going to be that 1 or 2 people need a business card, and it may be the first time that the organisation has procured business cards.

At the same time there must be a payoff for them having a business card. Students in the case of our example don’t really have a strong need for business cards,  so we are looking at some customer segments that coalesce around entrepreneurs and small businesses.

Unique Value Proposition

Moving onto the Unique Value Proposition

Steve Blank states it as the

Simple, clear compelling message that states why you are different and worth buying.

Our first attempt here is

Online ordering and smooth delivery of consumer designed business cards

As you can see we’ve jumped into the solution space a bit here and used the value proposition to hive off particular segments – people who are designing their own. So let’s rephrase the UVP to directly address the problem that customers are facing

Awesomely easy business cards

Now that’s unlikely to be the final value proposition but it clear offers a solution to the problems that we think that our target group has.

We’ve got something that we can test here. What are the problems that entrepreneurs and small business face with business cards? We can get out of the building and talk to them. We can ask them what an awesomely easy business card would look like and start to develop data driven solutions.

At the same time we still need to consider why, coming back to Bernard Roth’s point on problem solving, our target segment needs a business card. They want to have one so that they can use it to build relationships and sell something or get someone to do something. Their goal is not to have a business card, but to make a change in people’s behaviour.

As we iterate the lean canvas that’s something that we need to think about.

The next post will consider some of the other sections of the lean canvas and then thoughts on how we got out and start testing hypotheses

Using the Lean Canvas - Part 1