building

#Business Model Generation: Diving into Customer Segmentation

Yesterday I highlighted the 9 building blocks that make up a business model. Today, I want to take you all a layer deeper into customer segmentation. First let’s start by answering what customer segments are:

Customer Segments define the different groups of people or organizations an enterprise aims to reach and serve.

There are many ways to slice and dice customer segments. Often times enterprises find it most difficult to separate their customers intouniquesegments. Unique segments can be created based on common needs, behaviors, or other attributes. To be more explicit, customer groups represent separate segments if:

  • Their needs require and justify a distinct offering
  • They are reached through different distribution channels
  • The require different types of relationships
  • They have substantially different profitabilities
  • They are willing to pay for different aspects of the offer

There are also different types of customer segments. I want to take a moment to highlight a few examples:

  1. Mass Market: Business models focused on mass market don’t distinguish between different customer segments. The value proposition, distribution channels, and customer relationships all focus on one large group with similar needs and problems.
  2. Niche Market: This segments is very specialized, characterized by very tailored value propositions and distribution channels. Such business models are often found in supplier-buyer relationships.
  3. Segmented: Some business models distinguish between market segments with slightly different needs and problems. The retail banking arm of a financial services institution may segment its customers into below $100,000 savings and above $500,000 savings. Both customers are similar, but have varying needs and problems.
  4. Diversified: This business model serves two unrelated customer segments with very different needs and problems. Likewise, they offer two different value propositions, channels, and relationships.
  5. Multi-sided platforms: Some orgs serve two or more interdependent customer segments. For instance, a credit card company needs a large base of credit card holders and a large base of merchants who accept those credit cards.

As you can see, some thought should be put into thinking about whether the customers your company services have unique needs and problems. The choice of customer segmentation strategy has implications for the other blocks within the business model.

#Business Model Generation: The 9 Building Blocks

Undoubtedly I am a bit late on this post but I do believe late is better than never. As I continue to read through Alex Osterwalder’sBusiness Model Generation, I want to make sure I’m sharing some insights from this quick read. Today, I want to talk about the 9 “building blocks” to a business model. But first, let’s start with how we define a business model:

Business Model:A business model describes the rationale of how an organization creates, delivers, and captures value.

The following 9 building blocks are intended to establish a simple, relevant, and intuitively understandable breakdown of a business model while not oversimplifying the complexities of how businesses function. They show the logic of how a company intends to make money. These elements allow you to describe and think through your own organization’s business model, or even that of your competitors. With this shared language, you can easily describe and manipulate business models to create new strategic alternatives. The 9 building blocks are as follows:

  1. Customer Segments (CS) – An organization serves one or several customer segments.
  2. Value Proposition (VP) – It seeks to solve customer problems and satisfy customers needs with a value proposition
  3. Channels (CH) – Value propositions are delivered to clients through communications, distribution, and sales channels.
  4. Customer Relationships (CR) – Customer relationships are established and maintained with each customer segment.
  5. Revenue Streams (RS) – Revenue streams results from value propositions successfully delivered to customers.
  6. Key Resources (KR) – Key resources are the assets required to offer and deliver the previously described elements…
  7. Key Activities (KA) – …by performing a number of key activities
  8. Key Partnerships (KP) – Some activities are outsources and some resources are acquired outside of the enterprise.
  9. Cost Structure (CS) – The business model elements result in the cost structure.

Osterwalder offers a visual representation of the relationship between these building blocks. Although it is quite simplistic and not entirely helpful in understanding the intricacies within and between each element, I find it somewhat helpful in at least remembering the 9 blocks listed above:

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As I continue to dive into each of the 9 building blocks, I will share more details around each element and how it acts as a pillar within the business model. Also, Fred Wilson has been covering various revenue models in his “MBA Mondays” series. He has covered Advertising, Commerce, and Subscriptions. He is very comprehensive and explains each very clearly – highly recommend reading.