Q: I’m just about to get out of the building to validate hypotheses and start learning, but I have a problem with the business model canvas. I have been advised to develop detailed hypotheses before starting customer discovery. This is my startup and I have no idea how to fill in the business model canvas channel box or answer Steve Blank’s BMC channel/pricing hypotheses question on “the price at which half of the customers say yes.”
Serious Problems With Business Model Canvas For Startups
I see serious problems with business model canvas for startups. Founders get stuck trying to fill in every box in the BMC before doing any customer interviews. It triggers the analysis paralysis that you now find yourself in.
THE BMC is a template designed initially for large European firms (the equivalent of the US Fortune 500) and not intended for use by startups. I agree with Osterwalder’s definition for a business model:
But his 9 box canvas formula reminds me of Newton’s dot notation for calculus (fluxions or derivatives). It points out the need for a formal notation but it’s too cumbersome and not usefully extensible. I don’t question the need for meaningful and portable representations of business models, but I think the Business Model Canvas represents an evolutionary dead end.
In a number of implementations the BMC has become a way to smash the historical “13 slide VC Pitch” onto a single chart. It was intended to make business plans comparable across startups (or product proposals comparable across a multinational enterprise in the case of the original BMC), which is a different objective from offering entrepreneurs useful insight when they are exploring an early market.
Don’t Worry About The Channel Early in Customer Development
- Who is your customer?
- What is their problem?
- How can you make sure that they view it as a problem or a need?
- How have they done without your product until now?
If You Must Use A Canvas
If you want to use a canvas read Tristan Kromer’s post on “Business Model Canvas for User Experience” and his related “Hacking the Business Model Canvas.” He has done the most to adapt BMC thinking to a practical customer-focused approach for early stage startups.
Here are Three Checklists We Use Instead
I don’t find the canvas models helpful in the early market but your mileage may vary. Here are some checklists we use:
A Simple Model You Can Start With
Your question “the price at which half of the customers say yes” appears to be based on the page 227 of the 2007 Edition (Creation of Adam cover) of “Four Steps to the Epiphany” [PDF], which is part of the “Customer Discovery Hypothesis Channel Pricing Worksheet 1-c.” That checklist has three questions for “How Many Can You Sell?”
- If you charged $1.
- If you charge $1 million.
- What is the price at which half of the customers say yes.
My suggestion for early conversations is to determine if anyone will pay $1. That will tell you if you are solving a real problem for them. One simple model you can use to estimate pricing is to make an estimate of the value that your solution offers to your prospects and test price points at 10%, 20%, and 40% of that. Or just try to capture 10% of the hard dollar impact.
The implication from the three questions is that the price at which half the customers say yes is the right price. This is rarely the right price point for your product. You may be leaving either profit or a chance to grow market share on the table depending upon the structure of the market you are attacking.
You are looking for weak signals that you are working on an important problem for a category of customer, important enough that they are willing to pay attention, offer example data and constraints, and ultimately pay something. You can refine from there, but it’s better to derive pricing from value. Focus much more on the value you are creating in the customer’s business and less on the price per se in the early going.
Related Blog Posts
- How to Calculate Business Model Parameters for a Novel Product
- Business Model Representations
- Tools for Buzzword Compliant Business Models
- Five Tests For Your “We Will Just Run Ads” Business Model
- Is the Prisoner’s Dilemma A Good Model for Doing Business?