With the rise of methodologies like Lean Startup and tools like the Business Model Canvas, entrepreneurs are working to develop new business ideas more quickly, cheaply and hopefully more successfully than ever.
It feels you can’t even go for one coffee chat without hearing mention of business models.
But what is a business model exactly?
And how does understanding it help you better lead an impactful business as a social entrepreneur?
In the +Acumen Business Models for Social Impact course, we look to Alexander Osterwalder’s description to understand what a business model is. He shares, “a business model describes the rationale for how an organization creates, delivers and captures value.” These three broad themes can be outlined in the Business Model Canvas, a one-page tool used to draft how the nine core sections of a business model work together.
With the term ‘value’ being so ingrained in business-model-speak, it’s worth framing for this discussion. Mihir Desai shared this definition in the +Acumen Master Class on Demystifying Finance: “value is created when you exceed other people’s expectations.” Tying it together, a business model demonstrates how you positively contribute to the experience of others (create and deliver value) plus the positive contribution you receive in return (capture value).
A business model ultimately centers around the people you serve and how you serve them.
It’s just one piece of the strategic puzzle, but it’s the heartbeat of why your organization exists and how it stands out from the rest.
The pursuit of the ideal business model.
If you are involved in entrepreneurial pursuits, you have probably experienced firsthand how challenging it can be to figure out how the core pieces of a business model fit together in a way that is both highly impactful and financially sustainable. Entrepreneurs working on solutions to complex challenges frequently go through several iterations before arriving at the point where the business fits together cohesively.
However, for entrepreneurs in the thick of the startup phase, the solution that will provide the most sustainable positive impact is not always immediately visible.
How can you open up your perspective to innovative and original ideas?
As it turns out, the three main areas of the business model - creating, capturing and delivering value - are a useful starting point for opening your eyes to new possibilities that may not have organically presented themselves.
Let’s look at how focusing your attention on each of these three areas of the business model can open up your imagination to innovations that might hold the key to the next best step for your social venture.
(If you aren’t yet familiar with it, this is a good starting point for context on Alex Osterwalder’s Business Model Canvas, although it’s not a prerequisite for the rest of this article.)
Creating Value is primarily centered around the business’ Customers and the benefits, or Value Proposition, that it presents to them. Here you can also consider the type of Relationships you foster and the Channels you build to interact with each of your customer segments.
When using this section of the canvas as a frame for inspiration, you want to consider which customer segments you serve. With deeper exploration, you might discover the possibility to serve new segments, or you might start to see new or better ways to serve your existing customers.
A beneficial starting place for diving deeper into understanding each of your customer segments is with the Value proposition Canvas by Strategizer. This exercise goes into detail for two of the nine building blocks of the full Business Model Canvas and helps you articulate the needs arising from the specific ‘pains,’ ‘gains’ and ‘jobs’ of your customers, along with how the features of your product or service meet them.
To come up with original ideas around Creating Value, ask yourself:
How can my social enterprise improve the design and benefits of our product, service or platform in order to meet the specific needs of the customers we work with (while considering the multiple customer segments we serve)?
An example of innovation in this area is one of Acumen’s investees, Biolite. Biolite offers a solar lantern also equipped with a charging station. The combination of a charger into the lantern provides users effective benefits for everyday life.
To take this idea even further, BioLite’s business model centers around the use of core technologies that apply to two distinct segments, off-grid households in emerging markets and outdoor recreation users seeking fuel-independent cooking and charging. By fully understanding why people wanted this unique combination of features and benefits, they were able to see two distinct markets and this awareness opened up new possibilities for business model innovation.
When thinking about innovation within the Capturing Value area, you can look at creative ways to either reduce your Cost Structure and/or adapt your Revenue Streams as outlined in the Business Model Canvas.
To come up with original ideas around Capturing Value, ask yourself:
How can my social enterprise adjust the way we generate revenue our pricing, or our cost structures involved in delivering the product or service?
With a focus on serving populations that often have lower ability to pay, there are many examples of social enterprises leveraging original ideas in their pricing and cost structures.
On the revenue side:
#1 - Providing loans or financing to customers to increase affordability (or providing access to the same through key partnerships)
In one creative financing example, the social enterprise, Angaza Design, pioneered mobile pay-as-you-go platforms for clean energy products. This pay-as-you-go financing solution allows customers to rent a product while they make incremental payments until they eventually achieve ownership. This is a model of end-user financing that puts the product within Financial reach of a much larger market segment.
#2 - Serving two distinct markets with a similar offer but different pricing.
Cross-subsidization can be another powerful way to shift the revenue model in a social enterprise.
In addition to the Biolite example shared above, another classic example of this revenue model in action is Aravind Eye Hospital. Services range in price from free to market rates and people of all income levels are granted the dignity to choose how much they can and should pay. The ability for those who can afford to pay market prices serves as cross-compensation, covering the costs of providing service to those who opt for services for free or pay below-cost.
On shifting cost structures:
In addition to implementing cross-subsidization on the revenue side, Aravind also innovated its cost structures. Starting in 1992, they started a manufacturer, Aurolab, to manufacturer intraocular lenses used in surgeries for a fraction of the cost. When other manufacturers were charging up to $150 for lenses, Aurolab was able to meet the same quality for only $4. By 2011, more than 10 million people around the world were using Aurolab lenses.
For more inspiration for designing social enterprises with innovative revenue models read the article, 10 Creative Ways to Address Affordability in your Social Enterprise Business Model.
The section of the Business Model Canvas that centers around Delivering Value outlines the Key Partners, Key Resources, and Key Activities that allow your organization to deliver on the promises made in the Value Proposition.
One way to innovate when delivering value is figuring out creative ways to partner and collaborate with other players in the ecosystem. With partners, it’s possible to generate similar value for your customers with less inputs on your part. This can be achieved by outsourcing elements of key activities to partners or finding new ways to leverage the resources of others in your model.
With social enterprise, common key partnerships are around manufacturers, distributors, sales and service providers, financing institutions, government or community-based organizations. One key thing to keep in mind when evaluating potential partnership opportunities is to understand what is motivating each party so that a solid relationship can build on aligned values and priorities.
To come up with original ideas around Delivering Value, ask yourself:
How can my social enterprise design the value chain differently, or use new distribution systems used to make a product, service or platform more accessible?
One example of innovation in this area of the Business Model Canvas is Siembra Viva. Siembra Viva is a Colombian e-commerce platform for farmers that eliminates the middleman and streamlines logistics in the supply chain, connecting smallholder farmers in rural Colombia to a consumer base in urban cities. These efficiencies plus support for farmers to better understand and plan for product demand results in less crop wastage, higher incomes, and more economic stability.
Similarly, when Aravind Eyecare examined the value chain they were a part of, they discovered that they could vastly reduce their costs if they manufactured their own lenses.
David Green, who oversaw manufacturing under the Aurolab name, told the authors of an MIT Case study: “the price differential between the lenses produced in Madurai and those manufactured in developed countries is largely a result of the difference in organizational orientation: basically, we use the same equipment and manufacturing process and we fulfill the same regulatory requirements for quality as other companies do, whether they are in America or Europe or elsewhere … but Aurolab sells the lenses for less, not only because their costs are lower but because they choose to price them lower—because our goal is maximizing service rather than maximizing profit.”
No matter which part of the business model sparks insight for possible new directions, it’s worth noting that innovations can be entirely new and creative, or they can be a simple adjustment to what’s already working.
A small re-frame in thinking about how to create, capture or deliver value can dramatically shift the model as a whole.
Next time you are seeking original ideas to strengthen the way your social enterprise serves your customers and beneficiaries, look to the Business Model Canvas and how it creates, captures and delivers value, for inspiration.