NEIL TARALLO: So welcome to our presentation on the Business Model Canvas. This presentation is brought to you by the Leland and Mary Pillsbury Institute for Hospitality Entrepreneurship here at the School of Hotel Administration. And it's part of the Pillsbury Institute's Ambassador Program. I am a Pillsbury ambassador. That's pretty cool, huh?
I always wanted to be an ambassador. And there are quite a number of us that have been and are coming up throughout the rest of the semester as ambassadors. Go to the Pillsbury website. Check out opportunities to hear other folks talk about other topics related to entrepreneurship.
My name is Neil Tarallo, and I am a senior lecturer and the director of the Entrepreneurship Bootcamp for Disabled Veterans here at the Hotel School at Cornell University.
But before we start, I just want to take a minute and recognize some of our partners and some of our friends who collaborate with us and who I work with with Veteran Outreach over the course of a year. First is the Institute for Veteran and Military Families at Syracuse University. They are the parent organization for the Entrepreneurship Bootcamp for Disabled Veterans. They manage 10 consortium schools for us. And we are being broadcast through their Veterans Network System. So veterans across the country, around the globe, really, are picking up our livestream in that way.
The other partner who really plays a really big role in entrepreneurship and in business startup and growth in the United States and a partner who I think we tend to miss sometimes on university campuses around the country-- but the Small Business Administration, which is a branch of the federal government, supports entrepreneurship, new business ventures, growth, startups, all kinds of things related to that. It's really a wonderful organization. And we are providing this talk to them through their veteran's outreach, women's outreach, and small business outreach centers across the country. I think there's over 800 of them. So we welcome those folks in. Please chime in if you have questions. And we appreciate all that you do for all the folks that you support as well.
So we're here to talk about the Business Model Canvas. It's going to take me a little while to get to the Canvas, though, because I want to set the stage for you a little bit. I want to talk about some of the elements that we should be thinking about as we think about the Canvas as we go along.
And by now, most of you really kind of understand that entrepreneurship is as much about solving problems as anything else, right? You've thought about how to solve a problem in a market. Maybe you've got an idea that solves a problem. You understand that pain and what customers feel along those lines is part of what you need to do as entrepreneurs. And you've probably thought about the opportunity that you have. How many people are in the market? What's the competition look like? And how large of an audience is actually experiencing the problem? And maybe what degree that they're feeling pain as part of that problem.
But there's something that I find that is regularly missing when I talk to entrepreneurs, particularly new entrepreneurs and students, about their concepts and about starting a business. And the thing that's usually missing is this little talk that we're going to have about value here and the value that we provide for our customers. It is something that we need to be thinking about and we really need to be focusing on.
So one of the things that I typically see or hear from folks when they talk about ideas that they have is that they have this great idea for a new product or a new service. But products and services do not create markets by themselves. I appreciate that you've worked hard and you have this really great product, but it doesn't create a market.
Not only do products and service not create markets, but solving problems will. So solving problems help create markets. Not quite all the way there. We're still missing one little part of this equation. So as we think about solving problems, we also need to think about creating sustainable organizations that are going to be able to solve those problems and create value for our customers over a period of time. It's why if you take my class and you talk to me about apps, I'm really not that interested because apps by themselves don't solve problems. And if they do, they only solve a problem for a short period of time. But organizations that solve problems and use apps as a way to deliver that value to customers-- that's something that I really like to hear about. That's really important.
So if we break down these layers a little bit and we think about what we're putting forward for our customers, we always want to be moving towards creating sustainable companies, OK? And that's the premise from which I teach entrepreneurship. And frankly, that's the way we all think about entrepreneurship here at the Hotel School. We don't talk about-- we do. We help you with it. But we don't really focus on individual products, individual technologies.
And it's really important to remember that. It's not about your product. Products are a dime a dozen. People come to me almost on a daily basis with new products that they've created. It's not about your really cool technology, even if that technology is solving a problem. It's not about the technology. It's not about how great your food tastes. I'm sorry for all my chefs in the audience and my culinary folks who I get in my classes on a regular basis. It's not about the quality of your food.
Yes, we do need to reach a certain level of quality in order for us to be doing what we need to be doing and delivering value. But the quality of your food by itself is not going to give you a sustainable organization.
And it's really not even about your great service. The combination of the service and good quality food and value that you deliver to your customers will create an opportunity for you. But these things by themselves are not opportunities. And these things by themselves do not create value for an extended period of time. Does that make sense? Yeah. Little feedback for the professor up here is always good. You can nod your head every once in a while.
So it's always about how we capture and how we create value for our customers. That's what I want to hear about. That's what I want to hear about. And when I'm thinking about investing in companies, when I have my investor hat on, this is what I really am looking for from the entrepreneur, OK?
It's wonderful that you show me your technology. It's great. I'll take your app, and I'll look at it, and I'll play with it a little bit. But my question is always going to be, for whom are you creating value, and what exactly is that value that you're creating? And until you can answer that question for me as an investor, I'm not going to be moving forward with you. So we need to work on that and figure out how that works.
And in fact, that's the business model for us. The business model is how an organization creates and delivers and captures value for its customers. That's the business model. And that's what we're going to focus on tonight here at the talk we're doing.
So this gentleman, name is Alex Osterwalder, Alexander Osterwalder, was a PhD student. And that's actually the title of his dissertation up there-- "The Business Model Ontology-- a Proposition in Design Science Approach." That's why I never went through the PhD program, because I could never invent a title like that for any paper that I've ever written.
But what he did is he looked around, and what he saw as he talked to many, many different people was that-- or what he heard or didn't hear, I should say-- was that everybody had a different understanding of what a business model was. We all have heard of the term. We all use it as we talk about our companies. But when he asked folks, what is a business model? He'd never got a consistent answer or rarely got a consistent answer.
So his premise was that we need to create a common language around business models, a common language around the value proposition that we build for our customers. And in fact, what he landed on was a graphical way to represent business models that we all can look at and that we all can see. And that's what I have on the screen behind me.
This is called the Business Model Canvas, and it was created by Alexander Osterwalder. He has since spun this off into a business called Strategyzer. You'll see images that I use in my slides that have that Strategyzer label on them, and that's where they come from. I have gone through a training session with them. I've become certified in this. So it's a real tool that's available to us as entrepreneurs.
I'm going to show you three videos as we go through this talk. All of them come from Alexander Osterwalder and the Strategyzer group. There are many, many videos and many support documents out there for you to access yourself. If you just Google them up or if you go to YouTube, you'll find those so you can reference them. I would take advantage of as many of them as you can. They really do a nice job communicating what they're doing and their value proposition for what they do.
But if you look at what we have here on the screen, we have nine building blocks. And down the center, we see the value proposition. And as you're facing the screen on your right, you see the things that the customer sees, the front stage or front of the house, if you're in the hospitality industry, operations. And on the other side is the backstage or back of the house operations, those things that we have to do within our organization to support how we deliver value to our customer.
And then on the bottom two sections are the expenses that we incur as we run our business and we deliver that value and the revenues that we generate as our customers pay for our product or service.
But let's do a quick video. I'm going to let Strategyzer and Alexander Osterwalder do a quick three minute video on the Business Model Canvas.
-An organization's business model can be described with nine basic building blocks-- your customer segments, your value proposition for each segment, the channels to reach customers, customer relationships you establish, the revenue streams you generate, the key resources and the key activities you require to create value, the key partners, and the cost structure of the business model. But it's not sufficient to just enumerate the nine building blocks. What you really want to do is to map them out in a pre-structured canvas.
This is what we call Business Model Canvas, a tool that helps you map, discuss, design, invent new business [INAUDIBLE].
Let's briefly go through the nine building blocks, starting with the customer segments. These are all the people or organizations for which you're creating value. This includes simple users and paying customers. To each segment, you have a specific value proposition. These are the bundles of products and services that create value for your customers, channels described through as touchpoints you're interacting with customers and delivering value.
Customer relationships outline the type of relationship you're establishing with your customers. The revenue streams make clear how and through which pricing mechanisms your business model is capturing value. Then you need to describe the infrastructure to create, deliver, and capture value. The key resources show which assets are indispensable in your business. Key activities show which things you really need to be able to perform well.
Key partners show who can help you leverage your business, since you won't know all key resources yourself, knowing [INAUDIBLE] key activities. Then once you understand your business model's infrastructure, you'll also have an idea of its cost structure. So with the Business Model Canvas, you can map out your entire business model in one image. This works for startup entrepreneurs just as well as for the most senior executives.
NEIL TARALLO: So we're going to talk about this a little bit more in the context of how we can use the Business Model Canvas to develop and design business models as we start businesses, but also-- and I think there's even more possible impact for us after we've started our business or within existing organizations. So the Business Model Canvas and the application of it is a really strong tool for how we can grow our company. And we're going to talk about a couple of companies that regularly reevaluate business models and use them to grow. And they're companies that you'll be able to recognize very easily and very clearly.
So this is the Business Model Canvas broken down into the different quadrants, just so that we could see it and understand it a little bit better. And just a little caveat-- on the one side there where we're talking about customers, over here we have a picture of a truck. Don't mistake that for distribution. Distribution is on the other side of the canvas. It's a backstage function. Generally, I see distribution as part of key activities on the Business Model Canvas. But channels is how we actually are delivering the content to our customers. Or for me-- and if you've been in my classes, you've heard me say this repeatedly-- the channels are also traditional advertising that I might create and push out to my customers, my market segments, to get them into my social media sites and my online presence so that I can create relationships with them.
I'm sure you've all experienced when you go to a website, when you get to a company's website, all of sudden, every time you're on Google or you're online, you're getting these little ads on the bottom, right? What are those called, anybody know? That type of advertising?
SPEAKER 1: Banner advertising?
SPEAKER 1: Banner advertising?
It is a banner, but there's a very specific name for it.
SPEAKER 2: Retargeting?
Retargeting, good. So retargeting is when I go to a website, and then after I go back and do other internet searches that are not related, I will get advertisements for that company appearing on my website that I'm doing searches with. So retargeting is part of that. And it's a way, I think, that we learn to manage customer relationships using social media. For me, that's the role that social media plays in my business. And that's the role it plays in my business model canvas, how I create value, how I manage relationships once I have people attracted to my product or service.
So we break it up into these four areas. The backstage you see, the value proposition, or the value, in the center, front stage on the other side, and below, a new term that I haven't used yet called the "economic model." And the economic model, for me, are the levers that I have within my organizations that I can pull that change the way expenses happen in my company. I can manage my company by having it have more or less variable costs or fixed costs that's changing the operating leverage. And there's a relationship between my operating leverage, the volumes that I do, the income levels that I have, the margins that I have, and the revenue streams that I have. And those four areas play together to create an economic model. If you take the Business Plan course with us here, we use the Business Model Canvas extensively in that class. And the economic model is something that we spend a good part of a week or two on because it's such an important topic. So we do think about that, and the Business Model Canvas gives us an opportunity to visit the economic model and understand how those elements play together.
Any questions so far?
You use a Business Model Canvas by printing a really big one-- that's what I do-- and sticking it up on the wall and having a stack of a couple, at least, colors of Post-it notes. So what you see here is a business model canvas with Post-it notes on it, OK?
We say it's a sin to write on a business model canvas because that means you can't change what you've written. Business models change. What we learn about each of these blocks and how our customers feel about the things that we're thinking about changes. So by having Post-it notes, I can move them around, and I can change and rethink my business model canvas.
And in fact, these are a couple pictures of our Entrepreneurship Bootcamp for Disabled Veterans. If you look on the lower one here, you see business model canvases all around the room. They were up there for the entire week the veterans were with us. And they were moving their Post-it notes around. As our faculty were coming in and teaching them different things, different ideas, different ways to think about their business model popped into their head. And in between the classes, they would make adjustments and change them.
And then in the upper corner there, you see a picture of one of our graduate students, one of our MMH students, working with one of our veterans, rethinking certain parts of their business model canvas.
But at this stage of the game, each one of those Post-it notes are nothing more than guesses. We start by hypothesizing what we think is going to happen in the business model. Why is it a hypothesis at this stage? What's wrong with me just thinking about this and then rolling my business model out?
SPEAKER 3: You need to talk with your customer about what they need.
We need to talk with our customer. But more importantly, or as importantly, we need to listen to what our customers are saying, and we need to look and see what they're doing. So we use our Business Model Canvas to sketch out our hypotheses. And then we go into the market, and we test those hypotheses. And we take the information from our market. And we rethink or we re-hypothesize.
And we continue to go through that cycle until we get it right, so to speak. And technically, we never get it right because the values of our customers, the value proposition for our customers, are always changing. So this is a process that we want to continue to revisit as we go along. It's an important component of what we do. If you've taken classes with me, you hear me say that entrepreneurship is nothing more than a series of failures, highlighted by hopefully a big success at the end of all the failures.
And this is what I mean. We hypothesize. We're going to get it wrong. That's a failure, right? But we get information, and we come back, and we rethink what we're doing. And we re-hypothesize, and we go through it again.
So entrepreneurship is nothing more than a series of failures. And I'm sure you've heard all the catch phrases that are out there these days. Make sure you fail early, right? Make sure you fail fast. Make sure you fail cheaply. Make sure you fail forward, which means if you fall, fall forward, right? Because you can get up, and you just keep falling. And eventually you get to where you want to go. I think that's a pretty good analogy for this cycle of hypothesizing and reevaluating as you go along.
But we want to think about it that way. And if you think about what we're doing, we really start with this business model layer, and then we hypothesize, and then we have a test layer. And for me, it looks like this in my mind. These three business model canvasses, starting at the bottom with the business model layer, my first set of thoughts, and then my hypotheses as I go forward. And then those change. And they change as I test my market and I get feedback from my market and it comes through.
Now, as I do business model canvasses, typically I'm going to have multi colors there. And multi colors can be used for different things. They can be for different market segments. They can be for end users and customers if they are two different groups in my company or in our segments.
It can be different products-- bless you-- or services that we offer. So I can see multiple things happening on my canvas. And that's the beauty of this canvas is that it gives me a way to visualize all of these nine components and figure out ways to utilize them and have them work together.
So what is it that we test? We have to observe and listen to our customers. And this observation component is something that we tend to miss. I know when I was a student, both a grad student and an undergraduate student in business programs, I was taught market research is all about hard data. It's all about the quantitative component of what we're doing. Do surveys. Get the data back. Analyze the data. Decide what your market is. From those surveys, from research that you can do online, segment your market, and understand who your customers are.
But as I became an entrepreneur, what I really came to understand is the first step that I need to do is very simple. I need to watch people. I need to observe them as they go through their daily lives because when I observe them, what do I see?
SPEAKER 4: You can see the problems?
Problems that they experience, right? And I can see the degree to which they're experiencing pain as a result of those problems. And for me, in my mind, there's a distinct correlation between the amount of pain they're experiencing and how much money I can charge and how happy they will be to pay for that. That's a really nice dynamic. The more painful it is for you-- if my solution alleviates that pain, you're going to be happy to pay a reasonable amount of money for me. I don't have to be in a commodity market where I'm competing on price. I always want to be thinking about competing on value, the value that I deliver.
So observation is my first step. The next is listening to the folks that are out there. And that's really important because we talk about, or we say we want to go out and talk to our customers. But when we talk to them, we're asking them questions, and we're getting very specific information from them. But if I can get them talking about some of their experiences, if I can get them to tell me stories, from those stories, I can pull out problems that they're experiencing and pain that they're feeling without them even understanding it.
And this is what Steve Jobs was really good at. People say Steve Jobs had the ability to look into people's minds and see what they needed before they understood it themselves. And I'm here to tell you that's just not true. What Steve Jobs was really good at was listening to people and watching people and see the things that they experience in their lives and seeing the difficulties that they were having and using technology to solve those problems. We're going to talk about Apple at the end here a little bit and a little bit about how they solve problems and what they're doing as they go through it.
So it's about observing. It's about listening. Yes, the standard market research, the quantitative data is important, but this sets that up for me. I don't start surveying until I've listened. I don't start surveying until I've talked. Because that information sets up my surveys for me. It helps me understand exactly what I need to know on a larger scale with a larger random sample of the market than if I were to just start to do it.
And this is a really key thing here, and I think people who have been teaching business planning and entrepreneurship the right way for a long time-- and this is the way I was taught to teach entrepreneurship is that it's not an academic exercise. It's not about sitting in front of our computer and doing market research and industry research and product research and competitive research. It's about getting out and getting into the market and seeing and hearing and feeling what the people who live in those markets are seeing, hearing, and feeling. That's what entrepreneurship is really all about.
So I have a couple of questions here. "Is testing the same as uncovering the customer's needs?" So yes and no. The first iteration of the test is going to be for your hypothesis. But if we're doing this right-- this is a really good question. If we're open, and we're not convinced about our solution being the only solution-- if we're open, the market will push our concept in the right direction for us. And that's the beauty of this.
So what I tell my students in the business plan class is we don't want to build a prototype right away. There is this thought process that's out there right now that is all about building something and putting it into your customer's hands right away. If you do that, you've closed off your ears because the only thing you're going to be listening for is things that pertain to the solution that you have already thought about.
So for me, the product in the market test in that sense comes later. But if I'm open to that, I will uncover new problems or different problems or just little changes on the problem as I saw it. Each time I do that, I get closer and closer to what I call a market-driven opportunity, which is the home run for me. A market-driven opportunity is, very simply, me being able to identify a group of customers large enough to provide a return on my investment who want to pay for the product or service that I'm offering to solve their problem. That's the home run. That's what I always look for. So that's a great question-- thank you-- from online.
And then the next question is, "when the business is, when the business is brand new," maybe--
CRYSTAL: "When the business's brand is the person, how do you suggest [INAUDIBLE]?"
NEIL TARALLO: So we were talking about brand and personal brands. So when the business is the brand, my individual brand-- and I'm going to guess they're talking about consulting, maybe, and being an individual consulting house-- how do you promote the model? For me, it's the same thing. It doesn't matter if it's me or if it's 10 mes. Wouldn't that be horrible for all my students? That's a horrific thought. But it's still about the value proposition. It's still about what value do I deliver? It could be a big company, or it can be a one-person operation. And it's always about what value do I deliver to the market?
If you continue to think about that, if you make that the foundation of everything that you do as you go forward in entrepreneurship and in growing businesses, you're going to be all right. So I think I answered that correctly.
"So in essence, tips, resources, and information would be valuable product"-- can you help me with that one, Crystal?
CRYSTAL: It's the-- "so in essence, tips, resources, and information would be the valuable product? For example, writing a blog is a product to represent the individual."
NEIL TARALLO: So the question was, can we think about a blog as a way to deliver value? I'm kind of paraphrasing it. And the answer is, absolutely. There are some blogs out there-- you're all familiar with them, right? Anybody name a blog that makes a lot of money? That you visit? Seriously.
SPEAKER 5: HuffPost.
NEIL TARALLO: Pardon?
SPEAKER 5: Huffington Post.
NEIL TARALLO: Huffington Post. Good. That's a blog. They make a lot of money. And there are different ways that we make money. I'm aware of a blog that is written to help mothers think about travel. And they make money by blogging and mentioning points of travel.
So there's different ways to create value and to monetize that value. That economic model that we talked about at the bottom of the Business Model Canvas is how we take our concept, how we take that value that we provide for our customers, how we take the solution to their problems, and we monetize it. Very simply, that's how it is. Thank you for those questions.
So it's about observing. It's about listening. And it's lastly about talking. I try to hold off on the talking part for as long as I possibly can because as soon as I start asking questions about my solution, I've really kind of shut down a little bit of what's going on. That should happen over time. But early stages is about observation, and it's about listening. We call that ethnographic research. And if you are interested in that, we teach a course here at the Hotel School called Opportunity, Recognition, and Ideation. And our students actually go through this process of listening, watching, and talking to people to uncover the value proposition in concepts that they have.
So the first step is the value proposition. And it's really important. And if you look at the Business Model Canvas, the value proposition is really all about your customers and your value. And what Osterwalder has done through Strategyzer is they've created a second canvas. And that second canvas is called the "Value Proposition Canvas." And it breaks these two components down into individual components that have some very specific things that we want to look at. And I have another video for you that we'll play that'll help understand that a little bit better.
-Let's look at the Value Proposition Canvas, a tool that will help you design, test, build, and manage great customer value propositions. It's like a plug-in to the Business Model Canvas. The tool is based on two elements of your business model, the customer segment who you intend to create value for and the value proposition which you believe will attract customers. With the Value Proposition Canvas, you can map out both in more granularity and show the fit between what you offer and what customers want.
The customer segment profile describes the characteristics of your customers in more detail. The profile is composed of the jobs your customers are trying to get done in their work and in their lives, the related pains outlining the negative aspects they hate or would like to avoid, and third, the gains describing the positive outcomes and benefits which your customers would love to have.
Now, let's look at the profile in more detail. Jobs-- describe an important issue your customers are trying to solve in their work or in their lives. It could be the tasks they're trying to perform and complete, the problems they are trying to solve, or the needs they are trying to satisfy. And then jobs can have a functional, social, or emotional intent. Now, some jobs will be crucial to the customers. Others will be trivial.
Then the second aspect here are the pains describing anything that annoys your customers before, during, and after getting a job done. This could be undesired costs and situations, negative emotions, or risks. And again, some customer pains will be severe, others light.
And the third aspect of the profile are the gains describing the outcomes and benefits your customers require, expect, desire, or would be surprised by. This includes things like functional utilities, social gains, positive emotions, and cost savings. And again, some outcomes and benefits will be more relevant to customers than others. These three elements of the profile describe the customer characteristics that you can observe in the market.
Now, let's look at the value proposition map, describing the features of your value proposition, which you are designing to address your customers' most important jobs, pains, and gains. The map is composed of the products and services your value proposition is built around, the pain relievers outlining how your products and services alleviate customer pains, and third, the gain creators describing the positive outcomes and benefits your products and services create for your customers.
Now, let's look at the map in more detail. First, the products and services simply outline the bundle of products and services that you're offering customers to help them get a functional, social, or emotional job done and to address their pains and gains.
Now, the second aspect here, the pain relievers, make explicit how your products and services will alleviate specific customer pains before, while, and after the customer's trying to get a job done. They show which of all the customer pains your value proposition is addressing by eliminating or reducing them.
And the next aspect here are the gain creators. They make explicit how your products and services create customer gains. They show which of all the customer gains your value proposition is addressing by creating benefits and outcomes.
Now, you have achieved a so-called Problem/Solution Fit when the features of your value proposition map perfectly match the characteristics of your customer segment profile. When the market validates this match, and your value proposition gets traction with real customers, you have achieved a so-called product/market fit. But don't forget-- successful businesses have more than just a great value proposition. They have a great business model that makes a customer value proposition possible.
Now, do you have what it takes to design great business models and value propositions with pain relievers and gain creators that match real customer jobs' pains and gains? Class dismissed.
NEIL TARALLO: So what we've done here was we've broken out these two sections of the Business Model Canvas. We've broken out the customer segments and the value proposition, or the value segment. And interestingly, I think, if you think about this, typically what folks are doing, what entrepreneurs are doing, is they come up with what first? What do they do first?
SPEAKER 6: Come up with an idea.
NEIL TARALLO: They come up with an idea. They come up with a product, right? And then they try to figure out how to make that work in the market. I started in the world of venture capital and angel investing in the early '90s. And our fund, our partnership took inventions and science and services that were created on university campuses-- we started here at Cornell actually-- and because the folks who created these great products couldn't figure out how to sell them, how to monetize them. So we actually started by doing that. It's a difficult thing. And through that process, inevitably we would be doing market tests, and we'd hear from the market and saying, this is really good, but we wish it could do this. And so we had to go back and have the scientists make changes for us and then go back into the market.
We actually got into this cycle eventually. But think of how much time we spent and how much money we spent-- or the scientists spent, or the university spent-- developing this particular product without understanding the market fit. And I think it's really an important thing to do. Be open. Listen to what your market says. And I'm not saying you should wait a long period of time. You want to get as much information as you can. And you want to get a prototype into your customers' hands as quickly as possible. But you want to be smart about how you do it. It's not just about building something based on your own idea and then putting it into market to see what goes on.
So what we're doing here is we're lining these up. For me, whenever I can, I start with customers. My whole world is about customers and students. You are my customers. I think about the value that I deliver to you all the time. I don't come to class and force-- and if you're here and one of my students, you know this-- and don't force a topic to you because it's not-- as an entrepreneur, I'm not thinking right if I think I know what you need if you're my customer. So I give you a topic. But you tend to push the discussion that we have over the course of the class in the direction where you're looking for value. And I had some good examples of that, actually, this week in all three of my classes. So that's the approach I take, not just in business, but in how I think about delivering value to you in the classroom.
Start with the customer. Listen to what he or she is saying-- or the company, if it's a company that's a customer, if you're a B2C company. Understand the pains. And understand the expected gains as you go along. And let's break this down just a little bit more because I think it's a little confusing sometimes. When they talk about customer jobs, I tend to think of this as tasks, things that I need to do as I go through my day. And actually, on my way to campus here to give this talk, I have a contractor working one of my buildings, and he said, hey, I need you to pick me up a 24 inch by 12 inch grate, OK? So this is a task I have to perform. I have to go and pick up this grate. What are the pains that you think I'm going to experience as I go to do this? Where am I going to go? What's available to me here in Ithaca, New York?
SPEAKER 7: Lowe's.
NEIL TARALLO: Lowe's. So what are my pains when I go to Lowe's?
SPEAKER 8: Limited selection.
NEIL TARALLO: Limited selection. What else?
SPEAKER 9: Lack of customer service.
NEIL TARALLO: Lack of customer service. I could scream as loud as I want, and nobody's going to come. And when they do, they probably don't know a whole lot about grates. What else? What else am I going to struggle with? What other pain am I going to feel?
SPEAKER 10: The lines?
NEIL TARALLO: Maybe long lines, right? Maybe not many cashiers open, so the lines will get longer. Good. What else?
FELIX: Distance driving.
SPEAKER 11: Taking it to your car.
NEIL TARALLO: Taking it to my car, carrying it to my car. Geez, I hope I can do that. It's only 24 inches by-- what did you say, Felix?
NEIL TARALLO: How long I have to drive to do it. So these are the pains I'm going to experience. There's probably more, right? What are my expectations as I go through the actions of performing this task? What do I want to have happen? What is successful for me?
Go ahead, Tomas.
TOMAS: Being able to easily find it.
NEIL TARALLO: Easily find it, OK? Have you ever been to Lowe's looking for something like this? I don't know where to start. I don't know where to start. Justin.
JUSTIN: --help you find exactly what you need.
NEIL TARALLO: If they can help me find exactly what it is that I need. Good.
SPEAKER 12: Lowe's actually having it in stock.
NEIL TARALLO: Actually having it in the size that my guy says I need to get it for him by, right? And it's a good thing he doesn't give me a list because invariably what's going to happen is I'm going to go not just to Lowe's because they're not going to have everything on the list that he wants. Where else am I going to end up going?
SPEAKER 13: Home Depot?
NEIL TARALLO: Home Depot. We didn't think about that we started talking about it, though, right? Would you have seen that if you watched me? That's kind of an interesting twist on it, right? If you ask me these things or if we talk about them, your responses and what you think about it and what you see is going to be narrowed. It's going to be skewed by that, by the questions that I asked you. But if you watch me, you see me go into Lowe's. You see me come out with my head down, maybe shaking it a little bit, going to my car, and driving in the other direction down to the Home Depot to see if maybe they have it. And then what's the worst case scenario? What's the most painful thing?
SPEAKER 14: [INAUDIBLE] online?
NEIL TARALLO: They don't have it. But the one at Lowe's would do the job. So then I end up having to do what?
SPEAKER 15: Go back?
NEIL TARALLO: Go back to Lowe's, OK? These are the pains that people experience as they're doing tasks. And that's what we want to be thinking about. If we can observe them first and then get them talking about it, we'll get information that may change the way we think about our solution. So we break it down at that level, OK? Don't think about jobs that we do necessarily, like a part of our career, but tasks, things that we do on a daily basis.
What pains we experience, what gains we're expecting, and then on the other side of that, we start to develop and design solutions to these problems. We start to design things that are going alleviate the pain that they're feeling. That's a pain pill, by the way, up there. So we have these pains. What are the pain alleviators that we have? And are we addressing each one of the pains that our customers have? The extent to which we do that means that we have a better quality solution.
And the same thing is true for gains. If I have expectations that I've seen or heard or asked my customers about, if I meet all of those expectations, I'm really doing a good job. But I may also be able to find expectations that I can exceed for them, things that they hadn't thought about. And that makes my solution, the product or service that I create, very, very compelling as we go through that. Are there questions on this? Sometimes this gets a little confusing. I do have a question from online, and I'll get to that in just a second.
So what we're trying to do is line up our pain creators and our pain alleviators and our gain creators and the actual gains that our customers expect. And to do that, when we do that, we have a nice fit, and things start to make sense for us. We do this through that cycle of testing and hypothesizing and retesting. And we continue to go forward. So we want to map that. We want to understand it. We break this out. I tend to start with this first as I think about the Business Model Canvas. But that's not always the right way. And I'm going to talk about that in just a second.
So just some different ways to think about customer pains. It's not always the immediate things. There could be social implications to what we do, to those pains. There could be other dynamics that come into play. And these slides will be posted so you'll be able access them, and you can go through these and see them for yourselves.
The same thing is true for gains. The gains may not always be obvious to us. They may not be very tangible. But they could be very compelling for our customers. And it's important to observe and to listen and to talk to those customers to understand them and to find out what's going on. That's stage one, OK? So that's the early part.
And the second mistake that I see folks making when they use the Business Model Canvas is they simply put these Post-its up, and they say, here is my business model. I'm ready to rock and roll. I'm ready to go. But we really want to be thinking about the second stage. And the second stage is connecting those nine building blocks and being able to tell a story about how they all come together.
Now, if you go online and you look at the resources that Strategyzer provides to help you understand the Business Model Canvas and the Value Proposition Canvas, they use an example for Nespresso. Are you all familiar with Nespresso, right? They were the first machine with the little cups that come separately. Everybody else followed after that.
So just to keep it in the same context so that when you go online and do your own research to understand this better, you'll still be using the same example, let's look at this example as told again by Alexander Osterwalder.
-My name is Alex Osterwalder. I'm the lead author of Business Model Generation and co-founder of Strategyzer.com. I'm going to walk you through the business model of Nespresso, a company that sells coffee in the espresso business.
So let's look at the value proposition first. It's composed of two products, the Nespresso machine and the pods that go with it. And we're going to look at the distribution strategy that Nespresso has. They sell the machines to retail to households, which means they earn a one-time transactional sale from selling the machine. Most of that money goes to the key partners, the machine manufacturers who they work together with.
Then for the Nespresso pods, they have a totally different distribution strategy. They only sell the pods through their own channels. Started out with mail order and call center. Then they build Nespresso.com. And today, in the biggest cities of the world, you'll find Nespresso stores as well. This is interesting because it meant that they had to build distribution channels as a key resource in their business model because this is the first time that a Nestle-owned company sells directly to households.
Now, why do they use different distribution channels for the machines and the pods? Well, they use retail because it has the broadest reach possible, because they want to get the machines into your household. Once you have it in your house, you're actually locked in because you can only use Nespresso pods, that so-called "switching costs" which prevent you from going to another machine manufacturer. And they defend that through the patents that they have in the key resources. And some of those patents actually expired last year, which means they need to renew their business model to a certain extent.
Now, once you have the machine and you're locked in, you're going to have to buy pods from Nespresso, which means they earn money from repetitive pod sales. They create so-called "recurring revenue." They change an entire industry from moving it from a transactional business to a repetitive business with recurring revenue. So interestingly here, they have recurring revenues. They have direct sales with higher margins. And they ask you for five to six times more for the coffee that you pay. So they get people around the world to pay much more money for the same amount of coffee.
Now, let's look at the left-hand side of the Business Model Canvas to see what they need to have to do what they plan to do on the right-hand side. First of all, they need coffee. So they work together with coffee growers. And they try to source some of the best coffee in the world, which they put in the pods. And the pods are something that they manufacture themselves. So production of the pods is an important key activity. And they have production facilities to do that. They churn out 12 billion pods every year, which is one of their main costs.
Another important activity and key resource and main cost is marketing and branding. Obviously, when you're in consumer goods, you need to put a lot of money into that. And the last piece here that's interesting is that because they sell directly to households, a decision made on the right-hand side of the canvas, they had to build up business-to-consumer distribution logistics, which we find in the left-hand side of the canvas.
So now we have everything that's important for the success of Nespresso on one piece of paper.
And interestingly, when Nespresso started out, they had a totally different business model around exactly the same product, and that almost went bankrupt. So it's only after a couple of iterations of the business model that they were able to find the business model that you see on this piece of paper and that led to a multi-billion dollar business. So the difference was not the product alone. The difference were all the pieces here on the Business Model Canvas that led to the success of Nespresso.
NEIL TARALLO: So this is not that hard to figure out, right? We could think about that. And if you look at the Canvas as they put it together here, we have two different colors. What do those two colors represent?
SPEAKER 16: The machine and the pods?
NEIL TARALLO: The machine and the pods. Anybody catch that number? How many pods they distribute every year, they sell every year?
12 billion pods. Did you catch that number? That's pretty amazing.
What a lot of folks don't know is that when Nespresso originally came to market, this was not their business model. And in fact-- Nespresso is a Nestle company-- Nespresso in its own component almost went bankrupt. They were about ready to pull the plug on it. So here's this hugely successful, today, concept, this hugely successful business model that really changed the way we think about household coffee to a large extent that almost did not make it. And when you go back and look and do a little research on this, what you find is that the Nespresso machine was created and invented by somebody at Nestle. And they had their own idea of what problem their machine would solve. Anybody know what that was by chance? Their first market was-- I'm sorry. Go ahead, Beth.
BETH: Wasn't it companies' offices?
NEIL TARALLO: Yeah, large office buildings. That was their initial business model, that they were, in fact, going to sell the pods and the coffee makers-- and the machines-- directly to the large office buildings. And they were going to use a distributor to do that. They were going to use a sales company that represented a number of different companies.
So if you can imagine, what does that sales call look like? As a salesperson, I go in, and I go to [? Tahi ?] who's the purchasing agent, and I say, what do you want to buy today? And I've got this big book of equipment, of things that I can sell to her. Am I always going to be pulling the Nespresso machine out? No. What's going to motivate me to do that? Commissions, right? Incentives that I have-- good-- to do that. So that model didn't work for Nespresso. But when they rethought this and when they applied the elements of the Business Model Canvas to it and they listened and watched customers, it became very clear to what was going to happen. And we have a very different outcome because of that.
So Nespresso got it wrong. And if you look out there, there's a lot of companies who are getting it wrong because they're not focused on that magic word. They're not focused on value and what value they're creating for their customers, OK? So that's step two. Step two is getting all of these different nine building blocks to work together and to be able to tell the story, OK?
That's your business plan, by the way. And that's the second half of the business plan class for us. It's taking this business model canvas, reflecting on it just a little bit, and writing about these nine building blocks. And I could talk to that a little bit more specifically a little bit later on here.
Stage three, though, is really understanding how your competitors are using their business models. And I have a question from online-- what happens if there is competition? What happens if there is somebody out there that's already doing what I'm thinking of doing? And my answer is, start working on your business model canvas. And start observing and listening to customers. And you may find that the people, the customers, the target market that your competitor is looking at may not be at the right ones. You may find that the product or service that they are delivering may not be alleviating all the pains or hitting all those gain points that the customers are looking for.
So rethink that business model. I think that competition and competitive advantage as we move into the future is going to become more and more and more about business models and less and less and less about products, technology, and service. All of those are components of our business model, clearly, and they're important. But we need to think about the model before we start.
So what business is Apple in? If you've been in my classes, I think we've talked about it this semester already in all three classes. What business model is Apple in?
SPEAKER 17: Problem solving?
NEIL TARALLO: Solving problems, right? And they solve problems by looking at what the market needs and applying technology that they have expertise in to solve those problems. If you look at their products that they offer across the board in services, it's easy to say it's all technology, or it's all computers. But if we really start to break them down, it was solving a problem in the music industry. It was solving a problem in graphic design and video. It was solving a problem in phones. And as these problems become less and less significant to consumers, Apple lets those products go away. Anybody buying any iPods lately? No, right? So Apple just let's that quietly disappear. There will come a point in time, and I know this is hard for you to believe, but my bet is that at some point in time, the iPhone will disappear because some other technology, some other problem can be solved by Apple that's going to take its place.
If you look at all of Apple's products, you can really see exactly what problems they're solving with those products. And I think that's an interesting way to think about our businesses as we go along. Think about it, too-- and I want to emphasize this again. It's not just about a new venture creation, but it's about existing businesses that we have.
How do businesses, how do companies grow in today's world? There's really two ways. How do they grow? Three ways.
SPEAKER 18: Acquisitions.
NEIL TARALLO: Acquisitions. They buy other companies, right? What else do they do?
SPEAKER 19: They expand into complementary market areas?
NEIL TARALLO: They expand into complementary market areas. Whew, that's a long one for me. What else do they do?
SPEAKER 20: Innovate.
NEIL TARALLO: They innovate. They come up with new products, new technologies. If they're doing it right, they're looking for problems in the market, and they're solving those problems using their core competencies and the expertise that they have within the organization.
That's why entrepreneurship is becoming so interesting to the folks who are coming to our campuses and recruiting for jobs, not because you're going to start a new company for them, although you may sometime. But the elements that we talk about here, the tools that you get learning about entrepreneurship here at the Hotel School and elsewhere on campus apply in large organizations as well.
So just to make this point again, the Business Model Canvas is a tool. And I'm being very specific about this for a reason, and I'm going to talk about why. It's a tool that helps us discover customers. It helps us understand the value that we're providing for those customers and where it meets. And it works just as well for nonprofit and social ventures as it does for for-profit organizations. It works just as well for service industry as it does for manufacturing and technology.
Sometimes it's a little bit harder to make those connections. When you have a tangible product, I think it's a little bit easier to make these connections. When you have a restaurant where it's all about service, I think it's a little bit harder to do. But my premise is-- the reason why restaurants fail at the rate that they do is because they don't understand and explore the value proposition that they're delivering to their customers. It's a hard one to figure out. It's a hard one to crack. And I haven't done it yet, to be very honest with you. But I think there's really an important thing to think about there if you're in the hospitality industry. Before we open a restaurant, what is it that we're delivering to our customers, and how do we know that there's value there?
So it's not a replacement for a business plan. I want to emphasize that. It's not a replacement for a strategic plan. And it's not a replacement for a marketing plan. Be careful of the shiny new objects that are out there. There are a lot of them right now. The big catch phrase is, burn your business plan, because business plans have no value. To my veterans and military men and women who are listening, we know and they have taught me this-- there's this really famous quote from Dwight Eisenhower that the folks who say burn your business plan use repeatedly. And that quote is, "No plan survives first contact with the enemy." And they've twisted it a little bit to say, no business plan survives first contact with the customers. That's absolutely true. But if you read the entire talk that Dwight Eisenhower gave as general, he said, "No plan survives first contact with the enemy, but we plan so that when we make first contact, we can change direction and change our plan."
That's why we write business plans. That's why we think about strategy. We think about the process that's part of it. Your business plan, the written business plan-- and you hear me say this in my business plan class-- really has little value at the end of the day. But that process that you go through is what's really important and what gives us the ability to understand our environment and be able to change when we're out there because even if we do this business plan canvas correctly, we will fail the first time that we interact with our customer in the marketplace. And we need to be prepared to change. And that process lets us change.
Now, what they're all harping about is that in the past, in many schools, business planning was taught as an academic exercise where you sat behind a computer, and you did your research. And over the course of 15 or 20 weeks, you wrote a business plan. I was never taught to teach business planning that way. I was taught to teach business planning-- and I started teaching it in early 2000-- to talk to our customers, to get the business plan written and understand the environment that we're going to be competing in as quickly as possible, and to move forward to launch of the business, not so much an academic exercise as an experiential exercise. But the research that we have today about entrepreneurship and starting businesses can help you shorten the time and the number of failures that you have to go through as you iterate through the market. And it's important that you understand those kinds of things. So be careful of those shiny new objects.
Remember, you can't create a sustainable company with just a business model. You can't. What's this business model canvas missing when you think about the bigger picture of running a business?
SPEAKER 21: Team.
NEIL TARALLO: Team, human resources, right? Good. What else?
SPEAKER 22: Competitors.
NEIL TARALLO: Competitors. We don't really think about the industry that much. Good. I think anybody who starts a business without truly understanding your competition and what business models they are using really is doing themselves a disservice. So that's why we think about business plans. They give us the big picture. It's why in many business schools, the business planning class is now the final class that you have to take. It's the capstone class. Because it brings together all the elements of things that students have been learning about into one class and lets you execute on them. And that's really important because none of this matters until you execute, right? It's how we execute this plan, how we execute this business model that really makes a big difference.
So it's an effective tool in the process of discovery. It's part of the process of starting new businesses. It's part of the process of growing new businesses. But it is a tool. It is not the end all. So be careful. When you read books or you hear people talking about getting rid of business plans, not doing business plans, all you need to do is 20 minutes on this Business Model Canvas, and you're ready to start your business. Be careful about that, OK?
Questions from the audience? And I have a couple from folks online. Any questions in here? It's good thing I have folks online. So question-- "Do you think there is value in experimenting with the Canvas with different business models for the same product or solution?"
For me, that would be too confusing. And it really isn't the right approach because what I want to be doing is taking direction from my markets. So it really-- I don't want to say it doesn't matter where I start, but I just need to start, right? And if I'm running multiple business models, I'm still going to be getting the same information. And if I'm open to change the way I should be, it's very likely that those two are going to start to come together eventually. So from my perspective, I would start with just the one business model. Crystal, any others that we have? I think I have all of the questions taken care of online. Anybody else? Yes.
SPEAKER 23: How often do you think you should be doing this kind of business model. Is it something that you would only recommend doing before starting a business? Or if the business is already established, would you recommend doing it every few years?
NEIL TARALLO: Good question. So the question is, how often should we revisit the business model or this process? If you haven't done it-- if you started a business, and you haven't done it, then by all means, I think you should do it because you'll understand more about your customer as you go along. And you'll understand other opportunities within your business.
One of the things I really like about this process that we go through is it helps me identify additional revenue streams that my customers are looking for. So when I think about revenue and revenue drivers and revenue streams, I never want to have one revenue driver. Any company that has just one product or one service is destined to be out of business down the road. Multiple revenue streams can help you in many, many different ways. We learn about those when we study economic model for your business in the business plan class. But that's a great question.
Also, we think about this as part of our growth strategy. And I'm sorry, but I am a planner. I believe in going through this process on a fairly regular basis. And if you look at growth and starting up, we start up growing businesses in a very chaotic state. It's about how quickly can we respond to the market? How fast can we change here? As we grow quickly, we need to hire people as fast as we possibly can and get them trained to get in. When people talk about serial entrepreneurs, they talk to people that are addicted to that chaotic atmosphere. I consider myself one of those addicts. It gets boring after the company's been started.
But the trick for entrepreneurs, and kind of the double-edged sword, is as we grow, we want to move away from those chaotic decision making to planning and to being a little more premeditated about what we do when running a business. And that's when we start to think about growth. And every time I start to think about growth, every time I've had a company that gets there, we revisit this value proposition. And we start to look for additional things that we can do that don't jeopardize our core competency but give us an opportunity to extend our business offering out. Nike is really, really good at this. And we talk about Nike and study Nike when we talk about the business plans. Somebody else had a question.
SPEAKER 24: Yeah, I have a question followed by another question.
NEIL TARALLO: I charge you for a second questions.
SPEAKER 24: Yeah. So just think about a problem that people are experiencing every day. I think it's like a type of problem that people really wish would be resolved and then a type of problem that people-- it would be nice if it's resolved. So, like, do you think there's a degree of, like, importance of problem? And if so, how do we go about to measure that because I think intuitively we know, like, wow, this is a huge problem. But what are the factors that you look for that make sure that you're hitting a really important problem?
NEIL TARALLO: Good question. So the question-- and I'm just going to paraphrase it for the folks who are listening in-- is to-- and correct me if I get it wrong-- is sometimes problems are pretty obvious. So we inherently know that there's a problem there that needs to be solved. How do we figure out the degree to which it's a problem for customers? Is that basically what you're asking?
SPEAKER 24: Yeah. How do we figure out [INAUDIBLE]?
NEIL TARALLO: So to me it's about the pain. And it's about getting my customers to talk and telling stories. Getting customers to tell stories is really an art form that is so critical for us to really crack this part of it. Because through those stories, we really get a visceral understanding of what they're experiencing and what they're feeling as they tried to deal with this problem. And the more frustrated they are over it, the more I know my solution makes sense. And so that's where I try to think about that. The second question you had. You said you had two questions?
SPEAKER 24: Yeah. [INAUDIBLE]
NEIL TARALLO: I hit them both. Good. Somebody else in the room.
SPEAKER 25: What if the pain doesn't exist in the sense that the customer doesn't realize it exists until they try to run and realize, oh, wow, it's really hard for me to [INAUDIBLE]? How can we go about ensuring that visible pain is actually real?
NEIL TARALLO: See, but it's always there. It's just how are we getting the information from the marketplace? So the classic analogy we use in entrepreneurship for this is if Henry Ford went and asked somebody, what can I do for your transportation? How can I make your transportation better? People would say, I need a horse that runs faster, eats less, and could go longer distances, because they have no context for it.
But if Henry Ford sat down with somebody and said, tell me about the last trip you took. And they start saying, well, you know, I got on my horse, and we rode down the road, and we had to stop 10 times, and it took me forever to get there, he starts to understand the level of pain that they're experiencing.
And that's kind of where you want to be. It's always about letting your market give you the direction. The art form, for me anyway, is how we can get that information. That's the secret for it. If you survey people, you're not going to get the answer to your question. If you ask people questions by having interviews with them, you're not going to get the answer to that question. You have to get them talking, and you have to get them telling stories. And those stories let me pull these little nuggets of information out that give me the indication there's a problem and the extent to which they're feeling it.
And then I can start to catalog those experiences that they're having. And as I catalog those experiences with multiple people, I start to narrow down the kind of conversations I want to have. And I start to broaden the scope of my research. Eventually, I get to asking questions and doing surveys and doing focus groups. But the real revelation occurs when people are talking to me about frustrations. And they're not going to say what the problem is. Because you may have a technology that solves their problem. They just don't know that technology exists. Does that make sense?
Good. So online-- "should you talk to customers to validate your business model before starting? If so, how do you do that?" So if you came in late, it's about this series, the cycle that we go through, of hypothesizing what our business model should be and then going back and testing it into the market, getting information, and re-hypothesizing it, and doing it over and over again.
And I also want to be careful here, too, not to make you think that the only way we could provide value and give ourselves a competitive advantage is through the products that we create. Walmart created value on the other side of the Business Model Canvas. Walmart created value in key activities through their distribution. They weren't always the biggest retailer in the world. They didn't always have the buying power that could force manufacturers to lower their prices. They started out by changing the way product was distributed to stores. And they saved so much money in expenses, in the cost of distributing the product to their stores, that they were able to lower their prices.
So we can look for different ways to create value in different areas of this. We should focus on customer and value proposition. But those are not the only places that we could do that. I think, personally, that operations are an area that we tend to overlook as we're planning our business and creating business models where there is a potential to create enormous value and to create a big competitive advantage for ourselves. So don't shy away from that backstage operations or some of the other things that are not right in front of us all the time.
Please talk about competitors. We've got that. "What if your customer tells you what they need? Can you start a prototype then?" Well, sure, I think you can. There's no question about that. If they tell you what they need, then you could start a prototype. But before I think about that, I want to think about the scope, what the opportunity really is. How many people are experiencing the problem that they're experiencing? How many people are feeling the pain that they're feeling? And is it a large enough market for me to start a company around and build from that? Great.
One more question online, and then we'll call it a day. "Do you have to work the Business Model Canvas differently if you are addressing a product that deals with true customer needs versus customer wants, like luxury products?" So for me, it's all one in the same. I'm just talking to or listening to a different group of customers. There may be a customer that's very satisfied going to a Marriott Courtyard. But if I talk to the Marriott Courtyard people all the time, and Marriott Courtyard is the only opportunity in the marketplace, somewhere along the line, somebody's going to say, I really want to be waited on hand and foot. I really want to be pampered. I want to have a five star or four star restaurant in the hotel. I want a little piece of chocolate-- I want a big piece of chocolate-- on my pillow every night.
So I get that by talking to them, by listening to them, by getting them to tell me stories, and I figure that kind of stuff out. So to me, it's one and the same. If you're looking for a high end, it just means it's a narrower market. My value proposition needs to be stronger. And I need to be able to justify the expense of being in a smaller market where I'm going to have fewer number of sales. They have to have higher levels of profit.
Thank you, everybody. It was great having you here. Thank you to all my students and everybody else who came tonight. I appreciate that very much. Thank you to everybody online.
Look for more opportunities like this from the Pillsbury Institute. We have a lot of really wonderful people who can give you a lot of great information. Have a great night.
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The Business Model Canvas is a strategic management and entrepreneurial tool that allows you to describe, design, challenge, invent, and pivot your business model. But did you know that it can also help grow your business, conduct a competitive analysis, and conduct ongoing market evaluation?
Learn the basics, as well as more advanced applications of the Business Model Canvas, from Neil Tarallo, senior lecturer and Pillsbury Institute Faculty Ambassador at the Cornell University School of Hotel Administration.