5 mistakes everyone makes when building their Lean Canvas

I love running workshops. It's a passion of mine. You start off with setting the theme, or topic for discussion, and then you let the magic happen.

Last week, I was called in for a 2nd workshop on the Lean Canvas. The workshop was held in Nazareth which is in the north of Israel. Now, I live in the center of Israel, in a small city called Ramat Gan. Nazareth is about 100 km north of Ramat Gan and on a normal day, this shouldn't take longer than an hour and a half drive. But, as the workshop was scheduled to start at 6pm, I had to leave about 3 hours earlier to allow time for the heavy traffic. almost 3 hours!? That's crazy.

Photo: Downtown Nazareth. A beautiful place with G-R-E-A-T Shawarma!

For the past 2 years I've been giving back to the Israeli entrepreneurship eco-system by giving free lectures on Business Models and both the Business Model Canvas and the Lean Canvas. Did I already say that the Lean Canvas is my favorite? :-) I explained why in my previous post.

Lean Canvas first timers

Back on topic. Last week. I had a group of about 8 aspiring entrepreneurs who all have great embryonic ideas. I've met these guys before, about 2 weeks ago when I first exposed them to the Lean Canvas technique. This time, the plan was to go through their homework and together as a group, refine one canvas prepared by one of the entrepreneurs and drill down to a specific segment.

One of the guys, Maroon, had a great venture idea in the travel industry. Now there is another over saturated market, but nevertheless, a challenge. How do we niche an early idea? How do we make an idea into a compelling proposition?

In this post, I will address some of the misconceptions that came up during the workshop. This is important for anyone looking to describe their business model using the Lean Canvas.

Ok, a quick refresher on the Lean Canvas. The Canvas has 9 sections, each addresses key aspects of the business model.

In this post, I want to focus on the 5 main mistakes made while filling out this canvas.

1. Customer Segments contain real company names

It's natural to think about specific companies when you think about customer segments. However, this section includes only segments and sub-segments. A market segment is an identifiable group of individuals, families, businesses or organizations that share one or more characteristics or needs. The basic criteria of a market segment are:

* Homogeneity - common needs within the segment

* Distinction - unique from from other groups

* Reaction - similar response to marketing and promotional offers

In addition to the definition of a market segment, there is a process called market segmentation which is a strategic process whereby a broad market is divided into smaller, clearly defined market segments. It is important to distinguish a 5 main types of marketing segmentation practices:

A - Geographic Segmentation - a first step in international marketing and includes segmentation by countries, cities, states, religions, neighborhoods etc. This is normally followed by Demographic Psychographic Segmentations. You should understand your geographic segmentation early on when defining your business model. As an example, if you're planning on developing a mobile app that uses geo-location features to discover or acquire users, you would be segmenting based on local neighborhoods. Take Gett (GetTaxi). Their core segmentation is based on major metropolitan cities where short distance daily commuters is in high proximity and demand. Tools such as Google Analytics or other analytical tools provide real-time and historic statistics on these stats out-of-the-box.

In your canvas, you might want to be as broad as San Francisco or as specific as within a 2km radius of local neighborhoods in large metropolitans.

B - Demographic Segmentation - the 2nd step in segmenting is by age, gender, occupation, educational level etc. Assuming your start-up addresses a specific local market, say San Francisco, you would then want to further segment this market into the various age groups, genders etc.

Taking the Gett example above, we could specify the segment as busy professionals, predominately males, aged 25-40 in large metropolitans, working in the city center or within a 3km radius of it.

C - Behavioral Segmentation - this practice divides consumers based on purchase patterns, frequency of purchase, usage patterns and brand loyalty. The best example here are the Apple loyal fans. Apple had created a strong consumer brand-loyalty which on its own represents a market segment. Another good example is a home-exchange network, a website such as homeexchange.com. This segment addresses people that are open to and familiar with exchanging their homes with others on a frequent basis. Yet another example are people that prefer and often choose to buy and eat organic food.

D - Psychographic Segmentation - segmentation based on lifestyle and personality. The perfect examples for this is the GoPro camera which primarily targets the Extreme sports lovers. These days, GoPro had diversified and now targets additional segments, such as party-gowers.

E - Segmentation by Benefits - segmentation by benefits sought after by consumers. Easier way to explain this is by thinking of what is important to you when you think about your car. Is energy efficiency important? safety? low consumption?

F - Cultural Segmentation - used to classify markets according to cultural origin. Cultural origins provide strong insights into consumer customs, perceptions and general behavior.

When writing your customer segments, keep these practices in mind, it will help you get a good start on your segments and a better understanding of your target audience.

  

2. The Solution section includes the product's benefits

The Solution section must include the specific solution components. For instance, if your end product is a mobile app, then "Mobile App" should be described in this section.

It's easy to get confused with the Value Proposition section as people tend to describe the solution by its benefits. This is not the case here. You should also try and include up to 3 of your top features of the product or service you're offering. This will help clarify what it is all about.

Let's use the Gett example from above. The Gett company offers a Mobile App solution which includes Taxi ordering from you mobile, Auto-receipt generation and forwarding by email and a rating system for drivers.

3. Unfair Advantage section contain weak advantages

This one is one of my favorites. The unfair advantage refers to something that will not only make you stand out from the crowd but also something that will be VERY hard to reproduce by existing or new competitors. It is very important to not confuse this section with I would call 'standard' advantages.

Example. If you're planning on creating a travel planning app that includes local guides providing content and selling travel packages in the app, you might consider adding "Local Guides" as your unfair advantage. However, this is not the case. Partnering up with local guides for your venture could be easily done for another. Getting local guides involves using effective business development activities.

The idea behind unfair advantage is that you need to specify something unique and solid that will keep your competition behind as long as possible. Here are some guidelines on what an unfair advantage could be:

* Official / Exclusive Distributor - normally achieved by signing an agreement with an overseas exporter to solely represent and sell its goods and services

* Patent - a patent is a great example of how to establish and maintain a competitive edge in the marketplace

* Domain knowledge expert - attracting and in some cases hiring a domain knowledge expert such as a professor in a particular field can provide solid competitive leverage. From personal experience, while operating my start-up 5skills, I was able to locate a professor who conducted a very extensive research in the field of matching job seekers to jobs. This would have been a great addition to the start-up as far as being competitive in the online recruiting industry. Unfortunately, the strict research implementation requirements proposed by the university, would have changed the product offering significantly. As a result, this partnership dissolved.

* Celebrity - last but most definitely not least, using a celebrity association to boost the brand awareness and credibility, is a sure way of getting ahead in the early days. A great example I love using is a start-up called Feex. Feex finds and reduces your retirement fees using crowd-sourced management fees comparisons. One of Feex's founders is Uri Levine who was one of the founders of Waze. During the early days of Feex, you could have seen many promotions on Facebook, mainly in Israel, with the title "Uri Levine's new start-up". This is a perfect example of utilizing a celebrity or another well known figure to boost the start-ups awareness in the marketplace.

 

Source (left photo), Source (right photo)

4. Channels describe common channels

The Channels section must include specific channels that can attract the right segments with the proposed unique value proposition. Including only the common channels like social networks, blogs, online advertising is not enough and will make the business model weak.

You should really focus on finding niche-based channels, these have always proved to be the most effective in targeting the right audience (segments) with the right proposition. Example. Using the travel mobile app example mentioned earlier, let's assume that the start-up would like to attract 2 main segments, travelers and local guides.

Let's refine the travelers segment. Let's break-down the travelers into a primary segment of young (ages 25-35), single professionals that travel for long quick weekend getaways in major cities in Europe between 6-8 times a year. Now, you have to ask yourself, how do I reach this audience? If we're talking about young single professionals, we can assume they work in offices, perhaps some of them might work for big corporates? It would be fair to assume that some of these guys go to the gym 1-2 times a week, drink coffee in a cafe each morning and love going to the pub on Friday nights.

As you can see, we were able to narrow down the channels to very specific and effective ones very quickly. It'll be easy to extract channels such as gym billboard and newsletter, HR department in large corporates, coffee shops (using flyers and business cards), Pubs (billboards, beer coasters etc). You can also target specific web-sites, blogs and individuals to help promote the start-up idea. Use your imagination here and after trying a few options, you will be able to find solid channels you can use to reach your audience.

5. Key Metrics describe too broad metrics

The Key Metrics section is one of my favorites. This normally would require you to think carefully and decide what are the key 1 or 2 metrics you would need to track to ensure the business is growing. 

One common mistake many entrepreneurs make here, is describe a metric like Traffic or New Users. This on the surface is a valid metric to track, but I would always argue it's not one of the key metrics to track. Example.

In the travel app example from before, instead of using the metric Traffic, you could use a metric such as Number of purchased guided tour packs. This metric will cover both travelers and local guides preparing and selling guides. This metric will allow you to track the growth of the transactions of the business and in turn the growth in travelers and guides. You could refine this metric further and include the Unique number of purchased guided tour packs by unique monthly travelers. This metric includes the growth of new guided tour packs added into the system and sold to unique travelers that are active on a monthly basis (both new and existing travelers). See what I mean?

This is a very important metric to get right, but it might take you a bit of time and a few iterations until you land on the one best suited for your business.

Wrap up

I hope this was a useful summary of what NOT to do in some of the key Lean Canvas sections. Good luck with yours and feel free to contact me if you have any questions.

To get your Lean Canvas right, CONTACT ME HERE >

The Left Brain / Right Brain “Business Model” Theory

Raise your hand if you are an entrepreneur and at some point faced this question “What is your business model”?

We’ve all been there. You are passionate about your idea, you get excited about its potential, the product, its features, your co-founders… making the world a better place. Everything seems to be moving in the right direction and then, investors and other entrepreneurs ask you casually “and… how are you going to make money?”.

Your immediate point of call is Google naturally. Go ahead, type “Business Models” in Google, I dare you. Talk about losing your altitude - from excitement to ‘huh?’, ‘say what?’. It’s challenging enough creating a pitch deck, a 1-pager or an executive summary but trying to both understand what a business model is and how to write it down is almost considered a dark art.

Well, here are the good news, I’m going to give you the secret to deciphering what it is that you need to do to get your business model developed and documented in a way that is both easy to do and easier to understand.

I’m kidding about the ‘secret’ part of course :-)

By Allow me to introduce to my The Left Brain / Right Brain “Business Model” Theory.

My Left Brain / Right Brain “Business Model” Theory

Roger Wolcott Sperry, a neuropsychologist and a 1981 Nobel Prize Winner for his split-brain research. He coined the notion that the right-brain is best at expressive and creative tasks whereas the left brain is considered to be more responsible for logic, language and analytical thinking.

A Business Model can also be divided into two parts as well, the more creative and conceptual side, the right-brain and the more analytical and detailed side, the left brain.

The Right Brain Business Model

Similar to a top-down approach, defining a business model starts from the top, the more high-level and slightly conceptual level.

The best way to conceptualize and capture the thought process and iterative development of the business model is by using one of 2 best of breed tools. These tools are the Business Model Canvas and the Lean Canvas.

Business Model Canvas

The 1st model is called the Business Model Canvas or BMC for short and is based on the work done by Alex Osterwalder and Yves Pigneur. This canvas captures the key 9 essential components that make up the business model (see image below):

* Image from http://blog.bizzdesign.com/

The canvas provides a well thought through process for nailing the product / market fit. This is achieved by the unique structure of the canvas. If you draw a vertical line straight in the middle of the canvas, you will have 2 sides: the left side which addresses the Product components and the right side which addresses the Market components. The canvas is split right in the middle where the Value Proposition is formed.

Here is what every section in the canvas means:

• Strategic Partners / Key Partners - Key partners, key suppliers, key resources acquired from partners and key activities partners perform
• Key Activities - Key activities our value proposition, distribution channels, customer relationships and revenue streams require
• Key Resources - value proposition, distribution channels, customer relationships and revenue streams require, e.g. intellectual, human, financial
• Value Proposition - The actual value we deliver to our customer and the problem we’re solving, e.g. characteristics include newness, design, brand/status, price, cost reduction etc
• Customer Relationships - The type of relationship each customer segment require, e.g. personal assistance, self service, communities, co-creation etc
• Distribution Channels - How does the business plan to reach its customers
• Customer Segments - What customer segments will receive the value we create and offer?
• Cost - The most important costs in the business, the costs associated with the key resources and key activities
• Revenues - For what value are our customers willing to pay? How would our customers prefer to pay?

Creating the canvas is done in a certain order, ensuring you build on top of more important components. Working this way allows you to focus and elaborate on each item separately.

1. Value Proposition
2. Customer Segments
3. Channels
4. Customer Relationships
5. Key Activities
6. Key Resources
7. Key Partners
8. Revenue Streams
9. Cost Structure

Lean Model Canvas

This canvas was created by Ash Maurya, as a more problem-focused alternative. I personally have found that the Lean Canvas is easier to grasp for beginners and makes a bit more sense. Quite often, when working with entrepreneurs, I was told that the Business Model Canvas is a bit confusing and some of the content in a few sections appear to be overlapping.

Both canvases are great tools to get the process started. I recommend starting out with the Lean Canvas and working your way from there. This canvas replaces 4 sections with a more problem-solution theme as follows:

The new items that were swapped in are:

• Problem - a clear definition of the problem this venture / idea is trying to solve
• Solution - a clear statement of what the actual solution is. E.g. is it a website, a mobile app, an online call center etc
• Key Metrics - this refers to the business’ top 1 or 2 KPIs (Key Performance Indicators). It’s critical to keep in mind that every business normally has 1 or 2 top-level KPIs. These are used on a regular basis (normally days, weeks, months, quarters and year, and at times on an hourly basis) to track the growth and sustainability of every business
• Unfair Advantage - when entering a market, it’s critical to establish a unique unfair advantage. The obvious examples are IP-related assets, e.g. patents, scientists or professors who are part of the core team of the business. Other more modern examples include celebrity associations (see Feex as an example). These provide a hard-to-copy or compete advantage

The order in which to fill out this canvas was slightly changed as well. You first start off with the segments and work your way in through the problem statement as follows:

An iterative process

And last but not least - quite a few entrepreneurs don’t realize it - working with these canvases is an iterative process. You start off with a very high-level canvas that addresses multiple segments, and through the process of refinement, you end up with a small subset of canvases, each addresses a specific segment or sub-segment in your ideal market.

The Left Brain Business Model

The left brain business model drills down into the nitty gritty of an actual model you would expect to find in a business plan or when discussing it with an investor or a CFO.

But first, let’s revisit the definition of the phrase “Business Model” from the perspective of the left brain. In its pure form, a business model is a:

A scalable way to acquire customers and monetize these customers

at a significantly higher level than your cost of acquisition

So a business model has really only 2 components, the Acquisition and the Monetization. We use the abbreviation CAC to describe the acquisition cost, i.e. Customer Acquisition Cost and we use LTV to describe the monetization component of the equation. LTV means Life Time Value. The LTV of a customer will give us a key metric for evaluating the effectiveness and success of the selected business model or models. More on this later.

David Skok, partner at Matrix Partners, visualized this formula perfectly. He also pointed to a very important goal when creating and monitoring a business model. One must achieve an imbalance between the two components, whereby the LTV is significantly higher than the CAC. This is the only way to build a successful and growing business. See illustration below:

* Image taken from http://www.forentrepreneurs.com/business-models/

CAC - Customer Acquisition Cost

Calculating the CAC is easy and is done by using this formula:

Definition of each parameter in the formula is below:

• MCC = Total marketing campaign costs related to acquisition (Not retention)
• W = Wages associated with marketing and sales
• S = The cost of all marketing and sales software
• PS = Any additional professional services used in marketing/Sales (Designers, Consultants etc)
• O = Other overheads related to marketing and sales.
• CA = Total customers acquired

What you will need to do now is create a spreadsheet (preferably a Google Sheet document so you can easily share it) and outline all the above costs in a single column. See example below. Note that in this post I will not drill-down into the mechanism and the specific example mentioned but I will dedicate a post for just that soon.

LTV - Life Time Value

Next, you will need to add in the LTV figures. The LTV figures are based on time and are normally calculated on a yearly basis. Keep in mind that for an early-stage start-up, you will most probably build out a monthly sheet first and focus on your first 6 months. It’s almost impossible to accurately predict and forecast your CAC and LTV beyond the 6 months mark at this stage.

Below is a simple example of putting both the CAC and the LTV together. The most important metric to track in this sheet is the CLTV/CAC ratio or multiplier (CLTV = Customer Life Time Value and is another way of describing LTV). This gives us the growth ratio of the business. The longer customers stay with the business and keep paying for receiving value, the stronger and more stable the business will be in the long run. In addition, if we are able to show a x3 CLTV/CAC multiplier by year 3 and a x5 to x10 multiplier by year 5, we enter the realm of the ‘Hocky Stick’ growth start-ups and are prime for VC investments or M&A and IPOs.

Conclusion

To conclude, a Business Model can be divided into 2 parts, the high-level and conceptual part and the detailed, spreadsheet-driven part. Every entrepreneur needs both and you should always start off with the right side - the canvas side.

As with the split-brain theory which was eventually debunked, the Business Model must have both parts to be whole.