Last week I met with Steve Blank and Ann Miura-Ko at the University Coffee in Palo Alto to chat about Business Model Generation and our upcoming Business Model app for the iPad. It was a real treat. One of the questions Steve and Ann brought up was how to differentiate between users and customers in the Business Model Canvas.
Until this chat the question hasn’t really preoccupied me, because it has been less of an issue for most of the companies I work with (mainly large multinationals). However, I do see the relevance of the question (particularly in a start-up context in the software and Web space, but also in other spaces). And how couldn’t I have an open ear for a point made by one of my entrepreneurial role models and a rising VC star…
Steve and Ann suggest separating customers and users into two separate building blocks when describing a business model. I prefer keeping one single building block that captures users and customers. At the end of the day I think we all have to use the representation that we are most comfortable with. However, I do fully agree with Ann and Steve that it is interesting to look into the user vs. customer question (and a matter of survival if you are a start-up with users, but no customers…).
After the chat I couldn’t let go of the question, so I sketched out some business model examples on my iPad on a flight from beautiful Vancouver back to San Francisco, our family’s temporary HQ. This helped me get a clearer picture of the question. The models I sketched out were Skype, Google, Youtube, Flickr, and Sony Playstation. Each business model has a different user vs. customer configuration.
I basically see all groups for which a company creates value through a product or a service as users. Customers are simply users who pay for the value that is created for them in the form of a revenue stream for the company. In some cases users and customers are pretty similar, except that one group generates revenues by paying for additional features of functionalities (e.g. Skype, Flickr). In other cases users and customers are distinct groups, where one subsidizes the other (e.g. Google, Youtube, Sony Playstation, government services). Let’s have a look at some different business models and their dynamics.
Skype
Skype is company that allows making calls over the Internet based on its proprietary software. It has over 500 million users. Of that only a tiny fraction are paying customers. However, in this case it is difficult to distinguish between users and customers, because they might be the very same people. For example, I use free software-based Skype-to-Skype calling all the time, but occasionally also buy so-called SkypeOut credits to make calls from my computer to international landline and mobile phone numbers. I am a (free) user and (paying) customer at the same time.
Regarding the “free user vs. paying customer question” Skype provides some even more interesting material. Skype’s free users are crucial to its success. One might think that the reason is to assure a decent revenue even with a small conversion rate from free to paying users. In fact, that is not the only reason.
Skype needs a large user base to assure good calling quality. Every call is routed through the Internet, from one user to another, based on so-called peer-to-peer technology. The more users Skype has, the better the calling quality. In fact, in that regard users are a key resource of its business model. And since Skype manages no network (because of the Internet-based peer-to-peer technology) it costs the company practically nothing to add on free users.
Flickr
Flickr is a website that allows hosting images and videos. Like Skype it has a large number of free users and only a fraction of paying user/customers who pay for advanced features like increased storage space or unlimited uploads. Like Skype this is a so-called freemium business model with a set of free services and paid premium services.
However, different from Skype, people using Flickr usually fall either into the category of free users or paying customers. Another difference with Skype is that Flickr’s free users generate costs that the company has to recuperate with its paying user/customers. The free users do, however, add value by contributing to the content on the website. Flickr now has over 4 billion images on its site.
Google’s core business – search – is another story. In this case (free) users and (paying) users/customers are two totally distinct groups. The free users are the people using the search engine. The paying users/customers are the people buying keywords for search advertising. Both groups of users are offered two totally different services and value propositions. The first service (search) is free and subsidized by the latter (adverting). And the more (free) users Google can attract, the more interesting it is for advertisers.
Youtube
Youtube, the leading video-sharing website which was aquired by Google in 2006, provides another interesting element to the user vs customer discussion. Free users can be split into two subgroups: a smaller group of users who upload content (often their own user-generated content), and a larger group of users who simply view/consume content. The former provide an important resource to the business model – content – to attract the latter.
Sony Playstation
A fifth interesting case regarding the user vs. customer question is the business model of Sony’s game console, the Playstation. The users of the Playstation buy their console and in that sense they are customers. However, traditionally Playstation consoles are subsidized in order to make their price more affordable and attract as many users as possible to their game console platform.
Sony does this – and accepts losses on selling consoles – because their most lucrative user/customer segment lies elsewhere. It’s the game developers, who make the games for the Sony Playstation and who pay Sony a license fee for every single game sold. Hence, the more users/gamers Sony has, the more attractive it is to developers, the more games are made and sold, and the more license fees Sony pockets. In this sense, the user-base is a key resource to Sony and is its value proposition to game developers.
Other Models
There are other interesting models that I haven’t visualized. In government services their is also difference between users and customers. We could see beneficiaries of services as users (e.g. regarding grants and contributions) and governments or tax payers as customers (since they foot the bill).
A final model I have briefly looked into from the user vs. customer angle is the insurance model. One could argue that in an insurance scheme a large number of customers are paying for a policy in order to be insured against a hypothetical incident. Yet, only a small group of these customers turn into users because they incur the incident and want to benefit from the insurance policy… In this sense a large number of paying customers (who are not “users”) are required to “subsidies” a small group of customers who become users based on an incident.
Finally, … don’t ask me about Twitter 
Hi Alexander,
great insights, thanx.
And also excellent example of how to use the canvas.
I dare not ask about twitter, and do it anyway.
regards, Juan.
Hi Alex,
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Why don’t you use the Channels Building Block?
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I work mostly with SMEs (from manufacturing), first we take the picture of the target-customer (the final user) and after that we ask “Who owns the shelf?” “What kind of shelf is visited and seen by the user?”
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Then, we work on value propositions for both.
Interesting note and one that is worthy of discussion. Same topic is relevant within the airline industry. There can be users (you sitting in your Virgin America seat) and customers (your employer who paid for your ticket). They can also be the same (you when you go on vacation). However, the “buyer-flyer” relationship as it is often referred to can clash at times, which each group desiring different things. Thanks for bringing this up.
Dear Alex
Important point with customers and users. I try to cover this point with the distinction between Customers that can also just be users and Partners. In my model the partners could also be a source of revenue for the firm.
For important partners you also need a value proposition. Just think about Napster and the majors. Napster had a great value proposition for the users but none for the partner, the majors. And it failed even if it could have got money from the users.
So if you have a dual business models with users and paying customers models become more complicated. E.g. in the newspaper industry, you even got three distinct businesses interwoven into the paper business model we know. You have three paying customers (readers, advertisers and classified) with three distinct value proposition for each. It might be difficult to draw but I tried to do it here http://blog.business-model-innovation.com/2009/09/who-says-paper-is-dead-business-model-innovation-in-the-newspaper-industry/
And you face the classical dilemma with your canvas. All models are limited and exactly the limitation to the most important points is the key. Models are all about reducing the complexity of realty. The deliberate omission is important to see the basics. By the limitation you focus the discussion.
And of course, therefore no model is perfect for all circumstances. But the beauty of your or my model is that you can add some points that are important for different firms. So I added for example culture as a part if I discuss change for large corporations.
Regardless how many points we add, the business model has to answer the three key questions:
Which value do I create to whom? (Value Proposition)
How do I do this? (Value Architecture)
How do I earn money? (Revenue Model)
Enjoy California!
I
I think they (steve & ann) are right to question this and suggest the customer and (final) user be seperated out. It has universal consideration not just for start ups but for all businesses and organizations. They do have distinctly different needs out of a new business proposition.
I am surprised that your multinationals have not picked up on this as well. Maybe too occupied in getting their heads around all the components of the model.
Customers defined as having a paying relationship, Users as final consumers.
Does it change your model? No but it might require future distinction.
Alex,
Great examples, insights, and discussion.
Patrick reminds us that all models/frameworks simplify reality. So true. He also reminds us of the essence of what the business model canvas is after.
I believe one way we maintain integrity in the use of the model/framework is done just the way you have tackled this issue: precise definitions of terms. The “customer” is the one who pays. Yes, their may be many other users or beneficiaries of an organization’s offerings, but they are something other than customers.
Well done.
Hey Folks,
My 2cents:
1) It feels like silicon valley specific semantics to use the terms users and customers. Many SAS companies deal with this challenge – but not nearly all of them. You’d end up with a lot of empty canvas boxes for those ones.
2) The overlap gets tricky. Like you said with skype, you’re a user for 9 calls and a customer on the 10th.
So:
Maybe this is just a fundamental question to ask about your customer segments, – who you’re creating value for – and which of those segments you’re offering what services to for what price.
-Alan
Not a new question Alex.
I prefer clarity around customers – customers are people who pay (potentially cash or some other contribution) for your product or service.
They might pay a channel partner, who pays you (directly or indirectly).
You must never forget the customers customer, but the value proposition is one with the customer, and it will involve their customer’s perception to a greater or lesser extent depending on the product.
If I sell food flavours, for instance, I sell the flavour to a FMCG manufacturer (for instance). They are my customer. They need a proposition to their customer – (say) a supermarket chain (and so on).
Steve and Ann are thinking tech products, but the rest of the world can be even more complex.
Your 9 boxes encourage this clarity without too much more elaboration. In many circumstances a lot of attention needs to be paid to the channel, and ensuring that the channel is getting value and the activities and resources required for the channel operations are taken account of. And then, the value to the customer needs to be assessed in terms that are relevant to them – very often, to their customers.
Hi Alex, all
Interesting discussion. Having had the same question, I am now comfortable with using one “segment” block. Because, would not the discussion be a a matter of (i)abstraction and (ii)definition?
(i) As long as we see the Canvas as a meta-model, various instances/applications would depict different segments, all with its own relationships to the remaining building blocks. Thus, users and paying customers can be viewed as different segments within. The latter invokes the revenue block directly. Perhaps then a solution would be to look at the user/customer issue in terms of a business model pattern? (similar to two-sided markets)
(ii) “What should you call the animal?” Perhaps you could run a survey with the Hub to see if a more general terminology is preferred for the Customer block?
Cheers, Tor
I tend to include another addition to the user/customer building block. User/Influencer/Customer. I realize adding another separation expands the complexity of the model, but to my opinion, many users in organizations depent on influencers that enable them to get aligned with the customer.
Another add on could be to distinguish between user and usage. An user might have multiple roles, usage tends to be role specific.
I suggest to split CS into roles and usage. Align specific usage to roles and identify the KA for each CS. This helps me to recognize when activities get out of scope or to much stretch.
[...] of the Business Model Generation book we were happy to have coffee with Alexander Osterwalder and share our thoughts about what we thought was missing. In hindsight I think we were asking for the business model generation [...]
[...] of the Business Model Generation book we were happy to have coffee with Alexander Osterwalder and share our thoughts about what we thought was missing. In hindsight I think we were asking for the business model generation [...]
The distinction is not just a silicon valley one – old fashioned magazines and newspapers printed on paper have users (readers) and customers (advertisers). In some cases the readers pay a subscription. With newspapers that $ often goes to the distributors not the publishers. In some cases (alternative press) the readers don’t pay.
I all cases I would say everyone in the business model (users, customers, distribution channel, partners of all stripes) interact with the company / product because of value exchanged. In some cases that value is monetary. In other cases not. If you map one arrow into and another out of each entity in the diagram you can consider those the value that each participant gives or receives from the interaction. Not all of those values will be $$. Some will.
The net of the $$ values for the business must be positive for it to succeed. So the more non monetary value it can produce for cheaply the more profitable it can become.
Hard to describe this in words. Hope that’s clear enough.
having run some sessions with the canvas at our company away day we had similar discussions. The solution was to use the Customer section and draw out the market dynamicso we could see who paid/funded, who benfitted from or used a service and highlight the key drivers – which were then linked back into the channel/activties/resources and partnerships – the overall canvas worked really well so thanks you for that.
Niall
I was wondering if the templates were all products of your app. I’m a student in the process of training for a business competition and this is fascinating! While I don’t have an ipad, is there anyway for me to learn more about this?
Read your blog about the differentiation between Users versus Customers. It made me think because I had the feeling I had read about this topic before.
And then I remembered, it was in Crossing the Chasm. There it is even one step further: making the difference between end user, technical buyer and economic buyer.
Also in Crossing the Chasm there is the differentiation between the innovators, adaptors and laggards as you know …
But by making this the reason to separate building blocks, you get the same issue with the relation and the channel block: should I make a differentiation?
Thinking about this, in my opinion it is wise to keep the canvas generic and that the user should be aware of the fact that in some cases it is wise to make a differentiation between users and buyers and to take the evolution from innovator to laggards into account.
Alex,
I have read this and it makes sense. The Skype model is a perfect case study.
As per the comments above I do agree that keeping the customers segregated from user is the key element in furthering the value proposition, extending the segmentation and and channels. Partner and customer could to some extent on some model be integrated as revenue sources though.
The other tangible in this is addressing the empathy map, CLV( customer lifetime value) and Customer Lifecycle Management play an integral part.
I’m in the “keep it in one box” camp. Customer segments can be sliced and diced in many ways, and for sure, in many business models, “uses/pays/influences” is an important way to segment the customers.
I think of customer segments as clusters who all are generally attracted by the same Value Proposition, and understanding that the VP changes across the span of users, payers and influencers is one critical part of understand the business model.
I do not agree that sales and distribution channels are customers, because their view on the Value Proposition is totally different. Fundamentally they are looking to increase profits by delivering the offering, and the cash they pay is ultimately contingent on end customers “eating the dog food.” Yes, there is a VP for every channel, but for the most part those VPs are fundamentally different from customer VPs.
So while I agree with Steve and Ann that segmenting customers by whether they pay, or just use, is and extremely important part of customer segmentation, I think that many markets (consumer markets for example) usually conflate the two, so the distinction into two boxes is unnecessarily confusing for the general case.
In many cases in CPG the only way to the consumer is through a customer. They act as a gateway or gatekeeper in some cases. Your relationship with them is just as critical as it is with the consumer and is potentially different.
This shows one of the strengths of the Canvas, but also its weakness (and therefore also a potential pitfall when designing new models), it is relatively straight forward and most easily fits a (business model) model where the main interactions take place between two actors (provider and customer/user) and there is a separation between front-end (customers) and back-end (partners), but which to a certain extent can be stretched as Alex’s examples show.
In the end we may in some situations need to sketch more complex business networks with different actors and roles and different propositions and flows between them, as an add-on (or replacement) of the canvas. This is nothing new as we have seen many of these kind of models to describe business models, for example in the work of Well & Vitale (business model schematics) or Gordijn (e3 value).
I’m very intereseted in the diggerentiation between users and customers. At Andriessen, we provide Online Examination facilities including Exam Locations as an Online service to Educational Institutions, both profit and non profit.
We communicate and interact quite a lot with our clients customers: the exam candidates. One of our VP is to offer the the optimal exam experience.
How do we fit in the differences between our customer and our customer’s customer in the Business Model Canvas?