The Business Model Canvas for healthcare entrepreneurs

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Jane Levesque, MedCity News

In entrepreneurship, the term "business model" refers to the story of how your life science or digital health company will create, deliver and capture value. Any great business idea needs a great business model. A business is more likely to fail if its business model isn’t scalable and financially sustainable. The first work of an entrepreneur is to organize the challenges you face by developing a business model.

The basic principles of developing a business model are the same for a healthcare startup as they are for a startup in most other sectors. But starting a business in the healthcare industry comes with some of its own challenges, such as regulation, which must be addressed as part of your business model.

Business Model Canvas

  • Customer segments
  • Value proposition
  • Channels
  • Customer relations
  • Revenue streams
  • Key resources
  • Key activities
  • Key partnerships
  • Cost structures

How to create your business model

Map the environment around your model

  • Market forces
  • Key trends
  • Industry forces
  • Macro-economic forces

Test your model in the real world

Pitch your model

Business Model Canvas

The Business Model Canvas is a strategic management and entrepreneurial tool that allows entrepreneurs to describe, design, challenge, invent and pivot their business model. It was developed by Alexander Osterwalder, an author, speaker and adviser on business model innovation, and is detailed in his book, Business Model Generation. The Business Model Canvas is applicable to healthcare businesses because life science and digital health entrepreneurs need to answer all the major questions proposed by the canvas to create a successful business model, Osterwalder said.

The canvas’ nine building blocks are discussed below, using the example of Omada Health, a healthcare startup that creates digital health and lifestyle programs. The company’s first product, Prevent, is designed to help participants reduce their risk of developing Type 2 diabetes. (In an interview, Omada co-founder and CEO Sean Duffy discussed the company’s business plan through the prism of the Business Model Canvas.)

Customer segments

Customer segments are the people and/or organizations for whom you’re creating value.

Omada has a number of customer segments, Duffy said, but the most important is the end user – the person at risk for Type 2 diabetes. “When you’re building a business in healthcare, you have to think about a lot of customer segments and end users,” Duffy said. “For a behavior change company, most important has to be the person going through it.” The company’s end users tend to be 30 to 55 years old, slightly more likely to be female, and not necessarily tech savvy, Duffy said. End users can also pay for the service, he added, though that’s not the primary model.

Omada’s other customer segments include self-insured employers, providers (such as integrated delivery networks) and small business and individual insurance plans.

Value propositions

For each segment, you have a value proposition. These are the bundles of products and/or services that create value for your customers.

The value Omada creates – through working to improve health and reduce healthcare costs – is generally the same for each customer group, Duffy said, though there are some nuances. Omada also offers self-insured employers a benefit in productivity economics. “People with diabetes tend to miss significantly more work than others without diabetes,” Duffy said.

For integrated delivery networks, Omada also offers brand value. A patient of a large integrated delivery system who gets access to Prevent, Duffy said, could be encouraged to tell others about the initiative. The same holds true for insurance plans, he added.

Channels

Channels are the touch points through which you’re interacting with customers and delivering value.

Omada’s channels are entirely direct for now, Duffy said. The company has a sales team that reaches out to employers, plans and providers. “That’s deliberate,” he said. Because the company is still learning so much at this stage, Duffy said, putting an intermediary between Omada and the customer could hinder growth. But he expects the company will be more inclined to do channel deals in the coming year.

Customer relationships

Customer relations are the types of relationships you’re establishing with customers and how you’re acquiring and retaining them.

“We meet people in conferences,” Duffy said, citing Omada’s direct customer relations techniques. “We get introduced through advisers and friends.” At the company’s early stage, he said, it’s important to foster strong customer relationships. “[Customers] are more partners than anything,” Duffy added.

Revenue streams

Revenue streams are the pricing mechanisms through which your business model captures value.

Omada essentially has two revenue streams: business-to-business and direct-to-consumers, Duffy said. The larger of the two is business-to-business, including employers, integrated delivery networks and insurance plans. These customers are on a milestone-based pricing model (being charged more when participants achieve successes with Prevent), he said. Direct consumers, on the other hand, pay the company monthly via credit card.

Key resources

Key resources are the aspects that are indispensable in your business model, so you can describe the infrastructure you need to create, deliver and capture value.

The No. 1 ingredient, Duffy said, is talent resources, namely designers and engineers, to build the company’s products. “That’s one of our differentiators: building a product team that looks like it would have come out of a consumer web company or startup,” he said.

The company’s other key resources, Duffy said, include eventually building a large direct sales force, keeping up with intellectual resources in terms of trademarks and copyrights, and financial resources.

Key activities

Key activities are the things your business needs to be able to perform well.

On the product side, Duffy said, Omada focuses on two key activities: making an interesting and attractive program that people want to use and designing an experience that delights. The company also spends time learning about how its customers use the program, watching them with the product and understanding why they leave. “You want to establish a constant iteration cycle in learning as people go through your program,” he said.

When it comes to sales-related activities, Duffy said, being a healthcare company means handling more stakeholders than are typical in other industry verticals. It’s important to spend time understanding how those stakeholders fit together around your business, he said. A key activity for Omada is to orchestrate relationships between these different stakeholders, Duffy said, by mapping out how the company’s product touches each one, the pressures and emotions of each, and how each wants to be viewed by customers. “That’s an activity you need to do in all industries,” he said, “but it’s perhaps a bit more complex and nuanced in healthcare.”

Key partnerships

Key partnerships are with those who can help you leverage your business model. You won’t own all the key resources yourself or perform all the key activities.

For Omada, early key partners included self-insured employers, providers and insurance plans, Duffy said.

Distributors and suppliers are also key partners for Omada, Duffy said. These include partners that help the company with its technology, mailings and other initiatives, he said. “In healthcare, you lock arms with folks a bit more than in other industries,” Duffy said.

Cost structure

Cost structures are the most important costs inherent in your business model.

Omada’s most important cost is delivering its service, Duffy said. This includes the company’s mailings, resources and health coaches. “Those [costs] tend to be paid with volume,” he said. “As we grow the business, those grow.”

Other costs for the company are more fixed, growing less as the business grows. For instance, Duffy said, each product at Omada will likely have an engineering team no larger than 20 to 30 people, despite how many new participants join the programs. That’s where an economy of scale comes in.

How to create your business model

The first business model you create is likely to be a predictable one. Predictable business models can work, but they rarely give you a competitive advantage in the marketplace. That’s why it’s important not to fall in love with your first idea, Osterwalder said. “Your first idea is not one that you’ve proven,” he said. “You need proof from the market.”

Instead, think outside the box. One exercise would be to think of a model where you give away your value proposition for free. How would you then make money? Is it possible to model your business on Facebook, which succeeds because its millions of users create data for free? How can you lock in customers, so they can’t move to a competitor? These exercises might not lead to realistic business models, Osterwalder said, but they force you to consider alternatives to the norm.

Another exercise is to study successful and innovative business models in other industries. While it’s not bad to consider successful business models within the healthcare sector, Osterwalder said, that exercise won’t help you develop breakthrough ideas.  “If you’re serious about building a business, you should look everywhere,” he said. “You should copy shamelessly from other businesses.” Understanding the business models of companies such as Nespresso and IKEA can help you get to your own business model breakthrough.

There’s no right or wrong way to create your business model. But there are a few rules to keep in mind:

  • Focus on the business model – not just the product, technology or service.
  • Don’t fall in love with your first models. The best models are built from clever, creative elements. That comes from less obvious versions.
  • Iterate rapidly and test your models early – in the real world.

Map the environment around your model

You might have come up with your perfect business model, but it doesn’t exist in a vacuum. It’s important to map the environment around your model, so you can make your model more responsive to the outside world.

There are four building blocks to help you do that: market forces, key trends, industry forces and macro-economic forces.

Market forces

The term “market forces” refers to everything related to the customer segments you’ve included in your business model. Which other segments are out there? Which are the most lucrative? Which segments are growing? What do the customers in those segments want most? What might they resist? Considering the market forces around your business helps you answer the important question: Is my business model in line with evolving customer needs?

All of Omada’s customer segments are currently growing, Duffy said, but the company’s direct-to-consumer business is likely to remain relatively small. “Right now, we do it more to learn than anything,” he said. Duffy said he expects the company’s self-funded business to take off in 2014 and the plan and provider business to follow suit in 2015. “The growth here is pegged to some of the macro trends in healthcare,” he said.

Key trends

By considering key trends, you’ll become aware of whether new technologies are about to undercut your value proposition – or supercharge it. What regulations are coming up? How is society at large shifting? Considering the key trends around your business helps you answer the important question: Is my business model prepared for emerging trends?

Omada pays close attention to new technologies and regulations, Duffy said. “A new tech advance that you miss can shift everything,” he said. Don’t rely on others to keep you informed on new regulations and policies, Duffy advised. It’s important to read all of the primary literature, he said. “For instance, when the new Affordable Care Act wellness rules were released,” Duffy said, “we dug right into the full document.”

Industry forces

The industry forces are your competitors. Who are your main competitors? What advantages do their business models provide? Could they crush you? Your industry might already have a dominant competitor. But ask yourself: Where are their weaknesses? Can you disrupt them? What might happen as suppliers and partners evolve – or don’t? Considering the industry forces around your business helps you answer the important question: Does my business model have a competitive advantage today? Tomorrow?

While it’s important to keep an eye on competitors, Duffy suggested using customer feedback to determine whether your company is on the right track. It’s easy to fall into the trap of being too concerned with competitors. It’s more important, he said, to move forward with a vision you're confident in than to be constantly anxious about competitors, and always spending time studying what say, Healthways, Weight Watchers, UnitedHealth Group or the other plans are doing.

Macro-economic forces

Macro-economic forces are the broader economic conditions that could impact your business. How is the global economy doing? How available is capital? How well is the infrastructure developed in the market you’re doing business in? Considering the macro-economic forces around your business helps you answer the important question: How will my business model adjust to macro-economic shifts?

The major macro-economic force for Omada is the fact that chronic disease is killing more people than infectious disease for the first time in human history, Duffy said. The company monitors this and other macro-economic forces continuously, he said, by following diabetes trade journals and the health services space. “All the macros have propelled what we’re doing,” Duffy said, “and have helped accelerate it.”

Test your model in the real world

Once you’ve settled on your business model – your best guess – it’s time to fail. Many of the hypotheses you made in your business model are bound to be wrong. Finding that out – and correcting any inaccuracies – will make it possible for your business model to succeed. The Business Model Canvas makes it easy to react to these changes – as long as your mistakes are cheap and you act quickly to fix them.

The processes of testing your hypotheses are known as Customer Development and Lean Startup. Begin by explicitly stating the most important hypotheses underlying your business model. Then get out into the world to see if you’re right by conducting low-cost experiments and talking to prospective customers, distributors, potential partners and industry experts. The discussions with prospective customers are the most important component. They’re likely to have questions and concerns that never crossed your mind.

As you refine your business model and gain confidence, testing should intensify. Find out how your model fares in the real world. It’s likely you’ll succeed in some areas, but fail in others. That’s because there are always factors that are impossible to foresee from your office. Adapting rapidly and cheaply helps you account for these factors. The more you test and learn, the more your model matures.

The era of the fixed business plan is over – an evolving model is necessary to compete today. You should continuously adapt your business model based on the outcomes of your experiments. If you document your canvases (by, for instance, taking a digital photo of each), it’ll be easy to revisit them as you refine your model.

Pitch your model

Once your business model is refined, it’s time to pitch it to potential partners and investors. Avoid showing the model all at once – there’s simply too much information to digest. Since you wrote your business model like a story, pitch it like a story. One method is to use sticky notes to fill in the boxes one by one as you explain them.

Connect your vision to the facts, Osterwalder said. “Showing what is fact and what is hypothesis, that’s the way we do it today,” he said. “Nobody cares about opinions anymore.”

Reinforce your case by describing what you learned from testing your model. It might seem unorthodox to admit your failures to potential partners and investors, but it will show that your model is stronger for its real-world testing and adaptation. “If you can say, ‘This didn’t work,’ your investors are going to understand that you tried something, you learned, and now you’re going to do better.”

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