Business model design and innovation: value proposition, value creation and capture, business model canvas
Domain 2 - Business model design and innovation
The exam asks you to explain how a firm creates value, delivers it and captures a share of it, and to apply the Business Model Canvas to a specific case rather than recite nine headings. Innovation questions test whether you can distinguish types of innovation and justify why a model is or is not defensible.
Core rules and concepts
- Value proposition: the problem solved or benefit delivered to a defined customer segment - not the product's feature list.
- Value creation: the activities and resources that produce the offering (key activities, key resources, partnerships).
- Value capture: the revenue streams and cost structure that let the firm keep part of the value it creates. A model can create value and still fail to capture any.
- Canvas nine blocks: customer segments, value propositions, channels, customer relationships, revenue streams (market side); key resources, key activities, key partnerships, cost structure (efficiency side).
- Revenue models: outright sale, subscription, freemium, pay-per-use, razor-and-blades, advertising, licensing, marketplace commission.
- Innovation types (Oslo Manual): product, process, organisational, marketing. By depth: incremental versus radical; Christensen's disruptive innovation starts at the low end or in a new market.
- Defensibility: network effects, switching costs, economies of scale, brand, patents.
Worked example
A language-learning app offers a free tier and a €60 annual premium plan. With 100,000 free users and 2% conversion, it has 2,000 subscribers × €60 = €120,000 revenue. Servers and content cost €90,000, so contribution is €30,000. Value creation is the free content that builds the user base; value capture is the premium subscription. If conversion falls to 1%, revenue is €60,000 and the model loses €30,000 - the whole design rests on one ratio. Show the arithmetic in the exam, not only the conclusion.
Traps that cost marks
- Describing the product instead of stating the value proposition for a named segment.
- Mixing creation and capture: "the app creates value by charging €60" is wrong.
- Naming a revenue stream without its pricing mechanism.
- Labelling any new feature "radical innovation".