Developing Your Credit Union Business Model
Credit unions waste time trying to establish clarity of purpose through creation of mission and vision statements. A well-defined business model is a more worthwhile pursuit.
Tom Glatt
November 14, 2022
Top businesses have highly developed, well-tuned business models. If you are seeking a similarly clear and/or strong business model then you’ll love this article in which we’ll (1) map out the critical elements of credit union business model structure and (2) explain how you can redesign your credit union’s business model for optimal clarity and performance. To that end there are three areas I’ll be covering:
Why business model clarity is important
Business model context and structure
Building your model
Let’s dive in…
Business Model Clarity
Why is business model clarity important? Two reasons…
The first is because a business model is, boiled down, a company's plan for making a profit. Being clear on profit generation plans is critical for any business.
But hey, you say, we’re credit unions. We’re nonprofits. Oh, but wait - are you? You’ll often hear credit unions referred to as nonprofits, but that isn’t quite true. A nonprofit, in a definition offered by Cornell Law School, is a group organized for purposes other than generating a profit and in which no part of the organization's income is distributed to its members, directors, or officers.
Credit unions are different, and technically should be referenced as cooperatives organized as not-for-profit entities rather than non-profits. The not-for-profit means that the sole purpose of the organization relative to its owners isn’t profit, per se, but in the case of credit unions, profit is a necessity because profit is the only way to build capital, among other things.
So again, the first reason business model clarity is so important is that it makes it clear how profit is going to be generated.
The second reason business model clarity is important is because without business model clarity organizations are more at risk of failure - in one way or another.
Consider this chart…
What we’re showing is the total number of credit unions (the orange line) mapped against the health of credit unions (the blue line). While we have fewer credit unions than we’ve had since early in the history of the credit union movement, the industry as a whole is healthier than it has ever been.
The credit unions that are not here anymore are, in part, a casualty of bad business models - and the chart below offers an example. It illustrates the HealthScore of a CU that was conserved in 2012. As a side note, on their final day they were $300M - down from a high of $624M.
Let me explain the chart. The horizontal scale is a time horizon ranging from 2003 to the end of life for this credit union, which was in 2012. The vertical scale is our HealthScore - which we calculate by grading 17 different credit union performance metrics and rolling up the scores into an aggregate performance score. When we set up the model, we established 5 as reflective of baseline performance based on historical analysis - so for this credit union, they were above "average" until 2007.
What happened? This particular credit union had changed its focus, from a consumer-only credit union to one that also supported businesses. In 2007 a poorly conceived business model caught up with them.
In analyzing their failure, the NCUA Office of Inspector General cited several factors including investing too heavily in member business loans, failing to properly calculate loan loss allowances for this unique segment, and depending too much upon a third-party CUSO thereby separating them from understanding the unique attributes of businesses.
This is a business model failure - but it was because the business model itself was poorly structured to support what it was trying to accomplish.
So, if a business model is nothing more than a company's plan for making a profit, an ill-structured business model creates unclear connections between business activities and profit - and in the case of this credit union, actually created risk that eliminated profit altogether.
By the way, we offer quarterly HealthScore reports to credit union executives and board members free of charge. If you’d like to sign yourself up, simply visit our HealthScore resource at https://www.glattconsulting.com/healthscore.
Now to a big question…
What does a clear and functional business model look like?
Business Model Structure
Think of a business model structure as a map for how the parts of a business relate to one another, how connections are formed, and ultimately how the parts come together to generate value for “customers” and profit for the organization.
Consider this layout diagram for a garden. You see where the plants are to go, how the areas flow together, and the like. But in the case of a garden you are mapping out the flow of movement, colors, and the means to enjoy, which is the purpose of the garden - enjoyment.
In a business, a similar map - a business model - illustrates the purpose of the business and, at the end of the day, how it makes a profit as it delivers its value to consumers or other businesses. I love the Business Model Canvas as a construct for business model mapping. What is the Business Model Canvas?
“The business model canvas, invented by Alex Osterwalder of Strategyzer, is made up of nine building blocks showing the logic of how a company intends to deliver value and make money. The nine blocks cover the three main areas of a business: desirability, viability, and feasibility. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.”
And what are those nine blocks? They include:
Customer segments: the different groups of people or organizations an enterprise aims to reach and serve.
Value proposition: the bundle of products and services that create value for a specific Customer Segment.
Delivery channels: the bundle of products and services that create value for a specific Customer Segment.
Customer relationships: the types of relationships a company establishes with specific Customer Segments.
Revenue streams: the cash a company generates from each Customer Segment
Key resources: the most important assets required to make a business model work.
Key activities: the most important things a company must do to make its business model work.
Key partners: the network of suppliers and partners that make the business model work.
Cost structure: all costs incurred to operate a business model.
A list of bullet points is hardly a map like the one plotting the garden. So let’s show the business model in a more structured map-like format.
In the center of the map is the value proposition. To the left of the value proposition box we find the components that drive cost. These elements combine to aid in delivering the value proposition. To the right of the value proposition box we find how and to whom we deliver the value proposition. In effect, we’re mapping operations to member engagement through value propositions. And if, at the end of the day, the revenue streams from our revenue side are more than the costs, we have a profitable business model.
Truly the simplest of concepts, however the art is in constructing a business model that works well even in complex environments. Let’s take a look at two companies that have the same groups of consumers as customer segments, but with vastly different business models, as a means to explain the art of business model construction.
Here is our first company. The photo below was taken by Apple at the opening of a new Apple Store in Europe. With this photo front and center, I’ll focus on a few of the business model canvas elements that illustrate the art of business model construction.
First, let’s think about Apple’s customer segments. Apple has a variety of customers, from consumers to businesses to software developers, so in truth, they have multiple business models, each with an avenue to profit generation different from the others. For our purposes let’s focus on the consumer segment - the subject of this photo. A consumer with a smile on her face exploring an iPhone.
If we know that a customer segment of Apple’s are consumers, what value proposition do they offer that makes people like this person smile? In other words, what does Apple provide that inspires consumers to happily part with quite a bit of money for Apple products? It is the hardware and software for sure, maybe reliability, but what Apple really provides in terms of value to consumers is status. People are willing to pay a premium for Apple’s products because of the status they convey to others. Think I’m wrong? Are you a blue bubble or a green bubble? Need I say more?
If status-conscious consumers occupy the segment section of the business model canvas, how does Apple communicate with these consumers? And how does it get products into their hands?
These two questions deal with the two elements that fall into the delivery channel realm of the business model canvas: communication (delivery of message) and actual product delivery.
In this broader construct of delivery channel, we find Apple leveraging commercials that showcase the "carefree" lives of trendsetters as in the video to the right, we find Apple stores to allow for "delightful" high-end retail experience as in the photo above, and we also find stores like BestBuy that offer Apple products - but without a similar Apple Store experience - among other channels.
In effect, Apple’s delivery channels reinforce the value Apple offers as high-end and status-oriented, but through partnerships such as with BestBuy have put these products within reach of a wider range of retail consumers.
Now there are nine elements of the business model canvas construct. With regard to Apple, I’m not going to explore all of them - but a quick summary to this point is that apple has a clear consumer segment in mind, they deliver a value that appeals to that segment, and they offer a variety of pathways for such people to find their way into a relationship with Apple - a relationship that is not free but costs a lot of money and has made Apple the number one company in the world with a $2.3T market capitalization.
You can’t get to that level of success without the whole of the business model functioning well - including the cost side, which for Apple is such a well-oiled machine that they achieve high margins on their products and services.
Let’s explore another company with an intriguing business model. Take a look at this image of the company:
Wait - did I say another company? This image seems to show twelve different companies - from Vans to North Face to Smartwool. What gives?
Each of these companies is a part of VF Corporation yet for most of the world they are thought to be stand-alone independent companies. Talk about a variety of business models! There is the overarching VF Corporation business model that involves the VF relationship to the individual brands, but then you have the individual brands, each of which operates with some creative autonomy, managing their own business models as it relates to their customer segments.
That last thing I said there - creative autonomy. What do I mean? While each of these brands is a VF Corporation apparel company serving consumers, in truth each brand focuses on different types of consumers, offering products, and product value structures unique to the brand and the fashion interests of the segments on which it focuses.
Think about Timberland and Vans. Both are shoe companies, but they support different clientele and use cases - and the corporate vibes are definitely different. Not the same company - not at all.
Thinking about the nine elements of the business model canvas and with each brand’s name in front of us, we can start to understand how the uniqueness of each brand and brand business model comes together in one business model for the whole of VF. Let’s explore:
Customer segments - Each brand focuses on consumers, but the market is defined differently for each brand company thereby allowing VF itself to cover a multitude of consumer segments.
Value proposition - Each brand offers quality apparel products, but similar to apple each offers a different kind of status and vibe - a status aligned with the brand’s target customer segment.
Delivery channels - Each brand offers stores, physical retail stores and online stores, but the logistics that support stores are, in some cases, aggregated in VF to allow for economies of scale. But remember that “delivery channel” includes not only how the product gets distributed, but how people find the brand in the first place (brand communication to segments). This point of connection is left to the brands, which means that Vans can host a surf competition in Hawaii while Timberland can host an upcycle workshop in SoHo with a local DJ.
Customer relationships - Each brand offers a mix of personal assistance and self-service, with personal assistance in in-store engagement and self-service via each brand’s unique website. Relationships are also defined via the communities each brand supports (skaters, surfers, mountain climbers, and the like).
Revenue streams - Here’s where the business models find similar footing: all of these companies make money on apparel sales, but they get to those sales through their unique value proposition relationship to their customer segments. Vans makes money on California Cool, Timberland on Ruggedness, North Face on Adventure, etc. (Think I’m wrong? Take a look at their brand imagery and messaging.)
Key resources - Here’s another area where the business models find similar footing across the VF brands: apparel production. Each of these companies can leverage resources aggregated at the level of VF driving economies of scale, but that allow for brand-specific creative autonomy (Timberlands do not look like Vans).
Key activities - Each brand creates its unique vibe through in-brand marketing and messaging activities, hiring, etc. but each taps into the larger company for logistics, including manufacturing scale, product distribution, and the like.
Key partners - Each brand can establish their own partnerships, but can limit their use of overlapping partners by leveraging the larger VF family of companies. Scale benefits all of the parts of the brand empire because the whole can secure better partners at better prices.
Cost structure - Each brand has certain costs it must bear on its own, such as creative leaders, retail staff, and the like - but with regard to the broader realities of running an apparel business, they can do so at a lower overall cost due to the strength of the VF whole.
Both Apple and VF, and by extension the VF brands, have successful business models. But while each tries to serve consumers, how they serve consumers is differentiated by the uniqueness and clarity of their business models. Let's explore how you can build a unique and clear business model at your credit union.
Building Your Model
You are a complex entity, a credit union with many moving parts, perhaps even with wholly or partly owned CUSOs tagging along. You’re serving consumers, businesses - a segment which itself may be broken up into a multitude of unique segments such as service businesses, manufacturers, farmers, and the like. And that said, your consumer markets are probably multi-segmented too, meaning unique markets with unique needs. And I'm sure that who you serve today is not the same as who you served a decade ago even if your field of membership/charter hasn't changed.
It’s time to ask yourself two important questions.
Do you have a clear business model, or are you running without clarity? Is your business model current, or ages old, constructed before the dawn of the Internet?
If you’re feeling a little uneasy about your business model, if you’re feeling the drag of an old business model on results, let’s get you started down the path of building out a better model.
Remember the nine elements making up the business model canvas. One effective way to start the process of business model (re)consideration is to work through a few question prompts that flow through each of these nine areas.
Before we lay out these questions for you, be aware that there is an important caveat to the order of your exploration. It always pays to start first with identifying your segments before you nail down your value proposition. Why? If the market doesn’t care about your value proposition then it won’t pay for it - and you will not have profits.
Case in point? Apple. But not Apple 2022. Apple in the 90’s. As is widely known now, Apple was near failure because, as some state, “its operating system was outdated and its products were expensive and uninspiring.” Consider two markets Apple might have served in the 90’s: businesses and consumers. An outdated operating system and uninspired products were not worthwhile for either market, hence Apple’s near demise.
As a side note, allow me a moment to digress on something far too many credit unions do and which you should avoid: spend hours and hours trying to construct a mission statement without any consideration of what the marketplace of members and potential members actually wants. It’s a total waste of time. All you have at the end of the day is a statement that you spend the rest of your days trying to get people to find, see, and care about it. They won’t - mostly because it says what you want it to say, versus what is truly relevant and needed by members.
Ok! Back to constructing your business model. The task for you is to work through a set of questions that help you give thought to how your credit union’s business should function, and again we start with the segments that exist in your current membership and your broader field of membership.
Here is the first question: Who (people, groups) needs your solutions right now? Who will need your solutions in the future?
The answer to this question identifies the segments you could serve, and provides creative context for the remaining business model questions. But make sure as you answer this first question you identify and separate segments with notable unique attributes.
An easy example is that consumers and businesses are two different segments with notable, unique attributes. These segments are not like one another. And within the consumer segment, how about retired people vs young adults? While both fall into the consumer realm, these two groups might have unique attributes that may just require different business models as the path to profitability for each is likely to be different.
Once you have truly broken out unique segments, it’s time to drill into questions that take you through the rest of the business model construct. The questions are listed below, and they should be asked of each unique segment you identified in the first question.
Value Proposition: What problems do you solve for this segment and how do you solve them?
Relationship: What type of relationship does each segment expect you to establish and maintain with them? (is it personal service, self-service, both, or something else entirely?)
Delivery Channels: Where can members of this segment find you? How do you deliver solutions to this segment?
Key Activities: What do you do to produce, market, and deliver your value proposition “solutions?”
Key Resources: On what assets do you rely, or do you need to leverage, to produce, market, and deliver your value proposition “solutions?”
Key Partners: With whom do you work to produce, market, and deliver your value proposition “solutions?”
Once you have the answers to the questions above your faced with these final, two important questions:
Revenue streams: What revenue streams flow from the value proposition “solutions” you offer for each segment?
Cost Structures: What costs are incurred to produce, market, and deliver your value proposition “solutions?”
If when looking at the revenue to cost comparison you find that costs are likely to outweigh the revenue potential then either you shouldn’t go after the segment, or you need to adjust some aspect of the business model. Maybe more refined activities are in order, or fewer activities, or a restructured relationship construct. All would be on the table for discussion. But the good thing is that the discussion would be completely informed - and related to the segments contained with the membership and/or the field of membership.
To conclude, here is an example of a sample business model using the business model canvas visual structure. It is reflective of a “typical” credit union and it contains some holes and conflicting elements. Take a look. See if you can find the problems, and think through how to make them better. And, if this looks like your credit union, give us a call. We can help.
Need business model help?
- Chart 1: Glatt Consulting Group, Inc.
- Chart 2: Glatt Consulting Group, Inc.
- Photo 1: Paul Hanaoka on Unsplash
- Business Model Canvas: Osterwalder, Alexander; Pigneur, Yves. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (Strategyzer). Wiley.
- Photo 3: Apple
- Photo 4: VF Corporation
- Photo 5: Marek Piwnicki on Unsplash