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What Is a Business Model?
Understanding business models, evaluating successful business models, how to create a business model.
- Business Model FAQs
The Bottom Line
Learn to understand a company's profit-making plan
Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.
Investopedia / Laura Porter
The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.
Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.
- A business model is a company's core strategy for profitably doing business.
- Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
- There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
- The two levers of a business model are pricing and costs.
- When evaluating a business model as an investor, consider whether the product being offer matches a true need in the market.
A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.
A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.
Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .
When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.
A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.
One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.
The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.
When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.
Types of Business Models
There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .
Below are some common types of business models; note that the examples given may fall into multiple categories.
One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.
Example: Costco Wholesale
A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.
Example: Ford Motor Company
Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.
Example: DLA Piper LLP
Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.
Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.
Example: LinkedIn/LinkedIn Premium
Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers free version and a premium version.
If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.
Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business models attempts to make transacting easier, safer, and faster.
Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.
Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.
Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.
Example: HP (printers and ink)
"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.
Reverse Razor Blade
Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.
Example: Apple (iPhones + applications)
The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.
Example: Domino's Pizza
Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.
Example: Utility companies
A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.
There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:
- Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
- Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
- Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
- Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
- Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
- Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
- Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.
Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.
Criticism of Business Models
Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .
For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.
However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.
As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.
Example of Business Models
Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:
- Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
- Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
- More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.
A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.
What Is an Example of a Business Model?
Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.
What Are the Main Types of Business Models?
Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.
How Do I Build a Business Model?
There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.
A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.
Harvard Business Review. " Why Business Models Matter ."
Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."
Microsoft. " Annual Report 2021 ."
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What Is a Business Model?
- Andrea Ovans
A history, from Drucker to Christensen.
A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition. Many people believe Peter Drucker defined the term in a 1994 article as “assumptions about what a company gets paid for,” but that article never mentions the term business model. Instead, Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy. Businesses make assumptions about who their customers and competitors are, as well as about technology and their own strengths and weaknesses. Joan Magretta carries the idea of assumptions into her focus on business modeling, which encompasses the activities associated with both making and selling something. Alex Osterwalder also builds on Drucker’s concept of assumptions in his “business model canvas,” a way of organizing assumptions so that you can compare business models. Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. Rita McGrath offers that your business model is failing when innovations yield smaller and smaller improvements. You can innovate a new model by altering the mix of products and services, postponing decisions, changing the people who make the decisions, or changing incentives in the value chain. Finally, Mark Johnson provides a list of 19 types of business models and the organizations that use them.
In The New, New Thing , Michael Lewis refers to the phrase business model as “a term of art.” And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.
- AO Andrea Ovans is a former senior editor at Harvard Business Review.
What is a business model? (Plus, how to define yours)
Business models distill the potential of a business down to its essence. Companies across every industry and at all stages of maturity need business models. Some rely on lengthy processes to build complicated models, while others move quickly to articulate the basics and take action. Either way, having the discipline to work through this planning tool forces internal alignment.
You must build something that real people with real needs will find value in and pay for — otherwise you do not have a lasting business. Brian de Haaff Aha! co-founder and CEO
For established enterprises, a business model is often a living document that is reviewed and adapted over the years. For companies launching products and services or entering new markets, a business model helps ensure that decisions are tied back to the overall business strategy . And for early-stage startups, a simple one-page business model enables founders to explore the mechanics of a business and how you anticipate it will be successful.
Defining and documenting a business model is an essential exercise. Whether you are starting a new venture, expanding into a new market, or shifting your go-to-market strategy , you can use a business model to capture fundamental assumptions about the opportunity ahead and tactics to addressing challenges.
Unfortunately, many companies fail to integrate their business model into all aspects of the organization — from recruiting talent to motivating employees. Part of the issue is accessibility. That is why forward-thinking companies choose tools that make it possible to quickly build and share your business model. The Aha! business model canvas, for example, gives you a collaborative space to explore concepts and connect your model to everyday work.
Build a business model in Aha! Notebooks. Sign up for a free trial .
Start using this template now
You can access the business model template shown above using Aha! Notebooks . You can also try a similar template that is built into the product strategy section of Aha! Roadmaps . Or you can download these free Excel and PowerPoint business model templates .
This guide covers the basics of business models, from core concepts to best practices. Jump ahead to any section:
Definition of a business model
Business model components
Business model vs. business plan.
Different types of business models
Pros and cons of different models
Analyzing competitor business models
Business model templates
How to build a business model
What is the definition of a business model?
A business model defines how a company will create, deliver, and capture value.
A business model answers questions that are crucial for strategic decision-making and business operations. Creating a business model for your startup or product means identifying the problem you are going to solve, the market that you will serve, the level of investment required, what products you will offer, and how you will generate revenue. Pricing and costs are the two levers that affect profitability within a given business model.
A business model is part of your overall business strategy. Some business models extend beyond economic context and include value exchange in social or cultural terms — such as the intangible impact the company will have on a community or industry. The process of constructing and changing a business model is often referred to as “business model innovation.”
15 elements of a brilliant business strategy
This is why innovation programs fail
There are three main areas of focus in a business model: value proposition, value delivery, and value capture. The proposition outlines who your customers are and what you will offer. The delivery details how you will organize the business to deliver on the proposition. And the capture is a hypothesis for how the proposition and delivery will align to return value back to the business.
Below are some components to include when you create a business model:
Vision and mission : Overview of what you want to achieve and how you will do it.
Objectives: High-level goals that will support your vision and mission, along with how you will measure success.
Customer targets and challenges: Description of target customers (written as archetypes or personas ) and their pain points.
Solution: How your offering will solve customer pain points.
Differentiators: Characteristics that differentiate your product or service.
Pricing: What your solution will cost and how it will be sold.
Positioning and messaging: How you will communicate the value of your offering to customers.
Go-to-market: Proposed approach for launching new offerings and services.
Investment: Resources required to introduce your offering.
Growth opportunity: Ways that you will grow the business over time.
Positioning vs. messaging
- What is value-based product development?
- What is a go-to-market roadmap?
Business models and business plans are both elements of your overall business strategy. But there are key differences between a business model and a business plan.
A business model is seen as foundational and will not usually be reworked in reaction to shorter-term shifts — whereas a business plan is more likely to be updated based on changes in the economy or market.
Related: Business plan templates
What is the benefit of building a business model?
Innovation is about more than the products or technologies that you build. The way that you operate your business is a critical factor in how you stand apart in a crowded marketplace. The benefit of building a business model is that you can use the exercise to expose and exploit what makes your company unique — why choosing your offering is better for customers than any alternatives and how you will grow the business over time.
Many people associate business models with lengthy documents that describe a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast. But business models do not need to be a long treatise.
A one-pager is just as effective for distilling and communicating the most important elements of your business strategy. The concise format is useful for sharing with broader teams so that everyone understands the high-level approach. Done right, a business model can become a touchstone for the team by outlining core differentiators to promote and defend in the market.
Related: A more comprehensive business model builder
What are the different types of business models?
There are many different types of business models. Below are some of the most common business models with example companies for reference (take note of the companies that appear in several categories):
Did you keep track of the companies that appeared in several of the business model examples? Good. You now have a grasp of how complex enterprises with vast portfolios of products and services often employ many business models within the same organization.
Consider a company like Apple, which manufactures and sells hardware products as well as offering cloud-storage, streaming subscriptions, and a marketplace for other applications. Amazon, whose offerings range from retail (with the acquisition of Whole Foods) to marketplace (Amazon.com) to subscription services (Amazon Prime and Amazon Music) to affiliate, also features in different categories. Each division or vertical will have a distinct business model that reflects the nuances of how it operates while also supporting the corporate business model.
Related: The product manager vs. the portfolio product manager
Pros and cons of different business models
Some types of business models work better for certain industries than others. For example, software-as-a-service (SaaS) companies often rely on freemium business models. This makes it easy for potential users to experience the value of the product and incentivizes paid conversions via access to additional features.
Many social media platforms make money through advertising. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers and increases revenue for the business.
How do you analyze a competitor’s business model?
Business analysts and investors will often evaluate a company’s business model as part of due diligence for funding or market research . You can apply the same tactics to analyze a competitor’s business model — with a few caveats.
Public companies are subject to reporting requirements. This means that the business must regularly disclose financial and performance data to the public — these disclosures occur quarterly and annually. The data includes everything from gross revenue, operating costs and losses, cash flow and reserves, and leadership discussions of business results. Designed to protect and inform investors, these reports can provide you with the information you need to understand the basics of the company’s business model and how well it is performing against the model.
Private companies are not required to reveal business data publicly. Investors or partners may be privy to certain aspects of the company’s performance, but it can be difficult to understand exactly what is happening from the outside. Some analysts or business websites will attempt to “size” a business or market by looking at a variety of factors — including the number of employees, volume of search terms related to the core offering, estimated customer base, pricing structure, partnerships, advertising spend, and media coverage.
Once you have identified relevant alternatives to your offering and gathered all of the information that you can find, a good way to analyze a competitor’s business model is to conduct a competitive analysis.
Related: Competitor analysis templates
You do not want to spend too much time thinking about other companies when you could be focused on your own. A simple SWOT analysis is a helpful way to map out strengths, weaknesses, opportunities, and threats that were revealed during your research.
Below are three types of business model example layouts you can use to succinctly and objectively assess what is possible and what challenges could arise for your business.
Aha! Notebooks business model template
Articulate the foundation of your product or service in a flexible whiteboard-style format with the Aha! Notebooks business model template.
The focus is on capturing key elements like why the solution is worth buying (messaging), pain points of the buyers (customer challenges), and ways you will grow the business (growth opportunities).
Aha! Roadmaps business model canvas
The Aha! Roadmaps business model is the most complete template in this guide — based on our team's decades of experience building breakthrough products and software companies.
You can drag and drop each component within a custom layout. And once you have completed your business model, it is easy to share with your team via a live webpage or exported PDF. This business model builder is included with the free 30-day trial of Aha! Roadmaps.
Aha! Roadmaps lean canvas
Similar to the business model canvas, this model in Aha! Roadmaps takes a problem-focused approach to create an actionable business plan. It is most commonly used by startups and entrepreneurs to document business assumptions. The focus is on quickly creating a concise and effective single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money.
How to build a business model in 10 steps
Crafting a business model is part of establishing a meaningful business strategy. But a business model is essentially a hypothesis — you need to test yours to prove that it will actually provide value. Many startup founders especially underestimate the costs and timeline for reaching profitability.
1. Identify your target market Who will benefit from your offering? What characteristics do prospective customers share?
2. Define the problem you will solve What is the problem that you are solving? What are the pain points of your potential customers?
3. Detail your unique selling proposition (USP) What will you build and how will you support it?
4. Create a pricing strategy How much will you charge for your offering? What factors will go into choosing your price point?
5. Develop a marketing approach How will you market your product and reach target customers? What channels will you choose for go-to-market?
6. Establish operational practices How will you streamline processes and procedures to reduce overhead and fixed costs?
7. Capture path to profitability How will your business generate revenue? What level of investment will be required and what fixed costs exist?
8. Anticipate challenges Who are your competitors? What opportunities and threats exist for your business?
9. Validate your business model Was your hypothesis correct? Does your business model solve a problem the way you thought it would?
10. Update to reflect learnings What can you do differently in the future to ensure greater success?
Your business model will ultimately guide your organization and influence your product roadmap. Give it the deep thought it deserves — questioning your core assumptions about how you will generate value and how your team will work towards achieving shared goals.
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Additional strategy resources
Using Aha! software
Aha! Roadmaps — Strategy overview
Aha! Roadmaps — Strategic models
Strategic blogs and guides
- How to price your product
- How to position your product
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- What is product planning?
- How to diagram product use cases
- How product managers use Gantt charts
- Introduction to release management
- How to plan product releases across teams
- What is a product backlog?
- Product backlog vs. release backlog vs. sprint backlog
- How to refine the product backlog
- How to estimate team capacity
- What is requirements management?
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- How to manage your product requirements document (PRD)
- What is a product feature?
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- How to prioritize product features
- Common product prioritization frameworks
- JTBD prioritization framework
- Introduction to marketing plans
- What is a marketing plan?
- How to create a marketing plan
- What is a digital marketing plan?
- What is a content marketing plan?
- Why is content marketing important?
- What is a social media plan?
- How to create a marketing budget
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- Feature requirement
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- Collections: Product development process
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- Collections: Feature prioritization templates
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- Product design basics
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- Collections: Creative brief
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- What is agile product management?
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- Agile vs. lean
- Agile vs. waterfall
- What is an agile roadmap?
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- What is a burndown chart?
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- Introduction to agile metrics
- Agile glossary
- What is kanban?
- How development teams implement kanban
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- What is scrum?
- What are scrum roles?
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- Product release vs. sprint in scrum
- Themes, epics, stories, and tasks
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- SAFe® PI planning
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- Collections: Product launch checklist
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- What is a product?
- What is product development?
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- What is product operations?
- What are the stages of product development?
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- What is product development software?
- Why product teams need virtual whiteboarding software
- Introduction to marketing methods
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- Collections: Product management
- Daily standup meeting
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- What is the role of a product manager?
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- How to become a product manager
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- Introduction to marketing
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What is a business model?
A business model is nothing other than a representation of how an organization makes (or intends to make) money. This can be nicely described through the 9 building blocks illustrated in the graphic below, which we call " business model canvas ".
The business model topic is very popular among business people today because in various industries we can see a proliferation of new and innovative business models (i.e. new ways of making money).
In several industries new business models are threatening or even replacing established companies and conventional ways of doing business. Just have a look at the music or airline industry.
Hence, the interest in business models comes from two opposing sides:
- Established companies have to find new and innovative business models to compete against growing competition and to fend off insurgent
- Entrepreneurs want to find new and innovative business models to carve out their space in the marketplace
Within this context the business model concept is a particularly helpful unit of strategic analysis tailored to today's competitive business environment.
It helps executives as well as entrepreneurs increase their capacity to manage continuous change and constantly adapt to rapidly changing business environments by injecting new ideas into their business model.
But what actually is a business model?
In management meetings the question of what a business model is (even what “our” business model is) often remains relatively vague.
The main reason for this is because business people have an intuitive understanding of business models. Normal, since the business model is about how an organization makes money, which is a manger’s job after all.
However, there is often a lack of a more precise and shared understanding of what a business model is. Yet, such a common understanding is required if we want to have high quality discussions of one’s business model and make important business model decisions.
Therefore we have come up with the 9 building block approach to describing business models. It has the characteristics of any other type of model (e.g. in architecture or engineering).
Like other models it is a simplified description and representation of a complex real world object. It describes the original in a way that we understand its essence without having to deal with all its characteristics and complexities.
In the same line of thought we can define a business model as a simplified description of how a company does business and makes money without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows, and systems.
Based on an extensive literature research and real-world experience we define a business model as consisting of 9 building blocks that constitute the business model canvas (readers of this blog will realize that this is an updated and slightly adapted version of the model):
- The value proposition of what is offered to the market;
- The segment(s) of clients that are addressed by the value proposition;
- The communication and distribution channels to reach clients and offer them the value proposition;
- The relationships established with clients;
- The key resources needed to make the business model possible;
- The key activities necessary to implement the business model;
- The key partners and their motivations to participate in the business model;
- The revenue streams generated by the business model (constituting the revenue model);
- The cost structure resulting from the business model.
Origins of the term business model
The term business model became popular only in the late 90s, which, personally I think is related to the rapid erosion of prices in the IT and telecom industry.
The roots of my assumption lie in Transaction Cost Economics (TCE). As it became so cheap to process, store, and share information across business units and other companies all the way to the customer, many new ways of doing business became possible.
Value chains were broken up and reconfigured. Innovative information rich or enriched products and services appeared. New distribution channels emerged. More customers were reached.
Ultimately this lead to globalization and increased competition, but, as described above, it also led to new ways of doing business. In other words, today there is a larger variety of how companies can make money. "New" in this case refers to what they do, how they do it and for whom they do it.
For managers and executives, this means that they have a whole new range of possibilities to design their businesses. This results in innovative and competing business models in the same industries.
Before, it used to be sufficient to say in what industry you where in, for somebody to understand what your company was doing. All players had more or less the same business model.
Today it is not sufficient to choose a lucrative industry, but you must also design a competitive business model.
In addition, increased competition and rapid copying of successful business models forces all players to continuously innovate and adapt their business model to gain and/or sustain a competitive edge.
Companies that thoroughly understand their business model and know how the building blocks relate to each other will be able to constantly rethink and redesign these blocks and their relationship to innovate before their business model is copied.
Business models & innovation
The term business model is also closely related to innovation. As I mentioned, the business model concept is related to a whole new range of business design opportunities.
There are examples of business model innovations in each of the 9 building blocks described.
The most obvious is innovating in the value proposition. When mobile phones appeared in the market they offered a different value proposition than fixed line phones.
In the early days of the internet, popular indexes like Yahoo! helped people find information on the web.
Regarding target customer segments, low-cost airlines like EasyJet have brought flying to the masses.
Dell became really successful by exploring the web as a distribution channel.
Gillette has made a fortune by establishing a continuous relationship with customers based on its disposable razors.
Apple resurged based on its core capacity of bringing design to computers and electronic gadgets.
Cisco became famous for its capacity of configuring activities in new and innovative supply chains.
Intel thrived for its capacity to get partners to build on its processing platform.
Google tapped into an innovative revenue stream by linking highly specific search results and content with text ads.
Wal-Mart became dominant by its ability to slash cost throughout its business model.
About the speakers
Dr. Alexander (Alex) Osterwalder is one of the world’s most influential innovation experts, a leading author, entrepreneur and in-demand speaker whose work has changed the way established companies do business and how new ventures get started.
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What Is a Business Model? Business Models Explained
Understanding the problem you are solving for your customers is undoubtedly the biggest challenge you’ll face when you’re starting a business . Customers need to want what you are selling and your product needs to solve a real problem.
But, ensuring that your product fits the needs of the market is only one part of starting a successful business. The other key ingredient is figuring out how you’re going to make money. This is where your business model comes into play.
What is a business model?
A business model is the plan your business has for making money. It’s an explanation of how you deliver value to your customers at an appropriate cost. This includes descriptions of the products or services you plan to sell, who your target market is, and any required expenses.
The business model lets entrepreneurs experiment, test, and model different ways to structure costs and revenue streams. For those just starting out, exploring potential business models can help you determine if your business idea is viable, attract investors and guide your overall management strategy. For established businesses, it serves as the basis for developing financial forecasts , setting milestones, and setting a baseline for reviewing your business plan.
What are the key components of a business model?
In its simplest form, a business model can be broken down into three parts:
- Everything it takes to make something: design, raw materials, manufacturing, labor, and so on.
- Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale.
- How and what the customer pays: pricing strategy, payment methods, payment timing, and so on.
As you can see, a business model is simply an exploration of what costs and expenses you have and how much you can charge for your product or service. It brings together everything defined in the opportunity and strategy sections of your business plan . This includes things like your target market , your value proposition, sales and marketing activities, etc.
How do you know if your business model will be successful?
A successful business model just needs to collect more money from customers than it costs to make the product. This is your profit—simple as that.
New business models can refine and improve any of the three components mentioned above. Maybe you can lower costs during design and manufacturing. Or, perhaps you can find more effective methods of marketing and sales. Or, maybe you can figure out an innovative way for customers to pay.
Keep in mind, though, that you don’t have to come up with a new business model to have an effective strategy. Instead, you could take an existing business model and offer it to different customers. For example, restaurants mostly operate on a standard business model but focus their strategy by targeting different kinds of customers.
17 different types of business models
You don’t have to invent an entirely new business model to start a business. In fact, the vast majority of businesses use existing business models and refine them to find a competitive edge. Here’s a list of business model examples you can use to start your own business .
The advertising business model has been around a long time and has become more sophisticated as the world has transitioned from print to online. The fundamentals of the model revolve around creating content that people want to read or watch and then displaying advertising to your readers or viewers.
In an advertising business model, you have to satisfy two customer groups: your readers or viewers, and your advertisers. Your readers may or may not be paying you, but your advertisers certainly are.
An advertising business model is sometimes combined with a crowdsourcing model where you get your content for free from users instead of paying content creators to develop content.
Advertising business model examples
CBS, The New York Times, YouTube
The affiliate business model is related to the advertising business model but has some specific differences. Most frequently found online, the affiliate model uses links embedded in content instead of visual advertisements that are easily identifiable.
For example, if you run a book review website, you could embed affiliate links to Amazon within your reviews that allow people to buy the book you are reviewing. Amazon will pay you a small commission for every sale that you refer to them.
Affiliate business model examples
Brokerage businesses connect buyers and sellers and help facilitate a transaction. They charge a fee for each transaction to either the buyer or the seller and sometimes both.
One of the most common brokerage businesses is a real estate agency , but there are many other types of brokerages such as freight brokers and brokers who help construction companies find buyers for dirt that they excavate from new foundations.
Brokerage business model examples
ReMax, RoadRunner Transportation Systems
Some businesses take existing products or services and add a custom element to the transaction that makes every sale unique for the given customer.
For example, think of custom travel agents who book trips and experiences for wealthy clients. You can also find customization happening at a larger scale with products like Nike’s custom sneakers.
Customization business model examples
If you can bring together a large number of people to contribute content to your site, then you’re crowdsourcing. Crowdsourcing business models are most frequently paired with advertising models to generate revenue, but there are many other iterations of the model. Threadless, for example, lets designers submit t-shirt designs and gives the designers a percentage of sales.
Companies that are trying to solve difficult problems often publish their problems openly for anyone to try and solve. Successful solutions get rewards and the company can then grow its business. The key to a successful crowdsourcing business is providing the right rewards to entice the “crowd” while also enabling you to build a viable business.
Crowdsourcing business model examples
If you want to make and sell something in stores, you typically work through a series of middlemen to get your product from the factory to the store shelf.
Disintermediation is when you sidestep everyone in the supply chain and sell directly to consumers, allowing you to potentially lower costs to your customers and have a direct relationship with them as well.
Disintermediation business model examples
Casper, Dell, Apple
Instead of selling an entire product, you can sell just part of that product with a fractionalization business model.
One of the best examples of this business model is timeshares. Where a group of people owns only a portion of a vacation home, enabling them to use it for a certain number of weeks every year.
Fractionalization business model examples
Disney Vacation Club, NetJets
Franchising is common in the restaurant industry, but you’ll also find it in all sorts of service industries from cleaning businesses to staffing agencies.
In a franchise business model, you are selling the recipe for starting and running a successful business to someone else. You’re often also selling access to a national brand and support services that help the new franchise owner get up and running. In effect, you’re selling access to a successful business model that you’ve developed.
Franchise business model examples
Ace Hardware, McDonald’s, Allstate
With a freemium business model, you’re giving away part of your product or service for free and charging for premium features or services.
Freemium isn’t the same as a free trial where customers only get access to a product or service for a limited period of time. Instead, freemium models allow for unlimited use of basic features for free and only charge customers who want access to more advanced functionality. For more on the freemium model (and other pricing models popular with SaaS businesses), see this article .
Freemium business model examples
MailChimp, Evernote, LinkedIn
Leasing might seem similar to fractionalization, but they are actually very different. In fractionalization, you are selling perpetual access to part of something. Leasing, on the other hand, is like renting. At the end of a lease agreement, a customer needs to return the product that they were renting from you.
Leasing is most commonly used for high-priced products where customers may not be able to afford a full purchase but could instead afford to rent the product for a while.
Leasing business model examples
With a low-touch business model, companies lower their prices by providing fewer services. Some of the best examples of this type of business model are budget airlines and furniture sellers like IKEA. In both of these cases, the low-touch business model means that customers need to either purchase additional services or do some things themselves in order to keep costs down.
Low-touch business model examples
IKEA, Ryan Air
Marketplaces allow sellers to list items for sale and provide customers with easy tools for connecting to sellers.
The marketplace business model can generate revenue from a variety of sources including fees to the buyer or the seller for a successful transaction, additional services for helping advertise seller’s products, and insurance so buyers have peace of mind. The marketplace model has been used for both products and services.
Marketplace business model examples
Instead of pre-purchasing a certain amount of something, such as electricity or cell phone minutes, customers get charged for actual usage at the end of a billing period. The pay-as-you-go model is most common in home utilities, but it has been applied to things like printer ink.
Pay-as-you-go business model examples
Water companies, HP Instant Ink
14. Razor blade
The razor blade business model is named after the product that essentially invented the model: sell a durable product below cost to increase volume sales of a high-margin, disposable component of that product.
This is why razor blade companies practically give away the razor handle, assuming that you’ll continue to buy a large volume of blades over the long term. The goal is to tie a customer into a system, ensuring that there are many additional, ongoing purchases over time.
Razorblade business model examples
Gillette, Inkjet printers, Xbox, Amazon’s Kindle
15. Reverse razor blade
Flipping the razor blade model around, you can offer a high-margin product and promote sales of a low-margin companion product.
Similar to the razor blade model, customers are often choosing to join an ecosystem of products. But, unlike the razor blade model, the initial purchase is the big sale where a company makes most of its money. The add-ons are just there to keep customers using the initially expensive product.
Reverse razorblade business model examples
iPhone & iTunes, Peloton
16. Reverse auction
A reverse auction business model turns auctions upside down and has sellers present their lowest prices to buyers. Buyers then have the option to choose the lowest price presented to them.
You can see reverse auctions in action when contractors bid to do work on a construction project. You also see reverse auctions anytime you shop for a mortgage or other type of loan.
Reverse auction business model examples
Subscription business models are becoming more and more common. In this business model, consumers get charged a subscription fee to get access to a service.
While magazine and newspaper subscriptions have been around for a long time, the model has now spread to software and online services and is even showing up in service industries.
Subscription business model examples
Netflix, Salesforce, Comcast
Innovate with established business models
This is by no means an exhaustive list of all business models that exist—but, hopefully, it gets you thinking about how you might structure your business.
The key thing to remember is that you don’t need to invent a new business model when you’re starting your business. Using existing models can help lead you to success because the model has been proven to work. You’ll be innovating in smaller ways within that existing business model to grow your business.
A new business model could be extremely lucrative but also brings with it higher risk. You don’t know if customers will accept the model or not.
If you think I should add another business model to this list, please find me on Twitter and let me know.
Editor’s note: This article was originally published in 2017 and updated for 2021.
Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan. You can follow Noah on Twitter .
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8 Types of Business Models & the Value They Deliver
- 26 May 2016
You want to start a company but aren’t sure about a viable business model. How might you create something that people are willing to pay for and could earn you a profit?
Before diving into potential strategies, it’s important to understand what a business is and does. At its heart, a business generates value for its customers. A business model is a specific method used to create and deliver this value.
What Is Value in Business?
A successful business creates something of value . The world is filled with opportunities to fulfill people’s wants and needs, and your job as an entrepreneur is to find a way to capitalize on these opportunities.
A viable business model is one that allows a business to charge a price for the value it’s creating, such that the business brings in enough money to make it worthwhile and continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and quality expectations.
It’s important to note that value is subjective. What’s valuable to one person may not be to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, some professional athletes make far more money than the average brain surgeon.
Nonetheless, the concept of value provides a useful bedrock on which to begin building your business model. In particular, consider what forms of value people are willing to pay for. Here are eight potential business models and the forms of value they deliver—as well as the pros and cons of each—to help you get started.
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8 Types of Business Models to Explore
A product is a tangible item of value. To run a successful product-focused business, try to produce the item for as low a cost as possible while maintaining a reasonable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profit.
Products are all around us. From laptops to books to HBS Online courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.
- Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
- Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a service.
Related: How to Create an Effective Value Proposition
A service involves offering assistance to someone else for a fee. To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality.
Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.
- Pros: If you have a skill in high demand or a skill that very few others have, you can charge a fair price for your time and stand out in your field.
- Cons: If you don’t charge enough for your services, or many people have your skill, your business may not be as lucrative.
3. Shared Assets
A shared asset is a resource that many people can use. Such resources allow the owner to create or purchase the item once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience.
For instance, think of a fitness center. A gym typically buys treadmills, ellipticals, free weights, bikes, and other equipment and charges customers monthly membership fees for access to these shared assets. The key is to charge customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.
- Pros: This model provides people access to a lot of assets they wouldn’t otherwise have access to. In addition, many people are willing to pay a lot for access to trendy social spaces.
- Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough in your budget for quick fixes, if necessary.
A subscription is a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include the recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service isn’t affected by others.
To have a successful subscription-based offering, build a subscriber base by providing reliable value over time while attracting new customers.
The number of subscription services has exploded in recent years. From magazines to streaming services to grocery and wine delivery subscriptions, businesses are turning to the subscription-based model, often with great success.
- Pros: This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (for instance, customers may forget to cancel their subscription).
- Cons: To run this model, your business operations must be strong. If you can’t deliver value consistently over time, you may want to consider a different business model.
A lease involves obtaining an asset and renting it out for an agreed-upon amount of time in exchange for a fee. You can lease virtually anything, but it’s in your best interest to rent assets that are durable enough to be returned in good condition. This ensures you can lease the good multiple times and, perhaps, eventually sell it.
To profit from leases, the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price. This requires you to price the rental of the item strategically and potentially not lease to those who may not return it in good condition. This is why many rentals of high-value items require references, credit checks, or other background information that can predict how someone may return the leased item.
- Pros: You don’t have to have a novel idea to make money using a lease business model. You can purchase assets and rent them to others who wouldn’t buy them for full value and earn a premium.
- Cons: You need to protect yourself from unexpected damage to your assets. One way to do so is through insurance.
Insurance entails the transfer of risk from a customer to a seller of an insurance policy. In exchange for the insurance company (the seller of the policy) taking on the risk of a specified event occurring, they receive periodic payments ("premiums" in insurance lingo) from the policyholder. If the specified event doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder.
In a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic, risks. Policyholders can take insurance out on almost anything: life, health, house, car, boat, and more. To run a successful insurance company, you have to accurately estimate the likelihood of bad events occurring and charge higher premiums than the claims you pay out to your customers.
- Pros: If you calculate risk accurately, you’re guaranteed to make money using the insurance business model.
- Cons: It can be difficult to accurately calculate the likelihood of specific events occurring. Insurance only works because it spreads risk over large numbers of policyholders. Insurance companies can fail if a large portion of policyholders is impacted by a widespread, negative event they didn’t see coming (for example, the Global financial crisis in 2007 and 2008).
Related: 5 Steps to Validate Your Business Idea
Reselling is the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products they then sell to buyers. For example, think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to a hardware store.
Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a higher price to individuals. This price raise is called a markup.
- Pros: Markups can often be high for retail sales, enabling you to earn a profit on the items you resell. For example, a bottle of water might cost 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for the same bottle.
- Cons: You need to be able to gain access to quality products at low costs for the reselling business model to work. You’ll also need the physical space to store inventory to manage sales cycles.
Agents create value by marketing an asset, which they don’t own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.
Running a successful agency requires good connections, excellent negotiation skills , and a willingness to work with a diverse set of individuals. One example is a sports agent who promotes players to teams and negotiates on their behalf to get the best deal. In return, they typically receive compensation equal to a certain percentage of the contract.
- Pros: You can highly profit from expertise and connections in your industry, be it publishing, acting, advertising, or something else.
- Cons: You only get paid if you seal the deal, so you have to be able to live with some uncertainty.
Setting Your Business Up for Success
These eight types of business models each have pros and cons and deliver value in their own ways. If you’re looking to start a business and need a place to start, one of these could be the best fit for your venture and entrepreneurial skill set .
Interested in honing your entrepreneurial skills? Explore our four-week online course Entrepreneurship Essentials and our other entrepreneurship and innovation courses to learn the language of the business world.
This post was updated on February 19, 2021, and is a compilation of two posts, previously published on May 26, 2016, and June 2, 2016.
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What Is A Business Model? The 30 Types Explained
Your prototype might be ready for presentation to investors or licensees, but it is worth nothing if you do not have a business model in place. How will you explain to anyone what your product does or intends to do and how it will create value for customers and the company?
You need a business model for that.
It is a term people frequently use, but most of them don’t truly understand what it means. Michael Lewis, the author of The New, New Thing: A Silicon Valley Story , says that a business model is a “term of art”. Most people know it when they see it but cannot accurately describe it.
So, what exactly is a business model, and what are its components?
Let’s find out.
What Is A Business Model?
A business model is a conceptual structure that supports the viability of the business and explains who the business serves, what it offers, how it offers it, and how it achieves its goals.
All the business processes and policies that a company adopts and follows are part of the business model.
According to management coach Peter Drucker:
A business model is supposed to answer who your customer is, what value you can create/add for the customer and how you can do that at reasonable costs.
Thus, a business model is a description of how a company creates, delivers, and captures value for the customer as well as itself.
What Are The Components of A Business Model?
An ideal business model usually conveys four key aspects of the business , which are presented using a specialised tool called business model canvas . These key components are customers, value proposition, operating model, and revenue model.
Precisely, a business model answers the following key questions –
- Who is the customer?
- What value does the business deliver to the customers?
- How does the business operate?
- How does the business make money?
Who Is The Customer?
The customer forms the heart of a business model. It answers who the company plans to sell its offerings to. A business usually groups customers into different segments with certain homogeneous needs, characteristics, or behaviour. It then defines one or more customer segments that it serves or wants to serve, followed by an answer to why it plans to serve this segment.
What Value Does The Business Deliver To The Customers?
This is the most important component of a business model that answers several key customer and business value-related questions. It is often usually presented using a value proposition canvas .
- What are the jobs the customer wants to be done?
- What are their pains in doing the job?
- What do they gain by doing the job?
Once these questions are answered, the business answers another set of questions that relates business to the customers:
- How does the business get the job done?
- How does the business relieve the customer’s pain?
- How can the business help the customer get the gains?
How Does The Business Operate?
It’s the operating model of the business that elaborates:
- Key Activities: What all offerings does the business sell to the customers?
- Key Partners: Who helps the business in delivering value to the customers?
- Key Resources: What all resources do the business uses to develop and deliver its offerings?
- Key Channels: What channels does the business use to deliver its offerings to the customers?
- Customer Relationships: What type of relationships does the business maintain with its customers?
How Does The Business Make Money?
Making money is important for the business to sustain itself. This component of the business model focuses on elaborating on the financials and how the business makes money.
It’s called the revenue model of the business and has two components:
- The cost structure includes all the expenses that the business incurs in creating and delivering value to the customers.
- The revenue streams include all the primary and non-primary revenue streams that the business utilises.
Why Is It Important To Develop A Business Model?
The business model acts as the blueprint of the business and a roadmap for its success (or failure). This tool helps the founders decide how their business will work and make money.
It is the only documentation that makes clear –
- The business concept – the market opportunity the business capitalises on.
- The target market the business caters to.
- The problems the business intends to solve.
- The solution the business offers and how it creates customer value.
- How the business gets its customers.
- The operating model the business follows.
- How the business makes money, and what are the costs incurred to get the same.
Moreover, the business model gives a reason for the customers to choose the offering over others in the market. People chose Facebook because it helped them connect and chat with other people around the world (operating model), and it didn’t even charge for it (revenue model). Netflix’s business model was preferred over others as it provided value in the form of consistent on-demand content instead of the usual TV streaming business model.
The 30 Types Of Business Models
There are different types of business models meant for different businesses. Some of the basic types of business models are:
A manufacturer makes finished products from raw materials. It may sell directly to the customers or sell it to a middleman i.e another business that sells it finally to the customer. Examples – Ford, 3M, General Electric.
A distributor buys products from manufacturers and resells them to retailers or the public. Examples – Auto Dealerships.
A retailer sells directly to the public after purchasing the products from a distributor or wholesaler. Examples – Amazon and Tesco.
A franchise can be a manufacturer, distributor or retailer. Instead of creating a new product, the franchisee uses the parent business’s model and brand while paying royalties to it. Examples are McDonald’s and Pizza Hut.
Brick-and-mortar is a traditional business model where retailers, wholesalers, and manufacturers deal with customers face-to-face in an office, a shop, or a store that the business owns or rents.
The ecommerce business model is an upgradation of the traditional brick-and-mortar business model. It focuses on selling products by creating a web store on the internet.
A company that has both an online and offline presence allows customers to pick up products from the physical stores while they can place the order online. This model gives flexibility to the business since it is present online for customers who live in areas where they do not have brick-and-mortar stores. Examples – Almost all apparel companies nowadays.
In this model, the basic product provided to the customers is very cost-sensitive and hence priced as low as possible. For every other service that comes with it, a certain amount is charged. Examples – All low-cost air carriers.
Freemium is one of the most common business models on the Internet. Companies offer basic services to customers for free while charging a certain premium for extra add-ons. So there will be multiple plans with various benefits for different customers. Generally, the basic service comes with certain restrictions or limitations, such as in-app advertisements, storage restrictions etc., which the premium plans shall not have. For example, the basic version of Dropbox comes with 2 GB of storage. If you want to increase that limit, you can move to the Pro plan and pay a monthly premium of $9.99 a month. Some online image editors allow you to edit only a certain number of images in the free basic plan while an unlimited number of images is in the paid plan.
Youtube’s free plan comes with ads, while the premium plan has no ad interruption and other benefits. This model is one of the most adopted models for online companies because it is not only a great marketing tool but also a cost-effective way to scale up and attract new users.
If customer acquisition costs are high, this business model might be the most suitable option. The subscription business model lets you keep customers over a long-term contract and get recurring revenues from them through repeat purchases. Examples – Netflix , Dollar Shave Club .
The aggregator business model is a recently developed model where the company has various service providers of a niche and sells its services under its own brand. The money is earned as commissions. Examples – Uber , Airbnb , Oyo .
Online marketplaces aggregate different sellers into one platform who compete to provide the same product/service at competitive prices. The marketplace builds its brand over different factors like trust, free and/or on-time home delivery, quality sellers, etc. and earns a commission on every sale carried on its platform. Examples are Amazon and Alibaba .
Advertisement business models are evolving even more with the rise of the demand for free products and services on the internet. Just like the earlier times, these business models are popular with media publishers like Youtube , Forbes, etc., where the information is provided for free but is accompanied by advertisements that are paid for by identified sponsors.
Data Licencing / Data Selling
With the advent of the internet, there has been an increase in the amount of data generated from users’ activities over the internet. This has led to the advent of a new business model – the data licencing business model . Many companies like Twitter and Onesignal sell or licence the data of their users to third parties who then use the same for analysis, advertising, and other purposes.
An agency can be considered a partner company that specialises in handling non-core business activities like advertising, digital marketing, PR, ORM, etc. This company partners with several other companies that outsource their non-core tasks to them and is responsible for maintaining privacy and efficiency in their work. Examples of such agencies are Ogilvy & Mathers, Dentsu Aegis Network, etc.
The affiliate marketing business model is a commission-based model where the affiliate builds its business around promoting a partner’s product and directs all its efforts to convince its followers and users to buy the same. In return, the affiliate gets a commission for every sale referred. An example of a business operating on an affiliate marketing business model is lifewire.com.
Dropshipping is a type of e-commerce business model where the business owns no product or inventory but just a store. The actual product is sold by partner sellers who receive the order as soon as the store receives an order from the ultimate customer. These partner sellers then deliver the products directly to the customer.
Network marketing or multi-level marketing involves a pyramid-structured network of people who sell a company’s products. The model runs on a commission basis where the participants are remunerated when –
- They make a sale of the company’s product.
- Their recruits make a sale of the product.
The network marketing business model works on direct marketing and direct selling philosophy where there are no retail shops, but the offerings are marketed to the target market directly by the participants. The market is tapped by making more and more people part of the pyramid structure, where they make money by selling more goods and getting more people on board.
The crowdsourcing business model involves the users contributing to the value provided. This business model is often combined with other business and revenue models to create an ultimate solution for the user and to earn money. Examples of businesses using the crowdsourcing business model are Wikipedia , reCAPTCHA , Duolingo , etc.
Peer 2 Peer Catalyst/Platform
A P2P economy is a decentralized internet-based economy where two parties interact directly with each other to buy or sell goods or to conduct a transaction without the intervention of any third party. A P2P catalyst is a platform where these users meet. Examples of P2P platforms are Craigslist , OLX , Airbnb etc.
The Blockchain is an immutable, decentralised digital ledger. It is a digital database that no one owns, but anyone can contribute to. Many businesses are taking this decentralised route to develop their business models. Models based on blockchain are not owned or monitored by a single entity. Rather, they work on peer-to-peer interactions and record everything on a digital decentralized ledger.
SAAS, IAAS, PAAS
Many companies have started offering their software, platform, and infrastructure as a service . The ‘as a service’ business model works on the principle of pay-as-you-go, where the customer pays for his usage of such software, platform, and infrastructure; he pays for what and how many features he has used and not for what he hasn’t.
The high-touch model is one that requires lots of human interaction. The relationship between the salesperson and the customer has a huge impact on the overall revenues of the company. Companies with this business model operate on trust and credibility. Examples are hair salons and consulting firms.
The opposite of the high-touch model, the low-touch model requires minimal human assistance or intervention in selling a product or service. Since, as a company, you do not have to maintain a huge sales force, your costs decrease, though such companies also focus on improving technology to reduce human intervention further while making the customer experience better at the same time. Examples – Ikea, SurveyMonkey.
Mostly used for unique items that are not frequently traded and that don’t have a well-established market value, like collectables, antiques, real estate, and even businesses.
This business model involves the listing of an offering by the seller and the buyers making repeated bids to buy that offering while fully aware of other bids by other buyers. The offering is sold to the highest buyer, with the auction broker charging a listing fee and/or commission based on the transaction value.
eBay is one such auction platform.
A reverse auction is an auction where the roles of a buyer and seller are exchanged, i.e. sellers bid prices instead of buyers.
The reverse-auction-based business model is often used when there are several sellers selling a similar offering to a single buyer. These sellers lower their prices with every bid; generally, the lowest bidder wins the auction. However, there are cases when the bidder with a price higher than the lowest bid wins the auction as the buyer likes his offer (offering with add-ons)
A platform that lets sellers bid for government contracts is an example of a reverse auction-based business model.
Razor And Blades
Razor and blade model is used by companies that deal in complementary or companion products like razors and blades.
It involves selling the high-margin root product at a low price to increase the volume of sales of the complementary or related low-margin product.
By using this model, businesses create a stream of recurring income over the life of the root product.
Companies dealing in razors, mosquito vaporizers, and other refillable products employ this business model. The game industry also makes use of this model by providing the gaming console at a very economical price and making good profits with the sale of games.
Reverse Razor And Blades
A business employing a reverse razor and blades model offers the low-margin item at a very less price or below the cost to encourage the sale of the high-margin product.
Amazon employs this business model to sell its Kindle e-reader. It provides Kindle ebooks at a price lower than their actual cost to make people consider Kindle as a one-time investment to enjoy low-cost books throughout its life.
An on-demand model is where a customer’s demand is fulfilled by delivering goods and services on demand (usually immediately).
The use of the Internet and mobile phones drives this business model. It works like this –
- The customer order for products on services through a web app.
- The company’s employee or a demand-fulfilling partner receives the request.
- The employee or a partner fulfils the demand by delivering the ordered product or service either immediately or in the time promised.
Uber, Instacart, and Postmates are some examples of an on-demand business models.
Driven by the network effect , this business model involves granting access to a community or a network in return for a membership fee.
Glassdoor is a good example of such a user community.
Of course, most companies do not operate on any one of these business models but rather on a combination of some. You can be a Bricks-and-clicks Low Touch Retailer or a High Touch Subscription-Based Manufacturer. What business model you choose depends on your business needs and what value you want to create for your stakeholders. Next, we will see how to develop the perfect business model for your startup so that the chances of your success are amplified.
The Startup Process
We know how important your dream business is to you. Therefore, we’ve come up with an all-in-one guide: The Startup Process to help you turn your vision into reality.
A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.
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What Is a Business Model?
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A business model is a plan describing how a business will make money. It is an outline that explains the company’s revenue and cost structure, and how it expects to turn a profit—or at least sustain itself as a going concern.
- A business model is an outline of how your business will generate a profit. The plan includes important information like target market, market need, and details on business expenses.
- There are lots of types of business models, and models can be combined as well. You’re probably familiar with some of the more common ones like manufacturer, distributor, retailer, and franchise.
- When creating a business model, you should be clear about who your target customer is and how you’ll reach them. You’ll also want to know specifics about what you’re selling, and what sets you apart from your competition.
Definition and Examples of a Business Model
A business model is an outline that breaks down the ways that a company makes its profit. It identifies the target market, the market’s need, and how the business will serve its customers. The plan also includes the costs incurred from expenses like producing and marketing the product. There are multiple types of business models, each tailored to fit the unique needs of various businesses.
An example of a business model is one in which the concepts are split into two categories—business ideas and business resources. Under the business idea category lies products and services, target audience, competition, differentiation, advertising, and sales. Business resources, meanwhile, are what’s needed to make the idea work and can be divided into ownership, staffing, facilities, financial model, funding, and balance sheet.
A business is unlikely to be successful unless all facets of the business model provided in the example above allow it to be competitive in its marketplace.
Types of Business Models
Here are a few commonly used business models that you’re probably familiar with.
This type of business model is when a company makes a product from raw materials or assembles prefabricated items to create new merchandise. The business can sell the items directly to consumers itself, which is a business-to-consumer (B2C) model, or it can use a business-to-business (B2B) model in which it sells to other businesses.
An example of a B2C manufacturer would be a shoe company that sells its products directly to customers. A B2B manufacturer would be a business that sews dresses and only sells its products wholesale to other businesses, which then sell the dresses to the general public.
The distributor business model is when a company purchases inventory from a manufacturer and sells it to either a retailer or directly to the public. A common challenge that distributors face is picking the right price point that allows them to make a profit on the sale, but still offers competitive pricing. An example of a distributor would be a company that buys soft drinks from a manufacturer and sells those beverages to restaurants at a higher price.
There are many different types of business models and multiple models can be combined to create a new approach.
Retail business models are those used by companies that buy inventory from a manufacturer or distributor and sell those products to the public. Retailers can range from a single mom-and-pop shop to huge chain stores—they often have brick-and-mortar locations, an online store, or both.
An example of a retailer would be a hat store that buys the products from a distributor. A limited selection of the hat store’s products is available at its brick-and-mortar storefront, but its full inventory can be purchased online.
The franchise business model can be applied to other business models, like the ones we just discussed. The franchisee takes on the business model of the franchise and with it, the latter’s pre-established processes and protocols. Examples of popular franchises include McDonald’s, KFC, Burger King, and 7-Eleven.
When developing your business model, identify your target customer and how you’ll reach them. You’ll also want to familiarize yourself with what you’re selling (costs, margins, features, benefits, etc.) and what your competitive advantage is .
SCORE. “ Do you have a Successful Business Model? ”
SCORE. “ Develop Your Business Model by Answering These 4 Questions .”
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