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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.

Key Takeaways

• 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

Manufacturer

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

Fee-for-Service

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

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.

Example: Spotify

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.

Example: AT&T

Marketplace

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.

Example: eBay

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.

Razor Blade

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

Pay-As-You-Go

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.

Example: ReMax

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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Product Business Model

The product business model is a dyadic transactional relationship where your good or service can be designed and delivered without prior interactions with the customer.

This Pathway Requires

Selling products or services is the oldest and most common form of business model.

Exemplars for B2C include Ford motor cars; McDonald’s hamburgers, and for B2B companies include electric motors for consumer durables. This pathway requires:

• Identifying potential customers
• Identifying how to capture awareness and create demand
• Identifying mechanisms of monetization – that include unit price, freemium , razor-blade , discounts for quantity
• There are many ways the firm can be structured that include: hierarchical-integrated or unbundled-networked among partners of suppliers and channels.

Scalability – Greater volumes typically reduce costs.

Profitability – When the firm achieves scale and there are high entry barriers.

Risk – Copycat products especially those with lower costs.

Learn from exemplars

Transform your thinking of the product business model.

The BusinessModelZoo™ provides insight to help you understand and navigate the opportunities and rewards as well as risks and threats to the product business model it faces from the other business model pathways.

Engaging dynamically and as a result fulfilling more completely my customer’s needs is an essential element of transforming from a product to a solutions business model . These moves are likely to involve some significant costs, and are typically worthwhile only when I can digitize critical elements of the offering that allow the dynamic engagement to be offered at large scale (see digital solutions exemplar). The benefits of a solutions business model are typically higher prices and the opportunity to tailor prices to particular customers.

Adding a physical market place (or better a digital market place) that allows customers to buy not just my offerings but also those of rivals is an addition to my business portfolio . By definition, a market place uses a matchmaking business model that allows me to engage with a wider group of customers and to learn more about rival offerings, but typically demands more resources and a much more-nimble approach to management. Amazon’s market place is not a very profitable business considered separately, but this matchmaking business model has allowed Amazon to create complementary businesses such as AWS that are very profitable.

Adding a new customer group that brings a new additional revenue stream on account of their interactions with my current customers is an essential element of becoming a multi-sided business model. Such actions will be challenging, costly and are typically only achieved in stages, but might be a very profitable final end point. The new customers are likely to be advertisers, and whoever they are it is essential that they engage with my existing customers in a value adding manner. I will need enhanced capabilities to service this new group of customers (the advertisers). Once again, to be really effective as a multi-sided business model , I will have to digitize many elements of my offering.

My physical product business model is at risk from rivals offering solutions business models at scale. In every industry, there are small scale operators who offer solutions business models that are not a threat, but there is a significant threat when a large-scale operator appears with an attractive solutions business model . Such has been the case in capital goods industries where large firms are offering digitally enhanced products or services that engage more effectively with customer needs and are offered on “pay for use and performance” basis. Such a threat can only be countered either by my reducing price significantly, or by my switching to a solutions business model, something that will involve significant costs (see text above).

If a market place appears in my industry, my sales could be increased by participating in this matchmaking business model , but I might lose my direct customer relationship and that may reduce my profits. Airbnb expanded the sales of its smaller rental firm participants many-fold, but threatened traditional hotel chains who were reluctant to participate because they no longer “owned the customer”. My best response maybe to develop a solutions business model (see text above).

It may be very difficult to counter an effective multi-sided business model competitor, especially if the multisided firm is able to use one of its customer groups to subsidize the costs (and prices) of its offering. If the appearance of the extra customer group debases the offering in the eyes of your customers (as in say advertising supported educational offerings) you may be able to resist by maintaining the integrity of your offer. Otherwise you might be forced to change your business model to either a solutions business model or a multi-sided business model (see text above).

Engaging dynamically and as a result fulfilling more completely my customer’s needs is an essential element of transforming from a digital product to a digital solutions business model . Even in the digital sphere, these moves are likely to involve some significant costs. The benefits of a solutions business model are typically higher prices and the opportunity to tailor prices to particular customers.

Adding a digital physical market place that allows customers to buy not just my offerings but also those of rivals is an addition to my business portfolio. By definition, a market place uses a matchmaking business model that allows me to engage with a wider group of customers and to learn more about rival offerings, but typically demands more resources and a much more-nimble approach to management. Electronic games producers often run market places, and this aspect of their business is typically not a very profitable business considered separately, but the matchmaking business model allows the games producers to gain insights into market trends and competitor offerings.

Adding a new customer group that brings a new additional revenue stream on account of their interactions with my current customers is an essential element of becoming a multi-sided business model . Such actions will be challenging, costly and is typically only achieved in stages, but might be a very profitable final end point. The new customers are likely to be advertisers, and whoever they are it is essential that they engage with my existing customers in a value adding manner. I will need enhanced capabilities to service this new group of customers (the advertisers).

My digital product business model is at risk from rivals offering a digital solutions business model because customers of solutions business models are typically more loyal. Such a threat can only be countered either by my reducing price significantly, or by my switching to a solutions business model, something that will involve significant costs (see text above).

If a digital market place appears in my industry, my sales could be increased by participating in this matchmaking business model , but I might lose my direct customer relationship that may reduce my profits. (see text above).

It may be very difficult to counter an effective multi-sided business model competitor, especially if the multisided firm is able to use one of its customer groups to subsidize the costs (and prices) of its offering. If the appearance of the extra customer group debases the offering in the eyes of customers (as in say advertising supported educational offerings) you may be able to resist by maintaining the integrity of your offer. Otherwise you might be forced to change your business model to either a olutions business model or a multi-sided business model (see text above).

Discover other  Business Model  pathways

Explore all four business model pathways for developing your business. Each describes an ideal model of how a business can engage with its customer, deliver value, and monetize the result.

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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

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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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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.

4. Subscription

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.

5. Lease/Rental

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.

6. 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

7. Reselling

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.

8. Agency/Promotion

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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How to Design a Winning Business Model

• Ramon Casadesus-Masanell
• Joan E. Ricart

Smart companies’ business models generate cycles that, over time, make them operate more effectively.

Reprint: R1101G

Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.

Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.

Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.

The Idea in Brief

There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.

However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.

Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.

By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.

This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.

Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.

• RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
• JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.

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Home / Online Business Degree Programs / Traditional Types of Business Models

Traditional Types of Business Models

A business model is simply the overarching plan of a company to generate a profit by selling a service or a product. The business model provides an outline of the plans of the company to produce a product or service and to market it. This plan also includes the expenses that will occur with manufacture and marketing of the service or product. Different business models exist, each of which can suit different companies and types of businesses.

Manufacturer

The manufacturer business model utilizes raw materials to create a product to sell. This type of business model might also involve the assembly of prefabricated components to make a new product, such as automobile manufacturing. A manufacturing business can sell the products created directly to customers, which is known as the business-to-consumer model. Another option involves outsourcing the sales aspect of the process to another company, which is known as the business-to-business or B2B model. Wholesaling manufacturers typically sell products to retailers, which then sell directly to consumers. An example of this type of company might be a clothing manufacturer that sells merchandise to a retailer, which then sells to consumers.

Distributor

A company fitting the distributor business model would be a business that buys products directly from a manufacturing company. This business would then resell the products directly to consumers or to a retailer. The distributor often acts as one of the middle points between a manufacturer and the general public. Distributors have the challenge of setting price points that will produce a profit while also utilizing effective promotion strategies that will secure strong sales. Competition can be fierce for distributors, which necessitates continual analysis of the market.

A retailing business purchases products directly from a wholesale or distributing company, then sells the inventory directly to the public. Retailers often utilize a brick-and-mortar location for points of sale. Examples of retailers include grocery stores, clothing stores, and department stores. Retailers might be nationwide chains, or they could be independent shops operated by a single entity. A physical location for a retailer is common but not mandatory. Retailers may choose to offer sales as an online retailer. Online retailing can be done alone or in combination with selling from a physical location. Retailers experience the ongoing challenge of competing against other retailers that offer similar products.

A franchise business model might involve any of the other business models, such as manufacturing, distributing, or retailing. Franchise business are set up according to the unique service or product sold or produced. The business model of the franchise is adopted by the purchaser of the franchise, who is known as the franchisee. Purchasing a franchise has some important benefits for the franchisee, since most business processes and protocols are already established for the business. However, with these established protocols come less flexibility for the franchisee.

Additional Business Model Structure Options

Within these four standard business models, business owners can structure their companies to include specific features of one or more models. For example, a company that engages in direct sales to consumers might integrate a process of product demonstrations in the consumer’s home. Companies could also engage in direct online sales without the use of an intermediary company. Retailers that utilize both a physical store location and a website could offer online sales for consumers who could then pick up their items at the brick-and-mortar store. Companies might also hold Internet auctions for sales. Some businesses also utilize a sales approach that offers a free basic service with the option to upgrade to a paid, premium service. Business model structures can vary significantly, and companies might explore a wide array of combinations to find a model that meets with success.

• The Importance of Business Models  (PDF)
• How Entrepreneurs Identify New Business Opportunities
• The Business Plan
• What Is a Business Model?
• It’s the Business Model, Stupid!
• Types of Business Models
• Overview of Business Models  (PDF)
• Evaluating Your Business Model
• Types of Business Models  (PDF)
• What Are Business Models, and How Are They Built?  (PDF)
• Business Model Design  (PDF)
• Three Ways to Innovate Your Business Model  (PDF)
• Business Models  (PDF)
• Business Model Elements in Different Types of Organizations in the Software Business  (PDF)
• How to Choose a Business Model That Actually Makes Money
• Nine Proven Business Models to Consider for Your Startup
• Using Strategy to Change Your Business Model
• Six Great Business Models to Consider for a Startup
• Examples of Business Models Used in Major Industries
• Making Sense of Business Models in the Sharing Economy

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The Joy of Business

Products business model

This article is all about the products business model. It’s part of a series of articles about business models. If you haven’t yet read the central article about all the different types of business model you might use, you might want to start with that as your guide first. Or just dive in here for some tips on the products business model.

Update – I’ve gone much further into the products business model since I wrote this article. You should now check out all the fantastic resources at Adventures In Products , which is completely dedicated to productising, all for small business owners.

Adventures in Products

The big difference between selling products and selling services

When you sell products, you sell a one-off item. It might be a physical thing, such as a teddy bear. It might be a digital product , such as an ebook about some teddy bears who go for a picnic.

The point is that you’ve made a thing, and you sell this to your customer. Once you’ve made it you’ve pretty much done. When you sell a service, you’re effectively selling time, not a thing.

Some examples to make this a bit clearer

Maggie from BakeitFreeFrom sells kits for people to make allergen-free vegan cakes at home. That’s a product.

My friend Jennifer Lindsay-Clarke makes bizarre chocolate sculptures with Benedict Cumberbatch’s head on a rabbit’s body. That’s a product, as well as being weird.

I write books and sell them on my website and Amazon. That’s a product – once I’ve written the book, I’m finished, and I just need to sell it.

You don’t have to make the product yourself. I used to work with a client who bought mugs in Morrocco and sold them in the UK. He just bought mugs, and then, later on, ordered some to his own design.

Xero accounting is a product – they sell you some software so you can do your accounts. It’s still a product, even though we call this software as a service because you’re not actually buying their software, you’re just paying every month to be able to use their product.

We usually talk about the products business model when you’re making (or buying) something which you sell lots of.

And that’s the big difference between selling billable hours and selling on the products business model. With products, you can scale your business up and sell hundreds. When you sell services on a billable hours business model, you don’t have hundreds of hours in a day.

Repeatability and scalability

When you’re using the products business model, you’re selling a lot of the same thing. You’re repeating yourself. When Maggie from Bake it Free From sells me a cake kit, it’s the same cake kit as she sells to anyone else. We all get the same allergen free ginger cake. It takes Jennifer some time to make each Cumberbunny, but the real-time investment was to sculpt the mould, develop the techniques and work out which chocolate works best.

It’s repeatable. I don’t have to write a new book about small business pricing for each person who buys it. But when someone comes to me for advice about their pricing strategy , I do have to think about it differently each time and use my skills as a business advisor to come up with a solution for them. That’s a service and uses up some of my time each time I do it.

That repeatability is what makes the products business model so attractive.

Once you’ve done the initial work of sourcing or developing the product, you’re selling the same thing over and over again. Which makes it scaleable. Maggie can sell thousands of cake kits. Sure, each one takes some time to put together, but nothing like the amount of time it took Maggie to develop the first one.

Why we like the product business model

The product model is lovely when you want a business which you can build up because there’s no limit on how big you can grow that business. Of course, there are different stages of growth with the product model, and you still have to work on the marketing, but you’re not limited by the number of hours in the day.

When you’re selling services, you do have a ceiling of the number of hours you can work. And the only way to expand the business is to either take on more people to provide the services (moving on to running an agency) or to move to something closer to the products business model.

And we like the products business model because you are much more likely to build up a business which you can sell in a few years. Someone else can maybe take over the business from you and carry on selling the products. This can still be true of a services business, but it’s more difficult to train people to do the services, and to make yourself redundant from the company.

That’s why businesses based on the products business model tend to sell for more money than a service-based business.

Another example

Let’s take a massage therapist as a pretty extreme example.

Paul (not his real name) is a massage therapist. He worked with me and learnt lots about pricing and marketing, so he’s a pretty successful massage therapist now. He’s booked out every day, and he’s making okay money. He can do five massages a day, charging £55 a time, and works four days a week. He takes six weeks holiday a year and turns over 50k a year. After he’s paid for his massage studio and his marketing, he makes a 38k profit in a year.

But then Paul notices that his wrists are getting sore. And that he’s getting tired at the end of the day and doesn’t want to see his friends anymore because he’s taking on all the emotions his massage clients bring along with them. This is annoying, because he’s got a 3-year-old son and he wants to be able to play with him when he gets home.

Paul starts thinking about something more scalable. He cuts down on his clients and starts a product business, running courses on how to run a successful massage business.

Getting it off the ground is difficult and takes two years. But by the end of this, he’s got a much more successful business, with no limit on the number of courses he can sell, and he gets to play with his son every evening. They all live happily ever after.

What’s the hell bit?

The hell bit for a product business is usually at the beginning. It takes time to develop the product. Maggie took two years to work out how to make cakes that would still be tasty, even when they’re vegan and allergen-free. And then it takes time to do the marketing, and start getting customers in.

Product businesses are great for people who have some financial security behind them and are in the business for the long run. If you need to generate cash flow quickly, and/or you’re not too bothered about building a more significant business or one which you can sell for a large chunk of cash, you’re much better off with services, not products.

The other bits to remember with the product business model

There are time and money costs for each product you sell. These might be tiny if you have a digital product, but they’re still there. And if you’re selling a physical product, there’s going to be a cost with each one. That cost will be what you pay for the product or the raw materials, but will also be the cost of the postage, packing and handling.

Many people put a lot of effort into building their skills to develop a product, but forget to hone their skills in pricing , marketing and running a business. Both are important for growing a successful business.

More blogs on business models: 

Do we all need to be disruptive? 

What business model are you using? 

The lessons from Yummy Lollies

Julia Chanteray

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Product model and solution model

Differences and implications for social businesses.

As we discussed in other sections of our website, we are on a mission to help changemakers getting more familiar with the topic of business modelling . Navigating through business models for social enterprises might indeed get challenging at times. In this article, we dig into the main differences between two diverse business models: product-based and solution-based . 

Business model: a brief description

First things first, just in case you missed it. What is a business model?

According to Alex Osterwalder , a business model is “ the rationale of how an organization creates, delivers, and captures value “. The core of it all lays in the concept of value and “ value proposition “. Therefore, a business model makes explicit the kind of value provided to the audience, the infrastructure (i.e. activities, resources, etc.) needed to deliver it, and what’s in it for the firm.

Now, applying this logic to social entrepreneurship can get a little bit tricky. As a matter of fact, social businesses need to simultaneously create value for their beneficiaries (often fragile or unprivileged communities) and remain financially sustainable while doing it. “Quite a though challenge” , right?

True, but there are several business models for social enterprises interested in taking this path. Among all, we discuss below two different types: product model and solution model .

Product model and solution model described

Let’s start with the product-based business model . Social firms adopting a product model sell (or rent) products/services to a customer segment, getting paid in return. Here, customers and beneficiaries are actually one and the same. Because of that, social impact and profit are delivered simultaneously.

On the other hand, we have the solution-based business model . Once again, customers and beneficiaries here overlap, as social firms using such model still sell directly their beneficiaries. Yet, this time they do not sell standardized products/services, with standardized features and a clearly defined pricing. Actually, it’s quite the opposite.

Product model and solution model: main differences

Even though “product” and “solution” models are both “ direct models ” (selling directly to beneficiaries), they radically differ . The main reason stands in the way the firm engages and interacts with its target in order to tailor its offering.

As a matter of fact, companies adopting a product model create and deliver standardized products/services . This means that there is pretty much only one, unique offering for the whole market. The product or service sold stays the same regardless of the customer/beneficiary receiving it, with little or no room for adaptation and personalization.

Conversely, social enterprise implementing a solution model develop specific offerings with and for every single customer . This means that the company has to engage with the customer/beneficiary first, in order to create mutual trust and understand his specific needs and expectations. Only then, an integrated solution (most of the times, a service) is developed and delivered. This means that the offering is tailored , instead of being standardized.

As you may expect, choosing one model over another depends on different factors. For instance, we should prefer a “ solution ” model over a “ product ” one when the needs strongly differ from one beneficiary to the other. In such case, standardized products or services would fail in creating the same kind of value for each individual. However, keep in mind that it might be easier to achieve scalability and profitability through a product model, as customization processes can get quite costly.

As you probably understood, Social Business Design is all about breaking down business models of successful social enterprises. That’s why in this article we analyzed the main differences between product model and solution model .

As seen, on one hand there is the product-based model , that creates and delivers standardized offering to its target. On the other one, we have solution-based models , that tend to engage first with customers/beneficiaries and then develop specific , tailored offerings for each one of them.

So, what about you? Which of these two business models do you think can better suit with the project you have in mind? Let us know in the comment section or feel free do drop us a message !

Did you like this article?

If so, then don’t forget to check out for more at Social Business Design .

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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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