Business Model
What Is a Business
Model?
• 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.
• 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 companies attract investment,
recruit talent, and motivate management
and staff.
• Businesses should regularly update their business model or
they'll fail to anticipate trends and challenges ahead.
• Business models also help investors to evaluate companies
that interest them and employees to understand the future
of a company they may aspire to join.
Importance of a business model
• A business model is a critical component of any
organization’s strategy and operations.
• It defines how a company creates, delivers, and captures
value.
Primary Component: Value
Proposition
Description:
• Explanation of the goods or services offered.
Desirability:
• Why the goods or services are desirable to customers or clients.
Differentiation:
• Statement that differentiates the product or service from
competitors.
Components of a
Business Model
• Value Proposition: income?
• What unique value does the business • Key Resources:
offer to customers?
• What resources are necessary to
• Customer Segments: deliver the value proposition?
• Who are the target customers? • Key Activities:
• Channels: • What activities are essential to
• How does the business reach and delivering the value proposition?
deliver value to its customers? • Key Partnerships:
• Customer Relationships: • Who are the business’s key partners
• How does the business interact with and suppliers?
and retain customers? • Cost Structure:
• Revenue Streams: • What are the major costs involved in
• How does the business generate operating the business?
Types of Business
Models
• There isn't one type of business model. Not all companies
are the same and each has different ways of making
money. Business models can vary considerably.
• An aerospace company such as Boeing, for example, may
operate similarly to a peer such as Airbus but won't share
much in common in terms of how it makes money with,
say, a shoe store or bar.
Retailer
• 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 and can
sell what it makes 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 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
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 becoming an
upgraded member.
Example: LinkedIn/LinkedIn Premium
Bundling
• 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 receive compensation for
hosting a platform for business to be
conducted. Although transactions could
occur without a marketplace, this
business model attempts to make
transacting easier, safer, and faster.
• Example: eBay
Affiliate
• 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 needed to use
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)
Franchise
• 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
Brokerage
• 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 and freight.
• Example: Re/Max
How to Create a Business
Model
Identify your audience:
Identify • Most business model plans will start with either defining the problem or identifying your audience
and target market. A strong business model will reflect who you are trying to target so you can craft your
product, messaging, and approach to connecting with that audience.
Define the problem:
Define • 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 that creates demand for your services or products, your business may struggle to find its
footing.
Understand your offerings:
Understand • 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.
With your product selected, consider the hurdles your company will face. This
includes product-specific challenges as well as operational difficulties. Make
Document your needs: sure to document each of these needs to assess whether you are ready to launch
in the future.
Most businesses will leverage other partners in driving company success. For
example, a wedding planner may forge relationships with venues, caterers,
Find key partners: 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.
A business model isn't complete until it identifies how the company will make
Set monetization solutions: money and turn a profit. This includes selecting the strategy or strategies laid
out in the business model types section above.
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
Test your model: 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.
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 on product usage
(i.e. the amount of data being uploaded to SharePoint).
• Intelligent cloud: Microsoft offers server products and cloud services for a
subscription.
• Personal computing: Microsoft sells the Windows operating system as well as
physically manufactured products such as Surface, PC components, and Xbox
hardware. Residual Xbox sales include content, services, subscriptions,
royalties, and advertising revenue.
• 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 retailers may or may not make the actual
goods they sell.
