Definition 1:
Business model is a company’s plan or diagram for how it competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates.
Definition 2:
A business model is a company's plan for making a profit which identifies the products or services the business plans to sell, its target market, and any anticipated expenses. Essentially, a business model explains how a company creates value for itself and its customers.
The main reasons that having a clearly articulated business model is important are as follows:
- It serves as an ongoing extension of feasibility analysis,
- Focuses attention on how all the elements of a business fit together,
- Describes why the network of participants who are needed to make a business idea viable would be willing to work together.
- It articulates the core logic of a firm to all its stakeholders.
Business Model vs. Business Plan
While a business model and a business plan are closely related and often used interchangeably, they serve distinct purposes and focus on different aspects of a business
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Business Model |
Business Plan |
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Focuses on the core logic of the business.
Describes how the business makes money.
Includes the value proposition, revenue streams, customer segments, and key activities.
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A comprehensive document outlining the detailed strategy for running the business.
Includes the business model but goes deeper into specifics.
Covers financial projections, marketing plans, operational plans, and management team details.
Typically used to attract investors or secure funding.
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Types of Business Models
- Direct Sales Model: Selling products directly to consumers without intermediaries.
- Freemium Model: Offering basic services for free while charging for premium features.
- Subscription Model: Charging customers a recurring fee for continuous access to a product or service.
- Marketplace Model: Connecting buyers and sellers on a platform, earning revenue through commissions or fees.
- Advertising Model: Providing content or services for free, earning revenue from advertisers.
- Brokerage Model: Facilitating transactions between buyers and sellers, earning a commission on each deal.
- Razor and Blade Model: Selling a product at a low price or loss leader and charging high prices for consumables.
- Franchise Model: Allowing others to operate using the company’s brand and business model, earning fees and royalties.
- Affiliate Model: Earning commissions by promoting other companies' products.
- Crowdsourcing Model: Using contributions from a large group of people, typically via the internet, to obtain goods or services.
- Dropshipping Model: Selling products without holding inventory; suppliers ship directly to customers.
- Aggregator Model: Bringing together services from multiple providers under one brand, acting as a single point of access for consumers.
- On-Demand Model: Providing services or products when and where customers need them (e.g., Uber, DoorDash).
- Peer-to-Peer (P2P) Model: Allowing individuals to share access to goods and services directly with one another (e.g., Airbnb).
- Multisided Platform: Connecting two or more distinct but interdependent groups of customers (e.g., credit card companies connecting cardholders and merchants).
- Reverse Auction Model: Buyers post requests for products or services, and sellers bid to fulfill those requests (e.g., Priceline).
- Freelance/Gig Economy Model: Enabling individuals to offer their services on a short-term or freelance basis (e.g., Fiverr, Upwork).
- E-Commerce Model: Selling products or services online, directly to consumers.
- Network Marketing: Using a network of distributors to grow the business and sell products (e.g., Amway).
- User-Generated Content (UGC) Model: Relying on content created by users to drive engagement and revenue (e.g., YouTube, Instagram).
- Data Monetization: Earning revenue by collecting, analyzing, and selling data (e.g., Google, Facebook).
- Product-as-a-Service (PaaS): Offering products as a service, often with a subscription fee, where the product is maintained and upgraded by the provider (e.g., leasing rather than selling equipment).
- Pay-What-You-Want: Allowing customers to pay any amount they wish, sometimes with a suggested price (e.g., Radiohead’s "In Rainbows" album release).
- Long Tail Model: Selling a large number of niche products with low demand, which collectively generate significant revenue (e.g., Amazon).
- Hidden Revenue Model: Offering a free service while generating revenue from other sources, such as advertising or data sales (e.g., social media platforms).
- Auction Model: Selling products through bidding, allowing prices to be determined by buyers (e.g., eBay).
- Licensing Model: Granting permission to other companies to use intellectual property, trademarks, or technology for a fee (e.g., Dolby, Disney characters).
- Bait and Hook Model: Offering a basic product at a low cost or for free (the bait) and charging for refills or associated products (the hook), similar to the razor and blade model (e.g., printers and ink cartridges).
- Microtransaction Model: Earning revenue through small, often in-app purchases (e.g., mobile games).
- Community-Based Model: Building a community around a product or service and monetizing through memberships, events, or merchandise (e.g., Patreon, Kickstarter)
How to Create a Business Model
Define Your Value Proposition:
Identify the unique value your product or service provides to customers. Understand what problem you are solving or what need you are fulfilling.
Identify Your Customer Segments:
Determine who your target customers are and segment the market based on demographics, behavior, and needs.
Determine Key Resources:
Identify the essential assets required to deliver your value proposition. Include physical, intellectual, human, and financial resources.
Outline Key Activities:
Define the most important actions your company must take to operate successfully. Focus on production, problem-solving, platform/network management, etc.
Establish Key Partnerships:
Identify the network of suppliers, partners, and collaborators that help your business model work. Consider alliances, joint ventures, and strategic partnerships.
Develop Revenue Streams:
Determine how your business will earn money. Explore different pricing mechanisms and models (e.g., subscription fees, licensing fees, sales of goods).
Identify Cost Structure:
Outline the major costs associated with operating your business model. Differentiate between fixed and variable costs.
Customer Relationship Strategy:
Plan how you will attract, retain, and grow your customer base. Consider customer service, loyalty programs, and engagement strategies.
Channels to Market:
Determine how your product or service will be delivered to your customers. Consider various distribution channels, sales channels, and marketing methods.