A business model is a blueprint for how a corporation intends to make money in a certain market with its product and client base.
A business model outlines four key foundations:
- What product or service a company will sell.
- How it intends to market that product or service.
- What kind of expenses it will face.
- How it expects to turn a profit.
Because there are many different types of organizations, business models continuously evolve. While we’ll go through some common types below, there is no one-size-fits-all model that applies to every company.
A business model is essentially a roadmap for generating revenue. One of the most crucial components of starting a business is planning. Although time-consuming, the early stages require thinking about what you’ll sell, who your consumers will be, and how you’ll generate money.
You should choose a business model and include it in your study and strategy. Below, we’ll cover the definition, common types of business models with examples, and how to pick the ideal one for your company.
Business Model Example
The subscription model is a popular example, where firms charge clients a monthly, annual, or other recurring fee to access a service.
Key elements of a business model include:
- Problem and Solution: Your target customers’ pain points and how your company intends to address them.
- Revenue Model: A framework identifying viable income sources.
- Revenue Streams: Multiple ways your company can generate income.
- Profit Margin: The difference between revenue and business costs.
These elements may evolve as your business grows. Initially, you may not have a clear idea of how each component will look, but your model will provide vision and direction. Remember, your business model informs operations but does not fix strategy in stone—you can adapt it as you learn.
Most Common Types of Business Models
There are many business model types, and they can be customized depending on the company or industry. This flexibility often leads to disruptive business models. Here are 12 common types:
1. Subscription Model
Customers pay a recurring fee to access a service or product.
Examples: Netflix, HelloFresh, Stitch Fix, Hulu, Disney+.
2. Bundling Model
Offer two or more products as a single unit at a lower price than individually. Examples: AT&T, Adobe Creative Suite, Burger King.
3. Freemium Model
Provide basic access for free but restrict premium features behind a paid plan. Examples: Spotify, LinkedIn, Skype, MailChimp.
4. Razor Blades Model
Sell a main product at low cost, then sell higher-margin accessories. Examples: Apple iPhones/Macs, Keruig, Brita, Xbox, printer ink companies.
5. Product-to-Service Model
Sell results instead of the product itself. Examples: Zipcar, Uber, Lyft, LIME.
6. Leasing Model
Purchase products and lease them to others. Examples: U-Haul, Enterprise, Rent-a-Center.
7. Crowdsourcing Model
Gather ideas, opinions, or work from a large group via the internet. Examples: Wikipedia, YouTube, IMDB, Indiegogo.
8. One-for-One Model
Donate one item for every item purchased. Examples: TOMS, SoapBox, Smile Squared, Warby Parker.
9. Franchise Model
Buy the rights to replicate an existing business model. Examples: Starbucks, Domino’s, Subway, McDonald’s, UPS Store.
10. Distribution Model
Get products from manufacturers to retailers. Examples: Hershey’s, HD Supply, Avent, Cheney Brothers, ABC Supply Co.
11. Manufacturer Model
Convert raw materials into a product and sell it. Examples: Dell, HP, Intel, Magic Bullet, Black+Decker, LG Electronics.
12. Retailer Model
Buy from wholesalers and sell to customers. Examples: Nordstrom, Home Depot, Target, Best Buy.
How Netflix Illustrates a Business Model
Using Netflix as an example:
- Product/Service: Internet streaming of movies and TV shows.
- Marketing: Multi-channel approach—social media, email marketing, advertising, and word-of-mouth.
- Expenses: Content production/acquisition, technology, and employees.
- Revenue: Subscriptions.
This shows how a business model links product, marketing, expenses, and revenue to create a profitable strategy.
Essential Components of a Business Model
All business models share key elements:
- Value Proposition: What makes your product attractive.
- Target Market: The group most likely to buy your product.
- Competitive Advantage: Features that set you apart from competitors.
- Cost Structure: Fixed and variable expenses and their effect on pricing.
- Key Metrics: How success is measured.
- Resources: Physical, financial, and intellectual assets required.
Choosing the Right Business Model
To select the best model for your business, consider:
- How will your product or service benefit the customer?
- How will you generate revenue?
- Who is your target customer?
- What startup costs will you face?
- Which expenses are fixed vs. variable?
- Do you need investor support?
Research competitors and similar businesses to see how they structure their models. This can help you differentiate and refine your approach.
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