What is a Business Model?

What is a Business Model?
What is a Business Model?

What is a Business Model?

In the realm of business, a term often heard but not always fully understood is "business model." It encompasses much more than just the means of generating profit.

At its core, a business model serves as the fundamental framework and approach through which a company not only creates and delivers value but also captures it. It defines how a business operates, how it generates revenue, and how it maintains its competitive edge in the marketplace.

Rather than focusing solely on profit, a business model comprises a constellation of key components that propel a company toward success.

These components typically encompass the value proposition, target audience, revenue streams, cost structure, key activities, key resources, distribution channels, customer relationships, competitive advantage, and considerations of sustainability and scalability.

By gaining a deep understanding of and refining their business models, both emerging startups and established corporations can better align their strategies, allocate resources more effectively, and address customer needs.

An effectively designed business model can also serve as a beacon for investors, a source of inspiration for employees, and a clear roadmap for future accomplishments.

Comprehending Business Models

A business model acts as a strategic blueprint for running a profitable business within a specific market. At its heart, it revolves around the concept of a value proposition, which defines the unique products or services offered by a company, highlighting their desirability and distinctiveness in comparison to competitors.

For startups, a comprehensive business model should encompass crucial aspects such as startup expenditures, potential funding sources, the target customer base, marketing strategies, competitive analysis, and projections for both income and expenses.

It might also explore possibilities for collaboration with established enterprises to leverage mutual benefits, such as referrals or partnerships.

Successful businesses construct business models that enable them to cater to customer needs while keeping costs competitive and sustainable.

Nevertheless, in response to evolving business environments and shifting market demands, companies often find it necessary to review and refine their business models to remain relevant and adaptive.

When evaluating investment prospects, it is essential for investors to delve into a company's business model to gain a clear understanding of its revenue-generating mechanisms.

While the business model may not furnish a complete picture of a company's future, investors who grasp its intricacies are better equipped to make informed decisions based on financial data and market trends.

How to Create a Business Model

Developing a business model is a nuanced process, far from one-size-fits-all. There are various approaches to crafting a business plan and designing a business model. Here are some general steps to create a business plan:

Identify Your Target Audience

When shaping your business model, defining your target market is paramount. A deep understanding of the audience you intend to reach will allow you to effectively tailor your product, messaging, and approach to resonate with your desired customers.

Define the Problem

In addition to pinpointing your audience, you must identify the problem or need your business aims to address. Whether you are offering products for home improvement or delivering unique dining experiences to a community, a well-defined problem or need is a cornerstone of business success.

Understand Your Offerings

With your audience and problem in mind, contemplate the products or services you can provide. Assess your expertise and match it with market demands.

At this stage, your business model should revolve around adapting your offerings to meet market needs while aligning with your capabilities.

Document Your Requirements

After selecting your product or service, take into account the challenges your company may encounter. These challenges span both product-specific issues and operational hurdles. Documenting these requirements will help you gauge your readiness for future business launches.

Seek Key Partners

Most businesses harness partnerships to drive success. For example, a wedding planner might forge relationships with venues, caterers, florists, and tailors to enhance their services.

If you are a manufacturer, contemplate who will supply your materials and assess the significance of your relationship with that supplier.

Establish Monetisation Strategies

A business model remains incomplete until it delineates how it will generate revenue. This necessitates selecting a monetisation strategy or strategies that align with your business model type.

Initially, you may have a particular model in mind, but after reviewing your client's needs, another approach might make more sense.

Types of Business Models

Diverse business models exist to accommodate the varied needs and strategies of businesses. Here are examples of traditional business models:


Manufacturers procure raw materials and fabricate finished products using their internal resources, machinery, and labour. They may sell their goods to distributors, retailers, or directly to customers. Companies like Apple, IKEA, and Hyundai exemplify the manufacturing business model.


Retailers function as the final link in the supply chain, buying finished products from manufacturers or distributors and engaging directly with customers. Amazon, Costco, and Walmart serve as prominent examples of the retailer's business model.


Fee-for-service models centre on providing labour and services instead of selling products. They typically charge an hourly rate or fixed cost for specific agreements.

These businesses often specialise in offering expertise or services requiring specific training. Walmart is an example of a fee-for-service business model.


Freemium models entice customers with free basic products or services while offering premium, advanced versions that require payment.

The goal is to demonstrate the advantages of upgrading to a paid membership, although customers can theoretically remain on the free version indefinitely. Zoom and LinkedIn are prime examples of freemium business models.


Subscription-based models aim to attract and retain customers by offering ongoing benefits in return for regular payments.

While frequently used by digital companies for software access, subscription models are also popular for physical goods, such as monthly agricultural produce deliveries. Examples include Amazon Prime, Spotify, and Netflix.


Bundling entails selling multiple products to a single customer to offset customer acquisition costs. Companies capitalise on their existing customer base by offering pricing discounts for purchasing multiple products together.

McDonald's Happy Meals, which combines burgers, drinks, and fries instead of selling them separately, exemplifies product bundling.

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Razor Blade

The razor blade model involves selling a durable product at a low cost while generating high-margin sales from disposable components or complementary products.

Companies frequently give away the main product, such as a razor handle, and profit from subsequent sales of razor blades. Examples include coffee machines that require single-use coffee pods, inkjet printers with high-priced ink cartridges, and video game consoles that necessitate additional purchases.

Reverse Razor Blade

In contrast to the traditional razor blade model, the reverse razor blade model focuses on selling a high-margin product up front. Low-cost or free complementary products are provided to enhance the usage of the main product, even though they may not generate significant profits.

Apple is a pioneer of the reverse razor blade business model, offering iPhones and iPods as dependent products, while applications and songs from the iTunes store serve as consumable products.


Marketplace models provide a platform for business transactions and earn compensation for facilitating those transactions. Their objective is to streamline buying and selling processes, making them easier, safer, and faster. eBay and Etsy exemplify the marketplace business model.


Affiliate models depend on marketing through influential individuals or entities to promote products. Companies pay affiliates to endorse their goods, and affiliates receive compensation, either through fixed payments, a percentage of sales, or both. Amazon and social media influencers serve as examples of the affiliate business model.


Businesses following the brokerage model connect buyers and sellers without directly selling the goods themselves. Brokerage firms usually earn a percentage of the transaction amount when a deal is finalised.

They are prevalent in real estate, construction, development, and freight industries. QuickBuy and ReMax are examples of businesses with a brokerage model.


Franchise models replicate and expand existing businesses by leveraging established business plans. Franchisors support incoming franchisees in financing, promoting, and managing the new location while receiving a percentage of the franchisee's earnings in return. Chaayos and Domino's Pizza employ the franchise model.

Evaluating Successful Business Models

When companies craft their business models, it is crucial to estimate accurately the funding required to sustain the business until it becomes profitable.

Simply considering the costs associated with product introduction is insufficient. A company must ensure its revenues exceed expenses to sustain operations effectively.

Analysts and investors often assess the success of a business model by scrutinising the company's gross profit. Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue.

Comparing a company's gross profit with that of its primary competitor or industry peers offers insights into the efficiency and effectiveness of its business model.

However, relying solely on gross profit can be misleading. Analysts also consider cash flow or net income, which represents gross profit minus operating expenses, as it indicates the actual profit generated by the business.

Pricing and costs are the primary levers within a company's business model. By raising prices or finding ways to reduce inventory costs, a company can increase its gross profit.

Many analysts view gross profit as a pivotal factor when assessing a business plan because it reflects a strong foundation for the company.

Expense management, if handled poorly, may be attributed to the management team, but these issues are typically fixable. Therefore, analysts believe that companies with robust business models can run themselves efficiently.

When assessing a company for investment potential, it is essential to understand not only the products or services being offered but also how the company generates its revenue.

This understanding offers insights into the underlying business model, which plays a pivotal role in evaluating its potential for success.

Testing Your Business Model

Once you have your comprehensive plan in place, it is vital to test your business model. Conduct surveys or soft launches to gauge customer reactions and obtain feedback. Ask potential customers about their willingness to pay for your services at your specified prices.

Consider offering discounts to new customers in exchange for reviews and feedback. Utilising direct market feedback allows you to make necessary adjustments to your business model.

Analysing Competing Companies

Rather than reinventing the wheel, it is beneficial to analyse what competing companies are doing and how you can position yourself in the market. By observing other businesses' models, you can identify gaps and opportunities for improvement in their approaches.


  • A business model is the foundational strategy that allows a company to operate profitably.

  • It includes crucial elements such as the products or services the business intends to offer, the target markets it aims to serve, and anticipated expenses.

  • Various types of business models exist, including retailers, manufacturers, fee-for-service providers, and freemium providers, each with its unique characteristics.

  • Pricing and costs are integral components of a business model that significantly impact its profitability.

  • For investors, a key factor in assessing a business model is determining whether the product or service addresses a genuine market need, as this is crucial for its potential success.

Addressing Common Question

What is a business model?

A business model is a comprehensive description of how a company creates value, generates revenue, and maintains profitability.

What are the four fundamental business models?

The four basic business models include manufacturer, distributor, retailer, and franchise.

What defines an e-commerce business model?

In e-commerce, a business model outlines the strategy employed by an online company to generate revenue, which may encompass direct sales, subscriptions, advertising, or marketplace facilitation.

How does a business model differ from a business plan?

While a business model focuses on value creation and revenue generation, a business plan elaborates on objectives, strategies, and operational plans.

What characterises Amazon's business model?

Amazon primarily operates as an e-commerce platform, functioning as an online marketplace that connects buyers and sellers.

Which business model is considered the best?

The ideal business model depends on various factors, including the industry, target market, competition, and the unique value proposition of the business.

Why is a business model significant?

A business model plays a pivotal role in guiding strategic decisions, aligning operational processes, and ensuring the long-term success and sustainability of a company.


A company transcends the role of a simple goods seller; it represents an intricate ecosystem demanding a meticulously crafted strategy concerning its target clientele, product offerings, pricing, and value proposition.

The business model functions as a methodical blueprint illustrating how an organisation consistently generates value for its customers.

Through the establishment of a sturdy business model, a company attains a more defined understanding of its operational methods and lays a solid groundwork for financial success.

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