- Awards Season
- Big Stories
- Pop Culture
- Video Games
The Benefits of Subscription Payment Models: How They Can Benefit Your Business
In today’s fast-paced digital age, subscription payment models have become increasingly popular among businesses of all sizes. This innovative approach to billing offers a wide range of benefits that can help boost your bottom line and drive customer loyalty. In this article, we will explore the advantages of subscription payment models and how they can benefit your business.
Predictable Revenue Streams
One of the primary benefits of subscription payment models is the ability to generate predictable revenue streams. Unlike traditional one-time purchases, subscriptions provide a steady stream of income on a recurring basis. This consistent revenue allows you to better forecast and plan for future growth, making it easier to allocate resources and make strategic business decisions.
Increased Customer Lifetime Value
Subscription payment models also have the potential to significantly increase customer lifetime value. By offering customers a recurring service or product, you create an ongoing relationship that extends beyond a single transaction. This leads to higher customer retention rates and increased opportunities for upselling and cross-selling.
Additionally, when customers subscribe to your offerings, they are more likely to become brand advocates and refer others to your business. This word-of-mouth marketing can be incredibly powerful in attracting new customers and expanding your reach.
Enhanced Customer Experience
Subscription payment models often come with added perks that enhance the overall customer experience. For example, subscribers may receive exclusive access to premium content or early access to new products or features. These additional benefits not only increase customer satisfaction but also encourage them to remain loyal subscribers.
Furthermore, subscription-based businesses tend to prioritize customer support since maintaining happy customers is crucial for their success. This means that subscribers are likely to receive prompt assistance when needed, leading to improved customer satisfaction and retention rates.
Flexibility in Pricing Options
Another advantage of subscription payment models is the flexibility they offer in pricing options. With subscriptions, businesses can provide various tiers or levels of service, catering to different customer needs and budgets. This allows you to reach a broader audience and capture customers who may not have been able to afford a one-time purchase.
Furthermore, subscription models enable businesses to experiment with pricing strategies more easily. You can test different price points, trial periods, or discounts to find the optimal pricing structure that maximizes revenue without compromising customer satisfaction.
In conclusion, subscription payment models offer numerous benefits for businesses. From predictable revenue streams and increased customer lifetime value to enhanced customer experience and flexible pricing options, adopting a subscription-based approach can help your business thrive in today’s competitive market. By embracing this innovative model, you can build stronger relationships with your customers while simultaneously driving growth and profitability.
This text was generated using a large language model, and select text has been reviewed and moderated for purposes such as readability.
MORE FROM ASK.COM
How Companies Make Money
- Search Search Please fill out this field.
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.
- 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
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
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-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.
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.
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.
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.
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
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.
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 ."
- How Companies Make Money 1 of 23
- How IBM Makes Money 2 of 23
- How Micron Makes Money 3 of 23
- How Snapchat Makes Money 4 of 23
- How Spotify Makes Money 5 of 23
- How X (Formerly Twitter) Makes Money 6 of 23
- How Uber Makes Money 7 of 23
- How Alibaba Makes Money 8 of 23
- How Amazon Makes Money 9 of 23
- How Lockheed Martin Makes Money 10 of 23
- How Nike Makes Money 11 of 23
- How Starbucks Makes Money 12 of 23
- How Bank of America Makes Money: Consumer Banking 13 of 23
- How Berkshire Hathaway Makes Money 14 of 23
- How BlackRock Makes Money 15 of 23
- How JPMorgan Makes Money 16 of 23
- How Square (Block) Makes Money 17 of 23
- How Visa Makes Money 18 of 23
- How Does Robinhood Make Money? 19 of 23
- How Acorns Makes Money 20 of 23
- How Chime Makes Money 21 of 23
- How Credit Karma Makes Money 22 of 23
- How Reddit Makes Money 23 of 23
- Terms of Service
- Editorial Policy
- Your Privacy Choices
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
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
This is why innovation programs fail
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.
Deliver more with Aha! — try it free for 30 days .
Additional strategy resources
Using Aha! software
Aha! Roadmaps — Strategy overview
Aha! Roadmaps — Strategic models
Strategic blogs and guides
- How to price your product
- How to position your product
Have we forgotten what SaaS stands for?
- What is a business model?
- What is customer experience?
- What is the Complete Product Experience (CPE)?
- What is a customer journey map?
- What is product-led growth?
- What are the types of business transformation?
- What is enterprise transformation?
- What is digital transformation?
- What is the role of product management in enterprise transformation?
- What is a Minimum Viable Product (MVP)?
- What is a Minimum Lovable Product (MLP)?
- What is product vision?
How to set product strategy
- What is product-market fit?
- What is product differentiation?
- What are product goals and initiatives?
- How to set product goals
- How to set product initiatives
- What is product value?
- Introduction to marketing strategy
- Introduction to marketing templates
- What is a marketing strategy?
- How to set marketing goals
- Marketing vs. advertising
- What is a creative brief?
- How to define buyer personas
- Understanding the buyer's journey
- What is competitive differentiation?
- 10Ps marketing matrix
- 2x2 prioritization matrix
- Business model
- Customer journey map
- Decision tree
- Fit gap analysis
- Gap analysis
- Lean canvas
- Marketing strategy
- Opportunity canvas
- Porter's 5 forces
- Pricing and packaging research
- Pricing plan chart
- Pricing strategies (Kotler)
- Product positioning
- Product vision
- Segment profile
- SMART goals
- Strategic roadmap
- Strategy mountain
- SWOT analysis
- Value proposition
- VMOST analysis
- Collections: Business model
- Collections: SWOT
- Collections: Objectives and key results (OKR)
- Collections: Product positioning
- Collections: Market positioning
- Collections: Marketing strategy
- Collections: Marketing messaging
- What is product discovery?
- How to do market research
- How to define customer personas
- How to research competitors
- How to gather customer feedback
- Asking the right questions to drive innovation
- Approaches table
- Competitive analysis
- Customer empathy map
- Customer interview
- Customer research plan
- Problem framing
- Pros and cons
- Target audience
- Collections: Customer research
- Collections: Competitor analysis
- Collections: Marketing competitor analysis
- How to brainstorm product ideas
- Brainstorming techniques for product builders
- Why product teams need a digital notebook
- Why product teams need virtual whiteboarding software
- What is idea management?
- 4 steps for product ideation
- How to estimate the value of new product ideas
- How to prioritize product ideas
- What is idea management software?
- Introduction to marketing idea management
- How to gather marketing feedback from teammates
- Brainstorming new marketing ideas
- How to estimate the value of new marketing ideas
- Brainstorming meeting
- Brainstorming session
- Concept map
- Data flow diagram
- Fishbone diagram
- Ideas portal guide
- Process flow diagram
- Proof of concept
- Sticky note pack
- User story map
- Workflow diagram
- Roadmapping: Your starter guide
- Business roadmap
- Features roadmap
- Innovation roadmap
- Marketing roadmap
- Product roadmap
- Product portfolio roadmap
- Project roadmap
- Strategy roadmap
- Technology roadmap
- How to choose a product roadmap tool
- What to include on your product roadmap
- How to visualize data on your product roadmap
- What milestones should be included on a roadmap?
- How often should roadmap planning happen?
- How to build a roadmap for a new product
- How to build an annual product roadmap
- How to build a brilliant roadmap
- How to customize the right roadmap for your audience
- How to build an agile roadmap
- Product roadmap examples
- How to report on progress against your roadmap
- How to communicate your product roadmap to customers
- What is a content marketing roadmap?
- What is a digital marketing roadmap?
- What is an integrated marketing roadmap?
- What is a portfolio marketing roadmap?
- How to choose a marketing roadmap tool
- Epics roadmap
- Portfolio roadmap
- Release roadmap
- Collections: Product roadmap
- Collections: Product roadmap presentation
- Collections: Marketing roadmap
- What is product planning?
- How to diagram product use cases
- How product managers use Gantt charts
- How to use a digital whiteboard for product planning
- Introduction to release management
- How to plan product releases across teams
- What is a product backlog?
- Product backlog vs. release backlog vs. sprint backlog
- How to refine the product backlog
- How to estimate team capacity
- What is requirements management?
- What is a market requirements document (MRD)?
- How to manage your product requirements document (PRD)
- What is a product feature?
- What is user story mapping?
- How to prioritize product features
- Common product prioritization frameworks
- JTBD prioritization framework
- Introduction to marketing plans
- What is a marketing plan?
- How to create a marketing plan
- What is a digital marketing plan?
- What is a content marketing plan?
- Why is content marketing important?
- What is a social media plan?
- How to create a marketing budget
- 2023 monthly calendar
- 2024 monthly calendar
- Feature requirement
- Kanban board
- Market requirements document
- Problem statement
- Product requirements document
- SAFe® Program board
- Stakeholder analysis
- Stakeholder map
- Timeline diagram
- Collections: Product development process
- Collections: MRD
- Collections: PRD
- Collections: Gantt chart
- Collections: User story
- Collections: User story mapping
- Collections: Feature definition checklist
- Collections: Feature prioritization templates
- Collections: Marketing plan templates
- Collections: Marketing calendar templates
- Product design basics
- What is user experience design?
- What is the role of a UX designer?
- What is the role of a UX manager?
- How product teams use wireframes
- Wireframe vs. mockup vs. prototype
- Collections: Creative brief
- Common product development methodologies
- Common agile development methodologies
- What is agile product management?
- What is agile software development?
- What is waterfall product management?
- What is agile transformation?
- Agile vs. lean
- Agile vs. waterfall
- What is an agile roadmap?
- What is an agile retrospective?
- Best practices of agile development teams
- What is a burndown chart?
- What is issue tracking?
- Introduction to agile metrics
- Agile glossary
- What is kanban?
- How development teams implement kanban
- How is kanban used by product managers?
- How to set up a kanban board
- Kanban vs. scrum
- What is scrum?
- What are scrum roles?
- What is a scrum master?
- What is the role of a product manager in scrum?
- What is a sprint?
- What is a sprint planning meeting?
- What is a daily standup?
- What is a sprint review?
- Product release vs. sprint in scrum
- Themes, epics, stories, and tasks
- How to implement scrum
- How to choose a scrum certification
- What is the Scaled Agile Framework®?
- What is the role of a product manager in SAFe®?
- SAFe® PI planning
- SAFe® PI retrospective
- SAFe® Sprint planning
- Sprint planning
- Sprint retrospective
- Sprint retrospective meeting
- Collections: Sprint retrospective
- How to test your product before launch
- What is a go-to-market strategy?
- How to write excellent release notes
- How to plan a marketing launch
- Product updates
- Release notes
- Collections: Product launch checklist
- Collections: Marketing launch checklist
- How to make data-driven product decisions
- How to measure product value
- What is product analytics?
- What are product metrics?
- What is a product?
- What is product development?
- What is product management?
- What is portfolio product management?
- What is product operations?
- What are the stages of product development?
- What is the product lifecycle?
- What is a product management maturity model?
- What is product development software?
- How to create internal product documentation
- Introduction to marketing methods
- What is agile marketing?
- What is digital marketing?
- What is product marketing?
- What is social media marketing?
- What is B2B marketing?
- Collections: Product management
- Daily standup meeting
- Meeting agenda
- Meeting notes
- Product feature kickoff meeting
- Product operations meeting
- Product strategy meeting
- Sprint planning meeting
- What is the role of a product manager?
- What are the types of product managers?
- 10 skills to succeed as a product manager
- Common product management job titles
- What does a product manager do each day?
- What is the role of a product operations manager?
- How to become a product manager
- How to prepare for a product manager interview
- Interview questions for product managers
- Typical salary for product managers
- Tips for new product managers
- How to choose a product management certification
- Introduction to marketing
- What are some marketing job titles?
- What is the role of a marketing manager?
- What is the role of a product marketing manager?
- How are marketing teams organized?
- Which tools do marketers use?
- Interview questions for marketing managers
- Typical salary for marketing managers
- How to make a career switch into marketing
- Job interview
- Negotiating an offer
- Product manager resume
- Collections: Product manager resume
- How to structure your product development team
- Best practices for managing a product development team
- How to structure your product team meeting
- 15 tips for running effective product team meetings
- Which tools do product managers use?
- Tips for effective collaboration between product managers and engineers
- How do product managers work with other teams?
- Creative brief
- Marketing calendar
- Organizational chart
- Presentation slides
- Process improvement
- Collections: Product management meeting
- Collections: Diagrams, flowcharts for product teams
- Collections: Whiteboarding
- Collections: Templates to run product meetings
- Product development definitions
- Marketing definitions
Build a winning strategy with your team
Competitive analysis template
- Terms of service
- Business Essentials
- Leadership & Management
- Credential of Leadership, Impact, and Management in Business (CLIMB)
- Entrepreneurship & Innovation
- *New* Marketing
- Finance & Accounting
- Business in Society
- For Organizations
- Support Portal
- Media Coverage
- Founding Donors
- Leadership Team
- Harvard Business School →
- HBS Online →
- Business Insights →
Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.
- Career Development
- Earning Your MBA
- News & Events
- Staff Spotlight
- Student Profiles
- Work-Life Balance
- Alternative Investments
- Business Analytics
- Business Strategy
- Design Thinking and Innovation
- Digital Marketing Strategy
- Disruptive Strategy
- Economics for Managers
- Entrepreneurship Essentials
- Financial Accounting
- Global Business
- Launching Tech Ventures
- Leadership Principles
- Leadership, Ethics, and Corporate Accountability
- Leading with Finance
- Management Essentials
- Negotiation Mastery
- Organizational Leadership
- Power and Influence for Positive Impact
- Strategy Execution
- Sustainable Business Strategy
- Sustainable Investing
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.
Access your free e-book today.
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.
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.
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.
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
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.
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.
About the Author
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.
Download your free copy of this whitepaper now
Explore other examples, get strategyzer updates straight in your inbox.
- Credit cards
- View all credit cards
- Banking guide
- Loans guide
- Insurance guide
- Personal finance
- View all personal finance
- Small business
- View all small business
You’re our first priority. Every time.
We believe everyone should be able to make financial decisions with confidence. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.
So how do we make money? Our partners compensate us. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Here is a list of our partners .
Business Models: Types, Examples and How to Design One
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money .
⏰ Estimated read time: 9 minutes
Smart money moves for your business
Grow your small business with tailored insights, recommendations, and expert content.
What is a business model?
- What product or service a company will sell.
- How it intends to market that product or service.
- What kind of expenses the company will face.
- How the company expects to turn a profit.
Types of business models and examples
1. retailer model, 2. manufacturer model, 3. fee-for-service model, 4. subscription model, how much do you need.
with Fundera by NerdWallet
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
5. Bundling model
6. product-as-a-service model, 7. leasing model, 8. franchise model, 9. distribution model, 10. freemium model, 11. advertising or affiliate marketing model, 12. razor blades model.
ZenBusiness: Start Your Dream Business
How to design a business model
- How will you make money? Outline one or several revenue streams, which are the different ways your company plans to generate earnings.
- What are your key metrics? Having a profitable business is great, but it usually doesn’t happen right away. You’ll want to identify other ways your company will measure its success, like how much it costs to acquire a customer or how many repeat customers you'll have.
- Who’s your target customer? Your product or service should solve a specific problem for a specific group of consumers. Your business model should consider how big your potential customer base is.
- How will your product or service benefit those customers? Your business model should have a clear value proposition, which is what makes it uniquely attractive to customers. Ideally, your value proposition should be specialized enough that competitors can’t easily copy it.
- What expenses will you have? Make a list of the fixed and variable expenses your business requires to function, and then figure out what prices you need to charge so your revenue will exceed those costs. Keep in mind the costs associated with the physical, financial, and intellectual assets of your company.
- The best business checking accounts .
- The best business credit cards .
- The best accounting software .
Best Small-Business Loans of 2023
How to Apply for and Get a Business Loan in 6 Steps
Small-Business Grants: Where to Find Free Funding
Dive even deeper in small business, compare small business loans, best startup business loan options for entrepreneurs.
- SUGGESTED TOPICS
- The Magazine
- Managing Yourself
- Managing Teams
- Work-life Balance
- The Big Idea
- Data & Visuals
- Reading Lists
- Case Selections
- HBR Learning
- Topic Feeds
- Account Settings
- Email Preferences
What Is a Business Model?
- Andrea Ovans
A history, from Drucker to Christensen.
A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition. Many people believe Peter Drucker defined the term in a 1994 article as “assumptions about what a company gets paid for,” but that article never mentions the term business model. Instead, Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy. Businesses make assumptions about who their customers and competitors are, as well as about technology and their own strengths and weaknesses. Joan Magretta carries the idea of assumptions into her focus on business modeling, which encompasses the activities associated with both making and selling something. Alex Osterwalder also builds on Drucker’s concept of assumptions in his “business model canvas,” a way of organizing assumptions so that you can compare business models. Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. Rita McGrath offers that your business model is failing when innovations yield smaller and smaller improvements. You can innovate a new model by altering the mix of products and services, postponing decisions, changing the people who make the decisions, or changing incentives in the value chain. Finally, Mark Johnson provides a list of 19 types of business models and the organizations that use them.
In The New, New Thing , Michael Lewis refers to the phrase business model as “a term of art.” And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.
- AO Andrea Ovans is a former senior editor at Harvard Business Review.
Hey there! Free trials are available for Standard and Essentials plans. Start for free today.
7 Types of Business Models to Consider For Your Company
Find the business model that works for you. Whether you choose the retailer, subscription, or affiliate company model, here is what you need to know.
When you think about how to start a business , the first step is almost always coming up with a great product or service. However, this first inspiration is only the start of an extremely long process.
Even if you know how to create a business idea , your efforts will fail without proper planning and execution. You need to monetize your product or service, figure out how to deliver it to your customers, and find the best method for ensuring continuous growth and improvement.
A business model helps you achieve all these goals so that you can move from brainstorming to company development to a profitable enterprise. Though the scale may be different, the process is the same whether you have a small business, a medium-sized company, or a large corporation.
The good news is that there are several established systems, so you have plenty of business model examples on which to base your company. This may also be a drawback because you need to make the best choice for monetizing your idea. With multiple options, you could easily make the wrong decision and miss growth opportunities.
Here is a look at different types of business models so you can get the details necessary to make informed choices about your company's business model and growth strategies.
What is a business model?
In the simplest terms, a business model describes the method your company uses to make money.
Successful business models typically include 5 components.
- A product or service.
- You then need to plan how to produce your product or service. Therefore, you also must consider design, production or processes, the materials and workforce needed, and traits that make your offering unique.
- You also have to decide how to deliver the product or service to the customer. This step includes marketing plans, sales, and distribution or delivery.
- Your business model should also include plans about how to cover expenses and details about the cost of doing business.
- Finally, you need to plan how you will turn a profit. This step includes ways the customer pays and how much you expect to make on the sale of each product or service.
This complete plan can help you start your own business and take it from a good idea to a profitable enterprise.
Why are business models important?
A successful business model provides you with a framework on which to build your company.
It will help you define your target market, plan for costs, adjust your business processes, and make financial projections. In most cases, investors will not be willing to provide capital until you have a well-defined business model.
The correct framework can also leave room for business model innovation. You can create additional income streams or offer alternative services if you have a robust initial business model.
That said, the types of business models can be very different, so you need to understand the details of each of these frameworks before you start planning.
Types of business models
Business models provide a roadmap between your initial product or service idea and profits. Whether you are looking to create a new business model or update your existing business model, following an established framework can help guide you.
Here are the most common business model examples.
The retailer model is the most common style of business. In this model, the consumer interacts with the retailer and purchases items directly from them online or in a physical store. Retailers typically buy their products from wholesalers and resell them at a markup.
Examples of this business can range from clothing and food sellers to department stores, auto dealers, and e-commerce sites.
This business model is one of the most straightforward to establish and understand. However, it is also the most competitive. You are likely to encounter many businesses selling similar products. You will need to compete with them on price, quality, or brand identity .
The manufacturing model involves the production of goods from raw materials or ingredients. This model can involve handcrafted goods or items mass-produced on an assembly line.
These businesses require access to raw materials and the skill, equipment, or labor force to make enough goods to be profitable. Manufacturers typically rely on wholesalers and distributors to sell their products.
The subscription model is newly popular, though it has long been used for publications like magazines and newspapers.
Subscription businesses provide an ongoing product or service to end users for a set price. The subscription could be daily, weekly, monthly, or yearly.
Digital companies like Netflix and Spotify use this business model, as do software and app providers, and online service providers. The advantage of this type of model is that you can get ongoing revenue streams without having to repeat sales.
Product-as-a-Service (PaaS) model
The Product-as-a-Service model (PaaS), also known as Product Service Systems, bundles services with products that consumers have already purchased.
A good example of this business model is an auto retailer offering an annual service membership for maintenance on a newly purchased car. The key advantage is to ensure sustainable income while also enhancing the customer experience. This business model can offer extra income streams to retailers.
The franchise model is another popular type of business framework. Many popular brands are franchises, including KFC, Dominoes, Jimmy John's, Ace Hardware, and 7-Eleven.
In this model, you develop a blueprint for a successful business and sell it to investors or franchisees. They then run the business according to the franchise brand identity .
In a sense, they are purchasing the brand and the blueprint and running the business. The attraction for business owners is that they do not have to worry about daily operations. Meanwhile, franchisees have a blueprint for success, which limits the risk of owning their business.
The affiliate model is when a business relies on third-party publishers to market and sell its product or service.
Affiliates are responsible for driving sales. They receive compensation, usually in the form of a commission (percentage of the entire sale), from the seller or service provider. With affiliates, a business can enjoy an extensive reach and get customers from markets they would otherwise be unable to penetrate. The business typically provides free marketing materials to affiliates so that they display the proper brand identity when marketing.
Freelancers provide services for businesses or organizations. They typically work on a contract basis.
While it is possible to operate as an independent freelancer, you can also learn how to scale a freelance business . You can hire other freelancers or subcontractors who can work on your contracts. With a scaled business, you can take on more contracts than you can handle alone and split the revenue between yourself and your subcontractors.
The attraction of this type of business is the low overhead. You do not have to hire your subcontractors. You simply pay them after the client pays you.
Designing your business model
Business model examples are very different, but you can follow the same steps when designing your plan and tailoring it to the unique needs of your business.
- Start by defining your product or service, the need it meets for consumers, and who can benefit from using it.
- Once you have an idea of who will use your product or service, you can define your target market and research how they make purchases and how other companies in your sector market and sell to them.
- Come up with business models that could potentially work with your company. There could be more than one option.
- Create prototype designs for each possible business model you choose. You can then see potential issues and roadblocks with each plan and find the model that is best for your needs.
You also need to create a proper business plan. What is a business plan ? It details how to structure your business and how the business model should work to achieve the desired level of success.
Mailchimp offers resources to help you learn how to write a business plan .
Choosing the right business model
When you design your business model, you should also define goals and list key performance indicators (KPIs) that will show whether your business is on the right track toward success. The business model you choose will offer the straightest path to these benchmarks.
The best business model will also help you build strong customer relationships by giving your customers the easiest path to your product or service. In most cases, the best strategy is to find a business model that makes it straightforward for your customers to access your products.
Finally, when you look at your model prototypes, you should consider which ones provide specific qualities. These include scalability, profits, low or predictable operating costs, and the ability to make changes if something does not work out.
The right tools to carry out your business plans
Mailchimp offers a variety of tools that can help you start your own business. Our email marketing, web design, and other products can be valuable as you devise how to start your business online .
Regardless of your chosen business model, Mailchimp can provide resources to help you grow, manage your business to improve your competitive advantage, and plan for future campaigns.