What is business model and example?

1. Career development
2. What Is a Business Model? Definition, 17 Types and Examples

By Indeed Editorial Team

Updated August 22, 2022 | Published March 8, 2021

Updated August 22, 2022

Published March 8, 2021

A business model is a fundamental strategy for a company that outlines how the organization generates profits. When creating a new company, professionals design a business model to explain their ideas to investors better and develop a set of goals to reach. Learning more about business plans can help you improve your skills and knowledge if you're a business professional. 

In this article, we explain what a business model is and its importance, compare business plans and business models, list a business model's components and explain 17 types of business models with examples.

Key takeaways

• Business models are the primary strategies that businesses use to make money.

• A business model includes information about services, products, markets and expenses.

• Companies use different types of models depending on their goals.

 

What is a business model?

A business model outlines how a company plans to increase its revenue or essentially make a profit with its products, services and customer base. Each model helps support a business and aims to give customers a reason to choose one company over another. Not only does a model explain what it plans to sell, but also its plans to market a product or service, expected expenses and plans to make a profit.

Related: Guide To Best Business Models

Business model versus business plan

Both are essential tools for creating a successful company, but business models and plans differ. A business model is a foundational part of the company and expresses the primary method through which the company generates profit. The business plan is a detailed explanation that includes specific goals, strategies and resources.

Related: What Is a Business Plan?

Why are business models important?

Business models enable you to create value from new ideas. While it's important to have ideas for your products and services, you also need to answer key questions on how to take these ideas to the next step—all of which a business model can help.

A business model also helps you think about a company and highlight its key components to teams and stakeholders. In addition, business models help companies manage their strategies and create new growth. Having a business model also lets you determine how a company does things now and how it can do these things better in the future.

Related: Business Models and Business Plans: How They Differ

Components of a business model

Though business models vary in form and function, they all feature the same essential components. While all business models aim to increase revenue, they include many other factors outside of income. Here are the main components of a business model:

• Value proposition: A value proposition is a description of the products and services a company plans to sell, as well as a reason as to why they're desirable to the company's target audience. Ideally, a value proposition also explains how a company's product or service differs from its competitors.

• Target market: A company's target market refers to a group of consumers that's interested in its products and services. Identifying the company's target market in a business model can help you create an effective marketing strategy, all while ensuring you're keeping your market's interests at the forefront.

• Startup costs: A new company's business model should include projected startup costs and explain where or how the company hopes to secure financing.

• Competitive advantage: Since many companies offer similar products and services, the business model must include unique features about unique offerings that competitors don't provide.

• Cost structure: A business model also needs to include a list of the company's fixed and variable expenses to operate. In addition, it needs to include how both fixed and variable costs affect pricing.

• Key metrics: Key metrics refer to a company's primary method of measuring success. Essentially, this should describe how the company knows it's on track to meet its goals.

• Resources: A business model should include details regarding your company's physical, financial and intellectual resources or assets. This information shows what resources to allocate to help the business model succeed.

• Problem and solution: This refers to the target customer's pain points. Along with identifying their issues, a business model must also explain how the company plans to resolve or meet them.

• Revenue model: A revenue model is a framework or outline for how a company plans to generate income. The business model should identify income sources a company intends to pursue.

• Revenue streams: This refers to how a company plans to generate income. Companies generate income in many ways, such as selling their products or services.

• Profit margin: A profit margin explains how a business uses its revenue to make a profit. This lets you see how well a company generates income from its regular operations.

Read More: The 10 Key Components of a Business Model

17 types of business models

Because of the wide variety of businesses, business models continue to evolve. Remember that you likely won't find one model to fit every business. Here are 17 business models and examples of each:

1. One-for-one business model

In a one-for-one business model, a company donates an item to charity for every item purchased. This model typically appeals to customers who appreciate businesses with a charitable nature. Because they appreciate the company's efforts, they may feel encouraged to buy a product, allowing both customers and companies to commit to a philanthropic endeavor.

Example: A shoe company donates one pair of a simple style to an international charity for every higher-priced pair purchased. The company builds a profit while creating a positive brand with customers.

Related: The Fundamentals of Nonprofits

2. Hidden revenue business model

With this model, users don't have to pay for their services. However, companies still earn revenue from different sources. Compensation may be a fixed payment, a percentage of sales derived from the promotion, or both.

Example: A search engine receives advertising money from businesses that bid on keywords even though the site's users don't pay for the use of the search engine.

3. Open-source business model

An open-source business model offers both a complimentary service or product and a paid business version. Though open-source and "freemium" have some aspects in common, they aren't the same model. While a freemium business model involves a free product built and created by a company centrally, an open-source business model includes a free product built and designed by an open community of developers.

Example: A software company offers a free, open-source version but charges for support services or upscaled versions for enterprise users.

Related: Freemiums: Definition, Examples and Tips

4. Bricks and clicks

A bricks and clicks business model is essentially an extension of an in-store shopping experience. In this model, stores offer online ordering with the option of in-store pickup or online-exclusive items. This allows them to offer additional flexibility to current customers and appeal to potential consumers.

Example: A department store maintains both a physical store and an online purchase site. To promote its ecommerce site, it offers customers the option of picking up their items at the store, having them delivered to their home or saving money by buying "plus" services.

5. Distributor business model

Companies have one to three key distribution channels in a distributor business model to reach their final customer. If your company uses this model, it doesn't need to manufacture its products. Instead, it can focus on product distribution. With this business model, distributors can set prices to earn a profit and use various promotional strategies to ensure sales.

Example: An auto parts company buys its products from a manufacturing company and resells them to its customer base or various retailers.

6. Aggregator business model

In an aggregator business model, an aggregator acts as an intermediary between the involved parties. This model lets a company work with various goods and service providers and lets it sell its offerings under its brand. This form of business model is common in the travel industry.

Example: A home-selling website pulls in information from various real estate companies and lists all the homes on one site typically with a well-known brand. All the houses are provided under a single brand but by different real estate sellers.

7. Conceptual business model

This business model is a diagram that details an industry's or business functions. Companies that require concepts and ideas to create unique or innovative products can benefit from a conceptual business model. This type of business model typically involves research to develop new ideas.

Example: A car company creates a conceptual model of a new car to be introduced in the market. It develops the design after consumer research to understand what appeals most to consumers.

8. Razor blade business model

In a razor blade business model, companies offer a primary product cheaply and a complementary product or refill at an expensive rate. The latter essentially serves as bait since it seems like customers receive a bargain. When a company offers a cheaper product, it hopes its customers eventually purchase more expensive accessories. Companies use this model when they have a complementary product that can encourage customers to make another purchase.

Example: A manufacturer sells printers at a low price. However, it requires a specific type of ink that the company sells at a premium price. To use the cheaper printer, you must buy the company's ink and other accessories.

10. Franchise business model

A franchise is an established business purchased and reproduced by a buyer known as the franchisee. The original owner, known as the franchise, works with the franchisee regarding various business operations such as financing and marketing to ensure the business runs and operates like its predecessor. In this business model, the franchiser receives a percentage of the profits from the franchisee.

Example: Many companies use this business model for businesses ranging from fast-food restaurants to fitness centers, auto parts stores and more.

11. Multi-sided platform model

In this business model, companies offer services to the two different sides of a business. This allows businesses to create intuitive features and generate profits from multiple target groups.

Example: A social platform site helps users connect with other people. It also attracts advertisers who want to promote their products to various people. The platform accomplishes both objectives.

12. Crowdsourcing business model

In a crowdsourcing business model, companies receive feedback, opinions and work from various people through the internet. Companies using this business model can access an extensive network of talent instead of hiring in-house employees. Companies utilizing the crowdsourcing business model can generate profits by hosting content and advertisements.

Example: A diabetes awareness website may curate content from various accessible sources to share information about the disease, resources and frequently asked questions. It draws in revenue from advertisements or sponsored content.

13. Peer-to-peer (P2P) business model

A P2P business refers to a platform wherein two individuals interact to buy and sell products and services with each other. This business model eliminates the need for third-party involvement. They may also produce goods and services together. 

Example: A job site like Indeed uses its platform to connect job seekers and companies offering employment. Indeed is the platform, and the job seekers and companies interact to fill each other's needs.

Related: How To Implement Business Process Modeling in 5 Steps

14. Bundling business model

In a bundling business model, companies sell two or more products as part of a set or single unit. Typically, they offer this set at a lower price than they would if they sold each product separately. With a bundling business model, companies can increase their sales volume and potentially sell products or services that tend to undersell when sold individually.

Example: A fitness center charges clients for the number of classes they take per month. The more classes a customer takes, the cheaper each class is, even though the client's total cost increases.

15. Ecommerce business model

The ecommerce business model relies on the internet to sell goods. This business model aims to sell products through a website known as an online shop. The ecommerce model includes the business-to-consumer, business-to-business, consumer-to-business and consumer-to-consumer models.

Example: A jewelry maker with a small staff relies on online sales. It receives revenue without the expense of maintaining a physical store.

16. Manufacturer business model

A manufacturer business model involves manufacturers converting raw materials into products for companies to sell. Remember that even if companies create products using parts manufactured by another company, they're still considered manufacturers. In the manufacturer business model, companies make money by selling to other businesses or retailers.

Example: A business makes electronic parts for a cell phone. It sells those parts to a phone maker that buys parts from various companies to build its phones. All the companies involved make a profit from their sales.

17. Leasing business model

In a leasing model, a company purchases a product from a seller. Then, the company charges another company to use said product. Products that work well with the leasing business model include medical or manufacturing equipment.

Example: A heavy equipment company rents its backhoes and other equipment to a construction company that doesn't want to invest in its own inventory.

Related: 11 Successful Business Models To Use

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