What Is A Business Model?
A business model is a conceptual structure that supports the viability of the
business and explains who the business serves to, what it offers, how it offers it,
and how it achieves its goals.
All the business processes and policies that a company adopts and follows are part
of the business model.
According to management guru Peter Drucker:-A business model is supposed to
answer who your customer is, what value you can create/add for the customer and
how you can do that at reasonable costs.
Thus, a business model is a description of how a company creates, delivers, and
captures value for the customer as well as itself.
What Are The Components of A
An ideal business model usually conveys four key aspects of the business which is
presented using a specialised tool called business model canvas. These key
components are customers, value proposition, operating model, and revenue model.
Precisely, a business model answers the following key questions :-
1. Who is the customer?
2. What value does the business deliver to the customers?
3. How does the business operate?
4. How does the business make money?
Who is the Customer?
The customer forms the heart of a business model. It answers who the company
plans to sell its offerings to. A business usually groups the customers into different
segments with certain homogeneous needs, characteristics or behaviour. It then
defines one or more customer segment that it serves or wants to serve, followed by
an answer to why it plans to serve this segment.
What Value Does The Business Deliver
To The Customers?
This is the most important component of a business model that answers several key customers and
business’s value related questions. It is often usually presented using a value proposition canvas.
1. What are the jobs the customer wants to be done?
2. What are their pains in doing the job?
3. What do they gain by doing the job?
Once these questions are answered, the business answers another set of questions that relates business
to the customers:
1. How does business get the job done?
2. How does the business relieve the customer’s pain?
3. How can the business help the customer get the gains?
How Does The Business Operate?
It’s the operating model of the business that elaborates:
1. Key Activities: What all offerings does the business sell to the customers.
2. Key Partners: Who all help the business in delivering value to the customers.
3. Key Resources: What all resources does the business use to develop and deliver its offerings.
4. Key Channels: What channels does the business use to deliver its offerings to the customers.
5. Customer Relationships: What type of relationships does the business maintain with its customers.
How Does The Business Make Money?
Making money is important for the business to sustain. This component of the business model focuses
on elaborating on the financials and how the business makes money.
It’s called the revenue model of the business and has two components:
1. The cost structure includes all the expenses that the business incurs in creating and delivering value
to the customers.
2. The revenue streams include all the primary and non-primary revenue streams that the business
Why Is It Important To Develop A Business
The business model acts as the blueprint of the business and a roadmap for its success (or failure). This tool
helps the founders decide how their business will work and make money.
It is the only documentation that makes clear –
1. The business concept – the market opportunity the business capitalises on.
2. The target market the business caters to.
3. The problems the business intends to solve.
4. The solution the business offers and how it creates customer value.
5. How the business gets its customers.
6. The operating model the business follows.
7. How the business makes money and what are the costs incurred to get the same.
Moreover, the business model gives a reason for the customers to choose the offering over others in the market.
People chose Facebook because it helped them connect and chat with other people around the world (operating
model) and it didn’t even charge for it (revenue model). Netflix’s business model was preferred over others as it
provided value in the form of consistent on-demand content instead of the usual TV streaming business model.
Types Of Business Models
There are different types of business models meant for different businesses. Some
of the basic types of business models are:
A manufacturer makes finished products from raw materials. It may sell directly to
the customers or sell it to a middleman i.e another business that sells it finally to
the customer. Examples – Ford, 3M, General Electric.
A distributor buys products from manufacturers and resells them to the retailers or
the public. Examples – Auto Dealerships.
A retailer sells directly to the public after purchasing the products from a
distributor or wholesaler. Examples – Amazon, Tesco.
A franchise can be a manufacturer, distributor or retailer. Instead of creating a new
product, the franchisee uses the parent business’s model and brand while paying
royalties to it. Examples – McDonald’s, Pizza Hut.
Brick-and-mortar is a traditional business model where the retailers, wholesalers,
and manufacturers deal with the customers face-to-face in an office, a shop, or a
store that the business owns or rents.
E-Commerce business model is an upgradation of the traditional brick-and-mortar
business model. It focuses on selling products by creating a web-store on the
A company that has both an online and offline presence allows customers to pick
up products from the physical stores while they can place the order online. This
model gives flexibility to the business since it is present online for customers who
live in areas where they do not have brick-and-mortar stores. Examples – Almost
all apparel companies nowadays.
In this model, the basic product provided to the customers is very cost-sensitive and hence
priced as low as possible. For every other service that comes with it, a certain amount is
charged. Examples – All low-cost air carriers.
This is one of the most common business models on the Internet. Companies offer basic
services to the customers for free while charging a certain premium for extra add-ons.
So there will be multiple plans with various benefits for different customers. Generally,
the basic service comes with certain restrictions or limitations, such as in-app
advertisements, storage restrictions etc., which the premium plans shall not have. For
example, the basic version of Dropbox comes with 2 GB storage. If you want to
increase that limit, you can move to the Pro plan and pay a premium of $9.99 a month
for it. Some online image editors allow you to edit only a certain number of images in
the free basic plan while an unlimited number of images in the paid plan. Youtube’s free
plan comes with ads while the premium (Red) plan has no ad interruption plus it has
other benefits too. This model is one of the most adopted models for online companies
because it is not only a great marketing tool but also a cost-effective way to scale up
and attract new users.
If customer acquisition costs are high, this business model might be the most
suitable option. The subscription business model lets you keep customers over a
long-term contract and get recurring revenues from them through repeat
purchases. Examples – Netflix, Dollar Shave Club.
Aggregator business model is a recently developed model where the company
various service providers of a niche and sell their services under its own brand.
The money is earned as commissions. Examples – Uber, Airbnb, Oyo.
12. Online Marketplace
Online marketplaces aggregate different sellers into one platform who then compete
with each other to provide the same product/service at competitive prices. The
marketplace builds its brand over different factors like trust, free and/or on-time home
delivery, quality sellers, etc. and earns commission on every sale carried on its
platform. Examples – Amazon, Alibaba.
Advertisement business models are evolving even more with the rise of the
demand for free products and services on the internet. Just like the earlier times,
these business models are popular with media publishers like Youtube, Forbes, etc.
where the information is provided for free but are accompanied
with advertisements which are paid for by identified sponsors.
14. Data Licensing / Data Selling
With the advent of the internet, there has been an increase in the amount of data generated
upon the users’ activities over the internet. This has led to the advent of a new business model
– the data licensing business model. Many companies like Twitter and One signal sell or
license the data of its users to third parties who then use the same for analysis, advertising, and
An agency can be considered as a partner company which specialises in handling
the non-core business activities like advertising, digital marketing, PR, ORM, etc.
This company partners with several other companies that outsource their non-core
tasks to them and is responsible to maintain privacy and efficiency in their work.
Examples of such agencies are Ogilvy & Mathers, Dentsu Aegis Network, etc.
16. Affiliate Marketing
Affiliate marketing business model is a commission-based model where the
affiliate builds its business around promoting a partner’s product and directs all its
efforts to convince its followers and users to buy the same. In return, the affiliate
gets a commission for every sale referred. An example of a business operating on
affiliate marketing business model is lifewire.com.
Drop shipping is a type of e-commerce business model where the business owns
no product or inventory but just a store. The actual product is sold by partner
sellers who receive the order as soon as the store receives an order from the
ultimate customer. These partner sellers then deliver the products directly to the
18. Network Marketing
Network marketing or multi-level marketing involves a pyramid structured network of people
who sell a company’s products. The model runs on a commission basis where the participants
are remunerated when :-
1. They make a sale of the company’s product.
2. Their recruits make a sale of the product.
Network marketing business model works on direct marketing and direct selling philosophy
where there are no retail shops but the offerings are marketed to the target market directly by
the participants. The market is tapped by making more and more people part of the pyramid
structure where they make money by selling more goods and getting more people on board.
Crowdsourcing business model involves the users to contribute to the value
provided. This business model is often combined with other business and revenue
models to create an ultimate solution for the user and to earn money.
Examples of businesses using the crowdsourcing business model
are Wikipedia, reCAPTCHA, Duolingo, etc.
20. Peer 2 Peer Catalyst/Platform
A P2P economy is a decentralized internet-based economy where two parties interact
directly with each other to buy or sell goods or to conduct a transaction without the
intervention of any third party. A P2P catalyst is a platform where these users meet.
Examples of P2P platforms are Craigslist, OLX, Airbnb etc.
The Blockchain is an immutable, decentralized, digital ledger. It is a digital
database that no one owns but anyone can contribute to. Many businesses are
taking this decentralized route to develop their business models. Models based on
blockchain are not owned or monitored by a single entity. Rather, they work on
peer-to-peer interactions and record everything on a digital decentralized ledger.
22. SAAS, IAAS, PAAS
Many companies have started offering their software, platform, and infrastructure
as a service. The ‘as a service’ business model works on the principle of pay as
you go where the customer pays for his usage of such software, platform, and
infrastructure; he pays for what and how many features he has used and not for
what he hasn’t. Examples of SAAS are major ERP giants such as Oracle, SAP and
23. High Touch
The High Touch model is one which requires lots of human interaction. The
relationship between the salesperson and the customer has a huge impact on the
overall revenues of the company. The companies with this business model operate
on trust and credibility. Examples – Hair salons, consulting firms.
24. Low Touch
The opposite of the High Touch model, the low touch model requires minimal
human assistance or intervention in selling a product or service. Since as a
company, you do not have to maintain a huge sales force, your costs decrease,
though such companies also focus on improving technology to further reduce
human intervention while making the customer experience better at the same time.
Examples – Ikea, SurveyMonkey.
Mostly used for unique items that are not frequently traded and that don’t have a
well-established market value, like collectables, antiques, real estate, and even
This business model involves the listing of an offering by the seller and the buyers
making repeated bids to buy that offering while fully aware of other bids by other
buyers. The offering is sold to the highest buyer with the auction broker charging a
listing fee and/or commission based on the transaction value.
eBay is one such auction platform.
A reverse auction is an auction where the roles of a buyer and seller are
exchanged, i.e. sellers bid prices instead of buyers.
The reverse-auction-based business model is often used when there are several
sellers selling a similar offering to a single buyer. These sellers lower their price
with every bid and generally the bidder with the lowest bid wins the auction.
However, there are cases when the bidder with a price higher than the lowest bid
wins the auction as the buyer likes his offer (offering with add-ons)
A platform which lets sellers bid for government contracts is an example of a
reverse auction based business model.
27. Razor and Blade
Razor and blade model is used by companies which deal in complementary or
companion products like razors and blades.
It involves selling the high-margin root product at a low price to increase the
volume sales of the complementary or related low-margin product.
By using this model, businesses create a stream of recurring income over the
life of the root product.
Companies dealing in razors, mosquito vaporizers, and other refillable
products employ this business model. The game industry also makes use of
this model by providing the gaming console at a very economical price and
making good profits with the sale of games.
28. Reverse Razor And Blades
A business employing a reverse razor and blades model offers the low margin item
at a very less price or below the cost to encourage the sale of the high margin
Amazon employs this business model to sell its Kindle e-reader. It provides Kindle
ebooks at a price lower than their actual cost so to make people consider Kindle as
a one-time investment to enjoy low-cost books throughout its life.
An on-demand model is a model where a customer’s demand is fulfilled by delivering goods
and services on demand (usually immediately).
This business model is driven by the use of the internet and mobile phones. It works like this –
1. The customer order for products on services through a web-app.
2. The request is received by the company’s employee or a demand fulfilling partner.
3. The employee or a partner fulfils the demand by delivering the ordered product or service
either immediately or in the time promised.
Uber, Instacart, and Postmates are some examples of an on-demand business model.
30. User Community
Driven by the network effect, this business model involves granting access to a community or a
network in return for a membership fee.
Glassdoor is a good example of such a user community.
Of course, most companies do not operate on any one of these business models but rather on a
combination of some. Like it is perfectly possible for you to be a Bricks-and-clicks Low Touch Retailer
or a High Touch Subscription-Based Manufacturer. What business model you choose depends on your
business needs and what value you want to create for your stakeholders. Next, we will see how to
develop the perfect business model for your startup, so that the chances of your success are amplified.
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