What is a business model? Components, types and examples
At a glance
- A business model includes product types, financial plans and other information that, taken together, outline a path toward operational success.
- Existing companies should update business models regularly in anticipation of any changes in customer behaviors or market trends.
- There’s a wide variety of business models to choose from, including crowdsourcing, franchising, leasing, pay-as-you-go and marketplace.
- Aspiring entrepreneurs can learn about business models, business plans and more at University of Phoenix, which offers a variety of online business degrees.
Virtually all businesses have at least one thing in common: They depend on effective business plans. A business plan serves as a road map for your company, outlining the steps you will take to reach customers and generate profit.
But before you create a business plan, you must first determine your business model. This is the type or platform your business will engage to become profitable. Business models might include product types, financial plans, sales forecasts and other details that outline your plan for success.
Whether you’re an established CEO or an entrepreneur starting your own business, a business model and a business plan form important steps toward defining your company’s future. Partners, company executives and any other business professionals invested in a company’s future can regularly reference their business model and plan to maintain progress toward goals.
It’s never too early to begin studying, building or optimizing your business’s success plan. Even if you only recently obtained your business degree, you can advantageously influence your company’s business model and plan in several important ways.
A business model is just one step in starting your own business. Explore the complete guide to entrepreneurship on our blog!
Understanding business models
Your business model is meant to serve as a comprehensive guide — one that leads your business toward success. The best business models and plans also help companies navigate their market while identifying potential risks and avoiding setbacks.
Put simply, your company’s business model outlines the ways you plan to add value or grow and maintain a business. You’ll likely include details like employees, available resources, price points, competition, customer behaviors and potential expenses in your business model — all to help you forecast how your company might perform in the future.
If you’ve completed a business degree, you can use your business experience to help inform your company’s business model. In addition, earning an MBA can give you the tools to handle investments and high-level decisions that come with deciding on or switching up your business model. However, whether you’re a business management student or an experienced executive, it’s important to consistently evaluate your company’s progress and discover new business models that could propel that growth.
Start your business on the right track. Explore business degrees at University of Phoenix.
The importance of business models
Business models also might have a direct impact on your company’s success. If you’re starting a new company, your business model should help you attract talent and generate sales. Existing companies should update business models regularly in anticipation of any changes in customer behaviors or market trends.
Among other critical points, your business model should allow your organization to offer high-quality, affordable products or services. This key component will allow your business to change, scale and evolve as necessary. Include figures like cash flow, gross sales and net income in your business plan to maintain companywide accountability as you grow.
Business models provide more than just fiscal direction for your company. Your business model should also outline short- and long-term goals and provide a foundation for corporate culture. Take the time to include details about your organization’s identity in your business model.
Types of business models
Depending on the type of business you operate, you can choose from a wide selection of business models. Some business models primarily outline costs and anticipated sales; others include processes, formulas, workflows and other details that contribute toward corporate success.
Here are a couple of the most common components of a business model:
- Advertising — The use of advertising channels like social media, email and TV commercials to reach a specific customer segment. Companies can use this business model to remain familiar with customers who may be potentially interested in their products.
- Affiliate — The use of third-party individuals who generate leads or sell products on a company’s behalf and are compensated for their sales. Businesses may develop a model that focuses on enlisting consultants to sell popular products.
- Crowdsourcing — Online communities collectively fund a business’s product, service or platform. Some businesses use crowdsourcing to obtain ideas, not funding, from customers or other interested individuals. For example, a snack food company may launch a campaign asking customers to help them determine a name for a food item or determine their next flavor.
- Fractionalization — The sale of partial access to a specific product or service. For example, a resort may allow guests the opportunity to purchase permanent access to the room for a small portion of the year.
- Franchise — A recognizable company allows individual business owners to use its branding, processes or other assets. Businesses can use the franchise business model to support their growth into new markets.
- Leasing — Companies purchase products and then lease them to paying customers for some time. A rental car company, for example, may use this business model by purchasing vehicles and then renting them to customers for personal or business use.
- Marketplace — This model connects retailers with customers searching for their products. These companies exist not to sell their services but to securely connect buyers and sellers.
- Pay-as-You-Go — Customers pay companies for the use of company-owned goods until those goods are returned to the company. This business model may include charging customers a per-hour rate for the use of company-owned vehicles or equipment.
- Razor blade/Reverse razor blade — The sale of a product for a loss, and the sale of replacement products for a profit. Originally made popular by Gillette, this business model is also used by printer companies like HP®, which make much wider margins on replacement ink cartridges than they do the printers.
- Subscription — The sale of products or services to customers who are billed on a per-week, per-month or per-year basis. Online streaming providers use the subscription model, where customers pay each month for access to television shows, movies and other media programs.
These and other business model types can help you identify the purpose and direction of your organization.
9 components of a business model
No matter the type of business model you’ve elected to create or follow, most include similar elements. A quality business model or plan often includes several unique elements, where each element helps to further define your vision and direction.
Your comprehensive business plan should contribute to your company’s business model. Ideally, your business model contains the following nine components:
- Customer relationships — This encompasses any of your ongoing interactions with consumers, including customer service conversations, phone calls, email correspondence and other engagement.
- Customer segments — By analyzing your customers and dividing them into market segments, you can target each segment’s common characteristics.
- Value propositions — This is a promise of value to customers in the form of a product, service or another asset, which persuades consumers to choose your organization.
- Channels — The individuals or activities that deliver your products or services to customers, also known as “distribution channels.”
- Key activities — The most important tasks your business needs to do to remain successful.
- Key partners — Important partnerships and networking opportunities that contribute to your company’s ongoing success.
- Key resources — Cash, investments, materials and other assets that help your company capitalize on its business model.
- Revenue streams — The different ways your company earns money and remains profitable.
- Cost structures — Financial aspects of a company, such as structuring sales, commissions and labor to reduce overall expenses over time.
These essential pieces of a business model help you define every aspect of your company’s operations. When you understand your company’s available resources, liquid capital, recurring revenue, customer demographic and related details, you’ll position the business itself for long-term success.