Business models are a key tool for planning, managing, and innovating any venture. Despite this, few entrepreneurs take the time to create a business model to guide their decision-making.
Planning is the first step when starting your business; and while it may be tedious, it is essential to take the time to determine what you will sell, who your customer is, and how your company will generate revenue.
Business models are important because they better predict financial performance compared to industry classifications. In fact, some business models perform better than others (Weill et al., 2005).
Additionally, the ability to quickly and successfully adapt to new business models is a major source of sustainable competitive advantage (Geissdoerfer et al., 2018) for companies.
This article gathers definitions, descriptions of different types of business models, and cites several examples.
What Is a Business Model?
You might be wondering, what is a business model? The most widely accepted definition is by Osterwalder and Pigneur (2010), who state that “a business model describes the rationale of how an organization creates, delivers, and captures value.”
Geissdoerfer et al. (2018) define a business model as “simplified representations of value proposition, value creation and delivery, and value capture elements, along with the interactions between these elements within an organizational unit.” It is important to note that business models integrate disciplines such as strategy, entrepreneurship, and innovation (Budler et al., 2021).
The concept of a business model has evolved with the digital economy. In the past, a business could thrive using traditional models (such as physical retail). Today, technological advancements have led to models like Freemium (e.g., Spotify) and Pay-per-use (e.g., Uber), where revenue depends on scalable and customizable services.
Business models are not merely revenue plans; they are comprehensive frameworks that include:
- Value proposition: What problem does your product or service solve?
- Customer segments: Who is your ideal customer?
- Distribution channels: How will you reach your customers?
- Revenue streams: Where will your revenue come from?
- Cost structure: What are the costs associated with your operations?
These elements work together to form a coherent and functional system.
Importance of Business Models
Business models are vital because they help companies articulate new reasons for customers to use their products or services, integrating these into their strategy.
A business model allows you to clearly define what you will offer the market, the value you will provide, who you will sell to, how you will sell, and how you will generate revenue (Pérez, 2019). A solid business model is crucial for success, as it lays the foundation for achieving financial goals, attracting customers, and competing effectively in the market.
Companies like Amazon and Netflix owe their success to innovation in their business models, adapting to changing consumer needs and leveraging emerging technology. Kriss (2020) emphasizes that a business model must explain four things:
- What product or service you will sell.
- How you will market that product or service.
- What types of costs you need to cover.
- How you expect to generate revenue and profits.
In simple terms, it is the value proposition your company will offer to the market and its customers.
Cavallo et al., (2023) highlight the importance of business model innovation during the scaling phase for digital startups, demonstrating how growth hacking and simulation-based modeling methods, like DBM for Scaling, can help businesses scale effectively and sustainably. Meanwhile, research by Novelli y Spina (2024) showed that companies with highly developed business models achieved better economic performance (38% higher) compared to control companies.
Differences Between a Business Model and a Business Plan
Entrepreneurs often confuse business models with business plans. While both are important tools for planning and managing your company, they have substantial differences.
Business models and business plans are critical tools for creating and refining your strategy. They are closely related but, as described by Clavijo (?), they have significant distinctions:
Table 01. Differences Between Business Model and Business Plan.
| Business Model | Business Plan |
| It is a general formula that defines how a product or service will be sold. | Plans aim to create a step-by-step guide on how to achieve a business goal. |
| This tool allows structuring the operation of a company based on the type of response it provides to market needs. | This tool enables the precise definition of objectives, methodologies, and ways of working within companies. |
| They provide an overview of the target audience, the steps needed to offer goods and products, and the nature of their operations. | They help organize internal company activities, delegate responsibilities, and develop work strategies. |
| These tools help analyze market demands, brand reach, and the competition a business will face. |
Types and Examples of Business Models
When we look around, we can observe various business models. However, the design of a business model, especially the mechanisms for value creation and delivery, is essential to ensure that the intended meanings align with the individual interpretations of customers (Sanasi et al., 2024).
Although there is no universally accepted classification, the following business models are cited by Peiró (2017), Kriss (2020) and Qureshi (2022):
Manufacturing
The manufacturing business model is one of the most traditional. It refers to the manufacturer that transforms raw materials into a finished product. This model involves economic activity focused on producing specific products and selling them, usually to wholesalers who distribute them to retailers.
Distribution
A company operating as a distributor is responsible for bringing manufactured goods to market.
To make a profit, the distributor purchases the product and sells it to retailers at a higher price.
Retail
Retail businesses sell products directly to consumers that they have acquired from distributors.
A retailer represents the final link in the supply chain. The retail business model typically applies to large department stores that carry both private-label and third-party brand products. Examples include Walmart and Amazon.
Leasing
Under a leasing business model, a company purchases a product and then allows another company to use it for a periodic fee. According to Qureshi (2022), leasing contracts work best with high-cost items like medical equipment, machinery, or vehicles.
An example of a leasing business model is car rentals.
Ecommerce Business Model
The emergence of the internet enabled the development of various digital businesses. The main general categories of ecommerce business models are:
- B2B (Business to Business): Companies selling to other businesses (e.g., Salesforce).
- B2C (Business to Consumer): Companies selling directly to consumers (e.g., Amazon).
- C2C (Consumer to Consumer): Consumer interactions facilitated by platforms (e.g., eBay).
- Freemium: Basic free services with paid premium options (e.g., LinkedIn).
- Subscription: Models based on recurring memberships (e.g., Netflix).
Subscription
In this business model, customers make recurring payments, often monthly, to access a service or product.
A company may directly market its products via mail (e.g., magazines), or customers may pay for app usage.
The goal of the subscription business model is to retain customers for the long term and ensure recurring revenue from the purchase of a product or service.
Popular examples include streaming services like Netflix.
Freemium
The Freemium business model involves offering customers complementary services with additional costs. These businesses are often associated with online ventures or Software-as-a-Service (SaaS) companies.
The basic product is available for free, while the company generates revenue by offering linked premium products—additional features or services.
This business model is widely used by internet start-ups. An example is LinkedIn.
Patents
Patents as a business model involve generating revenue by licensing intellectual property or selling the rights to use a patented invention. This approach is common in industries like technology, pharmaceuticals, and manufacturing. Companies can monetize their innovations while protecting their competitive advantage.
Franchise
The franchise business model is perhaps the most widely used and understood.
Some well-known brands choose to grant certain licenses to other entrepreneurs to operate under their brand. In this case, the franchisee must meet a series of requirements to sell under a brand they do not own.
The franchisor (the original owner) works with the franchisee to assist with financing, marketing, and other business operations to ensure the business runs smoothly. In return, the franchisee pays the franchisor a percentage of the profits.
The most well-known examples of franchise business models are Starbucks, McDonald’s, and others.
Razor and Blades Model
A classic example of the “Razor and Blades” model is Apple’s iPhones and MacBooks. You purchase the high-margin item, and then Apple offers additional products, tools, and services that accompany that item.
Another classic example is the ink cartridge for your printer.
Bundling
Qureshi (2022) describes this business model where companies “bundle” one or more types of similar products into a single unit, often charging a slightly lower price than if each product were purchased individually.
Bundling is not limited to individual organizations, as two companies can form a partnership and use a bundling model to offer complementary products or services.
The most prominent example is Microsoft Office, which bundles its applications into a single package.
Crowdsourcing
Crowdsourcing involves receiving opinions, information, or work from many different people using the Internet or social media.
Kriss (2020) highlights that the crowdsourcing business model allows companies to leverage a wide network of talent without hiring internal employees.
The best-known examples are Wikipedia and YouTube.
One-for-One Model
The “One-for-One” business model means that a company donates an item to a charitable cause for every item purchased.
“One-for-One” appeals to the charitable nature and social consciousness of customers, encouraging them to buy a product or service while allowing both the company and the customer to actively participate in philanthropic efforts.
Two-Sided Market Model
A “Two-Sided Market” business model is a platform that facilitates economic exchanges between two distinct user groups, providing mutual benefits from a large network.
This business model creates a win-win situation for both the merchant and the consumer.
The purpose of a two-sided market platform is to facilitate interactions between buyers and sellers.
An example of this type of business model is Uber.
How to Choose the Right Business Model for Your Company
Factors to Consider
- Size and Industry: A subscription model may not be viable for small businesses in saturated markets.
- Growth Objectives: Are you aiming for stable income or rapid scalability?
Key Questions
- What unique value do you offer?
- Who is your target customer?
- What resources do you need to operate?
Practical Tips
- Use tools like the Business Model Canvas and conduct pilot tests before committing significant resources.
Sustainable Business Models
According to Geissdoerfer et al (2018), the scientific literature describes sustainable business models as a modification of the conventional business model concept, incorporating specific characteristics and objectives:
- Incorporate concepts, principles, or goals that guide sustainability;
- Integrate sustainability into their value proposition, value creation activities, and/or value capture mechanisms.
When discussing the sustainability of a company, we refer to its social, environmental, and economic viability. Lüdeke et al., (2024) emphasize that a business model for sustainability focuses on how an organization proposes, delivers, captures, maintains, unlocks, and shares value with and for its stakeholders.
Based on these characteristics, Geissdoerfer et al. (2018) define sustainable business models as:
“Business models that incorporate proactive stakeholder management, the creation of monetary and non-monetary value for a broad range of stakeholders, and have a long-term perspective.”
Sustainable business models aim to create not only economic but also social and environmental value. These models are characterized by:
- Circular Economy: Reducing waste and the need for virgin resources through strategies such as recycling, reuse, and extending product lifecycles.
- Shared Value Creation: Generating value for both the company and society by addressing social and environmental issues through core business activities.
- Sufficiency Models: Encouraging more conscious and responsible consumption by promoting durability, repairability, and access over ownership.
- Inclusive Models: Meeting the needs of underserved market segments, such as the base of the pyramid (BOP).
- Renewable Energy-Based Models: Creating value through the production and distribution of clean energy.
These models go beyond profitability, integrating social and ecological aspects into their design.
Business Model Innovation
Business model innovations have transformed entire industries and redistributed billions of dollars in value (Mark et al., 2008). Business model innovation is understood as a change in how a company or a specific area operates in response to opportunities or challenges. Geissdoerfer et al. (2018) define it as:
“The conceptualization and implementation of new business models. This may include developing new business models, diversifying into additional business models, acquiring new business models, or transforming one business model into another.”
Similarly, Andreini et al (2021) emphasize that business model innovation is a deliberate set of actions taken by managers and entrepreneurs to change the components and architecture of their business models in a consistent and innovative way. Meanwhile, Madanchian y Taherdoost (2024) highlight that traditional business models, based on the sale of physical products and services, are being challenged by the emergence of non-fungible tokens (NFTs) and the metaverse.
For more information, you can refer to our article “Business Model Innovation.”
Conclusion
A business model is a key tool for entrepreneurs to systematically plan their business idea. As an entrepreneur, you must develop skills in designing and using this tool.
Moreover, business models are dynamic documents that evolve as challenges and opportunities arise in the business environment and with technological changes in the industry. Business model changes, whether radical or incremental, occur in the dimensions of value proposition, value creation and delivery, and value capture (Thornton, 2024). Additionally, Leipziger et al., (2024) highlight the importance of incremental business model changes (BMT) for small businesses rather than radical changes.
References
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