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What Is a Business Model?

  • Andrea Ovans

what does a business model mean

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.

what does a business model mean

  • AO Andrea Ovans is a former senior editor at Harvard Business Review.

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What is a business model? (Plus, how to define yours)

Last updated: September 2023

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 .

Business model large

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.

what does a business model mean

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.

Business model in Aha!

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.

Lean canvas example in Aha!

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

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Business Models: Types, Examples and How to Design One

Randa Kriss

Randa Kriss

Writer | Small business, business banking, business loans

Rosalie Murphy

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Ryan Lane

Assigning Editor | student loans, student loan repayment plans, and education financing

what does a business model mean

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 .

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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.

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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.

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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.
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what does a business model mean

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 ".

what does a business model mean

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

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8 Types of Business Models & the Value They Deliver

Stacks of coins in a garden

  • 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.

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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.

4. Subscription

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.

5. Lease/Rental

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.

6. 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

7. Reselling

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.

8. Agency/Promotion

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.

So You Want to Be an Entrepreneur: How to Get Started | Access Your Free E-Book | Download Now

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.

what does a business model mean

About the Author

  • What is a business model? Types and examples

what does a business model mean

Few things are as important to a company as its business model. Your business model serves as a template and guide for just about every part of your business. It's essential to not only create a business model that reflects how you will make money, but also adapt it over time as the needs of your market change.

How does a business model work? What are some common types of business models? This guide will introduce you to business models and provide a helpful guide so you can create your own.

Business model definition

A business model explains an organization's core strategy for running a profitable operation. It describes what will be sold, how revenue will be generated and how the customers will pay.

Business models capture the rationale and the plan for creating and delivering value. Business models also reflect the company's unique value proposition, which is the essential way in which the company meets the market’s needs.

Key components of a business model

While every company's business model will look different, a successful business model will contain the following key components:

  • A description of the products or services (including the cost of manufacturing)
  • A strategy for distributing that product (marketing, delivery, merchandising)
  • How the customer pays (pricing structure, payment methods)

Your business model integrates all of the components of your business and organizes them into a cohesive structure.

Business model vs. business plan

The term "business model" is sometimes used synonymously with "business plan." However, the two documents serve slightly different purposes.

A business model is a holistic portrait of how the company operates. Think of a business model as an aerial photograph of your organization, giving you a comprehensive view of your current and future operations.

A business plan refers to the specific strategy for accomplishing a particular goal. A business plan is more like the turn-by-turn directions you receive on your GPS device.

The business model and business plan must be in alignment, but the business model explains how you will succeed while the business plan shows how you’ll get there.

Why choosing the right business model is important

Writing for the Harvard Business Review, Joan Magretta explains that business models matter because they tell a specific story about your company. Your company's "story" explains how all the pieces come together and connects this narrative to your raw financial numbers.

Business modeling is, therefore, important for at least three groups of people:

1. Your company's employees

Your business model determines the scope and strategy of your business processes. It's important for you and your employees to understand your existing business model, as well as how it translates into your day-to-day activities.

But more than that, a successful business model will also provide a vision for the future, which empowers established businesses to improve their cash flow and make expansion plans.

2. Your target customer groups

Successful business models also create value for your business and help you communicate this value to your target customer segments. While your key customers will likely never read your business model, it should help you strategize ways to communicate your unique value proposition to your customers.

3. Investors

Investors will also need to understand your business model. Ideally, your business model describes a clear strategy for meeting a market need, establishing your goals, and setting a long-term vision. A clear business model will help you gain the confidence of investors and secure funding.

What are common types of business models?

There are many different types of business models, with new models emerging as entire industries adapt and grow. The following list is not exhaustive but represents some of the more common business models in use today, along with some business model examples to illustrate how they work in the real world:

Manufacturing business model

A manufacturing business model focuses on the production of goods by sourcing raw materials and using a standardized production process. Manufacturers typically sell their finished products to retailers and other distributors, though some manufacturers also sell directly to consumers.

Examples include Ford Motor Company, Frito-Lay, and Whirlpool.

Retail business model

Retail is likely the most familiar business model for most American consumers. A retailer purchases finished goods from a manufacturer or distributor, then sells these products directly to customers.

This setup usually takes place inside brick-and-mortar stores, though many companies are adapting their business framework to offer online options.

Some of the most common retail business model examples include stores such as Target or Wal-Mart.

Franchise business model

A franchise business model might overlap with other business models, though the key difference is how the business is structured. In the franchise business model, a franchisee purchases the rights to a business from the franchisor or parent company.

The franchisee then operates under the established brand, which gives them more stability than if they'd launched their own business from scratch.

Common franchise business model examples include McDonald's, Ace Hardware, and Planet Fitness.

eCommerce business model

An eCommerce business model functions similarly to a retailer, though it relies on online platforms to advertise products and conduct transactions. eCommerce companies also utilize delivery companies to transport products to their customers.

The most common eCommerce business model example is Amazon.com, though retailers like Target and Wal-Mart have also launched eCommerce segments.

Freemium business model

The freemium business model is popular among technology companies. Freemium business models blend free and paid features on the same platform. The idea is simple: customers who enjoy the free service can be encouraged to sign up and pay for access to premium features.

Flickr, the online photo app, is a good example freemium business model, though many companies offer introductory services before promoting their premium features.

Advertising business model

Advertising companies are third-party organizations that help connect other businesses to their core customer segments. Essentially, the business’s users and customers are two different groups. Strategies can vary widely, especially when digital companies offer print ads, internet marketing, and content for social media platforms to help their clients expand their advertising reach.

Facebook, Instagram, and TikTok all fit into this business model.

Affiliate business model

An affiliate business model is similar to an advertising model, though an affiliate business strategy is more subtle. Instead of clear, overt advertisements, an affiliate business will embed links into other content to drive sales.

For instance, an affiliate business might link to Hulu when writing a review of popular streaming platforms.

How to create a new business model

Creating a new business model is important when launching a startup, but many companies create entirely new business models to adapt as they grow. Here's how to create a new business model that works for your unique industry:

1. Define the problem

First, determine the problem or need that your company can uniquely address. Identifying the problem can ensure that there is a demand out there for your products or services.

Every business idea should start with the question, "Why?" Why does your business exist? What need does it fill? Why will customers want to purchase your product? Keeping this understanding center of mind will help you stay focused throughout the process.

2. Identify your target market

A good business model will focus on specific customer segments. Who are you trying to reach? This insight will help you refine your marketing efforts and product features based on the demographic groups you seek to build relationships with.

3. List your products or services

The next step is crucial. You want to list and describe your products and services and explain clearly how these satisfy the need you defined in step 1. It's important to ensure that your team’s expertise matches the products and services that solve these needs.

For example, if you have a background in personal finance, you might consider how a new accounting software system might assist certain types of established businesses. This stage tends to be iterative, meaning you'll come back and redefine your product offerings based on feedback and adapt them to new market needs.

4. Determine your business needs

Once you zero in on your products, you'll want to determine what you'll need to connect them to your customer base. This calculation can include costs incurred from

manufacturing/product development, as well as the need for personnel, marketing, and other expenses.

5. Build a network of key partners

Depending on the nature of your business, you may want to network with other professionals. For example, if you're relying on a retail business model, you may want to start networking with distributors, manufacturers, and other industry players.

You may want to consider if there's an eCommerce platform you'd like to use in conjunction with retail sales or if there are business tools that can help you run your business more efficiently.

6. Create a financial strategy

Successful businesses use their business model as a financial model to calculate their overall profitability. You'll need to determine how you intend to make money, including things like cost structure, profit formula, pricing, and other core considerations.

A successful business model will ensure that you satisfy the need you identified in step 1 while generating profits that help maintain and grow your operations.

7. Test and refine your model

The most successful companies will test their existing business models to determine how well they're performing. This work might reflect things like customer feedback, financial performance, or the need to adapt to new market conditions.

Here's a tip: conduct a "soft launch" of your business for a select group of customers. Offer discounts in exchange for honest feedback. Incorporate their feedback into your business model design, then proceed to a full-scale launch once you've refined your model.

How to improve your business model

If you've had the same business model for years, it may be time for a review. Improving your current business model can help you adapt to new technology, changing costs, and new customer demands. For example, if an advertising firm's business model doesn't take into account new social media platforms, the company may miss out on opportunities to connect with its audience.

Here are some strategies for business model innovation and improvement:

Listen to customer feedback

Turn your existing customers into coaches. Product and company reviews can be a gold mine for information about current client needs and how well your company meets those needs. You may discover new ways to innovate and adapt.

Lower your overhead

If your company struggles to make a profit, you may want to rethink some of your overhead costs. For example, automating some of your core business processes through technology can help your employees work more efficiently, reducing the number of hours you spend on back-office tasks.

Introduce a new product or service

When your company has been offering the same products and services for years, it might be time to shake things up. Introduce a new product or service to demonstrate your value to your customers, or use this as an opportunity to gain a whole new set of customers.

Reconsider your revenue model

Your current revenue model may be based on an outdated price structure. It may be that the cost of manufacturing or rising inflation warrants an increase in the price of your core products and services.

If you operate a subscription-based service (or a freemium model), you may offer discounts to existing customers while raising the price of a product or service for new customers.

Change your marketing message

Your marketing campaign is how you tell your story. If your story changes, so should your marketing message. Refine your marketing strategy by adapting to new digital channels, or consider developing content that directly impacts your target audience.

How BILL can help improve your business model

Creating and refining your business model is just one way to run a successful business. BILL can help small and mid-size businesses save 50% of the time they spend on accounts payable. Learn more about how to pay smarter.

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What Is a Business Model?

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A business model is a plan describing how a business will make money. It is an outline that explains the company’s revenue and cost structure, and how it expects to turn a profit—or at least sustain itself as a going concern.

Key Takeaways

  • A business model is an outline of how your business will generate a profit. The plan includes important information like target market, market need, and details on business expenses.
  • There are lots of types of business models, and models can be combined as well. You’re probably familiar with some of the more common ones like manufacturer, distributor, retailer, and franchise. 
  • When creating a business model, you should be clear about who your target customer is and how you’ll reach them. You’ll also want to know specifics about what you’re selling, and what sets you apart from your competition.

Definition and Examples of a Business Model

A business model is an outline that breaks down the ways that a company makes its profit. It identifies the target market, the market’s need, and how the business will serve its customers. The plan also includes the costs incurred from expenses like producing and marketing the product. There are multiple types of business models, each tailored to fit the unique needs of various businesses.

An example of a business model is one in which the concepts are split into two categories—business ideas and business resources. Under the business idea category lies products and services, target audience, competition, differentiation, advertising, and sales. Business resources, meanwhile, are what’s needed to make the idea work and can be divided into ownership, staffing, facilities, financial model, funding, and balance sheet.

A business is unlikely to be successful unless all facets of the business model provided in the example above allow it to be competitive in its marketplace. 

Types of Business Models

Here are a few commonly used business models that you’re probably familiar with. 

Manufacturer

This type of business model is when a company makes a product from raw materials or assembles prefabricated items to create new merchandise. The business can sell the items directly to consumers itself, which is a business-to-consumer (B2C) model, or it can use a business-to-business (B2B) model in which it sells to other businesses. 

An example of a B2C manufacturer would be a shoe company that sells its products directly to customers. A B2B manufacturer would be a business that sews dresses and only sells its products wholesale to other businesses, which then sell the dresses to the general public. 

Distributor

The distributor business model is when a company purchases inventory from a manufacturer and sells it to either a retailer or directly to the public. A common challenge that distributors face is picking the right price point that allows them to make a profit on the sale, but still offers competitive pricing. An example of a distributor would be a company that buys soft drinks from a manufacturer and sells those beverages to restaurants at a higher price.

There are many different types of business models and multiple models can be combined to create a new approach.

Retail business models are those used by companies that buy inventory from a manufacturer or distributor and sell those products to the public. Retailers can range from a single mom-and-pop shop to huge chain stores—they often have brick-and-mortar locations, an online store, or both. 

An example of a retailer would be a hat store that buys the products from a distributor. A limited selection of the hat store’s products is available at its brick-and-mortar storefront, but its full inventory can be purchased online. 

The franchise business model can be applied to other business models, like the ones we just discussed. The franchisee takes on the business model of the franchise and with it, the latter’s pre-established processes and protocols. Examples of popular franchises include McDonald’s, KFC, Burger King, and 7-Eleven.

When developing your business model, identify your target customer and how you’ll reach them. You’ll also want to familiarize yourself with what you’re selling (costs, margins, features, benefits, etc.) and what your competitive advantage is .

SCORE. “ Do you have a Successful Business Model? ”

SCORE. “ Develop Your Business Model by Answering These 4 Questions .”

What Is A Business Model? The 30 Types Explained

business model

Your prototype might be ready for presentation to investors or licensees, but it is worth nothing if you do not have a business model in place. How will you explain to anyone what your product does or intends to do and how it will create value for customers and the company?

You need a business model for that.

It is a term people frequently use, but most of them don’t truly understand what it means. Michael Lewis, the author of The New, New Thing: A Silicon Valley Story , says that a business model is a “term of art”. Most people know it when they see it but cannot accurately describe it.

So, what exactly is a business model, and what are its components?

Let’s find out.

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, 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 coach 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 Business Model?

An ideal business model usually conveys four key aspects of the  business , which are 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 –

  • Who is the customer?
  • What value does the business deliver to the customers?
  • How does the business operate?
  • How does the business make money?

business model canvas template

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 customers into different segments with certain homogeneous needs, characteristics, or behaviour. It then defines one or more customer segments 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 customer and business value-related questions. It is often usually presented using a value proposition canvas .

  • What are the jobs the customer wants to be done?
  • What are their pains in doing the job?
  • 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:

  • How does the business get the job done?
  • How does the business relieve the customer’s pain?
  • How can the business help the customer get the gains?

how to fill value proposition canvas

How Does The Business Operate?

It’s the operating model of the business that elaborates:

  • Key Activities: What all offerings does the business sell to the customers?
  • Key Partners: Who helps the business in delivering value to the customers?
  • Key Resources: What all resources do the business uses to develop and deliver its offerings?
  • Key Channels: What channels does the business use to deliver its offerings to the customers?
  • 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 itself. 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:

  • The cost structure includes all the expenses that the business incurs in creating and delivering value to the customers.
  • The revenue streams include all the primary and non-primary revenue streams that the business utilises.

Why Is It Important To Develop A Business Model?

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 –

  • The business concept – the market opportunity the business capitalises on.
  • The target market the business caters to.
  • The problems the business intends to solve.
  • The solution the business offers and how it creates customer value.
  • How the business gets its customers.
  • The operating model the business follows.
  • 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.

The 30 Types Of Business Models

There are different types of business models meant for different businesses. Some of the basic types of business models are:

Manufacturer

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.

Distributor

A distributor buys products from manufacturers and resells them to 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 and 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 are McDonald’s and Pizza Hut.

Brick-and-Mortar

Brick-and-mortar is a traditional business model where retailers, wholesalers, and manufacturers deal with customers face-to-face in an office, a shop, or a store that the business owns or rents.

The ecommerce 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 internet.

Bricks-and-Clicks

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.

Nickel-and-Dime

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.

Freemium is one of the most common business models on the Internet. Companies offer basic services to 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 of storage. If you want to increase that limit, you can move to the Pro plan and pay a monthly premium of $9.99 a month. 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 is in the paid plan.

Youtube’s free plan comes with ads, while the premium plan has no ad interruption and other benefits. 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.

Subscription

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 .

The aggregator business model is a recently developed model where the company has various service providers of a niche and sells its services under its own brand. The money is earned as commissions. Examples – Uber , Airbnb , Oyo .

Online Marketplace

Online marketplaces aggregate different sellers into one platform who compete 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 a commission on every sale carried on its platform. Examples are Amazon and Alibaba .

Advertisement

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 is accompanied by advertisements that are paid for by identified sponsors.

Data Licencing / Data Selling

With the advent of the internet, there has been an increase in the amount of data generated from users’ activities over the internet. This has led to the advent of a new business model – the data licencing business model . Many companies like Twitter and Onesignal sell or licence the data of their users to third parties who then use the same for analysis, advertising, and other purposes.

Agency-Based

An agency can be considered a partner company that specialises in handling 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 for maintaining privacy and efficiency in their work. Examples of such agencies are Ogilvy & Mathers, Dentsu Aegis Network, etc.

Affiliate Marketing

The 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 an affiliate marketing business model is lifewire.com.

Dropshipping

Dropshipping 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 customer.

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 –

  • They make a sale of the company’s product.
  • Their recruits make a sale of the product.

The 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

The crowdsourcing business model involves the users contributing 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.

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, decentralised digital ledger. It is a digital database that no one owns, but anyone can contribute to. Many businesses are taking this decentralised 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.

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.

The high-touch model is one that requires lots of human interaction. The relationship between the salesperson and the customer has a huge impact on the overall revenues of the company. Companies with this business model operate on trust and credibility. Examples are hair salons and consulting firms.

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 reduce human intervention further while making the customer experience better at the same time. Examples – Ikea, SurveyMonkey.

Auction-Based

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 businesses.

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.

Reverse-Auction-Based

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 prices with every bid; generally, the lowest bidder 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 that lets sellers bid for government contracts is an example of a reverse auction-based business model.

Razor And Blades

Razor and blade model is used by companies that 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 of 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.

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 product.

Amazon employs this business model to sell its Kindle e-reader. It provides Kindle ebooks at a price lower than their actual cost to make people consider Kindle as a one-time investment to enjoy low-cost books throughout its life.

An on-demand model is where a customer’s demand is fulfilled by delivering goods and services on demand (usually immediately).

The use of the Internet and mobile phones drives this business model. It works like this –

  • The customer order for products on services through a web app.
  • The company’s employee or a demand-fulfilling partner receives the request.
  • 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 models.

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.

Final Thoughts

Of course, most companies do not operate on any one of these business models but rather on a combination of some. You can 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.

The Startup Process

We know how important your dream business is to you. Therefore, we’ve come up with an all-in-one guide:  The Startup Process  to help you turn your vision into reality.

Aashish Pahwa

A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.

Related Posts:

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Business Model Canvas

What is the business model canvas.

A business model canvas provides a high-level, comprehensive view of the various strategic details required to successfully bring a product to market. The typical use case for this tool is to outline the fundamental building blocks of a business, but it can be used effectively for individual products as well. The exact ingredients may vary, but these are some of the typical components included:

  • Customer segments —Who is going to use this product?
  • Product value propositions —What is this going to do for the customer to make their life/job better?
  • Revenue streams —How will the company make money from this product?
  • Channels —How will the product be sold or distributed?
  • Customer relationships —What is the success and support strategy for new customers?
  • Key partners —What other companies or individuals are part of the development and go-to-market strategy?
  • Key activities —What must happen internally to release this product?
  • Key resources —What people, materials and budget are required to pull this off?
  • Cost structure —How much will it cost to develop, manufacture, distribute, and support the product?

Asking and answering these questions should be de rigueur for any new product, but this particular framework is useful for distilling the supporting business case down into something easily digestible. By forcing everything to be on a single page, each question must be answered succinctly, which often cuts through any grandstanding to illustrate whether each area is truly addressed and viable.

How do product managers use the business model canvas?

The business model canvas serves two primary purposes for product managers : focusing their thinking during its creation along with expediting and framing the conversation when communicating with others.

Because the business model canvas is a comprehensive summary of what the product will do, who will use it, why they’ll use it, how it will happen, and how the money works, it requires a lot of thinking and homework to put it together. This exercise is very helpful for product managers to fully understand the market opportunity and refine their story while uncovering potential problem areas and fully vetting their impact. Plus the process of boiling everything down to a single page ensures that what is included is as truthful and well supported as possible.

The business model canvas can serve as a continually referenceable touchstone for the product development process and beyond, essentially serving as a mission statement for the product. As conditions on the ground change and more is learned about the product’s market reception and usage, the canvas can be updated to accurately reflect the latest information; reviewing the canvas periodically is a worthy activity in and of itself.

As a communication tool, the business model canvas is an ideal document for our short attention span world and is as useful with the executive team as it is with a junior developer. Since it only contains the most salient and relevant information, the audience won’t be drowning in details or distracted by supporting evidence or non-sequiturs. The canvas can also create a universal vocabulary for the product and get everyone using the same language and concepts going forward.

[Free report] 2021 State of Product Management ➜

Tips for using the business model canvas

Here is how to make the most of the business model canvas and the process of creating and maintaining it:

  • Note assumptions and challenge them —Since a business model canvas is developed while a product is still “theoretical” there is often a lack of actual facts to rely on. Instead, educated guesses, informed opinions and assumptions are utilized to build it out. While there’s often no escaping these, anything in the canvas that is an assumption versus a proven fact should be called out, with every effort made to both challenge the assumption and anticipate the impact if the assumption turns out to be incorrect.
  • Bounce it off a virgin audience —Fellow employees and even board members will approach a business model canvas with a trunkload of inherent biases. To truly test the veracity and completeness of a canvas, allow some outside parties to validate it independently. It should be a self-explanatory document, so allowing them to review it and provide feedback without any dialogue or explanations is a great test of its worthiness and thoroughness.
  • It’s easy to update, so keep it current —Unlike longer, weightier documents, the single-page nature of the business model canvas means there’s no excuse for it to languish and fall behind the business’s current line of thinking or newly gathered information. Reviewing it on a regular basis and maintaining its accuracy enhances its usefulness and is a helpful process to note when assumptions or plans have changed.
  • An ever-present reminder —Thoughts, plans, goals, and assumptions were laid out succinctly in the canvas with great care and deliberation. Going forward the canvas can be continually referred to for guidance, inspiration, and level setting as folks become swept up in the momentum of product development, sales, and marketing.
  • Present it in pieces —Sure, the entire business model canvas fits on one piece of paper, but there is a lot of things on that 8 ½ x 11 inch page. When presenting it, discuss each piece individually, gradually revealing the entire contents. This will prevent information overload and allow the team to convey things narratively instead of an information dump.
  • Reference all the evidence —Any hard data should be clearly referenced (if not included) in the canvas to give the arguments and statements as much legitimacy as possible. Reviewers will be trying to poke holes (as they should), so firm things up whenever there’s a chance.
  • Be specific —No one needs a business model canvas to understand fundamental business case elements; it is intended to tell the story and rationale for this particular product. Cut out anything generic and make it as relevant to this exact opportunity as possible. In particular, link individual customer segments with their respective value propositions, since a product won’t be all things to all people.
  • Create multiple canvases —During the early phases, generating more than one business model canvas based on divergent assumptions, target markets, or value propositions can be a useful tool for exploring different directions the product could head. After the plans are firmed up, multiple canvases can still be employed, this time to see how different scenarios pan out when key factors change… it can be used as a wargaming tool to prepare for different potential outcomes.
  • Who, what, and why first. How and how much second —Although a business model canvas includes everything from a value proposition and personas to implementation costs and resources, everything should be driven from the market opportunity and rationale for bringing a product to market. If those aren’t solid, spending cycles on technology and costs is a waste of time.

Creating a business model canvas puts new product ideas under the microscope and pulls together disparate sources of intelligence, opinions, hunches and research into a single piece of paper. It forces critical thinking and analysis of assumptions and guesses and provides an excellent reference point for the entire organization.

Once the canvas is approved and productization begins, the canvas can also serve as a straw man for the product roadmap, lining up future features and functionality based on the priorities laid out in the document to achieve market success.

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What is a Business Model Canvas? Definition, Examples, Channels and Key Resources

By Paul VanZandt

Published on: July 26, 2023

What is a Business Model Canvas

Table of Contents

What is a Business Model Canvas?

9 business model canvas examples, business model canvas explained, business model canvas channels, key resources of business model canvas.

Using a Business Model Canvas has become one of the premium alternatives to dragging one out on paper. These boards make creating and interpreting business plans or go-to-market strategies a collaborative endeavor and something anyone can create.

This article will define what a business model canvas is and discuss its various advantages, and how to use them, and walk you through our very own business model canvas. If you’re interested in learning more about our other template definitions, you can look at our guides on Kanban , customer journey maps , and SWOTs .

A business model canvas is defined as an organizational tool that helps visualize the development of a potential business model. It describes the components required to successfully take a business to market.

The end goal of using a business model canvas is to gain a better understanding of a target customer base, how to drive a profit, and how to deliver a unique value proposition. These are some of the key components to using a business model canvas and must be defined in order to achieve a successful go-to-market strategy.

Business Model Canvas

Business model canvases are an effective alternative to the traditional method of documenting a business plan, which is usually presented in long multi-page documents.

These templates make the core elements of a business plan more palatable and easy to understand while providing quick visualizations of these pieces of information. When used through an online whiteboard like IdeaScale Whiteboard , it also enables collaboration on these items, inherently making the results more accurate and informed.

The Business Model Canvas consists of nine building blocks, each representing a critical aspect of a business:

  • Customer Segments: Identifying the specific groups of customers or market segments a business aims to serve.
  • Value Proposition: Describing the unique value or benefits that the business offers to its target customers.
  • Channels: Explaining the methods and channels used to reach and interact with customers to deliver the value proposition.
  • Customer Relationships: Outlining the type of relationships and interactions the business establishes and maintains with its customers.
  • Revenue Streams: Identifying the sources of revenue and how the business plans to generate income from its customers.
  • Key Resources: Listing the essential assets, skills, and resources required to operate the business.
  • Key Activities: Identifying the critical tasks and actions the business must perform to deliver its value proposition and generate revenue.
  • Key Partnerships: Describing any external entities or organizations that the business collaborates with to strengthen its business model.
  • Cost Structure: Detailing the costs and expenses incurred in operating the business.

Once you completely understand why to use a business model canvas, it’s time to dive into the methodology behind each step. In this section, we will explain how to properly plan for success on a business model canvas .

1. Key Partners

Questions to ask: “What are your key partners to getting a competitive advantage?”

This question prods at the possible strategic partnerships to align your business with in order to gain an advantage over the competition. This could be certain people, other companies, or any type of collaborative partnership.

It’s important to consider partnerships when developing a business plan because they will eventually not only come in handy but be necessary for the growth and publicity of the business. They can also serve as an early advantage and can push a small business forward at exponential levels.

2. Key Resources

Questions to ask: What resources are needed to make your idea work? If you don’t already have these resources, what steps can be taken to obtain them?

Resources are one of the biggest drivers of change within a business, and it’s important to recognize which resources you have and which resources you need. By thinking about the resources you need to create a business, you tangentially focus on the steps that need to be taken in order to get it off the ground. The resources play directly into that and will affect how you are able to strategically create your plan.

3. Key Activities

Questions to ask: What activities will your business enable for customers?

This is effectively where you detail the product/service that is being provided. When thinking about what activities your business enables or improves, you are inherently thinking about the customer’s journey and what they will experience as a user.

The product/service that users interact with will be the driving force for the entire business, so it’s important to have a solid understanding of what this will be and how exactly they will use it. While thinking about the product/service is important, you should also think about the activities that are made possible as an extension of your business. These could be tangential actions or actions done in collaboration with other businesses. All of these scenarios are examples of how your business enables and improves other activities.

The Defining Solutions business model canvas

4. Key Propositions

Questions to ask: What is your unique value proposition? What do you bring to your customer’s lives that weren’t present before? How do you make their life/job easier?

The value proposition should be one of the most fleshed-out details of the entire business model because it is the core reason for creating the business. Without a value proposition, there is no meaning behind the business and customers will not feel like they can identify and find loyalty with your brand.

The value proposition should be something that is both in demand and unique. It doesn’t have to be an entirely unique idea, but it does have to have some kind of defining feature to make it stand out. This gives customers a reason to use your product/service over another. Because of the importance and centrality of the entire business model, the unique value proposition should be one of the most descriptive and prioritized sections of the template.

5. Customer Relationships

Questions to ask: How will you manage interactions with your current and potential customers? How will you get your value proposition across to them?

Building and maintaining customer relationships is key to a successful business plan, and thinking about these interactions in advance is greatly helpful in communicating your team goals and expectations. It can be easy to assume customer interactions will happen naturally, but especially when starting a business there has to be a strong push to facilitate these interactions.

It’s equally important to think about how you will allow your value proposition to shine through in these instances. This unique element to your business is ideally what will attract new customers and provide demand to those who are currently using your product/service. It’s important to think about ways to provide this information when planning your interactions so that your customers understand your special features.

6. Channels

Questions to ask: How are you going to reach your customers? What channels of communication will you utilize?

For this point, think about the various ways you will plan to reach your customers. This could be through direct outreach, word of mouth, blog posting, advertising, or any other medium. These outlets will generate different unique interactions with different customer bases and should be considered to optimize your outreach.

7. Customer Segments

Questions to ask: Who is your business targeting? Describe your target audience in a few words.

This section is meant to highlight the specific persona that your business is targeting. Think about the profile that defines your target audience, and write these details in a couple of notes.

This is arguably one of the most important sections in the business model canvas because this principal user will define your entire strategy and method of outreach. They are the end goal of the business plan and many of your features will eventually be catered to their needs. It can be smart to pair this part of the template with a Persona Map in order to gain the deepest understanding of your principal user that you possibly can.

8. Cost Structure

Questions to ask: What are you planning to spend on marketing and product development? Are you planning to charge for your product/service?

The final two points are meant to be logistic markers for how you plan to operate the financials of your business plan. Firstly, you must think about the marketing, development, and advertising costs of creating your business. These can be fixed or dynamic depending on how you want to set up your business. Next, think about the pricing structure of your product/service. Will it be a SaaS service? Will people pay for it or will it be free? These are important things to consider when thinking about your business’s cost structure.

9. Revenue Streams

Questions to ask: Where will the money come from? How will these revenue streams drive profits?

Revenue streams are effectively how your business makes a profit and the exact location of where this money comes from. Mainly, it should be coming from a point detailed in the cost structure (how you charge for your product/service). Think about the specific cost structure and how that will end up driving a profit for your business.

Learn more: What is Lean Canvas?

Here are five explanations of how the Business Model Canvas can be applied to various types of businesses:

1. E-commerce Business

  • Customer Segments: Online shoppers, B2B buyers, wholesale customers.
  • Value Proposition: Wide product selection, convenience, fast shipping, competitive pricing.
  • Channels: Utilizing online platforms including the website, mobile application, social media, and email marketing.
  • Customer Relationships: Self-service, automated support, personalized recommendations.
  • Key Activities: Inventory management, online marketing, website maintenance.
  • Key Resources: E-commerce platform, warehouse, delivery partners.
  • Key Partners: Suppliers, payment processors, and delivery companies.
  • Revenue Streams: Product sales, subscription fees, advertising.

2. Software as a Service (SaaS) Company

  • Customer Segments: Small businesses, enterprises, educational institutions.
  • Value Proposition: Scalable cloud-based software, cost-effective solutions, and regular updates.
  • Channels: Website, free trials, sales team, online communities.
  • Customer Relationships: Online support, account managers, knowledge base.
  • Key Activities: Software development, customer onboarding, support and updates.
  • Key Resources: Development team, servers, customer data.
  • Key Partners: Cloud service providers, integration partners, and resellers.
  • Revenue Streams: Subscription fees, premium features, consulting services.

3. Restaurant Business

  • Customer Segments: Locals, tourists, event planners, food delivery services.
  • Value Proposition: Delicious cuisine, welcoming ambiance, special events.
  • Channels: Physical location, online reservations, food delivery apps.
  • Customer Relationships: In-person service, reservation systems, loyalty programs.
  • Key Activities: Food preparation, staff training, marketing, event hosting.
  • Key Resources: Kitchen equipment, skilled chefs, dining space.
  • Key Partners: Local suppliers, food delivery platforms, and event organizers.
  • Revenue Streams: Food and beverage sales, event hosting fees, catering services.

4. Subscription Box Service

  • Customer Segments: Subscription box enthusiasts, gift buyers, and niche hobbyists.
  • Value Proposition: Curated selection, surprise factor, convenience.
  • Channels: Website, social media, influencer partnerships.
  • Customer Relationships: Subscription management, customization options, feedback loops.
  • Key Activities: Product curation, packaging, logistics, and customer support.
  • Key Resources: Product suppliers, subscription management software, warehouse.
  • Key Partners: Product suppliers, shipping companies, influencers.
  • Revenue Streams: Subscription fees, one-time purchases, affiliate marketing.

5. Freemium Mobile App

  • Customer Segments: Casual users, power users, and businesses.
  • Value Proposition: Free basic functionality, premium features, and convenience.
  • Channels: App stores, social media, referral programs.
  • Customer Relationships: In-app support, user communities, push notifications.
  • Key Activities: App development, updates, user data analysis.
  • Key Resources: Development team, user data, servers.
  • Key Partners: App stores, advertisers, third-party integrations.
  • Revenue Streams: In-app purchases, advertising, premium subscriptions.

These are just a few examples of how the Business Model Canvas can be used to describe different types of businesses. The canvas can be customized and adapted to fit the specific needs and characteristics of any business model.

Learn more: 4 Key Business Model Canvas Advantages

In the Business Model Canvas, the “Channels” component refers to the various ways a business reaches and interacts with its customers in order to deliver its value proposition. It encompasses the distribution and communication methods used to make products or services accessible to the target market. Channels can be both physical and digital, and they play a crucial role in shaping the overall business model. Here are some common examples of channels:

  • Direct Sales: The business sells its products or services directly to customers through its own sales team or physical stores. For example, a luxury jewelry brand may operate high-end boutiques to sell its products directly to customers.
  • Online Sales: Products or services are sold through an e-commerce website or mobile app. For instance, Amazon and eBay primarily operate through online sales channels.
  • Retail Stores: Businesses may use physical retail stores, such as supermarkets, malls, or specialty shops, to sell their products directly to customers.
  • Wholesale: Businesses may sell their products in bulk to other businesses (wholesalers or distributors), who then resell them to retailers or end consumers.
  • Franchise: Franchise businesses utilize a network of franchisees who operate their own outlets, using the parent company’s brand and business model. Examples include fast-food chains like McDonald’s and Subway.
  • Marketplaces: These are platforms that connect buyers and sellers. Examples include Amazon Marketplace, eBay, and Etsy, where individual sellers list and sell products to a broader audience.

Business Model Canvas

  • App Stores: Mobile app stores like the Apple App Store and Google Play Store provide a platform for businesses to distribute and sell mobile applications directly to users.
  • Agent/Broker: Intermediaries, such as real estate agents or insurance brokers, help connect buyers with sellers and facilitate transactions.
  • Social Media: Social media platforms like Facebook and Instagram can serve as channels for businesses to reach customers, advertise products, and interact with their audience.
  • Subscription Services: Businesses may use subscription models, such as streaming services like Netflix, to provide content or access to their products or services on a regular basis.
  • Content Marketing: Businesses create valuable content to attract and engage potential customers. This can include blogs, videos, and podcasts distributed through websites or social media.
  • Events and Trade Shows: Participating in industry-specific events and trade shows can be an effective channel to showcase products, generate leads, and network with potential customers.
  • Telecommunications: Businesses can use phone and email channels to communicate with customers, provide customer support, and even take orders.
  • Third-Party Platforms: Businesses may leverage third-party platforms and marketplaces, such as Airbnb or Uber, to reach a wider audience without having to create their own platform from scratch.
  • Brick-and-Click: A combination of physical and digital channels, where customers can shop both in physical stores and online, with features like in-store pickup and online ordering.

The choice of channels depends on the nature of the business, the target audience, and the specific industry. Effective channel selection is essential for reaching and engaging with customers to deliver the value proposition and generate revenue. Businesses may use multiple channels in a multi-channel strategy to optimize their market reach and customer experience.

Learn more: What is Mind Map?

In the Business Model Canvas, “Key Resources” refers to the essential assets, capabilities, and infrastructure that a business needs to create, deliver, and capture value. These resources are fundamental to the business model and help define the core competencies and advantages of the company. The key resources vary depending on the type of business and industry, but here are some common examples:

1. Physical Assets:

  • Manufacturing facilities
  • Equipment and machinery
  • Inventory and stock
  • Real estate and facilities

2. Intellectual Property:

  • Trademarks, patents, and copyrights
  • Proprietary technology or software
  • Trade secrets and know-how

3. Human Resources:

  • Skilled employees and management
  • Expertise and specialized knowledge
  • Training and development programs

4. Financial Resources:

  • Capital and funding
  • Lines of credit or loans
  • Cash reserves

5. Networks and Partnerships:

  • Strategic alliances and partnerships
  • Supplier relationships
  • Distribution networks

6. Brand and Reputation:

  • Brand recognition and reputation
  • Customer loyalty
  • Positive reviews and testimonials

7. Customer Data:

  • Customer databases and profiles
  • Market research and customer insights
  • Feedback and analytics

8. Technological Infrastructure:

  • Data centers and server infrastructure
  • Software and IT systems
  • Communication networks

9. Distribution and Logistics:

  • Supply chain and logistics networks
  • Transportation and delivery resources
  • Warehousing and storage facilities

10. Unique Processes:

  • Proprietary production processes
  • Innovative research and development methods
  • Efficient operational procedures

11. Reputation and Trust:

  • Strong relationships with stakeholders
  • Regulatory approvals and certifications
  • A track record of reliability and quality

12. Content and Intellectual Capital:

  • A library of content (e.g., books, music, videos)
  • Expertise in a particular domain
  • Educational materials or courses

13. Legal and Regulatory Permissions:

  • Licenses and permits to operate
  • Compliance with industry regulations
  • Exclusive rights to operate in a certain region

14. Geographical Presence:

  • Strategic locations or access to specific markets
  • Regional or global presence
  • Local knowledge and connections

15. Physical Locations:

  • Retail stores, offices, or service centers
  • Pop-up shops or event spaces
  • Showrooms or experience centers

Selecting and managing key resources effectively is critical for the success of a business. These resources support the business model’s value proposition, help it achieve a competitive advantage, and enable the efficient operation of the business. The specific combination of key resources can vary widely depending on the business’s industry, strategy, and objectives.

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Business Models – Example, Types, Importance & Advantages

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Every business or company makes a plan for generating profit. They create a model for identifying products and services to sell, the market they want to target and also take into account anticipated expenses. This is known as business models.

Even if the business is already established or even if it is a new business, a plan needs to be made. Businesses need to regularly update their plans and strategy as they need to take into account the challenges and trends for future models.

Table of Contents

What are the business models.

The strategy a business uses to turn a profit is referred to as its business model. It lists any estimated costs as well as the goods or services the company intends to sell, as well as its chosen target clientele.

Both new and established businesses need strong business models. They aid young, developing businesses in luring capital, hiring talent, and inspiring management and personnel.

Established companies must continuously alter their business models if they are to stay abreast of emerging trends and problems. Business models also assist employees in understanding the future of an organisation they might want to work for and investors in evaluating companies that interest them.

How to Evaluate Succesful Business Models

When developing their business concepts, many organisations frequently underestimate the costs of financing the venture until it turns a profit. It is not sufficient to calculate the costs of a product’s launch. A corporation must continue operating until revenues outweigh expenses.

The company’s gross profit can be used as one indicator for analysts and investors to determine whether a business strategy is successful. A company’s gross profit is its total revenue less its cost of goods sold (COGS).

The efficiency and efficacy of a company’s business model can be determined by comparing its gross profit to that of its main rival or its sector. However, relying only on gross profit can be misleading. Analysts also request access to net income or cash flow. This shows how much actual profit the company is making by taking gross profit and subtracting operating expenses.

Importance of Business Models

The business model helps to target the customer base of the company. It helps in making marketing strategies, and projections of revenues and expenses taking into account the type of Business models and clientele.

Every investor needs to review the business model in order to get knowledge about the company’s competitive edge . Understanding the business model helps investors to have a better sense of financial data.

Evaluating the business model helps the investors to get an overall view of the company’s products, its business strategies and future prospects.

Business Model Examples

For example, let’s take company A which rents and sells video games. So the company is in the business of video games. The company used to make a profit of 5 million after spending 3 million on their inventories for video games. So, the total gross profit margin is 2 million.

The Internet arrived in the market and the company now has to alter its business model by taking into consideration the Internet in order to survive in the market. So as a result the cost of holding inventory and distribution cost also gets reduced. Since expenses reduce profit increases.

Even though with the arrival of internet sales get reduced but the company was able to expand its business as technology helped it to change course.

In a similar way, there are various business models types-

What are Business Models Types?

We will discuss here 4 business models types:

Business Models - Example, Types, Importance & Advantages 2

1. Business -To- Business Models (B2B)

When dealings or transactions take place between two companies or businesses then this type of business model is known as business to the business model.

It has good market predictability and more market stability . Since under B2B sale is made in bulk amount this model leads to lower cost for the businesses.

The best example of this type of business model in India is IndiaMart InterMesh which is a wholesale B2B marketplace. It offers millions of products to its customers which includes consumer electronics, machinery, apparel and many more.

2. Business -To-Consumer Models (B2C)

The business-2-consumer business model is a model that refers to businesses that sell their services or products directly to the consumer who are the end users of the products or services.

There is an ongoing demand for the products as it provides the essential items. This thus eliminates the risk of fluctuation in demand and helps in maintaining consistency in the business. Since direct contact is there with the customers so information is shared with them directly and easily.

Customers are given products at a low price compared to their competitors for the business to run smoothly.

An example of business to consumer model is Avenue Supermart which provides goods directly to its customers.

3. Subscription-Based Models

Any application-based businesses or software companies have subscription-based business models. They offer their product as a one-time purchase, in return company earns monthly or annual revenues.

Business Models - Example, Types, Importance & Advantages 3

This type of business model allows the company to earn regular income by giving the client the opportunity to pay for the cost of the purchase in 12 equal payments rather than asking them to pay the wholesome amount in one go.

One of the leading examples is Infoedge for this type of business model.

4. On-Demand Business Model

It is the most recent form of model which is made out on the need by answering immediately. This type of business model is prepared in such a way that all the questions will be answered by just a click of a button in seconds.

It is very much convenient and easy for customers as even before customers have visited a particular city they get their hotels or places booked.

One of the examples is making my trip which allows customers to plan the holidays and make the bookings in advance.

Advantages of Business Models

  • A good business model gives the company a competitive edge in the industry.
  • A strong business model provides the company good reputation in the market place encouraging investors to remain invested in the company.
  • Making the business model strong leads to an ongoing business profit leading to an increase in cash reserve and new investments.
  • A proven business model brings financial stability to the organization.

Business models have disadvantages as well.

Disadvantages of the Business Model

  • Once a business model is created, then it restricts to implementation new ideas for the product.
  • Creating a business model is time-consuming as a lot of factors need to be considered.
  • There might be a chance that the business model may turn out to be inaccurate.

Apart from the disadvantages, the business model is mandatory to be prepared before starting of a new project.

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A business is more than just a place where things are sold. It’s an ecosystem, therefore it needs a plan for who to sell to, what to sell for, how much to charge, and how much value it’s producing.

What an organisation does to consistently produce long-term value for its clients is described by its business model. A company should have a clearer understanding of how it intends to function and what its financial future looks like after developing a business model.

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Frequently Asked Questions

What is a good business model.

A good business model is one that provides the company with a competitive edge in the industry-leading to good business profits.

Why is a business model important?

The business model is important because it provides the investors with knowledge about the competitive edge of the company and provides better insight into the workings of the company. A strong business model leads to cash generation and future expansion.

How do you create a business model?

The business model is created by identifying the products and services that will be sold in the market to be targeted like B2B, B2C, subscription-based model or on-demand market.

What are the components of the business model?

The business model includes information about the company’s products, its target market and its future prospect related to its business type.

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what does a business model mean

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 17, 2023

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Table of contents, business model definition.

A business model is a high-level plan for how a business will earn and maximize profits .

Business models establish whether a company will offer a product or service, be online or brick and mortar, or sell to businesses vs directly to consumers, or a hybrid between several traditional business models.

A business model is not an in-depth plan; it is a 30,000 ft view of the business which is used as a platform to build more in-depth plans upon.

A business model has 2 main focuses: a marketing plan and a financial plan.

Marketing Plan

Within a marketing plan, a company must establish its Value Proposition, Brand, and Target Market.

  • A Value Proposition is why customers should want to purchase a product or service from you instead of a competitor . For example, Uber's value proposition is a 24/7 fleet of drivers in your area to take you from point A to point B.
  • A Brand is how you communicate your value proposition to your customers and what consumers think of when they hear your company's name. While TJMaxx and Abercrombie both sell clothing, TJMaxx is a cheaper alternative while Abercrombie positions itself as premium casual wear.
  • A target market is who you are trying to sell to. A target market can be based on age, gender, marital status, location, life stage, job or a variety of other factors.

Here is a marketing plan example:

Financial Plan

A financial plan forecasts revenues while assessing variable and fixed costs .

Variable costs are costs associated with each unit of production, which are used to calculate the profit earned from each unit sold, known as " gross profit ."

Fixed costs are the necessary overhead costs to produce goods, such as a facility.

A financial plan will evaluate how many units must be sold to cover fixed costs and become profitable.

Invest in Growth and Protection

Every business' goal is to earn and maximize profits. However, many business owners fail to consider the many other factors that can potentially harm their businesses.

With the help of a financial advisor who can assess the viability of your business model, potential risks can be minimized or avoided and profitability can be maximized.

Business Model FAQs

What is a business model.

A business model is a high-level plan for how a business will earn and maximize profits and establish whether a company will offer a product or service.

How does a Business Model work?

Why is a business model important.

A business model gives a business definite specific goals that it will try to reach by the end of the time period that the model covers.

What is the purpose of a Business Model?

What are the two primary parts of a business model.

The primary parts of a business model are a marketing plan and a financial plan.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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what does a business model mean

Business Models: Components, Types and Examples

In the dynamic world of trade, business models serve as guides, showing the way for both entrepreneurs and established organizations to thrive. Through the lens of business models, one can unravel industry-shaping strategies and innovation drivers. By understanding the foundational elements of successful business models, entrepreneurs can create their own innovative blueprints and step into the realm of commercial success. Learn what is business model, and embrace the art of entrepreneurial success.

Business Models: Components, Types and Examples

 By understanding the core components and exploring various business models, entrepreneurs can make informed decisions about how to structure their ventures. Now let’s have a look at the definition of a business model along with its types and how you can create a business model.

Table of Contents

What is a business model, importance of business model, components of a business model, types and examples of business models, how to create a business model.

What is a Business Model?

A business model is a framework that summarizes how a company creates, delivers, and captures value. It describes the core components of a business, such as its target customers, value proposition, revenue streams, and cost structure. Business models can vary widely, from traditional retail and subscription-based models to more advanced approaches like the sharing economy or freemium models.

A well-defined business model serves as a roadmap for a company’s operations, helping it to align resources, make strategic decisions, and adapt to changing market conditions to ultimately achieve financial success and competitive advantage.

For established companies, it is essential to periodically revise their business model to stay ahead of evolving trends and potential challenges. Additionally, business models aid investors in assessing companies of interest and help prospective employees gain insights into the future direction of a company they aspire to be a part of.

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Importance of Business Model

The importance of a business model cannot be overstated in the world of business. A well-defined and effectively executed business model is crucial for the success and sustainability of any organization. 

Below, we have mentioned several reasons why business models are important:

  • Clarity and Direction : A business model provides a clear and concise description of what a company does and why it exists. It outlines the core purpose of the business. It defines the target market or customer segment the business intends to serve and the problems or needs it aims to address. This clarity is vital for aligning the entire organization behind a common mission and direction.
  • Value Proposition : A value proposition is a critical component of the business model. It explains the unique value that a company offers to its customers. A strong value proposition distinguishes a business from its competitors and helps in attracting and retaining customers. It’s essentially the “reason to buy” from the customer’s perspective.
  • Resource Allocation : A well-defined business model helps in allocating resources efficiently. It provides insight into where the company should invest its capital, human resources, and technology. It ensures that resources are directed toward activities that contribute most to the business’s success.
  • Revenue Generation : The business model outlines how the company plans to make money. It clarifies the revenue sources, pricing strategies, and sales channels. This is essential for ensuring the financial sustainability of the business. Revenue generation is a key component in determining the viability and profitability of a business.
  • Measuring Success : The business model defines key performance indicators (KPIs) that allow the company to measure its success and performance. KPIs provide benchmarks for evaluating progress and making data-driven decisions for continuous improvement.
  • Adaptability : Markets and customer preferences evolve over time. A well-articulated business model makes it easier to identify when changes are necessary. It serves as a basis for making informed strategic decisions, such as pivoting to new markets or adjusting the product or service offering.

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Components of a Business Model

While there are various business models, they generally consist of several key components, which are as follows:

  • Customer Segments : Involves identifying and categorizing the different groups of people or organizations a business intends to serve as customers. It’s crucial to understand customers’ characteristics, needs, and preferences to tailor the value proposition and marketing efforts effectively.
  • Channels : Channels are the methods used to reach and connect with customer segments. These can be physical (e.g., a brick-and-mortar store) or digital (e.g., an online marketplace). The choice of channels affects how customers discover, purchase, and access the product or service.
  • Customer Relationships : This component defines the nature of interactions and relationships with customers. It can range from self-service to personalized one-on-one relationships. It’s essential to understand how customers prefer to interact and adjust strategies accordingly.
  • Revenue Streams : Outlines how a business plans to make money. It includes the pricing strategy, whether the business charges one-time fees, subscription fees, or generates revenue through other means (e.g., advertising, licensing). The revenue model must align with the value being provided and how customers perceive that value.
  • Risk and Mitigation : Identifying potential risks and challenges that a business may face, such as market volatility, regulatory changes, or supply chain disruptions. Developing strategies to mitigate these risks and adapt to changing conditions is crucial for long-term success.
  • Cost Structure: This outlines all the costs associated with operating a business. It includes fixed costs (like rent and salaries) and variable costs (like raw materials). Understanding the cost structure is crucial for pricing products or services and managing profitability.
  • Key Partnerships : Partnerships represent collaborations with other organizations or entities that help a business function more efficiently or extend its reach. Partnerships can provide access to resources, technologies, or distribution channels that might not be available otherwise.

Types and Examples of Business Models

Business models can vary significantly depending on the industry, market, and specific needs and preferences of customers. There are various types of business models, each with its unique approach to generating revenue and delivering value to customers.

This table provides a comprehensive view of the various business models and their performance across different factors:

Here are some common types of business models:

  • E-commerce : E-commerce businesses sell products or services online. They may operate as traditional online retailers, marketplaces, subscription-based models, or dropshipping businesses. This model includes various subtypes like B2B (business-to-business), B2C (business-to-consumer), and C2C (consumer-to-consumer). 

Examples: Amazon (B2C), as one of the globe’s largest e-commerce giants, provides a diverse array of products for customers to purchase, spanning everything from electronics to books, all accessible through its online marketplace.

  • Subscription Model :  In the subscription model, customers pay regular, usually monthly, fees for access to a product or service. It often includes recurring billing.

Examples: Netflix, a subscription-based streaming service, offers a vast library of movies and TV shows for a monthly fee. Customers can access content as long as they maintain their subscriptions. Some other examples include software-as-a-service (SaaS) companies like Adobe Creative Cloud and subscription box services.

  • Freemium : Businesses offer a free version of their product or service with limited features, encouraging users to upgrade to a paid version with additional features. 

Examples: OpenAI provides a free version of its language model, ChatGPT, which users can interact with on platforms like chat.openai.com. Users can opt for ChatGPT Plus, a subscription plan offering benefits like faster response times and priority access to new features. Dropbox, a cloud storage service, provides a limited amount of free storage space. Users can upgrade to a premium plan for more storage and advanced features.

  • Advertising Model : This model generates revenue by displaying advertisements to users. The more users a platform attracts, the more valuable the advertising space becomes.

Examples: Google, a search engine and ad platform, earns a significant portion of its revenue through pay-per-click advertising, displayed alongside search results.

  • Affiliate Marketing : Affiliate marketers earn a commission by promoting and selling other companies’ products or services. They typically use affiliate links or codes to track referrals and sales. 

Examples: Amazon Associates is an affiliate marketing program that allows individuals and websites to earn commissions by promoting Amazon products and generating sales through their unique affiliate links.

  • Direct Sales : Businesses commonly employ a model where they market their products or services directly to consumers using sales representatives or consultants. This approach is frequently seen in sectors such as cosmetics, health and wellness, and household goods. Examples: Amway (nutritional supplements and home products) and Tupperware (kitchenware).
  • Franchise Model : Businesses grant the rights to operate their established business model and branding to franchisees in exchange for fees and royalties. Fast-food chains like McDonald’s and coffee shops like Starbucks often use this model.
  • Peer-to-peer (P2P) : Peer-to-peer models enable individuals to directly trade, share, or rent assets and services to one another through online platforms. Examples include Airbnb for accommodations and Uber for transportation.
  • Razorblade Model : Businesses sell a primary product at a low or subsidized cost and make profits by selling complementary products or services. This is common in the sale of printers and ink cartridges, gaming consoles and games, and razors and razor blades. 

Examples: Gillette (razor handles sold at a low cost, with profit from razor blade sales), gaming consoles (profit from games and accessories).

  • Crowdsourcing : Businesses leverage a crowd of individuals to perform various tasks, solve problems, or generate ideas. Crowdsourcing can be used in fields like design, content creation, and innovation. 

Examples: Wikipedia (content creation), Kickstarter (crowdfunding for creative projects), and Upwork (freelance services).

  • Marketplace : Online marketplaces connect buyers and sellers, often charging a fee or commission on transactions. 

Examples include eBay, Amazon Marketplace, and Etsy.

  • Traditional Retail Model : Traditional physical stores sell products or services to customers in physical locations. While this model has been challenged by e-commerce, many businesses still operate successfully in this way. 

Examples: Department stores, grocery stores, and boutiques.

  • Manufacturing : Businesses create products and sell them to distributors, retailers, or directly to consumers. This model can be used in various industries, from clothing, medicine to electronics.

Examples include pharmaceutical companies such as Pfizer and Johnson & Johnson.

  • Consulting and Professional Services : Individuals or firms offer expertise, advice, and services in areas like law, marketing, management, and finance.
  • B2B (Business-to-Business) : Companies in this model sell products or services to other businesses rather than individual consumers. 

Examples include software companies that sell enterprise solutions and manufacturers supplying components to other businesses.

  • Nonprofit : Nonprofit organizations focus on a mission or cause and rely on donations, grants, and fundraising to sustain their operations.

Examples include the A.P.J. Abdul Kalam Centre and Aadiwasi Janjagruti.

  • Cooperative : Cooperative businesses are owned and operated by their members or employees. They distribute profits among members or reinvest them in the organization.

How to Create a Business Model

Creating a business model is not a one-size-fits-all process, and various experts might recommend different approaches when developing a business plan. 

Below, we have mentioned  some general steps you can consider when creating your business model:

  • Identify your Audience : Start by identifying your target audience or customer segments. Who are the people or organizations that will benefit from your products or services? Understand their demographics, preferences, needs, and pain points. This helps you tailor your offerings to meet their specific requirements.
  • Define the Problem : Once you’ve identified your audience, define the problem or challenge they face that your business can address. Clearly articulate the pain points and issues your target customers experience. This forms the basis for the value your business will provide.
  • Understand your Offerings : Determine what products or services you will offer to solve the identified problem. Understand the unique features and benefits of your offerings and how they differentiate you from competitors. Your offerings should align with the needs and preferences of your target audience.
  • Document your Needs : Identify the resources, skills, and infrastructure you will need to operate your business successfully. This includes financial needs, technology requirements, physical space, human resources, and any other necessary elements. Documenting your needs helps you plan for the resources required.
  • Find Key Partners : Identify potential partners, suppliers, and collaborators who can help you achieve your business goals. Partnerships can provide access to resources, distribution channels, or expertise that you might not possess internally. Collaborative relationships can be essential to the success of your business.
  • Pricing Models : Decide on your pricing structure (e.g., subscription, one-time purchase, freemium, or tiered pricing).
  • Revenue Streams : Explore multiple sources of income, such as product sales, subscription fees, advertising, licensing, or affiliate marketing.
  • Cost Structure : Calculate your expenses and ensure that your revenue streams cover these costs while leaving room for profit.
  • Test your Model : Before fully launching your business, it’s essential to test your business model. This can involve creating a minimum viable product (MVP), conducting market research, or running pilot programs. Gather feedback from your target audience and make necessary adjustments based on their input. Testing helps refine your business model and ensures it is viable and sustainable.

In a world where innovation and disruption are constant, having a solid understanding of what a business model is and how it works is a vital step towards building a resilient and successful business. A business model is not a static document but a dynamic and adaptable roadmap. As your business evolves, your model may need adjustments to stay aligned with your goals and the changing marketplace. In essence, a well-crafted business model serves as the cornerstone for building a thriving enterprise. So, take the time to analyze, create, and refine your business model to ensure your journey in the world of business.

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Platform Business Model explained…in under 100 words

Everywhere we look today, platform businesses are in the news. From the most valuable start-ups that are disrupting traditional markets, to established companies that have shifted their business model from a traditional linear to a platform based approach.

Why platform businesses are nothing new

Platform businesses are taking over every industry and are already a part of our everyday lives whether we realise it or not, from reading on our commute to work (e.g. AmazonKindle), to borrowing money to opening a small business (e.g. LendingClub).

Auction house D.Art (“platform business”) organises its yearly modern art-painting auction in Zürich. The auction (“infrastructure”) is a well-known event that will help to make the paintings of young talented artists (“producers”) and art collectors (“consumers”) more accessible to each on an as-need basis. Experts (“agents”) are present to advise groups of collectors on relevant artists (“trust”) .

As D.Art does not own the paintings, it simply lays out the rules of interactions (“eliminate friction”) to enable the information exchanges (“value creation”) between the artists and collectors followed by compensation through money, goods and/or services, and fees for D.Art (“monetising strategy”) .

The explanation above is only one type of a platform business, what we call an aggregation platform that focusses on enabling short-term transactions among participants. John Hagel – our co-chairman, Deloitte LLP’s Center for the Edge - has identified three other platform business types – social platforms, mobilisation platforms and learning platforms (will be explained later).

The concept of a platform business is not a new phenomenon. Think about the old ancient marketplaces or the massive American shopping malls or even exhibition centres. The types of businesses have mostly used brick-and-mortar approach to enable interactions and to facilitate value exchanges. Nowadays platforms are increasingly supported by global digital technology infrastructures that help to scale participation and collaboration, but this is an enabler, rather than a prerequisite for a platform.

As case in point - with the auction house example in mind - think about the e-commerce company eBay. Through its platform, eBay facilitates consumer-to-consumer and business–to-consumer sales by enabling interactions between 170+ million buyers and 25+ million sellers across the globe 24/7.

So, what is a platform business?

What we mean with a platform business is a business model (not a technology infrastructure) that focuses on helping to facilitate interactions across a large number of participants. These interactions could take the form of short-term transactions like connecting buyers and sellers or they could involve formation of longer-term social relationships, longer-term collaboration to achieve a shared outcome or sustained efforts to accelerate performance improvement of participants by helping them to learn faster together. The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions at scale so that network effects can be unleashed.

Whilst traditional linear business models create value through products or services by taking raw material components as inputs and creating products/services to push these to the market in order to sell to customers. The platform business model does not own the means of production, but rather creates and facilitates the means of connection.

What are the different types?

Platform businesses are becoming increasingly integral to business value creation. However, not all platforms are created equal, with some platforms having far more potential to trigger powerful forms of increasing returns that will ultimately marginalise other forms of platforms. It’s important to understand not just the structure, but the dynamics, of different kinds of platforms. John Hagel¹ has distinguished four different categories of platforms that are becoming increasingly prominent in the business world (and elsewhere).

  • Aggregation platforms bring together a broad array of relevant resources and help users to connect with the most appropriate resources. These platforms tend to be very transaction- or task-focused: Express a need, get a response, do the deal, and move on. Marketplace and broker platforms like eBay and Etsy are well-known examples. Aggregation platforms tend to operate on a hub-and-spoke model, whereby the platform owner and organiser brokers all of the transactions.
  • Social platforms are similar in that they also aggregate a lot of people—Facebook and Twitter are leading examples—but rather than supporting the completion of a transaction or a task, they support engagement among people with common interests. They also tend to foster networks of relationships rather than hub-and-spoke interactions—people connect with each other over time in ways that usually do not involve the platform organiser or owner.
  • Mobilisation platforms move people to work together to accomplish something beyond the capabilities of any individual participant. They tend to foster longer-term relationships rather than focus on isolated and short-term transactions or tasks. In a business context, the most common form of these platforms brings together participants in extended business processes like supply networks or distribution operations.
  • Learning platforms facilitate learning by bringing participants together to share insights over time. They tend to foster deep, trust-based relationships, as participants have the opportunity to realise more potential by working together. Business leaders who understand this will likely increasingly seek out platforms that not only make work lighter for their participants, but also grow their knowledge, accelerate performance improvement, and hone their capabilities in the process.

As with social and mobilisation platforms, learning platforms critically depend on the ability to build long-term relationships rather than simply focusing on short-term transactions or tasks. Unlike the other platforms, though, learning platforms do not view participants as “static resources.” On the contrary, they start with the presumption that all participants have the opportunity to draw out more and more of their potential by working together in the right environment.

The good news is that any of the three forms of platforms—aggregation, social, and mobilisation—have the potential to evolve into learning platforms. The companies that find ways to design and deploy learning platforms will likely be in the best position to create and capture economic value in an increasingly challenging and rapidly evolving business environment.

Our message to you is, a platform business is not opportunity, it is an imperative!

We hope that this blog gives you some insights in the world of platform businesses.

1. John Hagel, The Power of Platforms – Deloitte University Press, 2015 - Read the PDF

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Business-to-Business (B2B): What It Is and How It’s Used

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

what does a business model mean

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

what does a business model mean

What Is Business-to-Business (B2B)?

Business-to-business (B2B), also called B-to-B, is a form of transaction between businesses, such as one involving a manufacturer and wholesaler, or a wholesaler and a retailer. Business-to-business refers to business that is conducted between companies, rather than between a company and individual consumer. Business-to-business stands in contrast to business-to-consumer (B2C) and business-to-government (B2G) transactions.

Key Takeaways

  • Business-to-business (B2B) is a transaction or business conducted between one business and another, such as a wholesaler and retailer.
  • B2B transactions tend to happen in the supply chain, where one company will purchase raw materials from another to be used in the manufacturing process.
  • B2B transactions are also commonplace for auto industry companies, as well as property management, housekeeping, and industrial cleanup companies.
  • Meanwhile, business-to-consumer transactions (B2C) are those made between a company and individual consumers.

Lara Antal / Investopedia

Understanding Business-to-Business (B2B)

Business-to-business transactions are common in a typical supply chain , as companies purchase components and products such as other raw materials for use in the manufacturing processes. Finished products can then be sold to individuals via business-to-consumer transactions.

In the context of communication, business-to-business refers to methods by which employees from different companies can connect with one another, such as through social media . This type of communication between the employees of two or more companies is called B2B communication.

B2B E-Commerce

Late in 2018, Forrester said the B2B e-commerce market topped $1.134 trillion—above the $954 billion it had projected for 2018 in a forecast released in 2017. That's roughly 12% of the total $9 trillion in total US B2B sales for the year. They expect this percentage to climb to 17% by 2023 . The internet provides a robust environment in which businesses can find out about products and services and lay the groundwork for future business-to-business transactions.

Company websites allow interested parties to learn about a business's products and services and initiate contact. Online product and supply exchange websites allow businesses to search for products and services and initiate procurement through e-procurement interfaces. Specialized online directories providing information about particular industries, companies and the products and services they provide also facilitate B2B transactions. 

Special Considerations

Business-to-business transactions require planning to be successful. Such transactions rely on a company’s account management personnel to establish business client relationships. Business-to-business relationships must also be nurtured, typically through professional interactions prior to sales, for successful transactions to take place.

Traditional marketing practices also help businesses connect with business clients . Trade publications aid in this effort, offering businesses opportunities to advertise in print and online. A business’s presence at conferences and trade shows also builds awareness of the products and services it provides to other businesses.

Example of Business-to-Business (B2B)

Business-to-business transactions and large corporate accounts are commonplace for firms in manufacturing. Samsung, for example, is one of Apple's largest suppliers in the production of the iPhone. Apple also holds B2B relationships with firms like Intel, Panasonic and semiconductor producer Micron Technology.

B2B transactions are also the backbone of the automobile industry. Many vehicle components are manufactured independently, and auto manufacturers purchase these parts to assemble automobiles. Tires, batteries, electronics, hoses and door locks, for example, are usually manufactured by various companies and sold directly to automobile manufacturers.

Service providers also engage in B2B transactions. Companies specializing in property management, housekeeping, and industrial cleanup, for example, often sell these services exclusively to other businesses, rather than individual consumers.

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Circular economy: definition, importance and benefits

The circular economy: find out what it means, how it benefits you, the environment and our economy.

what does a business model mean

The European Union produces more than 2.2 billion tonnes of waste every year . It is currently updating its legislation on waste management to promote a shift to a more sustainable model known as the circular economy.

But what exactly does the circular economy mean? And what would be the benefits?

What is the circular economy?

The circular economy is a model of production and consumption , which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended.

In practice, it implies reducing waste to a minimum. When a product reaches the end of its life, its materials are kept within the economy wherever possible thanks to recycling. These can be productively used again and again, thereby creating further value .

This is a departure from the traditional, linear economic model, which is based on a take-make-consume-throw away pattern. This model relies on large quantities of cheap, easily accessible materials and energy.

Also part of this model is planned obsolescence , when a product has been designed to have a limited lifespan to encourage consumers to buy it again. The European Parliament has called for measures to tackle this practice.

Infographic explaining the circular economy model

Benefits: why do we need to switch to a circular economy?

To protect the environment.

Reusing and recycling products would slow down the use of natural resources, reduce landscape and habitat disruption and help to limit biodiversity loss .

Another benefit from the circular economy is a reduction in total annual greenhouse gas emissions . According to the European Environment Agency, industrial processes and product use are responsible for 9.10% of greenhouse gas emissions in the EU, while the management of waste accounts for 3.32%.

Creating more efficient and sustainable products from the start would help to reduce energy and resource consumption, as it is estimated that more than 80% of a product's environmental impact is determined during the design phase.

A shift to more reliable products that can be reused, upgraded and repaired would reduce the amount of waste. Packaging is a growing issue and, on average, the average European generates nearly 180 kilos of packaging waste per year . The aim is to tackle excessive packaging and improve its design to promote reuse and recycling.

Reduce raw material dependence

The world's population is growing and with it the demand for raw materials. However, the supply of crucial raw materials is limited.

Finite supplies also means some EU countries are dependent on other countries for their raw materials. According to Eurostat , the EU imports about half of the raw materials it consumes.

The total value of trade (import plus exports) of raw materials between the EU and the rest of the world has almost tripled since 2002, with exports growing faster than imports. Regardless, the EU still imports more than it exports. In 2021, this resulted in a trade deficit of €35.5 billion.

Recycling raw materials mitigates the risks associated with supply, such as price volatility, availability and import dependency.

This especially applies to critical raw materials , needed for the production of technologies that are crucial for achieving climate goals, such as batteries and electric engines.

Create jobs and save consumers money

Moving towards a more circular economy could increase competitiveness, stimulate innovation, boost economic growth and create jobs ( 700,000 jobs in the EU alone by 2030 ).

Redesigning materials and products for circular use would also boost innovation across different sectors of the economy.

Consumers will be provided with more durable and innovative products that will increase the quality of life and save them money in the long term.

What is the EU doing to become a circular economy?

  In March 2020, the European Commission presented the circular economy action plan,  which aims to promote more sustainable product design, reduce waste and empower consumers, for example by creating a right to repair ). There is a focus on resource intensive sectors, such as electronics and ICT , plastics , textiles and construction.

In February 2021, the Parliament adopted a resolution on the new circular economy action plan demanding additional measures to achieve a carbon-neutral, environmentally sustainable, toxic-free and fully circular economy by 2050, including tighter recycling rules and binding targets for materials use and consumption by 2030. In March 2022, the Commission released the first package of measures to speed up the transition towards a circular economy, as part of the circular economy action plan. The proposals include boosting sustainable products, empowering consumers for the green transition, reviewing construction product regulation, and creating a strategy on sustainable textiles.

In November 2022, the Commission proposed new EU-wide rules on packaging . It aims to reduce packaging waste and improve packaging design, with for example clear labelling to promote reuse and recycling; and calls for a transition to bio-based, biodegradable and compostable plastics.

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This section features overview and background articles for the general public. Press releases and materials for news media are available in the news section .

Our next-generation model: Gemini 1.5

Feb 15, 2024

The model delivers dramatically enhanced performance, with a breakthrough in long-context understanding across modalities.

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A note from Google and Alphabet CEO Sundar Pichai:

Last week, we rolled out our most capable model, Gemini 1.0 Ultra, and took a significant step forward in making Google products more helpful, starting with Gemini Advanced . Today, developers and Cloud customers can begin building with 1.0 Ultra too — with our Gemini API in AI Studio and in Vertex AI .

Our teams continue pushing the frontiers of our latest models with safety at the core. They are making rapid progress. In fact, we’re ready to introduce the next generation: Gemini 1.5. It shows dramatic improvements across a number of dimensions and 1.5 Pro achieves comparable quality to 1.0 Ultra, while using less compute.

This new generation also delivers a breakthrough in long-context understanding. We’ve been able to significantly increase the amount of information our models can process — running up to 1 million tokens consistently, achieving the longest context window of any large-scale foundation model yet.

Longer context windows show us the promise of what is possible. They will enable entirely new capabilities and help developers build much more useful models and applications. We’re excited to offer a limited preview of this experimental feature to developers and enterprise customers. Demis shares more on capabilities, safety and availability below.

Introducing Gemini 1.5

By Demis Hassabis, CEO of Google DeepMind, on behalf of the Gemini team

This is an exciting time for AI. New advances in the field have the potential to make AI more helpful for billions of people over the coming years. Since introducing Gemini 1.0 , we’ve been testing, refining and enhancing its capabilities.

Today, we’re announcing our next-generation model: Gemini 1.5.

Gemini 1.5 delivers dramatically enhanced performance. It represents a step change in our approach, building upon research and engineering innovations across nearly every part of our foundation model development and infrastructure. This includes making Gemini 1.5 more efficient to train and serve, with a new Mixture-of-Experts (MoE) architecture.

The first Gemini 1.5 model we’re releasing for early testing is Gemini 1.5 Pro. It’s a mid-size multimodal model, optimized for scaling across a wide-range of tasks, and performs at a similar level to 1.0 Ultra , our largest model to date. It also introduces a breakthrough experimental feature in long-context understanding.

Gemini 1.5 Pro comes with a standard 128,000 token context window. But starting today, a limited group of developers and enterprise customers can try it with a context window of up to 1 million tokens via AI Studio and Vertex AI in private preview.

As we roll out the full 1 million token context window, we’re actively working on optimizations to improve latency, reduce computational requirements and enhance the user experience. We’re excited for people to try this breakthrough capability, and we share more details on future availability below.

These continued advances in our next-generation models will open up new possibilities for people, developers and enterprises to create, discover and build using AI.

Context lengths of leading foundation models

Highly efficient architecture

Gemini 1.5 is built upon our leading research on Transformer and MoE architecture. While a traditional Transformer functions as one large neural network, MoE models are divided into smaller "expert” neural networks.

Depending on the type of input given, MoE models learn to selectively activate only the most relevant expert pathways in its neural network. This specialization massively enhances the model’s efficiency. Google has been an early adopter and pioneer of the MoE technique for deep learning through research such as Sparsely-Gated MoE , GShard-Transformer , Switch-Transformer, M4 and more.

Our latest innovations in model architecture allow Gemini 1.5 to learn complex tasks more quickly and maintain quality, while being more efficient to train and serve. These efficiencies are helping our teams iterate, train and deliver more advanced versions of Gemini faster than ever before, and we’re working on further optimizations.

Greater context, more helpful capabilities

An AI model’s “context window” is made up of tokens, which are the building blocks used for processing information. Tokens can be entire parts or subsections of words, images, videos, audio or code. The bigger a model’s context window, the more information it can take in and process in a given prompt — making its output more consistent, relevant and useful.

Through a series of machine learning innovations, we’ve increased 1.5 Pro’s context window capacity far beyond the original 32,000 tokens for Gemini 1.0. We can now run up to 1 million tokens in production.

This means 1.5 Pro can process vast amounts of information in one go — including 1 hour of video, 11 hours of audio, codebases with over 30,000 lines of code or over 700,000 words. In our research, we’ve also successfully tested up to 10 million tokens.

Complex reasoning about vast amounts of information

1.5 Pro can seamlessly analyze, classify and summarize large amounts of content within a given prompt. For example, when given the 402-page transcripts from Apollo 11’s mission to the moon, it can reason about conversations, events and details found across the document.

Reasoning across a 402-page transcript: Gemini 1.5 Pro Demo

Gemini 1.5 Pro can understand, reason about and identify curious details in the 402-page transcripts from Apollo 11’s mission to the moon.

Better understanding and reasoning across modalities

1.5 Pro can perform highly-sophisticated understanding and reasoning tasks for different modalities, including video. For instance, when given a 44-minute silent Buster Keaton movie , the model can accurately analyze various plot points and events, and even reason about small details in the movie that could easily be missed.

Multimodal prompting with a 44-minute movie: Gemini 1.5 Pro Demo

Gemini 1.5 Pro can identify a scene in a 44-minute silent Buster Keaton movie when given a simple line drawing as reference material for a real-life object.

Relevant problem-solving with longer blocks of code

1.5 Pro can perform more relevant problem-solving tasks across longer blocks of code. When given a prompt with more than 100,000 lines of code, it can better reason across examples, suggest helpful modifications and give explanations about how different parts of the code works.

Problem solving across 100,633 lines of code | Gemini 1.5 Pro Demo

Gemini 1.5 Pro can reason across 100,000 lines of code giving helpful solutions, modifications and explanations.

Enhanced performance

When tested on a comprehensive panel of text, code, image, audio and video evaluations, 1.5 Pro outperforms 1.0 Pro on 87% of the benchmarks used for developing our large language models (LLMs). And when compared to 1.0 Ultra on the same benchmarks, it performs at a broadly similar level.

Gemini 1.5 Pro maintains high levels of performance even as its context window increases. In the Needle In A Haystack (NIAH) evaluation, where a small piece of text containing a particular fact or statement is purposely placed within a long block of text, 1.5 Pro found the embedded text 99% of the time, in blocks of data as long as 1 million tokens.

Gemini 1.5 Pro also shows impressive “in-context learning” skills, meaning that it can learn a new skill from information given in a long prompt, without needing additional fine-tuning. We tested this skill on the Machine Translation from One Book (MTOB) benchmark, which shows how well the model learns from information it’s never seen before. When given a grammar manual for Kalamang , a language with fewer than 200 speakers worldwide, the model learns to translate English to Kalamang at a similar level to a person learning from the same content.

As 1.5 Pro’s long context window is the first of its kind among large-scale models, we’re continuously developing new evaluations and benchmarks for testing its novel capabilities.

For more details, see our Gemini 1.5 Pro technical report .

Extensive ethics and safety testing

In line with our AI Principles and robust safety policies, we’re ensuring our models undergo extensive ethics and safety tests. We then integrate these research learnings into our governance processes and model development and evaluations to continuously improve our AI systems.

Since introducing 1.0 Ultra in December, our teams have continued refining the model, making it safer for a wider release. We’ve also conducted novel research on safety risks and developed red-teaming techniques to test for a range of potential harms.

In advance of releasing 1.5 Pro, we've taken the same approach to responsible deployment as we did for our Gemini 1.0 models, conducting extensive evaluations across areas including content safety and representational harms, and will continue to expand this testing. Beyond this, we’re developing further tests that account for the novel long-context capabilities of 1.5 Pro.

Build and experiment with Gemini models

We’re committed to bringing each new generation of Gemini models to billions of people, developers and enterprises around the world responsibly.

Starting today, we’re offering a limited preview of 1.5 Pro to developers and enterprise customers via AI Studio and Vertex AI . Read more about this on our Google for Developers blog and Google Cloud blog .

We’ll introduce 1.5 Pro with a standard 128,000 token context window when the model is ready for a wider release. Coming soon, we plan to introduce pricing tiers that start at the standard 128,000 context window and scale up to 1 million tokens, as we improve the model.

Early testers can try the 1 million token context window at no cost during the testing period, though they should expect longer latency times with this experimental feature. Significant improvements in speed are also on the horizon.

Developers interested in testing 1.5 Pro can sign up now in AI Studio, while enterprise customers can reach out to their Vertex AI account team.

Learn more about Gemini’s capabilities and see how it works .

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More From Forbes

7 things to know about temu before you ‘shop like a billionaire’.

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Temu aired six ads during the Super Bowl as it looked to drive sales growth.

If you hadn’t heard about Temu before Sunday, that’s likely changed after the Chinese -parented online giant went big at the Super Bowl, spending even more time on TV screens than Taylor Swift.

Temu aired six prime time ads and offered $10 million in giveaways as it attempted to seduce a huge national audience to “shop like a billionaire” as it aimed to revive a recent lull in U.S. sales growth. And that won’t have come cheap, with Super Bowl 30-second commercials costing about $7 million a pop.

So who exactly are Temu? Why has it established a cult following among bargain-hunting shoppers around the world and how come it chose to go the whole nine yards on Sunday?

Who Are Temu?

Temu is an online marketplace and, to quote the company’s description of itself: “The Temu shopping center is available at www.temu.com and through mobile apps. It offers a broad range of quality merchandise across 29 categories, including women's and men's clothing, beauty and health, home and kitchen, sports and outdoors, appliances, tools and home improvement, pet supplies, and toys and games, among others.”

Temu's name means “team up, price down.”

NASA Urges U.S. Public To See April 8’s Total Solar Eclipse—And Drops A Home Truth

New galaxy z fold 6 leak reveals stunning samsung design decision, meet the billionaires buying up hawaii, who owns temu.

Temu is officially incorporated in Delaware and headquartered in Boston, although it is owned by the global commerce group PDD Holdings PDD , which was founded by 43-year-old Chinese billionaire Colin Huang . It is the sister site to domestic e-commerce platform Pinduoduo and their joint parent, PDD Holdings, was founded in 2015 and relocated its headquarters to Dublin, Ireland in 2023.

At the end of last year, PDD Holding's market capitalization surpassed fellow Chinese giant Alibaba’s to make PDD the most valuable U.S.-listed Chinese company. That reportedly made Huang the second-richest man in China, although the company’s stock price has dipped and is off 10% in the year-to-date.

Why Is Temu So Cheap?

Temu sells a wide range of products directly from Chinese sellers at ultra-low prices, made even lower through lightning deals and sales, at up to 99% off. Temu’s model relies on keeping costs rock bottom by connecting consumers directly with suppliers, handling only the customer shipping.

This, along with leveraging low cost manufacturing and cheap labour in China, helps to keep operational costs, and therefore product prices, super low.

Temu sells at rock-bottom prices, which has brought controversy.

However, some analysts have expressed concerns about the sustainability of Temu's jacked-up marketing and the loss leaders it delivers to shoppers; some reports put the cost of such efforts between $2 billion to $3 billion in 2023, as Temu seeks to drive its rapid and aggressive expansion in more than 45 countries within a year.

Temu on Jan. 24 told Chinese media that it is opening its platform to U.S. and European sellers, and a Temu spokesperson confirmed the company’s plans, but declined to provide additional details, saying that “many of the business details are still in the process of being finalized.”

Where Does Temu Sell?

Temu was initially available in the U.S., where it launched in 2022, Canada, Australia, and New Zealand. As of April 2023, Temu also began serving European markets, including the U.K., France, Spain, Germany, Italy, and the Netherlands, before entering the Japanese and South Korean markets. From last September, Temu has been in the Phillipines, reflecting its wider ambitions in Southeast Asia.

How Does Temu Differ From Shein, Amazon, Wish?

Temu is more general than Shein, which focuses on fashion and accessories, and is typically cheaper than Wish and Amazon.

It's Pronounced Teh-moo

Temu's Super Bowl ad revealed that even its super-fans had been saying its name wrong. Although the name means 'team up', the ad pronounced its name as 'teh-moo,' not tee-moo or tea-moo. Clear?

Is It A Scam?

It may have attracted controversy from various quarters, but that’s very different from being a scam. And opinions on Temu probably come down to the buyer. Certainly it has received criticism from shoppers when products turn up that might not be as large or substantial as it looked online, but then at these prices should that really be a surprise?

And as with all low-cost non-food retailers, there are wider questions about the environmental consequences of retailing high volume, low price merchandise.

But at the Super Bowl Temu laid down a marker that it means business and its ardent followers love the idea of living a Champagne lifestyle on a beer budget.

You pays your money, and you takes your choice.

Mark Faithfull

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