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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

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Learn to understand a company's profit-making plan

what are the four parts of a business model

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

what are the four parts of a business model

Investopedia / Laura Porter

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

  • A business model is a company's core strategy for profitably doing business.
  • Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
  • There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
  • The two levers of a business model are pricing and costs.
  • When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

  • Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
  • Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
  • Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
  • Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
  • Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
  • Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
  • Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

  • Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
  • Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
  • More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2023 ."

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what are the four parts of a business model

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Focused Momentum Strategic Planning

Column Headline

4 elements at the core of your business model.

Picture of Cecilia Lynch

You understand your business model right?  Of course you do.  Today the phrase “Business Model” is over used and has a variety of meanings so, although you understand your business model, I bet your team would be hard pressed to define it the same way.

As a strategist, I find that management teams are not clear on how the pieces of their business fit together to form their unique business model.  To develop a new strategic direction, you must first understand what is at your core before you start messing with changes to it. Therefore, I have honed these 4 elements to ground strategy discussions.  Although they are not everything that you need to define your business model and outline a winning strategy, I find that gaining clarity on these four elements goes a long way to anchoring the rest of the important aspects of your business to create true competitive advantage.

1. Your Target Audiences

Defining who you serve with your product or service offering is the first core element of your business model.  It is highly likely that you have multiple and seemingly overlapping targets, but grouping these targets into three clusters and ranking them in terms of their importance to your business focus is an important first step.   Once defined it is easier to explore the historical beliefs about these target groups and your assumptions about how your relationship to these audience many need to evolve as your business model evolves.

2. Your Market Offering

Mapping your product and service offering against your target audiences and define the needs your current offering is striving to address brings discipline to what you offer.   As organizations grow they can expand their product/service offering for a variety of reasons.  Deliberately aligning your offering to your target audiences may result in you redefining what you offer, or it could identify a new target to serve. This exploration often results in greater clarity on what to eliminate and where to increase focus in the near term.

3. Your Essence

The concept of "essence" in business strategy comes directly from marketing strategy or brand development strategy.  I don’t recommend diving deep into your brand essence is this first pass, but understanding the concept of your entity's essence is critical for shaping a unique position for yourself in what is almost always a crowded, highly competitive market.  I define essence very simply: what you are best at and what is most important to you . As you look ahead, you will continue to invest and protect what you are best at and you will seek partners and collaborators that share what is important to you.  Making this clear up front saves a lot of back and forth conversations in planning later on.

4. Your Unique Strategic Position

We all want to be unique!  Organizations have an imperative to distinguish themselves, a competitive imperative.  If you don't strive to establish your difference in the hearts and minds of those that you serve, the market (your competitors, partners and customers), will do so for you and you may not like the result.  Although executing a powerful marketing and communication plan is the way to ensure that the market holds you in the exact space you desire.  Defining your ideal unique strategic position is a core element of your business model that you need to address early on and continually test against.

The next time you are discussing shifts to you “business model”, I strongly recommend you stop and reground your thinking around these four core elements before proceeding.  Who knows, you may find that the shift someone is advocating is not a good shift for you.

Need help drafting your business model?

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Arif Harbott

CTO | Transformation | Angel Investor

How to describe and create a business model

Arif Harbott

This article outlines an elegant approach to breaking a business model into four parts: customer value proposition (CVP), profit formula, key resources and key processes.

Business models fascinate me; how businesses define, reinvent or change their business model is one of the most interesting parts of business strategy.

I recently read an article called Reinventing Your Business Model by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, which in my opinion had an interesting approach to describing a business model.

Business model parts

Business model – four elements

A business model consists of four interlocking elements that, taken together, create and deliver value:

Customer value proposition (CVP)

Profit formula, key resources, key processes.

A CVP is the way you create value for customers, it’s the way you solve a customer’s problem. This element of the business model is by far the most important. Coke’s CVP focuses on its unique flavour that no one else can copy, where as Dell’s CVP is a low-cost, customised computer direct to your door.

The profit formula shows how you will make profits for your company while still providing value to the customer.

  • Revenue model = price x volume
  • Cost structure = Direct costs, indirect costs and economies of scale
  • Margin model = Given the revenue and cost structure how much profit do we make

The key resources are assets such as the people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition to the targeted customer.  This will heavily influence your cost structure.

Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale.

Complementary decisions

You need to make sure that these four elements are consistent and complementary. For example you shouldn’t have a high service CVP and then not invest in staff training and service processes. Conversely for a low-cost provider having fancy offices and labour-intensive processes is probably not the best approach.

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  • 11.2 Designing the Business Model
  • Introduction
  • 1.1 Entrepreneurship Today
  • 1.2 Entrepreneurial Vision and Goals
  • 1.3 The Entrepreneurial Mindset
  • Review Questions
  • Discussion Questions
  • Case Questions
  • Suggested Resources
  • 2.1 Overview of the Entrepreneurial Journey
  • 2.2 The Process of Becoming an Entrepreneur
  • 2.3 Entrepreneurial Pathways
  • 2.4 Frameworks to Inform Your Entrepreneurial Path
  • 3.1 Ethical and Legal Issues in Entrepreneurship
  • 3.2 Corporate Social Responsibility and Social Entrepreneurship
  • 3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
  • 4.1 Tools for Creativity and Innovation
  • 4.2 Creativity, Innovation, and Invention: How They Differ
  • 4.3 Developing Ideas, Innovations, and Inventions
  • 5.1 Entrepreneurial Opportunity
  • 5.2 Researching Potential Business Opportunities
  • 5.3 Competitive Analysis
  • 6.1 Problem Solving to Find Entrepreneurial Solutions
  • 6.2 Creative Problem-Solving Process
  • 6.3 Design Thinking
  • 6.4 Lean Processes
  • 7.1 Clarifying Your Vision, Mission, and Goals
  • 7.2 Sharing Your Entrepreneurial Story
  • 7.3 Developing Pitches for Various Audiences and Goals
  • 7.4 Protecting Your Idea and Polishing the Pitch through Feedback
  • 7.5 Reality Check: Contests and Competitions
  • 8.1 Entrepreneurial Marketing and the Marketing Mix
  • 8.2 Market Research, Market Opportunity Recognition, and Target Market
  • 8.3 Marketing Techniques and Tools for Entrepreneurs
  • 8.4 Entrepreneurial Branding
  • 8.5 Marketing Strategy and the Marketing Plan
  • 8.6 Sales and Customer Service
  • 9.1 Overview of Entrepreneurial Finance and Accounting Strategies
  • 9.2 Special Funding Strategies
  • 9.3 Accounting Basics for Entrepreneurs
  • 9.4 Developing Startup Financial Statements and Projections
  • 10.1 Launching the Imperfect Business: Lean Startup
  • 10.2 Why Early Failure Can Lead to Success Later
  • 10.3 The Challenging Truth about Business Ownership
  • 10.4 Managing, Following, and Adjusting the Initial Plan
  • 10.5 Growth: Signs, Pains, and Cautions
  • 11.1 Avoiding the “Field of Dreams” Approach
  • 11.3 Conducting a Feasibility Analysis
  • 11.4 The Business Plan
  • 12.1 Building and Connecting to Networks
  • 12.2 Building the Entrepreneurial Dream Team
  • 12.3 Designing a Startup Operational Plan
  • 13.1 Business Structures: Overview of Legal and Tax Considerations
  • 13.2 Corporations
  • 13.3 Partnerships and Joint Ventures
  • 13.4 Limited Liability Companies
  • 13.5 Sole Proprietorships
  • 13.6 Additional Considerations: Capital Acquisition, Business Domicile, and Technology
  • 13.7 Mitigating and Managing Risks
  • 14.1 Types of Resources
  • 14.2 Using the PEST Framework to Assess Resource Needs
  • 14.3 Managing Resources over the Venture Life Cycle
  • 15.1 Launching Your Venture
  • 15.2 Making Difficult Business Decisions in Response to Challenges
  • 15.3 Seeking Help or Support
  • 15.4 Now What? Serving as a Mentor, Consultant, or Champion
  • 15.5 Reflections: Documenting the Journey
  • A | Suggested Resources

Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.

Learning Objectives

By the end of this section, you will be able to:

  • Define a business model and its purpose
  • Describe a business model canvas
  • Describe a lean model canvas
  • Describe a social business model canvas

According to Alexander Osterwalder and Yves Pigneur , the authors of Business Model Generation , a business model “describes the rationale of how an organization creates, delivers and captures value.” Nevertheless, there is no single definition of this term, and usage varies widely. 29

In standard business usage, a business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.

Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.

A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used. There are hard-copy canvases modeled after an art canvas as well as digital versions. The original physical canvases are meant to serve as visual tools, used with sticky notes and sketches.

As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in Figure 11.6 .

Link to Learning

Visit this site to see examples of completed Business Model Canvases for a variety of industries for a deeper understanding of how the different categories are filled in.

Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation . Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains. The complementary and accompanying activities and resources can be useful for a deeper dive into and understanding of customer value creation in the form of value proposition, although there are other approaches to conceptualizing your value proposition. For Christensen, the originator of the disruptive innovation and jobs-to-be-done theories, a value proposition is a product that helps customers do a job they’ve been trying to do more effectively, conveniently, and affordably.

Finding the intersection of your customers’ problems and your solutions is how you create a unique value proposition, according to the entrepreneur Ash Maurya , the author of Scaling Lean and Running Lean . In Running Lean , Maurya offers the following formula for creating an initial value proposition in the canvas, as shown in Figure 11.7 .

Maurya deviated from the standard business model canvas to create the lean canvas. It overlaps the business model canvas in five of the nine components: customer segments, value proposition, revenue streams, channels, and cost structure ( Figure 11.8 ]. Rather than addressing key partners, key activities, and key resources, the lean canvas helps you tackle problems, solutions, and key metrics instead.

Visit this site to see examples of completed Lean Model Canvases from some major companies for a deeper understanding of how the canvas can be applied.

While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business.

Watch this Railsware video that demonstrates how the lean canvas model might be applied to startups to learn more. In the case example in the video, the lean canvas model is applied to the successful P2P ride-sharing app Uber, as if it were a startup.

Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities. 30 The customer empathy map is a portrayal of a target customer —the most promising candidate from a business’s customer segments—that explores the understanding of that person’s problems and needs ( Figure 11.9 ). Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as:

  • With whom are we empathizing?
  • What do they need to do?
  • What do they see?
  • What do they say?
  • What do they do?
  • What do they hear?
  • What do they think?

Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur , every transaction can be turned into a meaningful and valuable customer interaction. 31 Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants.

For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data. 32

On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map. 33 Thus, empathy mapping for Yeti is part of its product development process.

Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams). 34

Strategyzer offers six videos outlining the business model canvas that total about 12 minutes; specifically they cover the prototyping journey from ideation to visualization of conceptualization.

Business Model Canvas 35

As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship , their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships.

Early on, your greatest focus should be on the right side of the canvas because:

  • These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams).
  • The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change).
  • These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers).

In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side. 36

Read this blog that provides a walk-through of how to fill in a value proposition canvas to learn more.

When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability Figure 11.10 ). This framework forces the entrepreneur to address broad questions about the startup concept:

  • Desirability: How desirable is the product? Who will use it and why?
  • Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept?
  • Viability: Will this idea remain viable? How will it make money? How will it be sustained over time?

These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future.

The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation.

The business model canvas is not an exhaustive planning tool by any means. 37 , 38 The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless.

The Lean Model Canvas

The lean model canvas is Ash Maurya ’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success . The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan. 39

Social Business Model Canvas

As you’ve noticed by now, the core canvas components are common throughout the various versions. Many of the blocks of the social business model canvas are similar to those used in the business model canvas and the lean model canvas. 40 A few differences, as developed by Tandemic , focus on areas unique to social entrepreneurship ventures. For example, the new areas added include measures of what kind of social impact you are creating or developing, measures of surplus to address what happens with profits and where you intend to reinvest them, and measures of beneficiary segments, and social and customer value propositions. 41 These could be measures such as the number of trees planted, number of refugees housed and fed, jobs created, or investments made—depending on the venture. Social impact looks at an organization’s social mission beyond the bottom line. Measurement can differ among social entrepreneurs, but in terms of the canvas, impact measures are an effort to establish quantifiable metrics.

Social impact can be hard to measure, but nonetheless, many social entrepreneurs aim for long-lasting impact. 42 A 2014 report by the think tank, consultancy, and member network SustainAbility lists cooperative ownership, inclusive sourcing, and the “buy one, give one” model as three forms of social impact. 43 In addition to the Tandemic social business model canvas, there are other versions of similar canvases used for social entrepreneurship. For instance, Osterwalder adapted the business model canvas for mission-driven organizations into a mission model canvas. 44 There’s also a social lean canvas that adds purpose (explaining your reason for creating the venture in terms of social or environmental problems) and impact sections (describing the intended social or environmental impact). 45

This completed social business model canvas for the popular peer-to-peer lending platform Kiva illustrates how the business model canvas can and perhaps should be adapted for social entrepreneurship ventures.

What Can You Do?

Toms Shoes is perhaps one of the best-known companies for adopting a social entrepreneurship purpose into its business model. Part of its early success hinged on the fact that for every pair of shoes a customer bought, the company donated a pair of shoes to someone in need. The company won a prize in 2006 for its innovative solution to poverty. This “ 1-for-1 business model ,” sometimes commonly called the “Toms model” after the shoe company that popularized it, gained traction among other companies that followed suit in similar fashion, seeing both the social and the financial successes in the Toms model. Warby Parker is another example of a company that does essentially the same: A customer purchases a pair of eyeglasses, and the company donates a pair (although Warby Parker pays a third party to procure the glasses, as eyeglasses require an individual prescription, whereas shoes do not).

  • Can you think of an innovative social entrepreneurship business model?

The Birthday Party Project

Paige Chenault wanted homeless children in Dallas to feel special on their birthdays. Many have never experienced a birthday party. So this professional event planner sprang into action in January 2012. She launched the Birthday Party Project (https://www.thebirthdaypartyproject.org/), a nonprofit group whose mission is to celebrate the lives of homeless children (ages one to twenty-two). The group organizes monthly birthday parties with partner shelters. Since its inception, the concept has spread beyond Texas to cities across the United States, including Atlanta, Chicago, Los Angeles, New York, and San Francisco. In six years, the Birthday Party Project has celebrated 4,800 birthdays with 30,000 kids in attendance, eaten 40,000 cupcakes, cracked 30,000 glow sticks, and performed 1,100 renditions of “Happy Birthday.”

  • Identify a need in your community that could become a social entrepreneurship business, as Paige discovered with an initial passion project.
  • 29 Alexander Osterwalder and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Hoboken, NJ: Wiley, 2010.
  • 30 Charlene Perrin. “Create A Customer Empathy Map in 6 Easy Steps!” Conceptboard . March 28, 2019. https://conceptboard.com/blog/create-a-customer-empathy-map-in-6-easy-steps/
  • 31 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
  • 32 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
  • 33 Mike Godlewski. “The Secret to Knowing What a Client Is Thinking? Empathy Maps.” Yeti. February 8, 2016. https://yeti.co/blog/the-secret-to-knowing-what-your-client-is-thinking-empathy-maps/
  • 34 GermĂĄn Coppola. “What Is an Empathy Map, and Why Is It Valuable for Your Business?” Medium . November 28, 2017. https://medium.com/swlh/what-is-an-empathy-map-and-why-is-it-valuable-for-your-business-14236be4fdf4
  • 35 This material is based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
  • 36 Michelle Ferrier and Elizabeth Mays. Media Innovation and Entrepreneurship . The Rebus Foundation, 2017. https://press.rebus.community/media-innovation-and-entrepreneurship/.
  • 37 Jennifer van der Meer. "Do You Suffer from Value Proposition Confusion?" Linkedin . October 19, 2016. https://www.linkedin.com/pulse/do-you-suffer-from-value-proposition-confusion-jennifer-van-der-meer/
  • 38 “The Value Proposition Canvas.” Strategyzer . n.d. https://strategyzer.com/canvas/value-proposition-canvas
  • 39 Ash Maurya. “Why Lean Canvas vs Business Model Canvas?” Medium . February 27, 2012. https://blog.leanstack.com/why-lean-canvas-vs-business-model-canvas-af62c0f250f0
  • 40 "Social Business Model Canvas.” Business Model Toolbox . 2013. https://bmtoolbox.net/tools/social-business-model-canvas/
  • 41 “The Business Model Canvas Reinvented for Social Business.” Tandemic . n.d. http://www.socialbusinessmodelcanvas.com
  • 42 Ayse Guclu, J. Gregory Dees, and Beth Battle Anderson. “The Process of Social Entrepreneurship: Creating Opportunities Worthy of Serious Pursuit.” Duke/Fuqua case . 2002. https://centers.fuqua.duke.edu/case/knowledge_items/the-process-of-social-entrepreneurship-creating-opportunities-worthy-of-serious-pursuit/
  • 43 Lindsay Clinton and Ryan Whisnant. “Model Behavior: 20 Business Model Innovations for Sustainability.” SustainAbility . February 2014. https://sustainability.com/wp-content/uploads/2016/07/model_behavior_20_business_model_innovations_for_sustainability.pdf
  • 44 Alexander Osterwalder. “The Mission Model Canvas: An Adapted Business Model Canvas for Mission-Driven Organizations.” Strategyzer . February 25, 2016. https://blog.strategyzer.com/posts/2016/2/24/the-mission-model-canvas-an-adapted-business-model-canvas-for-mission-driven-organizations
  • 45 Social Lean Canvas. n.d. https://socialleancanvas.com/

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Entrepreneurship: The Practice and the Mindset

Student resources, learning objectives.

8-1: Define the business model.

The business model is the framework for creating and delivering consumer value, while extracting value for the entrepreneur as well.

8-2: Identify the four core areas of a business model.

Broken into four parts, each business model includes an offering, customers, infrastructure, and financial viability.

8-3: Explore the importance of the Customer Value Proposition in further detail.

The CVP outlines exactly how the firm will generate value, how it will generate it in excess of its competition, and how it will continue to do so in the future. As the true measure of any business is creating value, the true measure of a business model is its customer value proposition.

8-4: Describe the different types of Customer Value Propositions and learn how to identify your target customers.

Businesses tend to have different CVPs for each customer segment. This is to ensure they are meeting the needs of the customers within each segment. Examples of different customer segments targeted by different types of businesses include mass market, niche market, segmented market, diversified market, and multisided markets. Types of CVPs include all-benefits, points of difference, and resonating focus.

8-5: Identify the nine components of the business model canvas.

The four core elements of a business model can be expanded to nine business model components. Separating core elements into their respective components makes them easier to define and integrate with one another. The offering constitutes the (1) value proposition. Customers relate to (2) customer segments, (3) channels, and (4) customer relationships. Infrastructure includes (5) key activities, (6) key resources, and (7) key partners. Financial viability includes (8) cost structure and (9) revenue streams.

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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.

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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 are the four parts of a business model

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Reinventing Your Business Model

  • Mark W. Johnson,
  • Clayton M. Christensen,
  • Henning Kagermann

what are the four parts of a business model

Why is it so difficult for established companies to pull off the new growth that business model innovation can bring? Here’s why: They don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.

Drawing on their vast knowledge of disruptive innovation and experience in helping established companies capture game-changing opportunities, consultant Johnson, Harvard Business School professor Christensen, and SAP co-CEO Kagermann set out the tools that executives need to do both.

Successful companies already operate according to a business model that can be broken down into four elements: a customer value proposition that fulfills an important job for the customer in a better way than competitors’ offerings do; a profit formula that lays out how the company makes money delivering the value proposition; and the key resources and key processes needed to deliver that proposition.

Game-changing opportunities deliver radically new customer value propositions: They fulfill a job to be done in a dramatically better way (as P&G did with its Swiffer mops), solve a problem that’s never been solved before (as Apple did with its iPod and iTunes electronic entertainment delivery system), or serve an entirely unaddressed customer base (as Tata Motors is doing with its Nano—the $2,500 car aimed at Indian families who use scooters to get around). Capitalizing on such opportunities doesn’t always require a new business model: P&G, for instance, didn’t need a new one to leverage its product innovation strengths to develop the Swiffer.

A new model is often needed, however, to leverage a new technology (as in Apple’s case); is generally required when the opportunity addresses an entirely new group of customers (as with the Nano); and is surely in order when an established company needs to fend off a successful disruptor (as the Nano’s competitors may now need to do).

One secret to maintaining a thriving business is recognizing when it needs a fundamental change.

In 2003, Apple introduced the iPod with the iTunes store, revolutionizing portable entertainment, creating a new market, and transforming the company. In just three years, the iPod/iTunes combination became a nearly $10 billion product, accounting for almost 50% of Apple’s revenue. Apple’s market capitalization catapulted from around $1 billion in early 2003 to over $150 billion by late 2007.

  • Mark W. Johnson is co-founder and senior partner of the strategy consulting firm Innosight and author of  Lead from the Future   (HBR Press, 2020).
  • Clayton M. Christensen was the Kim B. Clark Professor of Business Administration at Harvard Business School and a frequent contributor to Harvard Business Review.
  • HK Henning Kagermann ( [email protected] ) is the co-CEO of SAP AG, in Walldorf, Germany. Johnson is the author of Seizing the White Space: Business Model Innovation for Transformative Growth and Renewal (Harvard Business Press, 2009).

what are the four parts of a business model

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what are the four parts of a business model

What You Need to Know About Business Models

Everyone wants a new one; Few are successful

“In a recent McKinsey poll, 84 percent of global executives acknowledged that innovation is extremely important to their growth strategies, yet a staggering 94 percent were unsatisfied with their own innovation performance.”  From Competing Against Luck

How do you best support innovation and change?  What interdependencies within your organization are impacted by necessary innovation?  What type of innovation are you, or should you be, focused?  Depending on the magnitude of the innovation/change, you may need to adjust or completely change your business model.

Early in my career I had the opportunity to assess and consolidate a number of functional business models for a client- boiling down the common and unique elements to create an integrated, enterprise-wide business model.  Recently there is some research pointing not only to a simple model of the critical moving parts, but also insight into common stages of maturity relevant to business models and implications for leaders and managers driving innovation. Let’s begin with a common framework for thinking about the key elements of a business model.

Business model framework: A common vocabulary

Since at least 2008, Professor Christensen at Harvard’s business school has been advocating for a four-part, integrated business model.  The following provides a quick introductory overview of the four, rather intuitive elements of this model. These definitions are from “The Hard Truth About Business Model Innovation” MITSloan Management Review, Fall 2016.

what are the four parts of a business model

Resources People, technology, products, facilities, equipment, brands and cash required to deliver this value proposition to targeted customers

Processes Ways of working together to address recurrent tasks in a consistent way: training, development, manufacturing, budgeting, planning, etc.

Profit Formula Assets and fixed cost structure, and the margins and velocity required to cover them

All four of the elements are interdependent.  Any change in one will require an adjustment in the other three.  The interdependencies provide much of the power and understanding this model.  These pathways also enable the framework’s use as an analytic frame to enhance understanding of the implications of innovation and of supporting change.

Note in the graphic “Our preferred framework,” the left stack of Value Proposition and Profit Formula represent entity “Priorities.” With the right stack of Resources and Processes representing “Capabilities.”

Driving to an actionable level

In order to be actionable, we need to understand and align the capabilities side of the model, and how those capabilities link to the customer value proposition and the profit formula. From our work in a number of industries, the “ General Management Framework ” can provide a analytic framework for the next step into the details of aligning resources and processes.

what are the four parts of a business model

Distribution Channels are how you “sell into” your target segments depending on needs and preferences. The Internet has brought another distribution channel into play causing some companies to compete directly with their customers.

Offering is the combination of your products and services. Think of this as the Customer Value Proposition.

People and Capabilities represents most of your business’ assets including people, processes, technology and physical infrastructure, brand, industry relationships, patents, intellectual property, and many, many others.

Organization quite simply defines the structure, roles and scope of the departments, divisions, functions that make up your business.

When developing the General Management Framework, interestingly the missing link- not found in the functional models- was “ Profitable Sale and Use .”  We believe this concept of sales connects the General Management Framework (e.g., Target Market, Distribution Channels, Offering (CVP), People and Capabilities) to the Profit Formula (e.g., Revenue, Cost Structure, Margin, Resource Velocity).  We strongly believe Profitable Sales and Use needs to be explicit in all business models.

Other Business Model Frameworks- A sidebar

If you are looking for an alternative business model framework, see Osterwalder’s Business Model Canvas which includes:

Customer segments Channels and Customer relationships Value Proposition Key Activities and Key Resources Key Partners Cost Structure and Revenue Streams

Osterwalder, et al, also have a good workbook on a structured approach to Value Proposition Design if you are looking for “how to” approach to complement Christensen’s “job to be done” from Competing Against Luck .

Recent research: Business models follow a one-way, three-stage journey

This fall Christensen, Bartman, and van Bever published research findings on business model phases including two principles for consideration by all leaders and managers.

First, there are three discrete stages all business models follow in their maturity journey.  Each stage focused on a different type of innovation, measurement and management.

what are the four parts of a business model

Sustaining Stage Primary focus is on how to continue and build on success, measuring income, and crafting processes.

Efficiency Stage Primary focus is on efficiency, measuring assets, and a rigid business model including return on capital.

Second, there is a single pathway or roadmap through the stages, and it is sequential .  Research has shown the business model tightens over time for all the right reasons- to maximize  profitable sales and use .  Metrics continue to become more sophisticated and refined.  And, managers spend more time on tweaking the capabilities to eke out incremental changes to the profit formula.

Implications and thoughts

We believe there are three key trends driving business change today including:

Accelerating Technological Innovation

Digital technological change is pervasive, is disruptive, and is changing most everything (e.g., cloud, big data, IoT, social business, mobile, consumerization of IT, machine learning/AI, robotics, genetics, 3D printing)

Blurring Boundaries

Technology innovation is accelerating the blurring of boundaries including geographical (e.g., globalization), industry (e.g., Apple in handsets and music, Amazon in retail and web services, Airbnb in hospitality), and those walls within the enterprise (e.g., go-to-market, supply chain, digital transformation).

Shifting Demographics

Changing workforce demographics create talent sourcing challenges and cognitive deficits.  Millennial talent churn is occurring, while Baby Boomers are leaving and taking their expertise with them.  And, in a parallel theme, shifting demographics are also impacting the marketplace.

These and other trends have shortened the life-span of companies.  According to Innosight, “Half of the S&P 500 companies are expected to be replaced over the next 10 years.”

In order for your company to continue to compete, you will no doubt be faced with the need for significant innovation within your business model.  This redefinition of your business will require a different capabilities’ stack and will require realignment of the elements of the General Management Framework .

Using the business model framework as a common language is helpful, particularly for functional managers who have not had much experience working across the enterprise.  Defining and analyzing the pathways between the four elements (Customer Value Proposition, Resources, Processes, and Profit Formula) can help optimize for building and sustaining a successful enterprise at each stage of business model maturity- both today and tomorrow.

Depending on the size of your organization, you should consider your portfolio of business models .  If, for example, most of your businesses are in the efficiency stage- what are you doing to prepare for the future?  Determining the right blend of businesses in each of the three stages is essential for your business’ long-term health .

Once you have clear targets for your Create-Stage models, consider developing a process for enabling and supporting new business model creation .  BCG advocates four approaches to business model innovation depending on impetus and focus (e.g., Reinvent, Maverick, Adventure and Adaption). It is possible this incubator may need to be outside of your current business, recalling the three stages are sequential.  Perhaps you can “reframe your beliefs” to support innovation as McKinsey posits.  Or, perhaps there are a number of companies with similar needs with whom you could fashion a non-competing network to create a supportive ecosystem .

“Over the long term, the greatest innovation risk a company can take is to decide not to create new businesses that decouple the company’s future from that of its current business units.”

Clay Christensen 1.24.2017 MITSloan Webinar

Endnotes and References

See Bartman, “Unlocking Growth and Resilience, Mastering business model innovation to survive and thrive in times of disruption,” Fall 2016 Trending@HBS Webinar Series- Harvard Business School Alumni Events, December 2, 2016. [Internet Webinar] From author’s notes: 2/3 of HBS MBAs take Prof. Christensen’s business model class- BSSE, Building and Sustaining a Successful Enterprise.

Christensen, Bartman, van Bever, “The Hard Truth About Business Model Innovation,” MITSloan Management Review (Fall 2016)

See Christensen, et al, Competing Against Luck, The story of innovation and customer choice (NY, NY: HarperCollins, 2016) for details of the “customer’s job” a manufacturer or a service provider is trying to accomplish- recently popularized as “Milk Shake Marketing.” Innovation quote can be found in the Introduction Chapter, page x

Christensen and van Bever, “Building a Business Creation Engine,” MITSloan Management Review Webinar, January 24, 2017. [Internet Webinar] [cited 1.30.2017] Video webinar available from http://sloanreview.mit.edu/webinar-building-a-business-creation-engine/on-demand/ Webinar slides available from http://marketing.mitsmr.com/events/HBS-Christensen-Webinar-2017.pdf

See de Jong and van Dijk, “Disrupting Beliefs: A new approach to business-model innovation,” McKinsey Quarterly , July 2015. [Internet] [cited 1.30.2017] http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/disrupting-beliefs-a-new-approach-to-business-model-innovation regarding testing beliefs for innovation- McKinsey’s five step model to “reframe” and four potential focus areas

See Johnson, Christensen and Kagermann, “Reinventing Your Business Model,” Harvard Business Review (December 2008) for Christensen’s initial article on the four-box business model framework (e.g., Customer Value Proposition, Resources, Processes, and Profit Formula)

See Lingardt and Ayers, “Driving Growth With Business Model Innovation,” BCG Perspectives, October 8, 2014. [Internet] [cited 1.30.2017] Available from https://www.bcgperspectives.com/content/articles/growth_innovation_driving_growth_business_model_innovation/ for a way of thinking of four scenarios for business model innovation based on a 2×2 with axes of Impetus (defend against industry decline or disruption; aspire for breakout growth) and of Focus (transform the core; Expand into noncore).  Also, see the second paragraph of the article for more detail on BCG’s executive 2014 survey on innovation

Osterwalder and Pigneur, Business Model Generation, A handbook for visionaries, game changers, and challengers (Hoboken, NJ: John Wiley & Sons, 2010)

Osterwalder, et al, Value Proposition Design, How to create products and services customers want (Hoboken, NJ: John Wiley & Sons, 2014)

Reeder, “General Management Framework,” NextForge Point of View [Internet] [cited 1.30.2017] https://nextforge.com/?p=171 

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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.”

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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 are the four parts of a business model

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

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Have we forgotten what SaaS stands for?

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The Leading Source of Insights On Business Model Strategy & Tech Business Models

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What Are The Key Components Of Any Business Model?

The key components of any business model are: 

  • A compelling value proposition :  How do you want your people to think about your brand?
  • A unique brand positioning:  What do you offer to your people that make them want more?
  • A 10x goal setting:  Can you offer a 10X better product or service? (compared to existing solutions)
  • Customer segments:  Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service)
  • Distribution channels:  How do you get your product or service to your customer?
  • Profit formula:  Is the business financially sustainable?

Table of Contents

A glance at the business model tools available

With FourWeekMBA I’ve been researching into over a hundred  business models at the time of this writing. From tech to luxury, from innovative to more traditional.

I’ve been in search of a framework, recipe or something that could help me dissect any company. As I came from a financial background the most logical thing for me was to look at these companies by analyzing their numbers.

However, I soon realized that approach was too reductive. So I started to look at other frameworks that could be used to find the simplest parts of a business model and its key components.

In this article, I’ll show you a few approaches and how they come down to similar vital components.

A recap of key components according to several business model tools and frameworks

A business model is a representation of a company in the real world (this is a definition that works for practitioners, not necessarily for academics).

Business modeling for entrepreneurs might be a useful tool to gain insights about competitors, better understand your organization or design toolbox to grow your business.

From that standpoint, over the years a few tools came handy . Some of them have been discussed at great length on this blog:

  • business model canvas
  • lean startup canvas
  • blitzscaling canvas
  • sales navigator framework 
  • and many others

Each of those frameworks assumes a business model has several key components. For instance, the business model canvas tells you that a business model has nine key components:

  • Key partners
  • Key activities
  • Value proposition
  • Customer relationship
  • Customer segment
  • Key resource
  • Distribution channel
  • Cost structure
  • Revenue stream

While a lean startup canvas tells you there are still nine key elements, but it substitutes key partners, key activities, key resources, and customer relationships, with a problem, solution, key metrics, and unfair advantage. Therefore, the lean startup canvas will look like that :

  • key metrics
  • value proposition
  • unfair advantage
  • customer segments
  • cost structure
  • revenue streams

The lean startup canvas as an adaptation from the business model canvas might be better suited for startup organizations, which need to scale quickly while gathering feedback from customers.

The blitzscaling business model innovation canvas instead, looks at a business model as primarily skewed toward massive growth .

In that instance, what identifies a business model is its ability to leverage on growth , or to limit its growth .

Thus it is comprised of four growth levers and two growth limiters:

  • Market size
  • Distribution
  • High gross margins
  • Network effects
  • Lack of product/market fit
  • Operational scalability

Another framework from BMI Lab put together in the sales navigator assumes that a business model key components are three:

  • value chain
  • revenue model

Those elements come together when a business owner answers to a few key questions, such as, “what do you offer to the customer?” or “how is the value proposition created?” or yet “why is it profitable?”

Another tool called four box business model framework by Innosight  breaks down the business model in four key components:

  • customer value proposition
  • key resources and processes
  • and the profit formula

Each of those elements feeds into each other to create a feedback loop of business model innovation. Those tools are quite useful, and it tackles how you can assess your business at each stage.

The FourWeekMBA business model framework

After looking at the key components of a business model based on a few toolboxes; based on the analyses performed over the years, for the business model boils down to three key elements, those are tied up by another ingredient.

This framework by FourWeekMBA has three aims:

  • noise reduction
  • and profitability

In short, I believe that a great business model toolbox has to have a super simple set up. It has to be based on very few elements. And it needs to focus on its long term financial sustainability.

However, what the toolboxes I’ve been looking at mostly miss is the branding of each business model success .

In short, for me there are two dimensions of a business:

  • The people dimension
  • The financial dimension

These two dimensions walk hand in hand. Yet the people side is what also makes the business thick from the economic standpoint.

The people side comprises the following elements:

This people dimension will help you build a solid brand. A solid brand builds up a tribe, a group of people that can follow you anywhere. Once you have a solid brand, you can focus on the second dimension: the financial dimension.

The three elements of the financial dimensions are:

Key takeaway

To recap an effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand.

The financial dimension will help you build proper distribution channels by identifying the people that are willing to pay for your product or service.

Other resources for your business:

  • Successful Types of Business Models You Need to Know
  • Blitzscaling
  • What Is a Value Proposition?
  • How to Write a One-Page Business Plan
  • How to Build a Great Business Plan According to Peter Thiel
  • What Is The Most Profitable Business Model?
  • The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
  • How To Create A Business Model
  • What Is Business Model Innovation And Why It Matters
  • What Is Blitzscaling And Why It Matters
  • Marketing vs. Sales: How to Use Sales Processes to Grow Your Business

Handpicked business models:

  • How Does PayPal Make Money? The PayPal Mafia Business Model Explained
  • How Does WhatsApp Make Money? WhatsApp Business Model Explained
  • How Does Google Make Money? It’s Not Just Advertising! 
  • How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
  • The Google of China: Baidu Business Model In A Nutshell
  • How Does Twitter Make Money? Twitter Business Model In A Nutshell
  • How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
  • How Amazon Makes Money: Amazon Business Model in a Nutshell
  • How Does Netflix Make Money? Netflix Business Model Explained

Key Highlights of Components of a Business Model:

  • Compelling Value Proposition: This is how you want your audience to perceive your brand. It’s the unique value or benefit your product or service offers to your customers.
  • Unique Brand Positioning: This involves identifying what sets your brand apart from competitors. It’s about defining the aspects that make customers want more from your brand.
  • 10x Goal Setting: This principle suggests aiming to offer a product or service that is significantly better (10 times better) than existing solutions. This drives innovation and differentiation.
  • Customer Segments: Identifying who your paying customers are, which segments of the population are interested in and willing to pay for your product or service.
  • Distribution Channels: Determining how you will deliver your product or service to your customers. This could include online platforms, retail stores, partnerships, etc.
  • Profit Formula: Ensuring the financial sustainability of your business. This involves analyzing costs, revenue streams, and ensuring that your business model is economically viable.

Business Model Tools and Frameworks Highlights:

  • Business Model Canvas: This tool breaks down a business model into nine key components, including customer segments, value proposition , distribution channels , cost structure, and revenue streams.
  • Lean Startup Canvas: Adapted from the Business Model Canvas, this framework focuses on problem-solution fit, key metrics, and unfair advantage, among other elements.
  • Blitzscaling Canvas: Geared towards rapid growth , this framework emphasizes key growth factors like market size, distribution , and network effects , along with growth limiters such as lack of product/market fit.
  • Sales Navigator Framework: Simplifies the business model into three elements: value proposition , value chain, and revenue model. It emphasizes creating value and understanding profitability.
  • Four Box Business Model Framework: This framework highlights customer value proposition , key resources and processes, and the profit formula as key components that interact to drive business model innovation.
  • FourWeekMBA Framework: This framework focuses on simplicity, noise reduction, branding, and profitability. It divides the business model into the people dimension (value proposition, brand positioning, 10x goal) and the financial dimension (customer segments, distribution channels , profit formula).

People Dimension and Financial Dimension Highlights:

  • People Dimension: This aspect focuses on building a compelling value proposition that resonates with customers, creating a unique brand positioning to attract a loyal following, and setting ambitious 10x goals to drive innovation.
  • Financial Dimension: In this dimension, identifying customer segments willing to pay for your product or service becomes crucial. Additionally, determining effective distribution channels and ensuring a sustainable profit formula are vital for business success.

Key Takeaway:

An effective business model incorporates both the people dimension (value proposition, brand, goals) and the financial dimension (customer segments, distribution , profitability). Balancing these dimensions helps create a strong brand, innovative product or service, and a viable economic structure for long-term success.

FourWeekMBA Business Toolbox

Business Engineering

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Tech Business Model Template

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Web3 Business Model Template

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Asymmetric Business Models

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Business Competition

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Technological Modeling

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Transitional Business Models

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Minimum Viable Audience

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Business Scaling

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Market Expansion Theory

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Speed-Reversibility

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Asymmetric Betting

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Growth Matrix

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Revenue Streams Matrix

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Revenue Modeling

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Pricing Strategies

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Connected Business Model Types

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Attention Merchant Business Model

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Marketplace Business Models

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Wholesale Business Model

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Retail Business Model

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Crowdsourcing Business Model

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Open-Core Business Model

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Open Source vs. Freemium

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Freemium Business Model

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Freeterprise Business Model

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Franchising Business Model

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About The Author

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Gennaro Cuofano

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Understanding the 12 Most Common Types of Business Models

  • Guides for Investors , Investing 101
  • June 3, 2022

In a speech in Switzerland , Warren Buffett discussed what he means by buying businesses he understands.

“ We don’t look for specific sectors; we look for businesses that I can understand. When I say understand, that means where I feel that I have a high degree of confidence in my ability to see what they’re going to look like 5,10,20 years from now .”

We need to understand the business model and how different companies make money to understand different businesses. The markets offer many different business models, and understanding them remains difficult.

But in today’s post, we will create a list of business models to help us better analyze those particular businesses.

Companies from Meta to Johnson & Johnson operate from different business models, and to analyze them well, we need to understand the business models.

In today’s post, we will learn:

  • What Is a Business Model?

Examples of a Business Model

Components of a business model, the 12 most common types of business models, investor takeaway.

Okay, let’s dive in and learn more about the list of business models.

What is a Business Model?

The basic gist of a business model is an outline of a company’s plan to make money from the product or service they offer to their customers.

Each business plan contains four core parts:

  • The product or service they plan to sell
  • The marketing the company intends to use to sell said product or service
  • The expenses the company will encounter while creating and selling its products or services
  • How they expect to generate profits

what are the four parts of a business model

Business models constantly change, and in the markets, many different companies offer many different types of products or services.

As investors, we need to understand those core parts and how they impact the company’s prospects and its plans to get there.

For example, in the payment space, many companies offer the ability to make payments easier, but some companies focus on smaller niches. Companies such as Fleetcor and Wex offer truck drivers the ability to make payments with a corporate card, allowing the corporation to manage their driver’s usage, track their routes, and manage those expenses.

what are the four parts of a business model

Business models also allow investors and companies to identify their target market or TAM (total addressable market), which can help both parties determine how viable the product or service is.

A simple question to ask yourself when analyzing a company:

“Does the idea make sense, and do the numbers add up?”

Let’s explore a business model example to understand how this might work.

For example, one of today’s more popular business models is the subscription model. Subscription models charge a fee (monthly, annually) for customers to access services.

what are the four parts of a business model

Netflix springs to mind as the most common example of this type of subscription business model.

Each subscription model can adjust to different needs of the individual model; for example, Salesforce charges customers for different uses of their platforms, while Amazon charges different subscriptions for different use cases of their cloud platform, depending on the customer’s usage.

Using Disney+ as an example, let’s break down their model based on the four core points we discussed earlier:

  • The kind of product or service they plan to offer: Disney+ sells an online streaming video service.
  • How they plan to market the products or services: Disney+ uses a multi-pronged marketing strategy and markets its streaming service through advertising, social media, email marketing, and word-of-mouth marketing, particularly among kids.
  • Expenses Disney+ expects to face : As a Fortune 500 company, Disney faces extensive expenses, including the costs of running its parks. The focus for the streaming service will include costs to produce or acquire new content, plus any technology and staff needed to manage the service.
  • How Disney expects to turn a profit : Despite Disney’s other sources of income from parks, merchandise, and media, the company expects to generate profit from the subscription sales of Disney+.

We can see how the core questions and answers contribute to Disney+’s business model as a subscription service from the above walkthrough.

Using the above process with companies you analyze will help you better understand the business model. It will give you better insights into how the company makes money, expenses, and how they could grow.

If a company remains unprofitable, this kind of analysis might help you determine what it will take for the company to become profitable. For example, Tesla remained unprofitable for many years, but they built up enough capacity to create more cars, leading to improvements in profitability. Using other car manufacturers as an example, investors could extrapolate profitability per car based on other companies’ operating margins.

As you study more and more business models, you will discover that models can differ in form and function, as our walkthrough above illustrates.

Despite these differences, all business models contain the same basic components.

what are the four parts of a business model

Important elements of any business model include a unique value proposition, a realistic target market, and a competitive advantage or moat, per Warren Buffett.

Any business model not containing these elements will have a heck of a time generating revenue.

Business models need to focus on the whole business, not just on generating revenue but also on the costs necessary to create the revenue. The business model needs to focus on the big picture.

Below are ten components we want to keep in mind when analyzing a company’s business model:

  • Value proposition : A description of the products or services the company offers and what makes them desirable to customers, stated in a way that differentiates them from competitors.
  • Target market : The focus group the company’s products or services targets. For example, American Express focuses on the affluent and travelers, whereas Block focuses on the general public. Also known as the TAM (total addressable market).
  • Competitive advantage or moat : A feature of your product or service that competitors cannot easily copy. For example, Apple’s iPhone has features and services, allowing it to become the dominant cell phone in the US, thus giving Apple a tremendous moat.
  • Revenue model : The company’s framework allows it to generate revenues from its products or services.
  • Revenue streams : The multiple streams of revenue the company generates. For example, Disney generates revenues from its parks, merchandise, and media. Berkshire Hathaway creates revenues from its insurance business, railroads, and utilities.
  • Profit margins : How much the company’s revenues exceed its costs. We can compare the company’s different margins, gross, operating, and income to others in the same industry as a benchmark. Margins can also create a competitive advantage by discouraging others from entering the industry.
  • Cost structure : creating a list of fixed and variable costs a company expects to generate revenue and how those costs impact the company’s potential pricing or sales mix. For example, if a company sells higher-margin products, it can help expand its margins.
  • Key metrics : Also known as KPIs, each industry uses to measure the company’s success. For example, Disney+ tracks the churn of subscribers, and Tesla tracks units sold.
  • Resources : These include the total of the company’s assets, including intellectual, physical, and financial. These assets drive the company’s growth, and each company’s assets remain unique.
  • Problem and solution : The company’s target market’s pain points and how it plans to solve them with its products and services. The company can tie this to both marketing and product development.

The above items make up the main points of a business model and help give us a framework to think about when analyzing a company.

For example, understanding the pain points of its customers and how the company solves those problems helps us better understand the company’s revenue model.

The below list is far from comprehensive, and there remain as many business models as stars in the sky. But this list remains the most common type out there.

what are the four parts of a business model

  • Subscription Model

The subscription model can apply to both brick-and-mortar and online businesses. The basic foundation of the model remains the customer paying a recurring payment regularly, i.e., monthly or annually, for access to the company’s product or service.

The company may ship its product via mail, deliver it through an app, or provide access to its space.

Examples include Netflix, Disney+, Hulu, StickFix, Duolingo, Audible, Planet Fitness, Peloton, YouTube TV, and many more.

2. Bundling Model

The bundling model involves companies offering two or more products or services together, often for a lower price than if charged individually.

The bundling model allows companies to create greater revenues while selling products that might be difficult to sell individually. A downside to this type of model is that the margins tend to shrink because the company discounts the products to move them.

Examples include Verizon, AT&T, and Adobe, plus the universe of fast-food restaurants offering combo meals like Chick-fil-A, McDonald’s, and Taco Bell.

3. Freemium Model

The freemium model exploded during the Covid pandemic with the rise of the SaaS businesses (Software-as-a-Service).

The SaaS basic framework works like this: a software company offers a proprietary tool hosted on its platform that users can access freely via an app or website. But, to drive desire, the company limits the use of certain key features that regular users will likely want more access to over time, thereby enticing users to pay for a subscription to access those features.

Spotify and Pandora in the music industry follow this model. Both give free access to music while interspersing ads throughout the catalog. At some point, users will pay to eliminate ads for their listening pleasure or additional access features like creating playlists. I fell for the Spotify model – hook, line, and sinker.

Examples include Spotify, Pandora, Mailchimp, Roblox, Minecraft, and every single app in the Apple app ecosystem.

4. Franchise Model

The franchise model offers probably the most familiar business model out there. Most of us visit franchises on a daily or weekly basis.

In a nutshell, franchises consist of an established business blueprint that investors can buy, reproduce, rinse, and repeat throughout a geographic area.

The franchisor (seller) often assists the franchisee (buyer) with financing, marketing, design, and operations to ensure the franchise succeeds. In return for the assistance and access to the model, the franchisee pays the franchisor a fee, typically a predetermined percentage of profits.

Examples include Starbucks, McDonald’s, Taco Bell, Dominos, Subway, UPS, and Chick-fil-a.

5. Distribution Model

The distribution model consists of distributors bringing manufactured goods to the market for sale.

Hershey’s, for example, produces and packages its delicious chocolates, but it outsources the distribution of its products to third-party agents to retailers for sale. For distributors to profit, they must buy in bulk and sell for a higher price to retailers.

The distribution model abounds in the food and liquor industry, in particular.

Examples include W.W.Grainger, HD Supply, US Foods, Fastenal, Southern Glazer’s Wine & Spirits, and Reyes Beverage Group.

what are the four parts of a business model

6. Manufacturer Model

The manufacturing model remains the OG of business models, where the manufacturer turns raw materials into products.

Manufacturers have changed from the old days of more industrial focus to include companies like Dell or HP, who assemble computers from manufactured parts made by other companies. The old standbys such as US Steel, A&P, and Nucor create steel and aluminum from raw materials before shipping to others to create products from their products.

Examples include Intel, Stanley, Black & Decker, Dell, HP, Weyerhauser, and Nucor.

7. Retailer model

The retailer continues as the last link in the supply chain. These businesses purchase goods or services from distributors for resale. They must sell these goods or services for enough to cover the costs and turn a profit.

Retailers often focus on a specific niche, for example, sports memorabilia, clothing, shoes, kitchenware, or books.

Examples of this popular business model include Home Depot, Walmart, Amazon, Target, Best Buy, and Restoration Hardware.

8. Razor Blade model

Yes, I know, kind of a strange name for a business model, but let me explain. To better understand this model, take a stroll through Walmart and notice that replacement blades cost more than the actual razors.

Companies in the razor industry offer cheaper razors with the understanding that we will buy more expensive blades in the future. And thus, the name “razor blade model”.

Companies also use the reverse razor blade model to offer a high-margin product and promote cheaper or lower-margin products as accompaniments.

The classic example of the razor blade model remains the Apple iPhone. Apple sells you the high-margin iPhone and then pushes additional products and services combining with the iPhone.

Examples include Apple, Xbox, Keurig, Gillette, and Brita.

9. Product to Service Model

The product to service model follows the idea that instead of creating parts for a product yourself, you outsource the idea to another specializing in creating the particular part.

Companies that follow the model allow customers to buy a result instead of the equipment to supply the result. For example, instead of buying a car to go to a movie, you buy a ride from Uber.

Examples include Uber, Lyft, Zipcar, Delta, United, and Southwest.

10. Leasing model

The leasing model allows companies to buy products and then lease them to buyers for a periodic fee. The leasing model works best in the high-ticket field of medical devices or manufacturing.

Examples include U-haul, Enterprise, Avis, and Rent-a-Center.

11. Crowdsourcing model

The crowdsourcing model allows companies to tap into a much larger pool of talent without hiring employees for the work. It involves using opinions, information, or others’ work using the internet and social media.

For example, the travel app, Waze, encourages drivers to report different road conditions to assist other drivers in real-time.

Examples include Wikipedia, YouTube, Waze, and IMDB.

12. One-for-one model

The last in the business models line, the one-for-one model, includes a company donating one item to charity for every item purchased by customers.

The model appeals to the charitable nature of the public, along with the social consciousness of customers to encourage further purchases. It also allows customers to do good while buying products or services they want or need.

Examples include TOMS, Warby Parker, and Smile Squared.

To better understand a potential investment, we need to understand how a company makes money. The ideas can range from products and services offered to target market, costs, and business model viability.

The list of business model failures litters the news, ranging from Blackberry to Sears; many companies failed because they didn’t adapt their business models or failed to anticipate possible changes.

The airline industry offers a great cautionary tale for finding business models that stopped making sense.

Joan Magretta, the former editor of the Harvard Business Review, kind of a big deal, suggests two major factors in sizing up business models. When a business model stops making sense, it comes down to the story not making sense anymore, and the numbers don’t add up to profits.

As investors learning how to analyze businesses, we must understand the business model and how they make money. The above list of business models and the four-part questionnaire is a great starting place.

And with that, we will wrap up discussing the list of business models.

Thank you for taking the time to read today’s post, and I hope you find something of value. If I can be of any further assistance, please don’t hesitate to reach out.

Until next time, take care and be safe out there,

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Business Model You (BMY)

Business Model You - Toolshero

Business Model You (BMY): this article provides a practical explanation of Business Model You (BMY) . Next to what it is, this article also highlights the structure and building blocks with an example of the Business Model You canvas, the four parts of the process (step-by-step plan) and a downloadable Business Model You template to get started. Enjoy reading!

What is Business Model You?

Business Model You (BMY) is based on the Business Model Canvas from the book Business Model Generation. Business Model Generation – a global best seller – introduced Business Model Canvas as a unique and visual methodology to summarise any organisation or idea, brainstorm about it, and explore in detail on just a single sheet of paper.

BMY uses this same piece of paper; the nine building blocks of a business. However, it applies it to the personal living and working environment of an individual. This canvas teaches users to draw personal business models that can reveal new ways to get more out of themselves based on skills and changing market demands. The goal of Business Model You is to launch or give shape to new, gratifying careers.

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The Business Model Canvas method has grown into the world’s leading and best known description of a business model. The book visually demonstrates how business-model-thinking works and how organisations are structured on the basis of nine simple building blocks. This helps them to chart their own personal business model.

When combined with the BMY, this ensures users understand the value of their own skills in the job market, and how they can use these to determine their personal goals. A combination of Business Model Canvas and Business Model You enables the user to develop a groundbreaking vision for his life, both on a professional and private level.

The idea to use the Business Model Canvas for individuals came from Timothy Clark, and not exactly on a whim either. Timothy Clark had over forty jobs and was the driving force behind the initiative to adapt the existing model.

He did so together with Alex Osterwalder and Yves Pigneur . When he was 51, he graduated university and became a professor at Tsukuba University in Tokyo.

Business Model You : structure and building blocks

Tim Clark innovated the Business Model Canvas to make it useful for planning complex career decisions. The Business Model You helps with complex quandaries when the user wishes to make changes to their career. It does so by focusing on a person’s talents, goals, needs, desires, and environment.

Business Model You Canvas - Toolshero

Figure 1 – an example of teh Business Model You Canvas

1. Who helps you – valuable partners

Making important career decisions is something that needs to be done in a very careful and considered way. In order to be able to justify one’s choice in the future, it’s a good idea to get advice from others.

The people who help you with this are the first – and highly important – building block of the BMY Examples of people who help with making choices are often the people who are close to someone, people like family, friends, superiors, mentors, etc.

2. What you do – core activities

The next step in the BMY is determining and writing down what the user does exactly. This is important information to potentially argue and motivate why a job change is a good idea.

It might turn out that the current job description doesn’t use the right talents, or that other positions might have more to offer in terms of personal development.

The big question that needs to be answered here is: What do I do? Which activities determine what my job looks like? For instance, is my focus on designing, teaching, managing, planning, or calculating?

3. How you help – value proposition

How you help refers to the specific value an employee adds. Does the employee help solve a particular problem for the employer or consumer? How does the employee help achieve goals for the consumer or employer?

The value proposition is an important part of both Business Model Canvas and BMY. The value that an employee adds to a goal directly influences their motivation and level of involvement they experience. Write down action sentences, such as: I contribute to reducing risks, building a strong brand, etc.

4. How you interact – customer relations

The way in which people communicate with others – such as employers or consumers – is often the reason for unhappiness. It is therefore important to note down any form of communication here. What kind of relationship do people have with the boss, and how do they communicate with employees? Does the communication mostly take place through online media, or is there a more personal approach?

5. Who you help – customer segments

Who you help says something about the type of organisation that might benefit from the work of a certain future employee. Here you write down the organisations you think you can contribute to applying your strengths.

6. Who you are and what you have – resources

This building block of the BMY is where the user has to write down his identity in the context of his career goal using some keywords. What are my talents? What type of work do I enjoy? What type of work makes me feel I’m making a difference? Which resources have helped me achieve my career goals?

7. What they think of you and what you deliver – channels

This seventh building block is about networks and reputations. When looking for a new job, it’s important to be visible. How can potential employers or clients recognise you and contact you? Am I active on different social media? How can they hire me, and how do I offer my services? How do I ensure that my employer is satisfied with my performance? In this seventh building block, create an overview of everything related to communication, networking, and visibility.

8. What you have – sources of income

Income is often a crucial factor when deciding whether or not to change careers. Although we know monetary compensation is only part of what motivates an employee, it is certainly necessary that the employee is paid fairly.

In this eighth building block you look at what you’re paid, what you’re paid for, whether you’re satisfied with this, how much you would like to be compensated by your next employer, and whether or not you’ll enjoy any other, non-monetary benefits.

9. What you give – cost structure

The eighth building block is about determining income. The ninth and final building block is about expenses, but in a non-monetary sense.

Which expenses or costs are involved with carrying out your work – such as time, your commute, stress, energy, etc. Decide whether you are happy with this or if there are things you would like to arrange differently with you next employer.

Business Model You: four parts

The BMY describes an effective four-step method to draw personal business models that enable individuals to adjust themselves and their vision in the search for new job ideals. Generally speaking, the book is divided into the following four parts

1. the Business Model You Canvas

The first part explains in greater detail what a business model is exactly, what business model thinking is, what a personal Canvas business model is, and how the user can take the lead to arrive at a valid and considered decision.

In his book, Tim Clark offers a wide range of opportunities for reflection. One of these is the BMY model with the nine building blocks. It can be downloaded freely in this article. Fill out this model will help you reflect on your personal environment.

The more of these reflections you fill out, the more you’ll learn about what goes on and what opportunities there are in professional life. Together with the reflections, the user then has to fill out the personal BMY model again, although now from this new perspective.

4. Act on your new Business Model You Canvas

In the final part, Tim Clark asks the reader to try out the new personal BMY model in practice. One important aspect to this is determining one’s personal business value.

How can the user benefit a future employer, and how much should he be paid for this? Based on the personal BMY model, the user is supported – by means of useful personal insights – on the path towards a career that will sufficiently satisfy him.

Business Model You template

Now that you’ve read about BMY model, you’re ready to conduct your own analysis with our Business Model You template.

Download the Business Model You template

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Now it’s your turn

What do you think? Are you familiar with the explanation of BMY? How would you use this article when making a decision about a potential career switch? What are some of essential aspects to consider when making an important decision like this? Do you have any tips or additional comments?

Share your experience and knowledge in the comments box below.

More information

  • Clark, T., Osterwalder, A. , & Pigneur, Y. (2012). Business Model You.
  • Osterwalder, A. , & Pigneur, Y. (2010). Business model generation: a handbook for visionaries, game changers, and challengers. John Wiley & Sons .

How to cite this article: Janse, B. (2019). Business Model You (BMY) . Retrieved [insert date] from Toolshero: https://www.toolshero.com/personal-development/business-model-you/

Published on: 03/14/2018 | Last update: 11/08/2023

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Ben Janse

Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.

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