What is a Business Model with Types and Examples

What is a Business Model?

A business model is how your company creates, delivers, and captures customer value. One way to think about it is as a blueprint of how a company operates, generates revenue, and sustains itself. A business model consists of multiple components:

• Customer Segment
  How are your target customers? This can be expressed through a buyer persona, customer segments, or other tools and frameworks.

• Unique Value Proposition
  What is our promise to these customers? Understanding the unique value proposition requires knowing what customer problems you are solving.

• Revenue Streams
  What value are customers paying for? The revenue model describes how the company generates revenue by solving the customer’s problem.

• Channels
  How do customers discover, evaluate, and hire your product? There needs to be more than just having a great product to achieve market success. You have to understand how your product can reach your customers.

• Costs
  What resources does a company use to serve its customers? Costs and revenue form the unit economics of your product, which is an important model for achieving a sustainable and growing business.

Additional aspects like key partners, resources, and activities create a comprehensive business model.

Why are business models important?

A business model is a critical piece of building your business as it answers many important questions:

• Does your idea have a clear path to reaching breakeven and achieving significant growth?
• Is your business investable? Different types of investors have different needs in terms of their portfolio companies, and many of the characteristics they are looking for are locked in the business model.
• How do you find your first customers? Combining customer segments, unique value propositions, and channels will shape the first go-to-market experiments you can do to test your hypothesis.
• How scalable is your idea? Moreover, what are the driving factors for scale - is it having more employees, investing in marketing, manufacturing products, or something else?

What are the different types of business models?

SaaS

SaaS products are delivered over the Internet and hosted in the cloud by the vendor, eliminating the need to install and manage a software application. The emergence of cloud technologies allowed very expensive and complicated self-hosting applications to be moved to the vendor’s infrastructure. Hubspot and Salesforce disrupted the CRM and ERP space by offering the respective solutions as a service.

Subscription

Subscription-based products developed in parallel with the SaaS business models are an alternative to the license-based business models. They offer access to a product or service for a given period of time (often monthly or yearly) for which the user pays a flat fee. This model was used in the past mainly by newspapers and magazines but is now the preferred model for many software companies like Strava.

Open Source

Open Source has been a strong movement since the rise of the Internet and computing technologies. It offers the source code of software products or components for others under different conditions depending on their license.

There are multiple paths to monetizing open-source products:

• Offering professional services, which Red Hat does for their Linux distribution
• Using an open-source product to offer additional paid services. GitLab offers an open-source version of its DevOps platform, with premium features available in paid tiers.
• Dual licensing offers a paid product version that provides more flexibility, like MySQL.

License-based

In license-based products, customers purchase a license to use the software, often with one-time payment or periodic renewals. This has been the predominant way of selling software products until newer business models emerged. Typically, such products require regular renewals for newer versions. The Windows operating system is a good example of a license-based business model.

Ad-Supported

In ad-supported products, the software is provided for free, and revenue is generated by integrating ad placement into the product experience. This has been the main revenue stream for big companies like Google and Meta (Facebook).

Freemium

The freemium business models offer the product for free with limitations:

• Quota limits (e.g., 10 AI conversations per day)
• Gated functionalities
• User limits
• Support and service levels

This is a great strategy for consumers to try your product and for you to deliver value to them before they decide to buy it.

API Licensing

Some products charge for offering access to their APIs, while they may have free or otherwise monetized user interface representation. Companies like Twillio and the Google Maps platform monetize by allowing developers to integrate with their products.

Crowdsourcing/Funding

Crowdsourcing and crowdfunding platforms offer a new way for products to secure funding by opening up the process to a broad range of users. Kickstarter allows people who want to build new products to get the needed resources and, even more importantly, to validate the need for the product they want to build as early as possible. These business models are great as they significantly reduce the risk of shipping a product for which there is no market.

Marketplace

The marketplace business model types are multi-sided products where one side (the supplier or the provider) offers a product or service to the other side (the consumer or the buyer). Companies like Amazon benefit from managing the interaction between the two parties through things like discovery, connecting, payments, thrust systems, etc.

Peer-to-peer

The peer-to-peer (p2) business model is a subtype of the marketplace business model. In this case, the two sides are equal, and the same user can often be on both sides of the marketplace. Airbnb allows people with free property to offer hospitality services without having to be a business or have 20 20-room family hotels. Platforms like Airbnb and Etsy increase the engagement of both sides by offering insurance and addressing the risk of doing business with unknown individual entities.

Pay-as-you-go

The pay-as-you-go business model charges users based on their utilization of the product or service. This is a successful business model for cloud services, as delivering it to consumers has significant costs. Pay-as-you-go allows for better cost management and ensures a sustainable business model.

Manufacturer

A manufacturer produces goods from raw materials and sells them directly to consumers or wholesalers/retailers. This is a common business model for physical products, especially fast-moving consumer goods (FMCG).

Retailer

A retailer buys products from manufacturers or wholesalers and sells them directly to consumers.

Fee-for-Service

This model charges customers a fee for specific services rendered. Revenue is directly tied to the services provided. It is often used by professionals like consultants, lawyers, and healthcare providers. This is not a typical model for a product company.

Bundling

Bundling sells multiple products or services at a lower price than if purchased separately. It encourages customers to buy more, increases perceived value, and can help move less popular products. This is rarely a standalone business model and is often used in combination with other business models for selling individual products.

Affiliate

The affiliate business model earns revenue by promoting and driving traffic or sales to another company's products or services. For example, many bloggers and influencers use the Amazon affiliate program to promote products sold on Amazon for a small commission from every sale coming from them.

Razor Blade

In the razor blade business model, you sell a primary product at a low price (or loss) and make profits from the consumables or accessories. This is the model used by producers of printers or razors (hence the name).

Reverse Razor Blade

This model is the opposite of the Razor Blade. It involves selling the primary product at a higher price and providing consumables or services at a lower cost or for free.

Franchise

The franchise business model is heavily utilized in the hospitality industry, including hotels, restaurants, and cafes. Some of the biggest chains we all know, like Costa Coffee and KFC, heavily rely on franchising to expand and scale globally.

Franchise agreements can take different forms, providing various levels of flexibility to the franchisee to change and adapt the customer experience to the local market.

Brokerage

Brokerage acts as an intermediary to facilitate transactions between buyers and sellers, earning a commission on each deal. Examples include PayPal, Visa, and Interactive Brokers.

6 Key Steps to Designing a Business Model

Step 1. Define Your Product or Service

Defining a business model starts with finding a space you care about. This doesn’t need to be final and will evolve as you progress with your business model, but you need a starting point rooted in a problem you deeply care about.

Step 2. Identify Your Target Audience

Identify your customer segments, especially the beachhead segment—the target segment in which you are in the best position to win first.

Step 3. Research the Target Market

Conduct customer problem research to identify the needs of the underserved, existing alternatives, and behavioral patterns of your target audience. You can do that by conducting customer problem interviews or using another research technique.

This part is very important. It will provide insights into how people solve their problems today, how they find solutions (think “channels”), how much they are paying and in what form (think “revenue streams”), and how critical the problem is for them.

Step 4. Explore Potential Business Models

Going through the list with the business model, pick the one that makes the most sense to you based on what you know so far. It might follow the patterns of existing alternatives, or you can also introduce business model innovation for the space in which you operate.

Step 5. Create Prototype Designs

The next step is to create some artifacts you can use to test your business model. Depending on the product you want to build, prototypes can mean different things:

• a landing page,
• a mockup,
• a concierge MVP,
• and so on …

Step 6. Evaluate and Select the Best Model

Repeat the test until you find a business model that resonates with your target audience.

Icanpreneur is a great partner in identifying your business model. The platform provides actionable guidance and examples for defining customer segments, unique value propositions, traction channels, and revenue streams as part of your business model canvas. Icanpreneur also helps validate the hypothesis behind your business model by managing the process of interviewing customers end to end.

FAQ