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What Is a Business Model?

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

The Bottom Line

Learn to understand a company's profit-making plan

what does a business model look like

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

what does a business model look like

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

Business Model

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


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


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-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 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


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 models 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


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:

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:

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 2021 ."

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Types of Corporations

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How to build a business model

Creating a successful business model is essential, whether you are starting a new venture, expanding into a new market, or changing your go-to-market strategy . You can use a business model to capture fundamental assumptions and decisions about the opportunity ahead, setting your direction for success.

Jump ahead to explore the following:

What is a business model?

Business model vs. business plan

Business model examples

How companies use business models

How to create a business model

Business model canvas and template

How to validate your business model.

Business model tools

Build a business model in Aha! Roadmaps. Sign up for a free 30-day trial .

What is a business model.

A business model is a framework for how a company will create value. Business models distill the potential of a business down to its essence. A business model answers fundamental questions about the problem you are going to solve, how you will solve it, and the growth opportunity within a given market.

Business models and business plans are both important tools that help you create and refine your strategy . Many times you will use both when pursuing a new business initiative, but they each serve a different purpose.

A business model is the foundation for your company and products. It captures the main idea of how your business will generate revenue. A business plan goes into greater detail — it is a document that explains how you will make the business model work. Your business plan will likely include your company's goals, the resources and methods you will use to achieve those goals, and even your expected timelines and financial performance. Together, your business model and business plan describe the intended value of your product and how you plan to deliver this value to your customers.

What are some business model examples?

There are many types of business models. Each one varies considerably based on the type of organization and offering. For example, a manufacturing company will have a very different model than an advertising agency. Even within a specific industry, business models vary. Here are some common types of business models used by technology companies:

Freemium business model: A basic product is provided for free but you charge for additional services or features.

Free trial business model: Customers can experience the full product for free for a limited amount of time.

Licensing business model: Technology or innovations are monetized by licensing them to other companies.

Open-source business model: Your product is free but you generate revenue through other means such as crowdsourcing.

Subscription business model: Customers pay a recurring fee to access your product or service.

Most businesses end up using a combination of business models to reach their customers and grow over time.

What is the best business model?

There are numerous business model examples to choose from, and the optimal business model will vary for each company — depending on the industry you are in and the problem you are trying to solve for your customers.

Some types of business models are more popular and work better for certain industries than others. For example, Software as a Service (SaaS) companies often use subscription and freemium business models. This makes software more accessible to customers while providing valuable recurring revenue for the business. On the other hand, many social media platforms use hidden revenue business models to 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.

It is also worth considering the types of business models your competitors use. Say that your competitor uses a subscription business model with no free options. If you offer a freemium model, you may be able to attract new customers (including some of your competitor's customers) who prefer to try a product for free before purchasing. In this example, choosing a different business model from your competition could give your company an advantage.

Ultimately, the best business model for your company depends on what is right for your product and your customers. But whether you use a business model example template or invent a new one, building out a business model takes significant research, planning, and analysis.

How do companies use business models?

Companies across every industry and at all stages of maturity use business plans and models. Some rely on lengthy processes and build complicated models, while others move quickly to articulate the basics. Having the discipline to work through this planning tool forces internal alignment.

For established enterprises, a business model is often a living framework that is reviewed and adapted every year based on changes with customers, employees, and the market. For companies launching new products and services or entering new markets, a business model can help get them off to the right start and ensure that early product and marketing decisions are tied back to the business strategy .

How do you create a new business model?

A business model should answer important questions about your business and set out a strong vision for the business. The key components of a business model should include relating to your target customers, the market, organization strengths and challenges, essential elements of the product, and how it will be sold. Establishing this foundation guides the next planning tool — your product roadmap .

Building your business model requires researching and defining a few core components. Here is a list of the essentials to include when you create a business model:

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 for costs, growth, and revenue.

But business models do not need to be a long document. A concise, visual document is an effective way to distill the key elements of your strategy and ensure everyone understands the high-level approach.

Below are two 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! business model canvas

Articulate the foundation of your product or service in a flexible canvas-style format with the Aha! business model canvas. This type of business model developed by Aha! is the most complete template available. It is based on the Aha! team's 20+ years of experience building breakthrough products and software companies. 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). You can drag and drop each component into a custom layout.

Business model in Aha!

Lean canvas

Similar to the business model canvas, this model takes a problem-focused approach to create an actionable business plan. First created by Ash Mauraya, it is most commonly used by startups and entrepreneurs to document their business assumptions. The focus is on creating a fast, 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. All of the elements can be found here in our free, downloadable template .

Lean canvas example in Aha!

Creating a business model is an important exercise, but a model is essentially a hypothesis — you need to test your model to prove that it will actually provide value for your customers. Here are some steps you can take to validate your business model:

1. Make your business model accessible and collaborative.

Customers, stakeholders, and team members are all valuable sources of feedback for improving your business model — so make it easy to update and share your model. You can use a cloud-based business model canvas or strategy tool to encourage and facilitate collaboration.

2. Build out other strategic models.

Extend your strategic thinking to other types of models. How will you take your product to market and reach target customers? Who are your competitors ? What opportunities and threats exist for your business? Use a variety of modeling tools to anticipate the different market challenges that your idea may face and identify any gaps in your business model.

3. Turn your model into achievable goals and initiatives.

Think about what it will mean for your business model to be successful. Is it an annual revenue target? A desired number of users? Set time-bound, measurable goals and determine the initiatives, or themes of work, that will get you there. These will be important proof points for external stakeholders, such as investors or partners.

4. Plan how and when you will deliver your business idea.

At this stage, you will translate your business goals into actual product or service features. You may not have a fully fledged offering at the start of the validation process, but you should determine what you need to deliver and then start testing your business model. You could create a demo or beta version of your product and offer it to a select group of users, for example.

5. Get feedback from customers and stakeholders.

Now is the most important step for validating your business model. Send out surveys, conduct interviews, and crowdsource feedback to understand customer preferences and needs. Was your hypothesis correct? Does your business model solve a problem the way you thought it would? This feedback will help you determine which aspects of your business model to adjust.

6. Refine and repeat.

With these new insights, return to your business model template and make refinements. You can also repeat the steps of the validation process above to continue iterating on your business model.

What are some business model tools?

A wide variety of tools are available to help you quickly build and share your business model. The Aha! business model canvas includes the most popular templates, including the two examples above. Aha! also lets you create your own custom business model, using the simple drag-and-drop interface. Access the business model builder for free during a 30-day trial . Or you can download these free Excel and PowerPoint business model templates .

Crafting a business model is part of establishing a meaningful business strategy. It requires deep thought about the core assumptions surrounding how a company or product is going to generate value and how the team will work towards achieving its goals.

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Business Models: Types, Examples and How to Design One

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Randa Kriss is a small-business writer who joined NerdWallet in 2020. She previously worked as a writer at Fundera, covering a wide variety of small-business topics including banking and loan products. Her work has been featured by The Washington Post, The Associated Press and Nasdaq, among others. Randa earned a bachelor's degree in English and Spanish at Iona College. Email: <a href="mailto:[email protected]">[email protected]</a>.

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what does a business model look like

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What is a business model?

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Types of business models and examples

1. retailer model, 2. manufacturer model, 3. fee-for-service model, 4. subscription model, 5. bundling model, 6. product-as-a-service model, 7. leasing model, 8. franchise model, 9. distribution model, 10. freemium model, 11. advertising or affiliate marketing model, 12. razor blades model, how to design a business model.

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What is a business model? Components, types and examples

Small business owners look over a business plan

By Cooper Nelson

At a glance

Virtually all businesses have at least one thing in common: They depend on effective business plans. A business plan serves as a road map for your company, outlining the steps you will take to reach customers and generate profit.

But before you create a business plan, you must first determine your business model. This is the type or platform your business will engage to become profitable. Business models might include product types, financial plans, sales forecasts and other details that outline your plan for success.

Whether you’re an established CEO or an entrepreneur starting your own business , a business model and a business plan form important steps toward defining your company’s future. Partners, company executives and any other business professionals invested in a company’s future can regularly reference their business model and plan to maintain progress toward goals.

It’s never too early to begin studying, building or optimizing your business’s success plan. Even if you only recently obtained your business degree , you can advantageously influence your company’s business model and plan in several important ways.

A business model is just one step in starting your own business. Explore the complete guide to entrepreneurship on our blog!

Understanding business models

Your business model is meant to serve as a comprehensive guide — one that leads your business toward success. The best business models and plans also help companies navigate their market while identifying potential risks and avoiding setbacks.

Put simply, your company’s business model outlines the ways you plan to add value or grow and maintain a business. You’ll likely include details like employees, available resources, price points, competition, customer behaviors and potential expenses in your business model — all to help you forecast how your company might perform in the future.

If you’ve completed a business degree, you can use your business experience to help inform your company’s business model. In addition, earning an MBA can give you the tools to handle investments and high-level decisions that come with deciding on or switching up your business model. However, whether you’re a business management student or an experienced executive, it’s important to consistently evaluate your company’s progress and discover new business models that could propel that growth.

Start your business on the right track. Explore business degrees at University of Phoenix.

what does a business model look like

The importance of business models

Business models also might have a direct impact on your company’s success. If you’re starting a new company, your business model should help you attract talent and generate sales. Existing companies should update business models regularly in anticipation of any changes in customer behaviors or market trends.

Among other critical points, your business model should allow your organization to offer high-quality, affordable products or services. This key component will allow your business to change, scale and evolve as necessary. Include figures like cash flow, gross sales and net income in your business plan to maintain companywide accountability as you grow.

Business models provide more than just fiscal direction for your company. Your business model should also outline short- and long-term goals and provide a foundation for corporate culture. Take the time to include details about your organization’s identity in your business model.

Types of business models

Depending on the type of business you operate, you can choose from a wide selection of business models. Some business models primarily outline costs and anticipated sales; others include processes, formulas, workflows and other details that contribute toward corporate success.

Here are a couple of the most common components of a business model:

These and other business model types can help you identify the purpose and direction of your organization.

what does a business model look like

9 components of a business model

No matter the type of business model you’ve elected to create or follow, most include similar elements. A quality business model or plan often includes several unique elements, where each element helps to further define your vision and direction.

Your comprehensive business plan should contribute to your company’s business model. Ideally, your business model contains the following nine components:

These essential pieces of a business model help you define every aspect of your company’s operations. When you understand your company’s available resources, liquid capital, recurring revenue, customer demographic and related details, you’ll position the business itself for long-term success.

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Business Model Analyst

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Business Model – What is it and How it works

What is a Business Model

The term business model has gained incredible popularity in the last decade as one of the most important ways of approaching business innovation and business strategy .

If you’re like most people, you probably define business model as a company’s plan for making money. And you’re not the only one. Probably 80 to 90% of people think like that. This article will show you that the business model is not just that. It is much more.

The term is still relatively new and still raises a lot of doubts about its definition and how it works. In fact, an efficient business model is much more comprehensive and deeper than how a company charges its customers. It involves identifying customer segments , delivery channels , key-partners , among other things. It is much more than simply establishing how a company makes money. It’s about explaining how it can create and deliver value to consumers .

Part of a business model includes the activities associated with production: design, supplies, raw materials, manufacturing (backstage). But there is a second part that involves other essential activities when selling a product: finding your audience, closing a sale, distributing a product, delivering a service (stage). This is known as the two sides of a Business Model .

The customer-facing part is the stage and the behind-the-curtains part is the backstage. Most of the time, we only see strategies of what’s “visible” to us, but there are many innovations that happen and we don’t notice.

Business Model - Two Sides - Backstage Stage

Check out our super guide about business models sides with 6 mental models explained to help you interpret and design business model strategies:

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The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit.

Any business, therefore, depends on a well-designed and thoughtful business model, which covers all these aspects, so that this company is set on a strong base. So let’s start with the basics.

What is a business model?

By definition, a business model describes the logic of how a company creates, delivers, and capture value.

Business Model Definition

There are three key components within a business model: creating value, delivering value, and capturing value. This shows that the business model doesn’t revolve around money. It revolves around value.

This Business Model definition was created by the Swiss Consultant Alexander Osterwalder as a result of his PhD thesis, entitled The Business Model Ontology, in which he researched different business model definitions to create a single one. It was this document that later gave birth to the popular Business Model Canvas tool .

Business Model Ontology by Alexander Osterwalder

How a business model works

To better understand how a business model works let’s look at an example. If we look at the news industry in the 20th century, how the three main components of a business model worked? How would the news industry, or a news company, created value? They would have journalists write articles and produce newspapers. How would they deliver this value? They would have paperboys that would go around delivering newspapers around neighborhoods. And how would they capture value? They would have companies that would advertise, place ads in these newspapers

Business Model Press Industry in the Past

Now, what about in the 21st century? How does the industry news look like today? It’s the exact same three pillars, creating, delivering, and capturing value. But it’s done in a different way. so, rather than having journalists create value today, we create value, we the people who use platforms like Google and Facebook. We are the ones creating content. It’s being delivered on these social platforms, like Google, Facebook, Twitter, Instagram, or Youtube. These are all platforms that are delivering the content that we create. And is the value of that delivered content being captured? It’s being captured through advertisements, Google Ads, Facebook Ads, Youtube Ads. So, the process still the same, but obviously has been updated and innovated in a different way to fit in with the technology of the 21st century.

Business Model Press Industry Actual Days

Again, if we look at an example of a grocery store from the 20th century, they would create value by accumulating all the goods and products from farmers, from butchers into one location. They would deliver value by basically allowing people to come into that location and buy whatever they would want in the quantity they needed. And they would capture that value in the cash register.

Business Model Groceries in the Past

Today, in the 21st century, again, still the same process, but done in a different way. So companies like HelloFresh and Deliveroo are pretty much revolutionizing the way we get groceries and the way we eat. So, for example, HelloFresh, the way they create value by creating recipes, and they deliver those recipes to you so you don’t have to actually go to a store or physical location. How do they capture that value? You subscribe online for a monthly fee on their website with your credit card.

Business Model Groceries Actual Days

So again, the process still the same, creating, delivering, and capturing value, but we can innovate the way it’s being done. That’s how business model innovation works. So again, to really emphasize, it’s all about value. It’s not about money, it’s about value.

Business Model is All About Value

Check out our super guide about business models in the 20th vs 21st centuries with 13 differents industries business models and how they have evolved through time:

Business Models in 20th vs 21st centuries - cover

Business Model Objectives

A business model is a high-level plan of how your company sells and operates. In practice, it includes baseline aspects of each and every business, such as value proposition, processes, target audience, offers, strategies, organizational structure, operational and political processes.

The objective is to identify the product and/or service to be sold, as well as the public to whom it will be offered, while anticipating the expenses involved in the entire production and sale process, in pursuit of the established goals. According to management guru Peter Drucker, “a business model is supposed to answer who your customer is, what value you can create/add for the customer and how you can do that at reasonable costs”.

In general, in addition to offering a direction for the enterprise, the business model also serves to attract investors, recruit talent, and motivate the team. A business model is an important tool in today’s corporate world.

Is Business Model the same as Revenue Model?

The vast majority think that a business model is the same thing as a revenue model. A revenue model describes how a company makes money through its various revenue streams and that’s not the business model. A revenue model is part of the business model, but it’s not the entire thing. There’s much more to the business model and that’s what we are going to cover next.

Business Model Different Revenue Model

Check out our super guide about revenue models with 21 models explained to help you choose the best revenue model for your company:

Revenue Models - Super Guide

Check it out by clicking here

When is a business model sustainable?

When it comes to business modeling, the following equation is extremely important: Created Value > Captured Value > Cost of Delivery

Business Model Equation

We have to create more value than we capture and we have to capture more value than it costs to deliver that value. A business model will only be sustainable if this equation holds true.

In order to create a sustainable business model you need to ask yourself the following questions:

What’s interesting is that when we look at business model innovation, we can innovate in each of these aspects.

What are business model components?

The business model has components related to marketing/sales (create value), operations (deliver value), and finance (capture value). Although the Business Model conceptually has three main components, the business model canvas , which is the most popular tool for business modeling , has a more detailed approach based on 9 construction blocks .

Business Model - 9 Blocks Components

The 9 blocks of construction are:

To better understand each of these blocks you can click on the links above to read more in-depth.

What is the business model process?

The process is known as business modeling or business model design has essentially two parts:

The business model development can be better achieved by using the business model canvas. There’s a specific order to develop a business model using the canvas.

Business Model Canvas Order

The order considers that a business model must approach first the desirability of the business. Does the customer want it? Can we create this? Second, you must approach the feasibility of the business. Can we operationalize this? Can we deliver this? And last, you need to prove the economic viability of the business. Can we capture profits?

Business Model Desirability Feasibility Viability

This is already part of the validation process, which is the second part of the business model development process. You need to assume that every part of your business model is a hypothesis that needs to be validated. The only way to validate your business model is by testing your assumptions. A more detailed approach to the business model testing cycle can be seen below.

Business Model Testing Cycle

Only after you have tested every single strategy for every single construction block you can have a better chance of a successful business model.

Check out our super guide about business testing with different tools and approaches to test your business model hypothesis and help its development.

Business Model Testing - Super Guide

How to develop a business model

The best way to put in practice the business model development process is by gathering people of different expertise into a visual workshop. The development of a business model involves the use of visual tools, such as the business model canvas, which works as a common language between participants.

Business Model Group Discussion

What is business model transformation?

New business models emerge or transform base on shifts in technology and consequently in customer behavior. New technologies force us to experience things in a completely new way. From car ownership to mobility apps, from in-class education to online education, from commercial hours malls to 24/7 online shopping.

Customers’ needs are still the same, but their behavior has changed. So the question you need to make is How does my business adds value in the new consumption era?

You can read more about Transitional Business Models in our Super Guide below:

Transitional Business Models

What is a business model example ?

A good example of a business model can be seen in the business model canvas of the Netflix

Netflix Business Model Canvas

What is business model analysis?

There are different ways of analyzing and assessing a business model. A very common approach is using the SWOT Analysis to understand the strengths, weaknesses, opportunities, and threats.

Business Model Analysis - SWOT

You Can do the SWOT Analysis of your Business Model using our Business Model Assessment Spreadsheet

Business Model Canvas SWOT Analysis Assessment Excel Spreadsheet

Types of business models

In fact, there are as many business models as there are types of business developed. Some of the most common are:

Which business model is best?

There’s no such thing as the best business model. There are plenty of successful company cases in many different business model types. But business models that use recurring revenue models such as subscription or SaaS or that uses network effects such as marketplaces and platforms are powering the most successful businesses.

Can you copy a business mod el?

Yes, you can. The essence of creating, delivering, and captures can be

Business Model Rationale

Can you protect a business model?

Business models can’t be patented but the technology that supports them can. This has been increasingly more difficult as technology becomes more and more accessible and diversified.

Just ask yourself: Can Google’s business model be patented? Can Netflix’s business model be patented? Can Facebook’s business model be patented? Can Amazon’s business model be patented? No, it can’t. But the reason you just don’t create another Facebook by creating another company with the same business model is because of how hard it is to create similar technologies or execute similar strategies.

Can you license a business model?

You can’t license business models, but you can license brands, processes, and other business model parts. This is usually done in the form of franchises. Companies like McDonald’s, Subway, and Pizza Hut all use the franchise business model.

Business model advantages

As a general rule, business models often include everything related to the creation, production, and sale of the product or service, information about the target audience and distribution of the product, as well as what the company’s revenue source will be, that is, how the consumer will pay for that good.

It is, after all, a “recipe” to be followed by the project team. This recipe usually starts with the value proposition – a description of the products and/or services that will be offered, by demonstrating what differentiates them from other competitors in the market.

Besides, it contains the costs involved, sources of financing, a definition of the target audience and the marketing strategy to reach it, projections of revenues and expenses, an analysis, even if brief, of the competitors, and a description of possible partnership opportunities.

The main purpose of a business model, therefore, is to allow the company to deliver value to the customer at a sustainable cost. As the business model is able to analyze all the details of the enterprise even before it is put into practice, the chance that this objective doesn’t get reached is very remote.

business model canvas template

You can download a business model template in PDF here

You can download a business model template in Powerpoint (PPT) here

Why Business Model Maters

Business model matters because they allow you to create business strategy and innovations in a more holistic way, going beyond revenue models or technology innovation.

Bottom line

Surely, there are many more business models other than those above. And, as market demands change, new models are created. Besides, it is worth remembering that most companies today don’t operate under a single business model. It is quite common to see a combination of several.

The business model you choose depends on your company’s needs and the value you want to create for the stakeholders involved, especially for your target customer.

Finally, don’t forget that any business, no matter how successful and established it may be on the market, need to revisit and update its business model and strategies in order to understand and get prepared for changes and trends. Any failure in this assessment can threaten the future of the company and its investors.

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20 Business Model Examples (And How To Pick The Right One)

Dale Cudmore

By: Dale Cudmore Digital Marketing and Sales Expert

If you’ve heard the term “business model,” but don’t know exactly what it means,  you’re not alone .

It’s used all the time by business analysts, and even they disagree on the exact definition of a business model.

But you know  a business model is important.

And it is. Your model sets your business on the path to success or failure , so you need to get it right.

This is a practical guide to:

It doesn’t require any previous experience or knowledge and will leave you with everything you need to know to pick the right business model for your next venture or reevaluate your current model.

As mentioned, there’s no single definition of a “business model,” so let’s look at the most common interpretations .

Long ago, the concept of a business model was simple –  how will your business make money .

It wasn’t until the 1990s or so where people started realizing that  your business model can make or break your company.

So it evolved from that basic definition.

While he didn’t specifically mention business models, Peter F. Drucker’s  theory of business  is often cited as the start of a shift. Instead of  just  focusing on monetization, he proposed that businesses should also consider customers, goals, and strategy.

Verifying Your Business Model

A modern business model should at the very least answer Drucker’s famous  five questions :

Still, that’s a bit open-ended.

Finally, Alex Osterwalder developed a comprehensive system to define a business model .

His view of a business model was that a business model is a combination of assumptions and guesses.

The Business Model Canvas

He developed the Business Model Canvas, which we’ll be looking at in more detail later.

It divides a model into 9 main sections that provide an organized way to break down all the important assumptions you have about a business.

Video: Alex Osterwalder provides a brief overview of the Business Model Canvas

What’s the Difference Between Business Models and Business Strategy

They both seem similar at first but have different scopes .

Business Model

A business model covers  how a business will operate , but a business strategy defines  how that business will carve out a position in its market.

In other words, a business model gives you a set of limitations . It might tell you how much you’ll charge, and what customers you’ll target.

Business Strategy

However, your business strategy will focus on how you actually reach those customers and distinguish yourself from competitors.

You’ll see both terms used interchangeably (incorrectly), but it’s good to know the difference.

The right business model can catapult you to glory or collapse, and that’s not an exaggeration.

Business model innovation is arguably the biggest form of competition that exists in modern business.

Clay Christensen, a professor of business administration at Harvard sums it up well:

Most managers think the key to growth is developing new technologies and products. But often this is not so. To unlock the next wave of growth, companies must embed these innovations in disruptive new business models.

IBM’s Institute for Business Value conducted a study in 2009 and found that  70% of companies are actively engaging in business-model innovation.

They also found that 98% of businesses were continually modifying their model to some extent.

Core Values and Competitive Advantage

You’ve seen examples of this, perhaps without realizing it.

Consider taxis and Uber, which both have essentially the same core value to customers of providing flexible, on-call transportation.

Uber has a drastically different business model. When they started up, their business model was their main competitive advantage .

Fast forward to today, and Uber and other similar businesses have  overtaken taxis .

Before we look at specific models you may want to consider using, let’s briefly go over the attributes of a solid business model .

1. They Match Up With Company Goals and Values

Your business model comes after you define what your company is trying to do.

Certain models will match up with your goals and values , and some won’t. If you start a diamond shop but try to implement a freemium model, there’s essentially no way you’ll succeed.

Pick a model that complements your  mission  and the  way you want to accomplish it .

2. A Business Model Should be Robust

You don’t want to base your entire business off a model that might not be effective after a year or two.

Your business model needs to consider:

Taking time to think of these when picking a business model may save you from a big mistake.

3. They Leave Opportunity for Innovation

You’re likely not going to get everything in your business model right the first time.

As Osterwalder noted, business models are based on assumptions. Things rarely go as planned.

If your business model depends heavily on all your assumptions being correct, it’s too rigid. Create a business model that you can re-evaluate and improve upon over time.

Mark W. Johnson has a great book called  How to Seize the White Space for Transformation .

In it, he covers 20 types of potential business models that you can choose from and their primary method of monetization.

I’ll summarize them here and provide examples of each, but if you’d like more detail, it’s a good book to pick up.

Affinity Club

An affinity club model is based on  partnerships with other organizations.  By buying or using your products, customers also get special access to other perks, giving them extra incentive.

Of course, you’ll need to provide an incentive to those partners to get them on board.

This is best used in competitive fields where products are all similar.

A great example of this is MBNA, who uses this model with their credit cards. Different cards come with different perks , so they can target a wide audience.

mbna screenshot

For example, one card is targeted towards football (soccer) fans. If you sign up for a Manchester United card, you get points that can be exchanged for their merchandise.

There are also monthly draws and other perks .

Automation-Enabled Services

This model relies on technological advancement and is tough to use unless you have a good deal of specific technical knowledge yourself.

The goal is to automate services that typically use human labor , so your operating costs are reduced.

For example, instead of going to a financial advisor, you can go to  Betterment . It’s an automated online financial advisor that gives you a similar quality of advice as most financial advisors would.

Video: An overview of how Betterment uses technology to provide financial advice.

A broker connects buyers to sellers and gets a small fee for each transaction.

There are many examples of this:

Any marketplace that allows others to sell on it, and focuses on bringing in customers for those sellers is using a brokerage model.

A bundling business model packages related products together to make a more convenient and enjoyable experience for customers.

A classic example of this is the fast-food value meal, but that can be replicated fairly easily.

A better example is the combination of iPod and iTunes. You can’t use an iPod without iTunes, so each new iPod customer results in a new iTunes user (and potential customer).

itunes screenshot

Bundling is very effective when a company is launching a new business and can leverage existing success as Apple has done.


Don’t confuse a crowdsourcing business model with crowdsourcing funding from sites like Kickstarter.

A crowdsourcing business model relies on  user-generated content . The business focuses on making contributions easy and providing an incentive for users to contribute (usually money or a charitable goal).

YouTube is one example of a crowdsourcing model, where users upload videos, and most hope to generate revenue from those videos.

Wikipedia is another great example, where all the content on the site has been created for free by willing users who want to spread knowledge.


The idea behind a data-into-assets is to obtain valuable data that can be sold to willing buyers.

This is one of the few that can run into real ethical dilemmas.

For example, this is the business model that Facebook uses. The site is free for users, but in return, Facebook collects massive amounts of data about users and uses that to generate revenue through advertisers.

The Dangers of Data

They are facing  large privacy lawsuits  that could set a precedent for other businesses.

It’s hard to know where to draw the line, as Google is another data-into-assets business that most have no big issues with. They scrape data from just about all sites and transform that into search results that users desire.

Then they sell ads to advertisers on the search results.

Digital Platforms

Since the beginning of the Internet, creating a digital platform has been a viable business model for some companies.

For example, OpenTable started in 1998, which is a site that provides an online restaurant-reservation service.


There are still opportunities to be innovative in an industry simply by providing a useful product online.

To use this, you can apply modern technology to outdated industries , or apply new technology to any industries ready for it.

We’re also seeing new digital platforms innovate upon old ones by leveraging new technology like machine learning and blockchain technology. These could almost be considered business models of their own.


This mouthful simply means directly delivering a service or product instead of through a middleman.

Tesla is a great modern example of this. Instead of selling cars through a dealership, you buy online and skip the salesman. Not only is it more convenient, but it reduces costs for consumers .


Fractionalization consists of letting customers buy a portion of a product or service.

A good example of this is a time-sharing condo. People buy  part  of the condo and can use it during a certain time of the year that they purchased it from.

It’s a great model when your target customers only want your product or service part of the time . They get the full benefits but don’t have to pay full price.

Freemium is a modern business model that is often used by software companies.

Because there’s very little overhead in serving data, businesses can choose to provide a portion of their service or product for free, but requiring payment for full access .

Spotify and Dropbox

Dropbox gives you a small amount of free cloud storage and asks you to upgrade to a paid plan if you need more space.


Spotify offers free music but has ads. If a user buys a paid plan, they get rid of the ads.

Freemium lets you reach a wider audience, and often get more referrals, which can lead to a steady stream of customers.

Leasing is nothing new and has been used by car dealerships for many years. It works best for expensive products.

When a customer often can’t afford to pay cash or only needs a product one time, you offer them use of the product for a rental fee .

A low-touch model takes a high-end offering and reduces the cost (and quality) of that product or service.

Competing on cost is a difficult business model to succeed with, but can work if you get enough customer volume.

Walmart is a great example of this, who sell lower-quality products than most competitors, but at a better price.

Negative Operating Cycle

This is a business model popularized by Amazon.

It’s especially popular with online retail businesses and allows businesses to sell products at a low-profit-margin (or even at cost), and still be highly profitable.

How Does It Work?

By maintaining a low inventory and getting payment upfront. Of course, you need a reliable and fast fulfillment process for this to work effectively.

The profits then come from the volume of sales that are attracted through low prices, or by utilizing the money sitting around before having to pay suppliers.

That money generates interest or can be used to fund long-term investments or research and development.


This business model is exactly what it sounds like, customers pay as they use your service.

This can only be used in certain industries where customers regularly consume varying amounts.

For example, car2go lets you pay for car rentals by the minute, hour, or day.

Some web hosts , like  Cloudways , let’s you pay only for the resources your websites actually use .

cloudways hosting

Razors and Blades

Razors and blades can be interpreted literally or symbolically.

This business model consists of bundling 2 products together that require each other. Then, you sell the main component (razor) at no profit or even a loss but recoup that because the complementary product has high margins (blades).

Another good example of this is the personal printer. They’re cheap to buy, but the ink is very expensive and high margin.

Reverse Razors and Blades

This is the same as above, but the two products are split.

You offer the “blades” at a very low cost in order to get people to buy the expensive and high margin “razor.”

One example of this is Amazon Kindle books, which are very cheap, and may tempt consumers into purchasing an expensive Kindle to read the books on.

kindle sale


There are many times that people want to use a product, without buying it. A product-to-service model lets people pay a service fee to have access to a product.

It’s similar to leasing and fractionalization .

A good example of this is Zipcar, which is a car-sharing company. Members pay a monthly or annual fee to have access to car reservations as needed.


If you can take something that has a lot of variabilities and create a consistent, standardized product, you stand out from competitors.

Dominos did this with their “30 minutes or it’s free” offer for pizza delivery, which at the time was unheard of.

Subscription Club

A subscription club lets customers buy a product on a regular basis.

This is a popular model for software businesses that most SAAS (Software As A Service) platforms fall under.

Netflix and Dollar Shave Club also would be subscription clubs.

User Communities

Finally, some businesses create paid user communities that generate revenue from fees and possibly advertising.

The most famous example of this is Angie’s List, a home services review community that required payment until a little while ago.

It’s a tough model because most people prefer free forums and other types of communities, but good if people will pay for higher quality information.

We can finally get to some practical work on your business model.

As mentioned before, monetization methods are not enough on their own.

There are 2 main approaches that you can take if you would like to create a new business model or refine an existing one.

Business Model Canvas

The Business Model Canvas comes from Alexander Osterwalder.

It’s a chart that includes the 9 important elements of a business model.

Business model canvas

9 Sections of The Business Model Canvas

Let’s go through the 9 sections, each one includes questions to prompt you if you get stuck:

Lean Business Model Canvas

The Business Model Canvas is a general model that works well in most cases.

However, the Lean Canvas has been  created by Ash Maurya  as an adaption that’s more suited to startups and small businesses with lots of uncertainty. You can find an  image file to print out here .

Lean Canvas Sections Explained

Again, there are 9 sections, but it’s “easier” to fill out for these types of businesses.

Here’s a brief description of each section:

If you got this far, you understand business models more than most entrepreneurs.

I’d highly recommend spending just another ten minutes or so and quickly work through either the Business Model Canvas or Lean Canvas .

Even if you can’t fill it out completely, you’ll quickly realize which areas of your business models need more attention and strengthening.

Table of Contents

© 2019


What a Big-Data Business Model Looks Like

There are three main ways to profit from the data revolution.

The rise of big data is an exciting — if in some cases scary — development for business. Together with the complementary technology forces of social, mobile, the cloud, and unified communications, big data brings countless new opportunities for learning about customers and their wants and needs. It also brings the potential for disruption, and realignment. Organizations that truly embrace big data can create new opportunities for strategic differentiation in this era of engagement. Those that don’t fully engage, or that misunderstand the opportunities, can lose out.

There are a number of new business models emerging in the big data world. In my research, I see three main approaches standing out. The first focuses on using data to create differentiated offerings. The second involves brokering this information. The third is about building networks to deliver data where it’s needed, when it’s needed.

Differentiation creates new experiences . For a decade or so now, we’ve seen technology and data bring new levels of personalization and relevance. Google’s AdSense delivers advertising that’s actually related to what users are looking for. Online retailers are able to offer — via FedEx, UPS, and even the U.S. Postal Service — up to the minute tracking of where your packages are. Map services from Google, Microsoft, Yahoo!, and now Apple provide information linked to where you are.

Big data offers opportunities for many more service offerings that will improve customer satisfaction and provide contextual relevance. Imagine package tracking that allows you to change the delivery address as you head from home to office. Or map-based services that link your fuel supply to availability of fueling stations. If you were low on fuel and your car spoke to your maps app, you could not only find the nearest open gas stations within a 10-mile radius, but also receive the price per gallon. I’d personally pay a few dollars a month for a contextual service that delivers the peace of mind of never running out of fuel on the road.

Brokering augments the value of information . Companies such as Bloomberg, Experian, Dun & Bradstreet already sell raw information, provide benchmarking services, and deliver analysis and insights with structured data sources. In a big data world, though, these propriety systems may struggle to keep up. Opportunities will arise for new forms of information brokering and new types of brokers that address new unstructured, often open data sources such as social media, chat streams, and video. Organizations will mash up data to create new revenue streams.

The permutations of available data will explode, leading to sub-sub specialized streams that can tell you the number of left-handed Toyota drivers who drink four cups of coffee every day but are vegan and seek a car wash during their lunch break. New players will emerge to bring these insights together and repackage them to provide relevancy and context.

For example, retailers like Amazon could sell raw information on the hottest purchase categories. Additional data on weather patterns and payment volumes from other partners could help suppliers pinpoint demand signals even more closely. These new analysis and insight streams could be created and maintained by information brokers who could sort by age, location, interest, and other categories. With endless permutations, brokers’ business models would align by industries, geographies, and user roles.

Delivery networks enable the monetization of data . To be truly valuable, all this information has to be delivered into the hands of those who can use it, when they can use it. Content creators — the information providers and brokers — will seek placement and distribution in as many ways as possible.

This means, first, ample opportunities for the arms dealers — the suppliers of the technologies that make all this gathering and exchange of data possible. It also suggests a role for new marketplaces that facilitate the spot trading of insight, and deal room services that allow for private information brokering.

The most intriguing opportunities, though, may be in the creation of delivery networks where information is aggregated, exchanged, and reconstituted into newer and cleaner insight streams. Similar to the cable TV model for content delivery, these delivery networks will be the essential funnel through which information-based offerings will find their markets and be monetized.

Few organizations will have the capital to create end-to-end content delivery networks that can go from cloud to devices. Today, Amazon, Apple, Bloomberg, Google, and Microsoft show such potential, as they own the distribution chain from cloud to device and some starter content. Telecom giants such as AT&T, Verizon, Comcast, and BT have an opportunity to also provide infrastructure, however, we haven’t seen significant movement to move beyond voice and data services. Big data could be their opportunity.

Meanwhile, content creators — the information providers and brokers — will likely seek placement and distribution in as many delivery networks as possible. Content relevancy will emerge as a strategic competency in delivering offers in ad networks based on the context by role, relationship, product ownership, location, time, sentiment, and even intent. For example, large wireless carriers can map traffic flows down to the cell tower. Using this data, carriers could work with display advertisers to optimize advertising rates for the most popular routes on football game days based on digital foot traffic.

There are many possible paths to monetize the big data revolution ahead. What’s crucial is to have an idea of which one you want to follow. Only by understanding which business model (or models) suits your organization best can you make smart decisions on how to build, partner, or acquire your way into the next wave.

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The 7 Elements of a Strong Business Model

Envisioning the many moving parts of a functioning business is the first step to success.

By Larry Alton • Apr 22, 2015

Opinions expressed by Entrepreneur contributors are their own.

Creating a business model isn't simply about completing your business plan or determining which products to pursue. It's about mapping out how you will create ongoing value for your customers.

Where will your business idea start, how should it progress, and when will you know you've been successful? How will you create value for customers? Follow these simple steps to securing a strong business model .

1. Identify your specific audience.

Targeting a wide audience won't allow your business to hone in on customers who truly need and want your product or service. Instead, when creating your business model, narrow your audience down to two or three detailed buyer personas. Outline each persona's demographics, common challenges and the solutions your company will offer. As an example, Home Depot might appeal to everyone or carry a product the average person needs, but the company's primary target market is homeowners and builders.

Related: The Science of Building Buyer Personas (Infographic)

2. Establish business processes.

Before your business can go live, you need to have an understanding of the activities required to make your business model work. Determine key business activities by first identifying the core aspect of your business's offering. Are you responsible for providing a service, shipping a product or offering consulting? In the case of Ticketbis , an online ticket exchange marketplace, key business processes include marketing and product delivery management.

3. Record key business resources.

What does your company need to carry out daily processes, find new customers and reach business goals? Document essential business resources to ensure your business model is adequately prepared to sustain the needs of your business. Common resource examples may include a website, capital, warehouses, intellectual property and customer lists.

4. Develop a strong value proposition.

How will your company stand out among the competition? Do you provide an innovative service, revolutionary product or a new twist on an old favorite? Establishing exactly what your business offers and why it's better than competitors is the beginning of a strong value proposition. Once you've got a few value propositions defined, link each one to a service or product delivery system to determine how you will remain valuable to customers over time.

Related: How to Develop and Evaluate Your Startup's Value Proposition

5. Determine key business partners.

No business can function properly (let alone reach established goals) without key partners that contribute to the business's ability to serve customers. When creating a business model, select key partners, like suppliers, strategic alliances or advertising partners. Using the previous example of Home Depot, key business partners may be lumber suppliers, parts wholesalers and logistics companies.

6. Create a demand generation strategy.

Unless you're taking a radical approach to launching your company, you'll need a strategy that builds interest in your business, generates leads and is designed to close sales. How will customers find you? More importantly, what should they do once they become aware of your brand? Developing a demand generation strategy creates a blueprint of the customer's journey while documenting the key motivators for taking action.

7. Leave room for innovation.

When launching a company and developing a business model, your business plan is based on many assumptions. After all, until you begin to welcome paying customers, you don't truly know if your business model will meet their ongoing needs. For this reason, it's important to leave room for future innovations. Don't make a critical mistake by thinking your initial plan is a static document. Instead, review it often and implement changes as needed.

Keeping these seven tips in mind will lead to the creation of a solid business plan capable of fueling your startup's success.

Related: 5 Strategies for Generating Consumer Demand

Freelance Writer & Former Entrepreneur

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What Is a SaaS Business Model and How Does It Work?

Software as a Service (SaaS) is the business model of today. According to a study done by Virayo , over 80% of businesses use some type of SaaS application.

SaaS applications run in the cloud, and they are often accessible both through a web interface, as well as through desktop and mobile apps (as needed).

For a recurring monthly fee, people have a powerful online tool at their disposal. SaaS companies benefit from the recurring revenue and can roll out new features as soon as they’re ready.

However, for a novice company that wants to enter the software realm, the SaaS business model can be somewhat difficult to understand than other archetypes. In this article, we hope to clarify what a SaaS business model is and how it works.

How Does a SaaS Company Works?

So, what is SaaS business model? SaaS is software owned, supplied, and managed remotely by one or more of its providers.

SaaS companies maintain servers, databases, and software that enables the product to be used over the internet. Users can also access and use the software from almost any device. Generally, the users pay a recurring subscription fee to have access to the software. The more popular business model for SaaS include:

Check out if your SaaS is a CRM or similar: How Introducing a CRM Helps Your Sales

Why Do Businesses Adopt the SaaS Model?

Because it works! Software installed on a device can undergo harmful interactions with other software and OS errors. In SaaS business model, users don’t have to install anything to access the product features.*

SaaS is cheaper than software sold via other billing models, which convinces users to adopt the product. Developers love SaaS because it is developed consistently and run on the company’s infrastructure. Investors love SaaS revenue because it is recurring, which leads to predictable cash flow.

The Stages of a SaaS Business

For every SaaS business model , there are three primary stages that they go through:

Benefits of the SaaS Business Model

Adopting a SaaS Business model over standard software installations is beneficial to both the product vendor and customer.

Benefits for the Customer

A business model for SaaS favors your target customers. It minimizes costs and increases product usage flexibility. The key benefits of SaaS for your target customers include:

Lower Costs : SaaS platforms are distributed on a subscription basis. That eliminates licensing fees involved in traditional software installs.

It also allows your clients to increase or decrease their expenses based on usage. Additionally, because SaaS solutions are cloud-based, infrastructure costs for customers are eliminated.

Flexibility & Scalability : The SaaS business model offers your customers greater flexibility. If you base your pricing on a usage metric, then your clients will only pay more if they’re using the product more often.

This provides your customers with the opportunity to grow their business with your software . It also eliminates the risk of paying a hefty fee in advance for a product that might not suit their needs.

Quick Benefits : Because SaaS tools are cloud-based, clients see immediate gains. In most cases, it is as easy as signing up with a name and email address to instantly access product functions.

Higher Adoption : The ability to use SaaS tools anywhere in the world has increased their adoption. If users experience immediate benefits from the software, the chances of sticking with the product are much higher.

Free Upgrades : For many companies, downtime can be costly. In most cases, it happens during product upgrades. SaaS software upgrades are generally done without experiencing user downtime or with shorter maintenance windows.

Benefits of The SaaS Business Model Vendors

The benefits of the SaaS business model for vendors include:

No Sales Friction : Most of the SaaS solutions are priced per user or per month. This price allows the end-users to calculate software costs easily. It eliminates the sales friction that can come as a result of IT budget approval.

Recurring Revenue : One of the greatest benefits of the SaaS business model is that it allows a recurring stream of revenue which helps you control churn.

Pivoting & Improvements : With SaaS, you can continuously update your product. That will help fine-tune your product so that you can increase retention and attract new customers in the process.

Easier Free Trial Support : On-premise software support can be lengthy and tedious. With SaaS, you can provide support to users immediately as well as a free 7, 14 or 30-day trials. Thereupon, the user can continue with the free trial or upgrade to a paid level when they can.

Easier to Update and Support : As a SaaS company owner, you control the system and the environment that the product is being developed in.

Easier to Update and Support: As a SaaS company owner, you have to know how to value a SaaS company, and that includes controlling the system and the environment that the product is being developed.

For example, if you build a product that needs to be installed on multiple devices, it will need to support edge cases and different OSs, etc. With a browser-related SaaS (e.g. Asana ), you control the infrastructure on which it is being used .

SaaS Sales Approaches

There are two major ways to sell SaaS: Low-touch and high-touch sales. The sales approach defines whether you sell to B2C or B2B customers.

Low-Touch SaaS Sales

SaaS is a product that can sell itself. The main sales channels are the SaaS website , email, and in many cases, a free trial optimized for onboarding from the start. In general, low-touch SaaS is sold on a monthly subscription.

Basecamp is an excellent example of a low-touch SaaS business.

High-Touch SaaS Sales

Some prospective users need further persuasion in deciding whether to use a particular product. High-touch SaaS is all about using human staff to convince your potential clients to adopt the software or continue using it.

In SaaS, most of the high-touch sales are B2B focused. The key to the success of this sales model are the sales teams. More specifically, sales development representatives (SDRs), account executives (AEs), and account managers (AMs).

Sales teams are usually strengthened by marketers that keep the lead pipeline full for the sales team to assess and close. Salesforce is a typical example of a high-touch SaaS business.

Key SaaS Metrics

Metrics are the indication for the health of any business model, not only SaaS. However, among the abundance of things that you can measure when growing your software business, some metrics are more important than others, and you need to keep a close eye on:

The churn rate points to the number of customers that left or unsubscribed within a specified period. A SaaS business model without churn does not exist. Products evolve all the time, and users leave one company for another in a flash.

The churn rate can tell you exactly how satisfied the users are. However, if it’s on a constant rise, it’s a sign that things are going downhill in your business. For SaaS, 5-7% of churn rate is the acceptable level. 

For calculating churn rate, you can use the following formula:

The # of Churned Customers (for a given period) / Total # of Customers

Customer Acquisition Cost (CAC)

Knowing how much time and money you need to invest to acquire a new user is one of the best ways to determine whether your SaaS company is profitable. To calculate it, use the following formula:

Total Investment in Sales & Marketing / # of Acquired Clients

Monthly Recurring Revenue (MRR)

MRR is the anticipated revenue that can be expected per month. Measuring MRR can help you understand the month-to-month variations in your income. To calculate it, you can use the following formula:

MRR = # of Customers X Average Revenue

Average Revenue Per Account (ARPA)

The average revenue per account (ARPA) is a metric that shows how much revenue is derived from one client, in most cases, per month, quarterly, or yearly. To calculate it, use the following formula:

Total MRR / Total # of Customers

Customer Lifetime Value (CLV)

Customer lifetime value (CLV) is the average revenue that you can get from users during the period that they’re subscribed to for the software. It can be calculated according to the following formula: 

CLV = (ARPA x Gross Margin %) / Churn Rate

Customer Retention Rate (CRR)

Customer retention is a metric that shows you the percentage of customers who have continued to pay for using your software. To calculate the retention rate for a given period, you can use the following formula:

(# of Customers that Continue to use the Software / Total # of Customers at the Start of the Time Period) x 100

WordPress SaaS Considerations

WordPress is no longer a blogging platform . As the most powerful CMS in the marketplace, today, you can practically build anything, including software-as-a-service. It allows SaaS businesses to use a cohesive platform and technology, with a higher product focus and flexibility than any other CMS.

Furthermore, WordPress provides SaaS companies with ready-made plugins that can be used as a foundation for the software. For example, on top of WordPress, we’ve built DX Sales CRM , a high-end CRM plugin:

With WordPress, customization is much smoother, and you can install various plugins and add more functionalities to your layouts. The development process is modular, and you can extend your SaaS according to the requirements.  

However, along with the benefits that WordPress provides, there ought to be a few challenges along the way when building SaaS on top of the CMS. 

Our CEO, Mario Peshev, throughout the years of developing high-scale WordPress SaaS platforms, learned about and shared some of the biggest infrastructural hurdles that any SaaS business needs to expect on his blog , namely:

Wrapping Up

The SaaS business model provides you with endless business opportunities. It’s widely accepted, and its adoption will continue to rise. Coupled with the market demand and competition, you need to pay attention to the SaaS industry dynamics and work to provide unique solutions and value to your customers.

*This depends on the SaaS product and if there are any apps provided for accessing/using the software on desktop, mobile, and in a web interface.

WordPress SaaS Development

We have built from scratch or developed components for various Software as a Service solutions built on WordPress.

Team DevriX

Blog Writing & Content Creation Our marketing team is responsible for the creation of the content on the DevriX website and social media profiles. We can provide content production & marketing services for you, too: link . Contact us to start your Inbound Marketing Retainer now.

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The SaaS business model can track many metrics that other businesses cannot track on a monthly scale, such as MRR, efficiency, and churn, among others. This opportunity allows SaaS owners to constantly develop new versions and updates, offer new programs, and work out bugs in systems to provide seamless service.

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Starbucks Chain Business Model In A Nutshell

Starbucks origin story.

In 1983, Howard was a young man walking through the streets of Milan and Verona.

As Howard Schultz would put it, he became “enamored” by people’s coffee experience in the Italian bars. 

Places where the  Barista  knew the name of each person entering it, and the coffee experience was about more than just a cup of coffee; it was about creating this sense of community.

That’s how Howard Schultz set out to bring that same experience back to the US.

At that time in 1983, Starbucks had three stores in Seattle.

However, it wasn’t serving any beverage, but only coffee to bring home.

When Howard looked at the way he experienced Italian coffee, he understood the real segment of the business that could have made Starbucks truly successful was serving coffee directly to consumers.

The objective was to replicate the Italian experience back in the US. Thus, making Starbucks – in the words of its founder – the  third place between work and home.

What’s Starbucks’ mission?


Starbucks’ mission is to provide the so-called Starbucks Experience, consisting of “superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty. “

What are the primary segments of the business?


The main Starbucks segments can be broken down in:

At the geographical level instead, Starbucks operates in four main regions:

Is Starbucks a chain or franchising? Understanding Starbucks’ business strategy


The answer is both if we look at the mix of operated vs. licensed stores.

However, in revenue generation, company-operated stores made up more than 80% of the company’s revenues in 2022.

As specified by Starbucks in its annual reports:

The mix of company-operated versus licensed stores in a given market will vary based on several factors, including our ability to access desirable local retail space, the complexity and expected ultimate size of the market for Starbucks, and our ability to leverage the support infrastructure within a geographic region.

As the company further highlighted:

Our retail objective is to be the leading retailer and brand of coffee and tea in each of our target markets by selling the finest quality coffee, tea, and related products, as well as complementary food offerings, and by providing each customer with a unique Starbucks Experience.

To understand why Starbucks chose to increase its company-owned stores substantially, we need to look at the customer experience:

The Starbucks Experience is built upon superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty

Thus, Starbucks wants to keep as much control over its customer experience by operating most of its stores.

In the case, for instance, of a business model like McDonald’s , the company has been able to control the look and feel of its franchised restaurants thanks to the fact it operates a commercial real estate business .


Indeed, McDonald’s leases and buys the land where franchised restaurants are operated, thus keeping tight control over their operational activities.

This formula worked for McDonald’s as the company built a multi-billion commercial real estate empire .

Starbucks, instead, picked the opposite route where the properties are primarily bought to operate its company’s owned stores and keep as much control over the experience through this business strategy .

Where do most of Starbucks’ revenues come from?


As of 2022, company-operated stores accounted for over 80% of total net revenues. At the same time, the rest came from licensed stores and other revenue. 

As specified in the Starbucks annual reports, “ In our licensed store operations, we leverage the expertise of our local partners and share our operating and store development experience. Licensees provide improved and at times, the only access to desirable retail space. “

It is important to remark that even though company-operated stores have higher gross margins . They also have a lower operating margin compared to licensed stores.

What are the most sold Starbucks products?


As specified in its annual reports:

Starbucks is committed to selling the finest whole bean coffees and coffee beverages. To ensure compliance with our rigorous coffee standards, we control coffee purchasing, roasting and packaging and the global distribution of coffee used in our operations. We purchase green coffee beans from multiple coffee-producing regions around the world and custom roasts them to our exacting standards for our many blends and single-origin coffees.

Regarding revenue generation, beverages represented most of the company’s net sales in 2022. Followed by food and other products.

Beverages comprise f resh-brewed coffee, hot and iced espresso beverages, Iced Coffee, Cold Brew, Nitro, Frappuccino® coffee and non-coffee blended beverages, Starbucks Refreshers® beverages, and Teavana® teas.

How does Starbucks protect itself from the sudden change in the price of raw coffee?

As specified in its annual reports Starbucks “ buys coffee using fixed-price and price-to-be-fixed purchase commitments, depending on market conditions, to secure an adequate supply of quality green coffee. “

Thus, the company leverages large orders to guarantee supply at a fixed price. And as specified, “ price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established. “

As the company further explains, “ for most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. “

How much revenue does Starbucks make?


The US still represents the most critical geographic area in terms of revenues.

Starbucks’ transition toward a heavy company-owned business model

Starting in 2015, Starbucks completed the acquisition of a good chunk of former licensed stores, then became the company’s operated stores.

At the same time, Starbucks is unloading some of its previously operated stores to the licensee in some other geographic areas. More precisely

In short, in the last 3-5 years, Starbucks has gone through a substantial business model change.

As of 2018 skewed more toward company-operated stores.

Starbucks’ business model highlights

Visual Stories Contained In The Starbucks Business Model Analysis

Starbucks Business Model


Starbucks Revenue


Starbucks Strategy


Starbucks Store Strategy


Starbucks Revenue By Product


Starbucks Mission Statement


Starbucks Competitors


Starbucks Organizational Structure


Starbucks SWOT Analysis


More Resources

What Is Critical Chain Project Management? The Critical Chain Project Management In A Nutshell

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Thumbtack’s Business Model: How to Build a Billion-Dollar Marketplace

How did Thumbtack build a billion-dollar marketplace? Here’s what you need to know about Thumbtack’s business model and how it works.

Build your online marketplace today!

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Want to know how Thumbtack succeeded in creating a successful, billion-dollar marketplace startup? 

Today, you’ll learn all about Thumbtack’s business model, growth strategies and more and how to use this to grow your own marketplace business.

Want to learn more? Read on! 

thumbtack business model

Source: Pexel

What does Thumbtack’s business model look like? 

The way Thumbtack works is that service providers offer their services on the platform (the list of services is long and they include services like cleaning and house repairs). Customers post jobs, choose from bids by service providers and contract the business that is the most suitable for their needs.

thumbtack website

Today, Thumbtack’s valuation is $1.7 billion. (However, Thumbtack has seen its revenues drop due to the COVID-19 crisis. It’s too early to say how this will affect the company in the long-term.)

And why is it valued so high? Thumbtack’s revenues have grown 125% year-over-year. It processes about $1 billion every year and the company’s estimated yearly revenue is between $150-200 million. 

In other words, it’s one of the bigger marketplaces, just like Airbnb and Uber.

Of course, this was not always the case. 

The company, founded in 2009, was launched as a marketplace for services. Thumbtack’s value proposition has been the same since day one: To provide all types of services all over the US. Initially, it didn’t attract many investors and it had to pivot several times to create a revenue model that worked. 

And what does this revenue model look like? Here’s what you need to know. 

How Thumbtack makes money

Today, Thumbtack makes money by selling leads to service providers. So, when someone opts to work with a service provider on the platform, Thumbtack will charge a fee from the service provider.

The cost per lead depends on the project size, market, and how many other available vendors there are. 

Thumbtack pricing

You can read more about Thumbtack’s pricing model here . 

Thumbtack vs TaskRabbit 

When Thumbtack was founded, there weren’t that many similar marketplaces around. However, one of its main competitors, TaskRabbit, had already opened its doors in 2008. Today, TaskRabbit has been acquired by IKEA, while Thumbtack is still an independent business.

The main difference between TaskRabbit’s and Thumbtack’s business models is that Thumbtack works with professional service providers, whereas TaskRabbit’s service providers can be people who earn a side income from their services. 

TaskRabbit is also present in fewer states and Thumbtack offers bidding for projects, which TaskRabbit doesn’t. 

Now you know what Thumbtack’s business model looks like. But how did initially start growing -- and how did it grow so fast it got a billion-dollar valuation? That's what we’ll look at next. 

How did Thumbtack grow its business? 

When Thumbtack was founded , it got started in an economy that was in a recession. That made it so much harder to find funding (as is usual for similar, San Francisco-based companies), which forced the company to quickly come up with a profitable business model.  

Different pricing models and markets

First, it tried a commission model where the vendors pay a percentage of their earnings to the platform. As this didn’t work out, the company went for a subscription model where vendors pay a certain amount for leads that they generate off of Thumbtack. This revenue model proved to be much more successful.

The other factor that helped the business get traction fast was that it focused on different “pockets” of the market that were lucrative (such as events). This meant that it could grow with scale in several different areas all at once. 

Different ways to scale

Thumbtack used a few different ways to grow and scale its business early on.

For example, it created a tool that allowed providers to post a good-looking listing to Craigslist. That way, it was able to scrape Craigslist users to start using its own services. 

Also, one of the ways Thumbtack retained its users was to upsell them to different services (for example, a user who had used a carpet cleaning service might try a moving service). 

So, now you know what it took for Thumbtack to grow. Can you do the same? Let’s have a look.

Can you copy Thumbtack’s growth strategies?

The question you might be asking yourself right now is:

“Can I use these strategies to grow my own business?” 

Every startup story has lessons to learn from. And so does Thumbtack -- you can certainly get inspired by its growth strategies.

Growing your business just like Thumbtack probably isn’t the best idea.

The company was founded in 2009 and marketplace businesses were not a huge deal back then. There were few competitors doing the exact same thing as Thumbtack. 

In other words, Thumbtack had completely different challenges to solve when it started then you probably have now.

Here’s how to grow YOUR marketplace in the conditions that are prevalent today.

Find a niche!

First, Thumbtack didn’t really have a niche when it launched. It offered all types of services to everyone.

We always recommend you to choose a niche ( here and here ). 

The reason is simple. With a niche, you stand out. The people you target understand why they should use your platform instead of another platform.

For example, if your platform connects pet sitters with pet owners, it will be much easier to get users to sign up than if your marketplace offers all kinds of services to everyone. 

To get inspired, take a look at our customers Clik Trip , a curated photography marketplace connecting customers to recommended local photographers and high-quality photo experiences around the world, and Ellect , a marketplace that connects microenterprises with corporate and government procurement buyers. 

Market your marketplace scalably

Thumbtack got early traction by scraping Craigslist. While that might have worked in 2009, it was already then against Craigslist’s terms and conditions. And today, it would be hard to pull off something similar.

Instead, use proven strategies to grow your marketplace. Yes, finding strategies that help you scale while being easy to execute is never easy. But to get started, you can engage with people in social media groups (Facebook, Reddit, and other online forums) and use this to grow a loyal audience. And once you have your first users, the list of things you can do to grow your marketplace is long:

Read our full marketing guide here. 

Use a commission pricing model

Depending a bit on the type of marketplace you start, the most profitable pricing model is probably going to be a commission pricing model. Thumbtack, on the other hand, opted for a lead-based pricing model because commissions didn’t work for it. 

If you’re unsure, try a few pricing models and see which one gets you the most users and profits. Read more about pricing here. 

Get started faster

You have one clear advantage over Thumbtack: 

Many of the tools that make it extremely easy to start a marketplace didn’t exist in 2009.

Today it’s easier than ever to create, market, and grow your marketplace.

Take Kreezalid, our own business. 

We offer a no-code marketplace website SaaS that lets you set up your own marketplace website with a few clicks. 

By tapping into these types of tools, you can start your own marketplace right away. 

Want to learn more?

There you have it. Now you know what Thumbtack’s business model looks like. You also know how the company grew… And if you should use its growth strategies. The short answer: Probably not, even if there are always things to learn from every growth story.

Are you looking to build your marketplace business? 

Then, try Kreezalid for 14 days for free. (No credit card required.)

Charlène Guicheron

After 5 years helping companies to develop their online marketplace, I saw success stories as well as failures. Today I share my experience and my clients feedbacks through useful resources that will allow you to focus on what really matters for the success of your online marketplace. Because believe me, the secret isn't in the code ...

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Related topics, what is a lean business model.

what does a business model look like

February 06, 2018

Running a lean business has been very challenging for many entrepreneurs and business owners. But what does a lean business model look like in practice?

The days of spending months strategizing the best path forward are over for most businesses. Imagine proudly presenting a 100-page business plan to your stakeholders only to realize that half of your material was already outdated and your customers had moved on? Considering the current pace of change in today's marketplace, a lean business model has become more and more attractive.

Traditionally, being “lean" has meant doing more with less, but the concept has expanded.

Today, a lean business model is a strategy that streamlines processes to rapidly address customer requirements. It involves fast cycles of surveying customers about their needs , developing and prototyping new products and services accordingly and adapting to shifts in demand.

A Lean Business Model Focuses on What Works

Many business owners would like to embrace a lean business model, but aren't sure how to do it. Having an agile mindset is a key component.

Lloyed Lobo's company  Boast Capital  helps North American businesses recover research and development costs from the government, and automates the R&D tax claim process.

—Deep Chakraborty, CEO, Enact Systems

“To be lean, you need to make it a part of your company's DNA to prioritize ideas based on ROI as well as continuously test your assumptions and make adjustments based on the results," Lobo says.

“For example, when we started out, we used several marketing channels," he continues, "but eventually zeroed in on direct sales and in-house events based on our hypothesis of the potential ROI. Hosting large events has not only allowed us to generate new clients, it has also generated revenue via ticket sales and sponsors and helped us barter for business services with several vendors."

A lean business model often rewards experimentation and can be more cost-effective because they avoid lengthy implementations of unproven strategies and investments.

“Although the road to success with a lean business model might take longer, it beats spending on growth frivolously while you lose time and money planning. As the saying goes, 'nail it before you scale it,'" says Lobo.

A Lean Business Model Puts Value at the Center

Another advantage of the lean business model is its emphasis on delivering customer value.

Deep Chakraborty is CEO of  Enact Systems , a San Ramon, California-based company that hosts a software platform for solar project management. Due to complex sales and delivery processes in the solar industry, a lean business model has been critical in effectively addressing operating challenges that could diminish value.

“A typical solar transaction requires multiple stakeholders to dance together: customer, installer, financier and the local utility, with multiple steps, dozens of information exchanges and lots of documents," says Chakraborty. “A lean business model lets us develop a seamless flow for these interactions so we don't waste time and the customer doesn't either."

Technology is often at the heart of a lean business model, facilitating complicated processes and automating more tedious, manual ones;  measuring what's working ; and adopting new and more sophisticated applications as they become available.

But Chakraborty is quick to point out that software alone can't drive a lean approach.

“The secret to lean business model success involves business professionals leveraging the right software in daily business processes, perfecting business process flows, creating market pull and scaling to  grow the business ."

A lean business model can help streamline processes so businesses can address market changes quickly. Incorporating such a model into your business may help you start addressing your customer's needs in real time.

Read more articles on  organizational productivity .

Photo: Getty Images

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what does a business model look like

What does a good operating model look like?

We explore how to define and measure the best operating model for your business

This is a common question, or should be if you’re in the business of designing operating models. And we are. At Sionic we spend a lot of time with clients designing operating models for their businesses.

In truth there are many answers to this question but before I dive in I should point out that the question is not ‘What does a good operating model document or diagram look like’? That’s also a valid question and one I’ve addressed before (and will probably do so again). Fundamentally the answer to that though is one of communication, clarity and completeness of information.

Anyway back to the question of what makes an operating model ‘good’?

This often depends on the objectives of the business. Does the business want to be able to extend or flex their model in response to a changing product strategy or client strategy? Does the business need to reduce overall operating costs? Or do they seek to operate in different markets (location or jurisdictions). Occasionally they do just want to understand what they’re doing today – maybe they’ve been through M&A activity, but that’s back to the documentation question, understanding what they do now before they change the model.

I’ve listed below several key measures that define a good operating model.

Coverage of essential capabilities

Fundamentally an operating model should enable the business to run.  I appreciate that this is a relatively obvious and vague statement but if the operating model does not support the business then it’s not doing its job. Consider an investment management business operating model that does not include the capability to make investments, or more specifically to make investments in a specific asset class. The operating model must cover all essential functions for the business it pertains to.

Knowing what those capabilities are is key. At Sionic we carefully maintain a number of reference models depending on a number of key factors, cascading from the type of business e.g. investment manager, fund manager, pension scheme, wealth manager etc but also based on asset class coverage e.g. private market investments; investment strategy, client type and jurisdiction to name but a few.

Capability alignment

A good operating model carefully matches the capabilities of the teams, companies or business groups to the functions of the business. It may be easy to consolidate functions within a single team and tempting to do so because the functions may sound the same. However understanding the true nature of the functions, the systems employed, the processes involved is key to ensuring that the model is efficient.

Similarly deploying the right system, technology is equally important, especially in a service industry such as the ones Sionic focusses on.

Operational efficiency

This is effectively keeping operating costs to a minimum, whilst also ensuring that the model is not overly sensitive to expected changes in volume, up or down.  This is a much more difficult measure to determine. An efficient model clearly keeps operating costs low – automating where necessary, removing redundant processes, centralising or capabilities where appropriate.


Providing scalability in an operating model is very closely linked to operational efficiency. It is ensuring headroom in the model as well as enabling the model to add further capacity without changing it’s structure. Technology often plays a part in the solution here and a good model deploys it appropriately without over complicating the architecture.


A strategic-level operating model tends to ‘live’ for a long time; or least the basic structure does. Changing technology or responsibilities can be expensive. However the drivers of an operating model do not tend to stand still; businesses launch new products; they use new suppliers; adjust to client demands, or branch out into new markets for example.

Consequently an operating model must be flexible but building in flexibility that will never be used can be costly. Over-engineering an operating model is always a possibility. The art is to determine the amount of change up front that the target business anticipates and precisely where that change might be. Using this information flexibility can be built into the operating model to accommodate the future change.

For example flexibility might be ensuring that a system is able to cope with particular capability in the future that is not required right now – that’s a relatively simple solution. Considering investing in asset classes again, it is ensuring that a system can manage future asset classes that are not managed today.

More difficult is providing an ‘extension point’ in the operating model; providing extensibility without compromising the overall model itself. A good method involves separating functions ‘horizontally’ so that components can be delegated to individual specialist groups or systems. In the Investments industry this might be acknowledging that financial asset classes are managed differently but must be combined elsewhere in the model to provide a consolidated view. However, there is a trade-off here – introducing a boundary between functions (and associated teams or systems) that may not be necessary and that may compromise efficiency.

In many cases the priority of each of the above measures is dependent on the situation and strategy of the business.

This is a short essay on a complex topic; the headline measures by which we critique our own operating model designs. There are many more drivers and objectives that our clients expect us to cover – and we do.  If you would like to find out more, please contact us .

About the author

Jonathan hammond.

I specialise in asset management operating models; application and data strategies; and enterprise architectures.

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Aragon Research

What Is A Business Capability Model?

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By  Betsy Burton

After last week’s blog ( How Do You Model Business Transformation? ), I received several questions about a business capability model, and what one really looks like.

The reality is, I could do a whole years’ worth of notes, blogs, and presentations just on this topic. But let me try to give you a bit of an overview in this blog. 

Business Capability

I first heard about a business capability model when I was working with a number of clients several years ago. When I started doing research on the topic, I started finding a couple of definitions that I thought were interesting.

The strongest that I’ve seen so far from an external source is from a professor at Boston University:

I have since tried to clarify that definition a bit on my own:

The real nut of these definitions is that business capability modeling is a way of modeling the future state of your business and your business strategy in a way that’s abstracted from all the details of how you operate your business. 

The benefit of business capability modeling is that you can explore your future state in a way that is unencumbered by political issues related to domains, organizational structure, processes, or functions.

What Does a Business Capability Model Look Like?

I’ve created this semi fictitious business capability model to illustrate what a business capability model could look like. In this case I’m using a very large regional health care provider organization as my example. 

In this case study example, the organization’s business strategy is to increase quality of care and decrease costs by promoting hyper-local preventative care, dynamic incident and research scrums, end-to-end patient care and regionalized partners.

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The key is that the business capability model must be driven by the business strategy and must reflect the future-state capabilities needed to support that strategy. 

How to Use Business Capability Model to Guide Business Transformation

By themselves, business capability modeling can be interesting to strategic planners and business architects, and (honestly) probably few others.

However, business capability modeling can be very interesting if used to address the specific questions of senior executives, and business and IT leaders. 

Say for example, your senior executive would like to understand where your business needs to make investments.

You could use a business capability model to illustrate what future-state capabilities are commodity, differentiated or innovative. 

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Then you can start to have some interesting discussions.

Do we really need to invest in modernizing or transforming applications that are supporting commodity capabilities in the future? Probably not.

We do need to invest in innovative solutions and business models that enable innovative capabilities in the future. 

Bottom Line 

This is honestly a quick overview of business capability modeling, intended to give you an idea of the potential value and impact of this technique.

If you are interested in this topic, please let us know by dropping a note to [email protected] . If there is interest, we are happy to write, blog and present more on this topic. 

The key about business capability modeling is that it is an organization-, domain-, and function-neutral way for exploring, understanding and communicating about your future-state business with the goal of informing investment decisions.

I personally get excited about it because it is an opportunity for executives, leaders and architects to think creatively about their potential future without the political infighting that can occur. 

P.S. If you ever have questions about this or need a business capability model reviewed, please feel free to schedule an inquiry with me:

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This blog is a part of the Business Transformation blog series by Aragon Research’s  VP of Research, Betsy Burton .

Missed the previous installments? Catch up here:

Blog 1: Betsy Burton Brings You a New Blog Series on Business Transformation

Blog 2: what are the benefits of supporting business architecture, blog 3: how do business architects gain and retain management support, blog 4: how do we find and recruit great business architects, blog 5: is a charter necessary to start a business architecture discipline, blog 6: product managers can make great business architects, blog 7:  4 necessary steps to successfully start a business transformation effort, blog 8:  5 best practices: developing an executive business case presentation for business transformation, blog 9: how do you model business transformation, stay tuned we publish a new blog every week., about paula quiroz, have a comment on this cancel reply.

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HR strategies and guidance for 2021

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What does a great HR Business Partner look like?

The HR business partner role has been around since the mid 90s, but a lot has changed since then. How does truly strategic business partnering work in organisations today? And what impact can be made when we get this role right?

HR business partnering is more than a role – it’s an attitude, an ambition and a driving force to raise the level at which HR operates. It transforms how HR interacts with stakeholders, which leads to transforming what HR can deliver, and how they’re regarded.

If you want to ensure that HR outcomes are driven by business needs, then a robust partnership between HR and the business is crucial. But how do you ensure that the HR business partner responds effectively to business needs? How can you achieve a higher level of strategic impact?

Expecting more from the HR professional in the role is unfair – and won’t deliver – if the conditions are not created for them to succeed.

HR business partners must be spearheaded by the C-Suite

A good HR business partner can be a powerful conduit to understanding business reality and deploying HR’s resources effectively. But only if there is proactive leadership from the Chief Human Resources Officer (CHRO).

Business partnering has to be led from the top. What is the business rationale? How will it work as a strategic principle as well as an operational relationship?

Let’s start with the big picture, the why , and then we’ll come back to the operational implications and the daily life of the HR business partner. 

In what way will the introduction of the HR business partner role – for it has to involve more than a different job title – contribute towards strategic goals?

All senior leaders need to be on board with the why. “It has to be more than the CHRO saying ‘I want this model’ – there has to be a business rationale”, says Asad Husain, 4 x CHRO in leading global organisations. “The CHRO needs to have fully imagined how it will play out and work, how it will be different and what their role will be – how things will be different.”

HR business partnering is one element in a strategic rethink for HR

As always, context is key. What else is changing? Is this part of an organisational transformation, where the business rationale is clear? To what extent are the HR systems and processes geared up to support a more client-driven way of working? Expecting more from the HR professional in the role is unfair – and won’t deliver – if the conditions are not created for them to succeed.

That comes down to the relationship between the CHRO and CEO. This plays out at every level, right down to the HR business partner. They won’t be able to deliver unless they are supported by leadership across the organisation. “In this,” says Asad Husain, “the size of the company doesn’t matter.”

How well equipped is your existing HR talent to fundamentally shift their stakeholder relationships?

Let’s look now at the individual HR business partner and how they shift the relationship so that they are able to add value at a higher level. Moving towards business partnering is achieved conversation by conversation – explaining and advocating the benefits of deploying the HR business partner’s expertise more strategically. 

If we assume that the strategic rationale is clear and supported, then the HR business partner still needs to explain to their stakeholders what this responsibility means in practice. Often the individual moving into this role can no longer take on as much from their line manager, who has to be more self-sufficient in some areas to leave time and space to engage with the business partner more strategically in others.

Where this isn’t handled well, or where trust isn’t in place, the line manager can feel disappointed and frustrated that they can no longer ‘dump’ issues on the HR professional. They may even take this issue to their own boss. ‘HR are being unhelpful’, is a complaint I’ve heard made. The way the line manager’s boss deals with this is pivotal. Do they say ‘yes, I understand why the HR business partner is saying that, let me explain the rationale …’ or do they say ‘that’s not right, I’ll sort it,’ and head off to complain to HR at their level.

Performance management quality is the acid test for HR business partners

To see how this plays out, let’s look at a typical scenario faced by the HR business partner. The line manager – we’ll call them ‘Jan’ – has a performance issue in their team. For the busy HR business partner as well as the stressed line manager, the most time-effective solution in the short term might be to ‘sort this out for me’ as requested by Jan.

It’s at this point that the HR business partner makes a critical decision. This may take more of their time in the short term but will deliver more in the long term. Will they take the time right now to explain how they can add more value if they handle this differently? If they do this successfully, they can coach the line manager and achieve a better long-term solution.

A great HR business partner shows a genuine curiosity and appetite for getting under the skin of what drives business success.

The HR business partner and line manager relationship

The change in the way the HR business partner and line manager work together has to be explained within the business context – the benefits that it will deliver.

The Business Partnering Matrix, below, clarifies how the HR business partner can move the conversation forwards. All four modes have value at the appropriate time, but it’s important for the HR business partner to ask themself two key questions about where the conversation is going:

These two factors will build outcomes that deliver greater value, alongside more trusting and robust relationships. 

HR Business Partner Matrix

What does a great HR business partner look like?

Let’s go back to Jan and the performance issue. A business-savvy HR business partner will use experience and data to provide a deeper analysis of the impact of performance issues. For example, they might say: ‘Jan, I reckon that you’re having to spend a day a week dealing with team members who aren’t meeting the required standards.’ That will get Jan’s attention to the broader issue and the need to improve their own skills.

The HR business partner can take this logic to Jan’s boss, and point out ‘You’ve got 10 Jan’s struggling to get the performance they need from their teams. When we add up all that time, it’s a significant waste of resource – and big numbers get senior leaders’ attention. We could spend that on training them and increase productivity as well as reducing attrition.’

Leading business partnering from the top is the best route to ensuring that HR deliver what the business needs.

What are the results of great HR business partnering?

The rewards come when the operational outcomes turn the strategic vision into reality.

This example applies at every level of the organisation, and across every function, whether you’re focused on productivity, performance, wellbeing , engagement or customer experience. It’s the small things that add up to the big numbers. 

The maturity of leaders and how they view their responsibility in leading and managing performance is another important element. “The CHRO has to lead the entire company,” says Husain. “You have the reach and the breadth of exposure and the power to ensure that leaders follow the process that was agreed by the business.” 

HR business partners require strategic support to deliver strategic value

Too often, as I hear from many HR business partners in our workshops, senior leaders expect the HR business partner to achieve some kind of magical transformation on their own. Good HR people, whatever their role title, will always seek to understand the business, raise the level of the conversation, and coach and challenge the line manager to manage their people well.

The business partner has to use examples in the moment to explain the rationale behind the bigger picture. The performance issue that’s happening right now, for example, is an opportunity to explain how HR can add more value if they work on the cause rather than the repeated effect.

Achieving true HR business partnering takes work

Whatever the HR business partner is facing at the front line with the line manager, and how well they can deliver the transformation in how HR relates to the business, depends on the level of understanding and commitment that exists at the most senior level of the organisation. 

The true power to make it work comes from strategic business alignment – a clearly articulated business case that can be shared at every level of the organisation.

Enable HR’s new Business Partnering programmes recognise the new demands of the role. Please register your interest .

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