What are business models?
A business model is a framework for how a company will create value. Ultimately, it distills 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.
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 in one place, setting the direction for success.
Business model vs. business plan
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:
High-level overview of the core essence of your product strategy, including what is being built and why
Definition of your top-level goals and how they will be measured.
Customer targets and challenges
Description of the different types of target customer and their pain points
How your product will solve those pain points
Key characteristics that differentiate your product or service
A view into what your solution will cost and how it will be sold
External explanation of your product that communicates key points of value to customers
Channels you will use to reach and sell to customers, such as social media
Costs required to make your solution successful
Identified ways your business will grow
Business model canvas and template
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.
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.
How to validate your business model
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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