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

Last updated: September 2023

Business models distill the potential of a business down to its essence. Companies across every industry and at all stages of maturity need business models. Some rely on lengthy processes to build complicated models, while others move quickly to articulate the basics and take action. Either way, having the discipline to work through this planning tool forces internal alignment.

For established enterprises, a business model is often a living document that is reviewed and adapted over the years. For companies launching products and services or entering new markets, a business model helps ensure that decisions are tied back to the overall business strategy. And for early-stage startups, a simple one-page business model enables founders to explore the mechanics of a business and how you anticipate it will be successful.

Defining and documenting a business model is an essential exercise. Whether you are starting a new venture, expanding into a new market, or shifting your go-to-market strategy, you can use a business model to capture fundamental assumptions about the opportunity ahead and tactics to addressing challenges.

Unfortunately, many companies fail to integrate their business model into all aspects of the organization — from recruiting talent to motivating employees. Part of the issue is accessibility. That is why forward-thinking companies choose tools that make it possible to quickly build and share your business model. The Aha! business model canvas, for example, gives you a collaborative space to explore concepts and connect your model to everyday work.

Build a business model in Aha! Notebooks. Sign up for a free trial.

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You can access the business model template shown above using Aha! Notebooks. You can also try a similar template that is built into the product strategy section of Aha! Roadmaps. Or you can download these free Excel and PowerPoint business model templates.

This guide covers the basics of business models, from core concepts to best practices. Jump ahead to any section:


What is the definition of a business model?

A business model defines how a company will create, deliver, and capture value.

A business model answers questions that are crucial for strategic decision-making and business operations. Creating a business model for your startup or product means identifying the problem you are going to solve, the market that you will serve, the level of investment required, what products you will offer, and how you will generate revenue. Pricing and costs are the two levers that affect profitability within a given business model.

A business model is part of your overall business strategy. Some business models extend beyond economic context and include value exchange in social or cultural terms — such as the intangible impact the company will have on a community or industry. The process of constructing and changing a business model is often referred to as “business model innovation.”

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Business model components

There are three main areas of focus in a business model: value proposition, value delivery, and value capture. The proposition outlines who your customers are and what you will offer. The delivery details how you will organize the business to deliver on the proposition. And the capture is a hypothesis for how the proposition and delivery will align to return value back to the business.

The components of a business model include everything the organization needs to document and internalize so that the team can implement all three value focuses. This includes the market in which you operate, organizational strengths and challenges, essential elements of your product or products, and how you will generate revenue.

Below are some components to include when you create a business model:

  • Vision and mission: Overview of what you want to achieve and how you will do it.

  • Objectives: High-level goals that will support your vision and mission, along with how you will measure success.

  • Customer targets and challenges: Description of target customers (written as archetypes or personas) and their pain points.

  • Solution: How your offering will solve customer pain points.

  • Differentiators: Characteristics that differentiate your product or service.

  • Pricing: What your solution will cost and how it will be sold.

  • Positioning and messaging: How you will communicate the value of your offering to customers.

  • Go-to-market: Proposed approach for launching new offerings and services.

  • Investment: Resources required to introduce your offering.

  • Growth opportunity: Ways that you will grow the business over time.

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Business model vs. business plan

Business models and business plans are both elements of your overall business strategy. But there are key differences between a business model and a business plan.

Business model

A business model captures your hypothesis for how your business will generate revenue and reach profitability — charging a price for an offering you create at a sustainable cost.

A business model will include a brief overview of what you offer and to whom.

Business plan

A business plan drops down one level to show how you will implement the business model.

It includes specifics such as operational practices, experience and structure of the management team, milestones to be reached on a set timeline, and comprehensive financial projections.

A business model is seen as foundational and will not usually be reworked in reaction to shorter-term shifts — whereas a business plan is more likely to be updated based on changes in the economy or market.

Related: Business plan templates


What is the benefit of building a business model?

Innovation is about more than the products or technologies that you build. The way that you operate your business is a critical factor in how you stand apart in a crowded marketplace. The benefit of building a business model is that you can use the exercise to expose and exploit what makes your company unique — why choosing your offering is better for customers than any alternatives and how you will grow the business over time.

Many people associate business models with lengthy documents that describe a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast. But business models do not need to be a long treatise.

A one-pager is just as effective for distilling and communicating the most important elements of your business strategy. The concise format is useful for sharing with broader teams so that everyone understands the high-level approach. Done right, a business model can become a touchstone for the team by outlining core differentiators to promote and defend in the market.

Related: A more comprehensive business model builder



What are the different types of business models?

There are many different types of business models. Below are some of the most common business models with example companies for reference (take note of the companies that appear in several categories):

Type

Description

Advertising

Displays advertisements from other companies to a specific audience.

  • Advertising business model examples: LinkedIn and YouTube

Affiliate

Pays a small commission to others to promote goods.

  • Affiliate business model examples: Amazon, ClickBank, Share-a-Sale

Bundling

Sells multiple products to a single customer for a fixed price.

  • Bundling business model examples: AT&T, Allstate, Comcast

Fee-for-service

Sells labor (intellectual or physical) for a set price (hourly or by project).

  • Fee-for-service business model examples: McKinsey & Company, MedExpress, Walmart

Franchise

Builds on existing successful business and receives a percentage of earnings from franchises who invest in, operate, and promote new locations.

  • Franchise business model examples: Ace Hardware Stores, McDonald’s, The UPS Store

Freemium

Provides a limited free product with a more advanced option that users can pay to access.

  • Freemium business model examples: LinkedIn, Slack, Zoom

Manufacturer

Sources raw materials to produce finished goods that are sold to retailers or directly to customers.

  • Manufacturing business model examples: Apple, IKEA, Mercedes-Benz

Pay-as-you-go

Charges customers based on actual usage of a product.

  • Pay-as-you-go business model examples: Apple, Amazon Web Services, Mint Mobile

Retailer

Procures and sells products manufactured by others — the last step of a supply chain.

  • Retailer business model examples: Aldi, Amazon.com, Walmart

Subscription

Offers a product that requires ongoing payment for a fixed time period.

  • Subscription business model examples: Apple, Amazon Prime, Netflix

Marketplace

Hosts a platform for other companies to do business in exchange for compensation

  • Marketplace business model examples: Apple, Ebay, Etsy

Did you keep track of the companies that appeared in several of the business model examples? Good. You now have a grasp of how complex enterprises with vast portfolios of products and services often employ many business models within the same organization.

Consider a company like Apple, which manufactures and sells hardware products as well as offering cloud-storage, streaming subscriptions, and a marketplace for other applications. Amazon, whose offerings range from retail (with the acquisition of Whole Foods) to marketplace (Amazon.com) to subscription services (Amazon Prime and Amazon Music) to affiliate, also features in different categories. Each division or vertical will have a distinct business model that reflects the nuances of how it operates while also supporting the corporate business model.

Related: The product manager vs. the portfolio product manager

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Pros and cons of different business models

Some types of business models work better for certain industries than others. For example, software-as-a-service (SaaS) companies often rely on freemium business models. This makes it easy for potential users to experience the value of the product and incentivizes paid conversions via access to additional features.

Many social media platforms make money through advertising. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers and increases revenue for the business.


Type

Pro

Con

Advertising business model

Simple and transactional

Customers expect return on investment

Affiliate business model

Low barrier to entry for customers

Lack of control over branding

Bundling business model

Sell more products at once

Reliance on discounting

Fee-for-service business model

Simple billing

Requires pipeline of new leads

Franchise business model

Low initial cost

Difficult to maintain quality

Freemium business model

Rapid user growth

Path to profit is uncertain

Manufacturer business model

Control and innovation opportunities

High capital investment

Pay-as-you-go business model

Low barrier of entry for customers

Challenges with customer retention

Retailer business model

More profit margin

High competition

Subscription business model

Continual revenue stream

High customer churn


How do you analyze a competitor’s business model?

Business analysts and investors will often evaluate a company’s business model as part of due diligence for funding or market research. You can apply the same tactics to analyze a competitor’s business model — with a few caveats.

Public companies are subject to reporting requirements. This means that the business must regularly disclose financial and performance data to the public — these disclosures occur quarterly and annually. The data includes everything from gross revenue, operating costs and losses, cash flow and reserves, and leadership discussions of business results. Designed to protect and inform investors, these reports can provide you with the information you need to understand the basics of the company’s business model and how well it is performing against the model.

Private companies are not required to reveal business data publicly. Investors or partners may be privy to certain aspects of the company’s performance, but it can be difficult to understand exactly what is happening from the outside. Some analysts or business websites will attempt to “size” a business or market by looking at a variety of factors — including the number of employees, volume of search terms related to the core offering, estimated customer base, pricing structure, partnerships, advertising spend, and media coverage.

Once you have identified relevant alternatives to your offering and gathered all of the information that you can find, a good way to analyze a competitor’s business model is to conduct a competitive analysis.

Related: Competitor analysis templates

You do not want to spend too much time thinking about other companies when you could be focused on your own. A simple SWOT analysis is a helpful way to map out strengths, weaknesses, opportunities, and threats that were revealed during your research.

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Business model templates

Below are three types of business model example layouts you can use to succinctly and objectively assess what is possible and what challenges could arise for your business.

Aha! Notebooks business model template

Articulate the foundation of your product or service in a flexible whiteboard-style format with the Aha! Notebooks business model template.

The focus is on capturing key elements like why the solution is worth buying (messaging), pain points of the buyers (customer challenges), and ways you will grow the business (growth opportunities).

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Aha! Roadmaps business model canvas

The Aha! Roadmaps business model is the most complete template in this guide — based on our team's decades of experience building breakthrough products and software companies.

You can drag and drop each component within a custom layout. And once you have completed your business model, it is easy to share with your team via a live webpage or exported PDF. This business model builder is included with the free 30-day trial of Aha! Roadmaps.

Business model in Aha!

Aha! Roadmaps lean canvas

Similar to the business model canvas, this model in Aha! Roadmaps takes a problem-focused approach to create an actionable business plan. It is most commonly used by startups and entrepreneurs to document business assumptions. The focus is on quickly creating a concise and effective single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money.

Lean canvas example in Aha!


How to build a business model in 10 steps

Crafting a business model is part of establishing a meaningful business strategy. But a business model is essentially a hypothesis — you need to test yours to prove that it will actually provide value. Many startup founders especially underestimate the costs and timeline for reaching profitability.

1. Identify your target market Who will benefit from your offering? What characteristics do prospective customers share?

2. Define the problem you will solve What is the problem that you are solving? What are the pain points of your potential customers?

3. Detail your unique selling proposition (USP) What will you build and how will you support it?

4. Create a pricing strategy How much will you charge for your offering? What factors will go into choosing your price point?

5. Develop a marketing approach How will you market your product and reach target customers? What channels will you choose for go-to-market?

6. Establish operational practices How will you streamline processes and procedures to reduce overhead and fixed costs?

7. Capture path to profitability How will your business generate revenue? What level of investment will be required and what fixed costs exist?

8. Anticipate challenges Who are your competitors? What opportunities and threats exist for your business?

9. Validate your business model Was your hypothesis correct? Does your business model solve a problem the way you thought it would?

10. Update to reflect learnings What can you do differently in the future to ensure greater success?

Your business model will ultimately guide your organization and influence your product roadmap. Give it the deep thought it deserves — questioning your core assumptions about how you will generate value and how your team will work towards achieving shared goals.

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Additional strategy resources

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