What is a business model? (Plus, how to define yours)
Last updated: March 2024
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 for addressing challenges.
Forward-thinking companies integrate their business model into all aspects of the organization — from recruiting talent to motivating employees. That is why many choose tools that make it possible to quickly build and share a business model. In Aha! software, for example, there are multiple ways to build a model and connect it to everyday work. One of the quickest ways is by using our whiteboard template — featured below.
Get this business model whiteboard template — with a free trial.
You can also try a similar template that is built into the product strategy section of Aha! Roadmaps. Or you can download free Excel and PowerPoint business model templates in this guide.
This article 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.
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Affiliate | Pays a small commission to others to promote goods.
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Bundling | Sells multiple products to a single customer for a fixed price.
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Fee-for-service | Sells labor (intellectual or physical) for a set price (hourly or by project).
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Franchise | Builds on existing successful business and receives a percentage of earnings from franchises who invest in, operate, and promote new locations.
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Freemium | Provides a limited free product with a more advanced option that users can pay to access.
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Manufacturer | Sources raw materials to produce finished goods that are sold to retailers or directly to customers.
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Pay-as-you-go | Charges customers based on actual usage of a product.
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Retailer | Procures and sells products manufactured by others — the last step of a supply chain.
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Subscription | Offers a product that requires ongoing payment for a fixed time period.
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Marketplace | Hosts a platform for other companies to do business in exchange for compensation
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Did you keep track of the companies that appeared in several of the business model examples? Good. You now have a grasp of how complex enterprises with vast portfolios of products and services often employ many business models within the same organization.
Consider a company like Apple, which manufactures and sells hardware products as well as offering cloud-storage, streaming subscriptions, and a marketplace for other applications. Amazon, whose offerings range from retail (with the acquisition of Whole Foods) to marketplace (Amazon.com) to subscription services (Amazon Prime and Amazon Music) to affiliate, also features in different categories. Each division or vertical will have a distinct business model that reflects the nuances of how it operates while also supporting the corporate business model.
Related: The product manager vs. the portfolio product manager
Pros and cons of different business models
Some types of business models work better for certain industries than others. For example, software-as-a-service (SaaS) companies often rely on freemium business models. This makes it easy for potential users to experience the value of the product and incentivizes paid conversions via access to additional features.
Many social media platforms make money through advertising. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers and increases revenue for the business.
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.
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 layouts available in Aha! software that you can use to succinctly assess what is possible and what challenges could arise for your business.
Whiteboard business model template
Articulate the foundation of your product or service in a whiteboard-style format. 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).
Business model canvas
This business model canvas included in Aha! Roadmaps uses drag-and-drop components within a flexible layout. You can rename or hide components as needed. And you can create as many strategic models in your workspace as you would like.
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Lean canvas
Similar to the business model canvas, the lean canvas 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, single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money.
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.
