An Overview of Business Models 

A good business model is crucial to every successful organisation, whether it is a new venture or an established player. The business model spells out how customers will be served and how the business can make money.  

A winning business model describes how a company creates and delivers value to customers, as well as how it can capture that value. It encompasses the flow of cost, revenue and profit.  

Elements of a business model 

A sound business model answers fundamental questions such as:  

• Who is the customer and what do they value? 

• How is money made in this business?  

• How can the business deliver value to customers at an appropriate cost?  

Essential elements of a business model include:

• Value proposition 

  • Customers: the customers and their needs that a company intends to serve 

  • Product and service: the product/service offering with which a company wants to address customer needs 

  • Geography: the countries and areas where a business is carried out 

• Revenue model 

  • Pricing logic: the general pricing logic applicable given clients, products and value creation 

  • Customer interaction: the base and manner of the interaction with the client 

  • Channels: the distribution channels through which the customer interaction is facilitated such as local stores or online services 

• Cost model 

  • Assets and capabilities: the core assets and capabilities required for value creation 

  • Core activities: the essential activities and processes that link assets in value creation 

  • Partner network: the extent of the partner network that gives rise to collaboration and fosters value creation 

Business model design 

The success of a business depends on how the business model is designed and how it is implemented. Good business model design requires a deep knowledge of customer needs. All winning business models need an understanding of existing business models in the market. Most new model designs are hybrids of others.  

Business models are seldom successful without fine-tuning. Business modelling is similar to the scientific method – you start with a hypothesis, which you test in action and then revise. A company’s success depends on how the business model creates a product or service that differentiates itself from its competitors.   

A planning tool  

When used correctly, a business model forces companies to think systematically about how they operate. It focuses attention on how all the elements of the system fit into a working whole. However, business models do not consider one critical dimension of performance – competition. This is dealt with via strategy.  

Many fledgling companies rush to market with identical business models. They do not have strategies to differentiate themselves in terms of which customers and markets to serve, what products and services to offer, and what kind of value to create. When you have many companies offering the same products and services to the same customers, none of them will thrive.  

Possible business models 

Some successful companies today have created new business models that are both compelling and profitable. A useful way to understand different business models is to study current ones. A company may adapt one of these basic forms to come up with a new business model that suits their needs.  

Examples of existing models include: 

• Bundling: Packaging related goods and services together (e.g. fast-food value meals) 

• Crowdsourcing: Getting users to contribute content for free in exchange for access to other people’s content (e.g. Wikipedia; YouTube) 

• Disintermediation: Selling direct, sidestepping traditional intermediaries (e.g. Dell; WebMD) 

• Freemium: To offer basic services for free and charge for premium service (e.g. LinkedIn) 

• Leasing: To rent high-margin, high-priced products (e.g. cars) 

• Low-touch: Lowering prices by minimising service (e.g. IKEA) 

• Pay-as-you-go: To charge for actual, metered usage (e.g. electric companies) 

• Razor/blades: Offering a high-margin companion product (the razor) at below cost to increase volume sales of low-margin item (blades) (e.g. printers and ink) 

• Subscription: To charge a subscription fee for a service (e.g. Netflix) 

References 

Magretta, Joan. “Why Business Models Matter”. In HBR’s 10 Must Reads on Business Model Innovation, 1–13. Boston, Massachusetts: Harvard Business Review Press, 2019. 

Ovans, Andrea. (2015, January 23). “What is a Business Model?” https://hbr.org/2015/01/what-is-a-business-model 

Teece, David J. (2018). “Business Models and Dynamic Capabilities.” Long Range Planning, 51(1): 40–49. https://doi.org/10.1016/j.lrp.2017.06.007