A business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies. A business model is a holistic framework to understand, design, and test your business assumptions in the marketplace.
In this guide, we’ll also see 70+ business model types identified by the FourWeekMBA research.
Ever since this list started to be published back in 2018, many copycats around the web have started to duplicate it without understanding the meaning of each model referenced here.
Thus, if you need our feedback, feel free to reach out. We update this list frequently based on the continued research and changing business landscape.
I’ve also built a custom database of visual business models which you can navigate from here, through our business model explorers!
Business Model Explorers
You can jump directly to some of the main ones below or read the guide in order, where you’ll find also updated patterns:
There used to be a time (the late 1970s) when the strategy was way more about understanding competition, framed in terms of bargaining power and barriers to entry.
However, as digitalization took over, around the 1980s, and 1990s it became clear that the whole nature of the competition was changing.
While frameworks, like Porter’s Five Forces, might be still useful to map some business contexts.
The legendary Andy Grove, together with many other practitioners identified six forces shaping from the bottom entire industries.
The Six Forces Model is a variation of Porter’s Five Forces. The sixth force, according to this model, is the complementary products. In short, the six forces model is an adaptation especially used in the tech business world to assess the change of the context, based on new market entrants and whether those can play out initially as complementary products and in the long-term substitutes.
Indeed the sixth force is aboutcomplementary products.
This force is subtle, hard to spot, and very very blurred.
In fact, complementary products, when it comes to the digital and tech world, are not easy to spot.
Competition might arise from unexpected places, as there is no direct overlap between these complementary products.
In short, there is a linear way to map the business context of complementary products, where you look at existing alternatives in the same market/industry.
Yet this might be effective in the short-term (3-5 years) but fail miserably in the long-term survival of the business.
From the phone business, there was the computing industry, which slowly, then suddenly took over the phone business of AT&T.
In fact, from Bell Labs, the first semiconductors came to life. Spurring the whole computer industry first, then the Internet.
Between the end of the 1800s and until the 1950-60s, Bell Labs played a crucial role in developing the most critical innovations (from scaling the phone business to the first transistors), it revolutionized various industries. It opened the way to information theory and microprocessors. Therefore, giving birth to Silicon Valley.
When perhaps the same IBM decided to move from B2B computing to the consumer industry, it suddenly adopted an opposite strategy compared to what it had done so far.
IBM approached the development of a PC for consumers with an open approach, where it outsourced most components to other players (this in part also to antitrust concerns).
This strategy in the long-term generated a whole new set of markets, industries, and tech players (Microsoft, Intel, and Compaq to name a few).
From there, when the PC dominating players tried to enter the Internet (see Microsoft vs. Netscape) they also faced unpredictable market forces.
Coming from the bottom (consumer adoption) that completely reshaped entire industries, thus giving birth to the next wave of Internet players (see Google, Amazon, etc.).
Indeed, Andrew Grove, back in the late 1980s former Intel’s CEO and the father of theOKR Goal-Setting System, in his book “Only The Paranoid Survive” highlighted how the sixth force – complementary products – was one of the key forces that determined a complete reshaping of the way of doingbusiness.
And therefore, one of the forces that most (especially in the techindustrytraveling at a faster speed compared to other sectors) had the ability to changebusiness models, leading to what Andrew Grove called a strategic inflection point.
A point from which the way of doing business would never be the same.
This could become both a bigthreatfor existing players, and anopportunityfor new entrants, but also a way for existing dominant players to redefine completely theirbusinessmodels.
That is why, it makes sense, especially for companies operating in the techbusinessworld, to map andanalyzethe context by adding this sixth force.
Breaking the boundaries of the business world
With a much more fluid business world, the whole business playbook changed.
And while this had become already evident with players in the computer industry, things more rapidly changed with the adoption of the Internet.
As the Internet morphed into the Web, a bunch of companies that by the late 1990s were promising to revolutionize entire industries were still running with the old business playbook.
Most of these companies went bankrupt during the dot-com bubble of the early 2000s.
For the very few, great, and also lucky (you can see also how companies like Amazon managed to survive the dot-com bubble thanks to lucky timing) players who survived, the whole paradigm shifted.
A startup company is a high-tech business that tries to build a scalable business model in tech-driven industries. A startup company usually follows a lean methodology, where continuous innovation, driven by built-in viral loops is the rule. Thus, driving growth and building network effects as a consequence of this strategy.
During the early 2000s, companies like PayPal and the few other survivors of the dot-com era had managed to build, on the fly, the Internet business playbook that made them thick during these decades.
PayPal was born as the merger of two early Internet startups, Confinity (founded by Max Levchin and Peter Thiel) and X.com (founded by Elon Musk). Both companies stumbled on a commercial killer feature (enabling Internet payments via email) and ended up being extremely useful on a nascent auction platform: eBay. From the merger of these companies, PayPal was born. And it wrote the Internet business playbook for startups.
Hundreds first, thousand of companies then, followed suit. Giving rise to the lean startup.
While practitioners building companies didn’t have a name for it.
Other practitioners turned academics/scholars built a terminology around that playbook.
In this increasingly complex business world, where the boundaries are much more blurred, rather than following a more complex business strategy, digital players tended to simplify it.
And companies like Amazon led the way, with their obsession with customers.
Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start with the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.
Customer obsession, therefore, is a simplification, which helps companies gain focus as they execute a business strategy.
Customer obsession also gave rise to business modeling as a key discipline!
Business modeling is intended as a bottom-up approach to business, where a company is way more focused on customer feedback, quick feedback loops, product-market fit, and demand generation than anything else!
What is a business model and why is it important?
A business model is a critical element for any startup’s success as it is what unlocks value in the long term. In a way, developing a business model isn’t only about monetization strategies.
Indeed, that is way more holistic. To develop a business model companies need to create value for several stakeholders.
Thus, a business model is about what makes users go back to your app, service, or product.
It is about how businesses can get value from your solution. It is about how suppliers grow their business through it.
A business model is all those things together. In short, when those pieces come together, that is when you can say to have a business model.
A quick history of business models
“business model” and “business models” in millions of books according to Google Ngram
While the Internet worked as a catalyzer for business model innovation, the term itself was born way before that.
Indeed, business modeling started to become a key component to explain long-term strategic advantages, by the early 1990s.
For instance, an article from 1993, from HBR, entitled “Strategy And The Art of Reinventing Value” explained IKEA’s success as a business model advantage:
IKEA has performed well with a not-terribly-original business model that, in less skillful hands, may well have failed.
Yet, as we get close to the mid, end of the 1990s business modeling starts to take a connotation tied to the Internet ecosystem.
Our findings suggest that no single entrepreneurship or strategic management theory can fully explain the value creation potential of e-business. Rather, an integration of the received theoretical perspectives on value creation is needed. To enable such an integration, we offer the business model construct as a unit of analysis for future research on value creation in e-business. A business model depicts the design of transaction content, structure, and governance so as to create value through the exploitation of business opportunities. We propose that a firm’s business model is an important locus of innovation and a crucial source of value creation for the firm and its suppliers, partners, and customers.
Therefore, at that time, in the early 2000s, business modeling becomes also a way to analyze and explain the competitive advantage that companies had built in the marketplace.
The peak of this movement – I argue – came, when in 2019, Fred Wilson, from AVC, in a piece entitled “Business Model Innovation” explained:
I believe business model innovation is more disruptive than technical innovation.
In short, Fred Wilson, went on to articulate the reason why business model innovation matters more than technical innovation.
A good example of this was moving from web apps to mobile apps, which was largely a technical innovation. While the move to mobile certainly created some new companies, it largely strengthened the market position of the big Internet companies because there was little to no business model innovation.
And referring to the rise of blockchain-based business models he explained:
I am excited about the move to crypto based business models supporting decentralized apps for this very reason. I think it opens up the possibility that some very large new companies will be created that innovate largely on entirely new business models.
To take a step back, when the Internet proved commercially viable, indeed, business model innovation took off.
Indeed, the dot-com burst proved to the best enhanced for the next wave of digital companies, which would leverage business model innovation as a key ingredient to their success:
Indeed, many companies were born during the dot-com era.
Those companies used the Internet as a new distribution channel but they still played with an old business playbook.
When the dot-com bubble burst.
That left the room for a few companies which not only would prove commercially viable. They would also become among the tech giants that dominated the web.
Companies like Amazon, Google, and eBay built, tweaked, and consolidated their business playbook during that era.
A business model is not a business plan
Among the top results,Googlesuggests “How towriteabusiness model” when typing “how to …business model. When you click on the result thatGooglesuggested, see what happens.
When you click on theGooglesuggested result for “How towriteabusiness model,” you get “how towritea business plan.”
A common misunderstanding is to think of business modeling as a one-page business plan.
However, a business plan is a document with a specific aim. It contains a bunch of assumptions about your business.
It also contains financial projections about the business for the next 3-5 years.
However, those assumptions can be hardly tested. The business plan thus remains a document that lives in the imaginary world.
Drafted beautifully to impress banks and potential investors; hardly of any use for business model innovation. Instead, as we will see business modeling is primarily about experimentation.
As reported by Google Ngram, by 2008, the business model was picked up as a key concept, compared to a business plan. This shows how in the last decade business modeling has become a key concept in the business world.
A business model is not a revenue generation strategy
An example of howAirbnb“confused” itsbusiness modelfor its monetizationstrategy(Slideshare)
How WeWork described itsbusiness modelin the report before the IPO. You might notice that what they’re talking about is their revenue generationstrategy.
Another misconception about business models is to confuse them with the monetization strategy or the revenue model of a company.
While this is an essential piece of the puzzle, it is just one of the components of a successful business model.
In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a business model.
However, a business model implies the understanding of operations, customer acquisition, retention, supply chain management, besides monetization.
According to the business model you designed over the years for your organization there will be a piece that plays a more critical role compared to others.
Each company will develop a unique model among the many types of business models which is what makes your company robust in the long run!
The importance of business model design
Strategic analysis is a process to understand the organization’s environment and competitive landscape to formulate informed business decisions, to plan for the organizational structure and long-term direction. Strategic planning is also useful to experiment with business model design and assess the fit with the long-term vision of the business.
The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry or niche.
Therefore, this value chain will start from a value proposition, a promise you make to the key players and partners in that market, industry or niche depending on where you start.
For instance, when PayPal started it didn’t look to dominate the whole market. It started from a niche.
As Pether Thiel put it in his book, Zero to One:
The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
Indeed, PayPal began identifying its most valuable partner, what at the time they called “power user.”
Therefore, instead of focusing on generically offering a service for everyone, PayPal focused on acquiring and attracting as many power users as possible.
Those power users were mostly on another platform that had already scaled up: eBay.
Only after PayPal had drafted, tested, and validated a clear value proposition for a small, yet critical group of power users, it could move on to take larger and larger segments of that market.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Business modeling is about experimentation
Where scientists have labs where they can manufacture and run experiments.
Entrepreneurs have the real world as a way to measure their assumptions.
Designing and executing business models for an entrepreneur is like designing and running experiments for scientists.
However, where a scientist might be looking for lasting truth, an entrepreneur searches for a business model that will work in the marketplace at that particular point in time.
Indeed, one of the common beliefs is that business models can be sketched on a piece of paper and they will work in the real world.
That (almost) never happens.
Before a business model does work in the real world that will require a lot of strategic and deliberate thinking, experimentation, and tinkering.
Thus, a successful business model is usually the fruit of this process.
In fact, while the vision of a business model might remain intact, the way it gets impelmented in the marketplace might need to be readjusted several times, to succeed.
Take the case of the Tesla business model. The whole story is very compelling because when Elon Musk first started to invest in Tesla, back in 2004, he was involved primarily as an active investor.
Yet, as the company started to execute its business plan, it became clear that it wasn’t going to work.
In fact, Tesla’s original founders, Martin Eberhard and Marc Tarpenning were trying to build an electric vehicle, by outsourcing most of the parts.
The idea to outsource most parts, which seemed viable, from a business planning standpoint, proved non-viable, as it became harder and harder for Tesla to find the proper components to assemble its first prototype.
The situation got so bad, that the initial estimates for making a prototype skyrocketed, as time went by.
This created a power struggle into the company, the oust of the initial founders, and Musk taking over as CEO.
By August 2006, Musk shared his masterplan for Tesla, summarized as:
So, in short, the master plan was:
Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
That was it!
A business plan made of a few lines, and yet it would take fiteen years to execute!
As Tesla went through various struggles and near-death experiences.
Musk admitted that the Tesla’s ride has been so ridicously wild, that the compamny was a few days away from bankruptcy several times, in a decade, and Musk had his whole fortune at stake.
Thus, even though Musk’s vision for Tesla was clear since the onset, the company’s business model had to change multiple times over the years, to test, thousands of small to big assumptions.
That is how Tesla evolved into the company we know today!
That implies that often an entrepreneur has to design multiple variations of the same business model and test those in the marketplace.
For instance, if you’ve built a company that offers software but you positioned yourself with a freemium model.
You might realize that the model won’t work in your case, so you will need to move the revenue generation back to a premium model, where your target customers are willing to pay more and you move the needle from B2C to B2B.
Thus, cutting yourself space within a specific niche. That will, of course, limit the number of customers you might be able to reach; at the same time, it will enable you to find product/market fit.
Technological innovation vs. business model innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The misconception starts from the fact that nowadays, technological advancement is pushing toward new ways of doing business.
The Internet is still enabling new, untested models to pick up.
For instance, the business modelsof companies likeNetflixwould not be possible if the Internet didn’t allow new ways of content delivery, and so also of how those same companies make money.
However, technological innovation is wholly different from business innovation.
That’s because technological innovation often happens in labs or research centers (take the internet) rather than just companies, or in a business context.
In short, technological innovation requires a massive amount of resources upfront and researchers, which might not follow business objectives, but rather experiment freely with ideas that take time to work out.
In addition, even when a specific technology becomes commercially viable that might also be soon commoditized.
Thus, technology itself hardly becomes acompetitive advantage. Technology coupled with new ways of serving customers, a powerful distribution strategy, and creative monetization strategies might create lasting competitive advantages.
Competitive moats are generated around business model innovation
What should you be doing in running your business? Just what you always do: Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs. With the exception of insurance pricing and coverages, almost all operating decisions that made sense a month ago make sense today
In a memo dated September 26th, 2001 Warren Buffet highlighted the importance of building moat.
For financiers, a moat is a lasting competitive advantage. There was a time when you could build those moats by following Porter’s five forces.
However, the digital era, dominated by platform business models, taught us that competitive advantages sit outside the company’s boundaries.
And the ability of digital businesses to take advantage of those external resources, also wrecked those barriers, making competition way more fluid, unpredictable, and hard to build with the old business playbook.
Therefore, companies like Amazon have learned to take advantage of network effects, and rather than follow a linear logic, designed business models with built-in flywheels focused on customer obsession:
The point here though is not that you have to build a tech giant like Amazon.
Instead, you need to realize that the Internet and the digital era enabled new ways of doing business.
Thus, they are not just new distribution platforms, but they require a new business playbook altogether.
With that in mind, Amazon found its business-model market fit.
When that happens, traction becomes wired to the company’s DNA for a while.
Business modeling as the foundation of Business Engineering
In the last decade, I’ve been looking at thousands of companies, I’ve been building from scratch a few tech business models, and in the process, I have developed my own way to look at the business world.
Business engineering is a way of thinking that combines various disciplines. Among these disciplines, there is business modeling, in the extent to which, it helps business people test the underlying assumptions of a business, quickly.
The business engineering manifesto moves along a few key principles, which I outline below:
A business engineer borrows the customer-centered approach from design thinking but it brings it to another level with customer obsession. Indeed, customer obsession is a bottom-up, non-linear force, able to shape industries in unpredictable ways. The business engineer knows that to go beyond completion, you got to simplify your execution strategy, by obsessing over customers.
A business engineer borrows experimentation from business modeling, to execute a business strategy, and test the underlying assumptions of a business. Once defined the boundaries of your business (things that go against its mission and vision) everything else needs to be tested.
A business engineer starts by following the money, but it moves through the layers of a business to find its core asset. In short, understanding the financial side of a business is an avenue into the subtleties to find its core asset.
A business engineer understands the intricacies of a complex system, where figuring out the problem is the real problem! Indeed, I argue that the main scope of being in business is about figuring out problems for our customers. That is what businesses exist for.
A business engineer knows that competition in the short term is linear, while it becomes non-linear in the long run. Thus, the business engineer keeps an eye on the long-term landscape, while executing fast, in the short term. Today’s niches are tomorrow’s new industries. The business engineer is aware of that.
A business engineer knows when to use an incremental approach, and when a breakthrough approach is needed, instead. Indeed, a business engineer might rely on the same tools and frameworks for years, until she/he realizes the business landscape has changed. And in that context, the business engineer will look for, or build new frameworks, based on a new mindset.
What are the primary components of a business model?
Although there is not a single way to define a business model, there is a standard called “business model canvas” which is a good way to start understanding what are the pieces and moving parts of a company’s value creation chain.
Then we’ll look at the FourWeekMBA method of classifying a business model.
The business model canvas perspective
As highlighted in the business model canvas there are seven key ingredients for any business model to succeed:
In short, large companies relied and still rely primarily on elaborate planning, with business plans hundreds of pages long, and full of assumptions. Startups primarily rely on experimentations.
Where large corporations invest large resources upfront to design or build up a product or service; Startups use the process of iterative design and agile development, where users help the startup get from MVP to product/market fit.
Whether you decide to use the business model canvas, the lean startup canvas, or develop your own methodology, it is critical to gain a holistic understanding of your business.
Thinking in terms of business modeling is the key to reaching that kind of understanding.
In other cases, a framework like the Blitzscaling might be more suited to assess whether your business or the company’s business model you’ve designed has all the ingredients to scale up, quickly:
In that scenario, you might want to assess whether your business model has been engineered to encompass four key growth factors (market size, distribution, gross margins, and network effects) and avoid major growth limiters (lack of product/market fit and operational scalability).
The FourWeekMBA perspective on business model components for startups
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
The key components of any business model according to the FourWeekMBA analysis are:
A compelling value proposition: How do you want your people to think about your brand?
A unique brand positioning: What do you offer to your people that make them want more?
A 10x goal setting: Can you offer a 10X better product or service? (compared to existing solutions)
Customer segments: Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service)
Distribution channels: How do you get your product or service to your customers?
Profit formula: Is the business financially sustainable?
This business model framework by FourWeekMBA has four aims:
Noise reduction: choosing a few key data points, rather than looking at a massive amount of data that only adds noise and paralyze decision-making processes.
Branding and distribution: looking at a business model as a systematic way to build a strong distribution network and a strong brand. The two things walk hand in hand.
And profitability: the financial viability of a business model is a key element for its success.
In short, according to this framework, there are two dimensions of a business:
The people dimension.
The financial dimension.
These two dimensions walk hand in hand.
Yet the people side is also what makes the business thick from the economic standpoint.
The people side comprises the following elements:
A compelling value proposition: How do you want your people to think about your brand?
A unique brand positioning: What do you offer to your people that make them want more?
A 10x goal setting: Can you offer a 10X better product or service? (compared to existing solutions).
This people dimension will help you build a solid brand. A solid brand builds up a tribe, a group of people that can follow you anywhere.
Once you have a solid brand, you can focus on the second dimension: the financial dimension.
The three elements of the financial dimensions are:
Customer segments: Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service).
Distribution channels: How do you get your product or service to your customers?
Profit formula: Is the business financially sustainable?
The FourWeekMBA VTDF Framework to dissect tech companies
The VTDF framework breaks down techbusiness models into four main components:
And financial model (revenue modeling, cost structure, profitability, and cash generation/management).
Those elements coming together can serve as the basis to build a solid tech business model.
How many types of business models exist?
We can classify business models in several ways.
For instance, based on how companies and startups monetize their business, how they deal with their suppliers, customers, and the value proposition those companies can offer to several stakeholders.
Some business models have always existed, some others are new, others yet innovate by bringing old business models to a new industry (take the Netflix business model case study as an example).
In this guide, we’ll see several business models based on successful companies, tech startups, and also more traditional organizations.
The aim is to give you an overview of all the different moving parts that comprise a business model.
In some cases – take Microsoft or Amazon – there isn’t a single way to describe a business model, as some companies have been able to diversify so much their operations to be able to generate value propositions across several stakeholders across many industries.
For instance, Microsoft isn’t just the company selling Microsoft Office products.
True, that is still an essential part of the business, as of 2022. Yet, Microsoft has many other segments, that are independent of others, and some others that are complementary.
Microsoft has a diversified business model, spanning from Office to gaming (with Xbox), LinkedIn, search (with Bing), and enterprise services (with GitHub). In 2021, Microsoft made over $198 billion in revenues, of which over $67 billion came from Server products and cloud services, and $44.8 billion came from Office products and cloud services. Windows generated $24.7 billion, Gaming generated over $16 billion, LinkedIn over $13 billion, and search advertising (through Bing) over $11.5 billion. Enterprise (GitHub) generated $7.4 billion, and devices (PC) generated almost $7 billion.
From a quick look at Microsoft revenue breakdown from 2016-to 2018, you can appreciate the changes the company has gone through and the complexity of its business model.
Indeed, while Microsoft Office is still the core of the business, other products, such as Xbox, might seem at first sight completely separate segments.
However, when you understand that Microsoft’s involvement in the gaming industry has proved as a perfect ground for AI systems; you can appreciate how the Xbox becomes the perfect “playground” for innovation in the other company’s segments!
Or take how Amazon back in 2000 was trying to figure out a way to allow other stores to build their e-commerce on top of Amazon, yet it was impossible to do that with its infrastructure at the time.
That is why Amazon started to develop that infrastructure, which has now become Amazon AWS:
In 2017, Amazon AWS represented the fastest-growing segment of the company, and it generated over $17 billion in revenues!
Why am I telling you that? As highlighted so far, a business model can be designed.
Yet, most of it is about tinkering and experimentation. Thus, the business model design is a tool to accelerate the process of building up a sustainable machine that captures value in the long run. The key though is to leave that machine unleashed.
How do you understand the way the business model moving parts come together? What is the glue that keeps them together?
Vision vs. Mission: why understanding the difference between them is important
There is one key ingredient of any company’s business model that seldom changes, that is the company’s vision.
While the company’s mission statement might change over time, the vision sticks.
The main difference between mission and vision is about the present and future. The mission is the way the company wants to achieve its objectives now and its purpose in the present.
In other words, the vision is the map, that influences the company directions and decisions for the future.
The mission is about how the company wants to achieve its objectives, thus getting closer to its future vision, in the moving present.
That is a tool aligning the key players of an organization (employees, suppliers, customers, and more), while it allows the forming of a culture within the organization.
The mission statement instead might have two functions, one is internal, and one is external. Internally, the vision aligns with people around the same map.
Externally, the vision allows outside observers to understand why an organization might be looking in a certain direction.
Therefore, the vision is “organizational DNA.” Once the vision is clear, you might not even need a mission statement to succeed.
Even though the mission statement is a critical propeller that helps companies focus on short-term success.
Going back to Google’s mission statement “to organize the world’s information and make it universally accessible and useful,” that allows Google to focus its efforts to achieve its future vision.
That only represented the means to achieve its mission.
The New Era of AI Business Models
In the fall of 1999, one of the most respected venture capitalists of Silicon Valley, John Doerr, arrived at the two-story L-Shaped building on the 101 freeway, in Palo Alto, California.
There, he was about to meet the founders of a company that was growing so quickly, which just two months before had moved from a small office in downtown Palo Alto to this new building on the 101 freeway.
As John Doerr explained in his book, Measure What Matters, he had placed the biggest bet in his nineteen years career as a venture capitalist, $11.8 million (which Doerr called a wager) for 12% of that startup, which had outgrown its Stanford dormitory, just a year before.
The two founders of this startup, which was just a research paper and a prototype just a year before, convinced Doerr to place such a bet by presenting him with 17 slides in PowerPoint, which represented their whole pitch.
That small startup was tackling a market – that of search – which was already crowded (they entered as the 18th search engine on the market); it seemed irrelevant (most players at the time were walled gardens like AOL, which believed that search was a minor feature of the growing Internet); and a good chunk of search players mainly featured advertising as results to users’ queries, which made search even less interesting.
The two founders had created a new algorithm for search, which they promised, would turn search engines into more exciting tools able to keep up with the exponential growth of web pages.
To make a final call on his investment, venture capitalist John Doerr asked the two founders how big they thought their market could be.
This is a typical question for venture capitalists as they place bets since it enables them to guess the size of the new market they are investing in.
Doerr had already been thinking about that, and in his mind, a market cap of $1 billion would have been an incredible achievement for that startup and a great payoff for his investment.
Yet, one of the two founders, Larry, replied to Doerr with “Ten billion dollars.”
A bit confused, Doerr made sure he got it right, thus further asking Larry, “You mean market cap, right?”
And Larry replied swiftly, “No, I don’t mean market cap. I mean revenues.”
That implied a potential market cap of $100 billion, which at the time was the capitalization of Microsoft.
By 2006, as that startup had figured out a scalable business model for its search engine, it had passed $10 billion in revenues. And today, that company, Alphabet, which controls Google, is a trillion-dollar company.
That $11.8 million investment for 12% of Google, which John Doerr bought back in 1998, would be worth more than a hundred billion dollars today!
Google was a breakthrough product.
Indeed, in 1998, its founders, Page and Brin, created an algorithm called PageRank, explained in a paper entitled, The Anatomy of a Large-Scale Hypertextual Web Search Engine.
That was the birth of Google!
Yet the paradigm shift came when Google combined its search engine with an incredible advertising machine, which by 2021 generated over $148 billion.
This new architecture of crawling, indexing, and ranking gave Google the ability to scale. Thanks to the Page Rank algorithm, users’ searches and intents could be ranked and easily found on the web, which was growing exponentially.
Back then, both Brin and Page were quite skeptical about the advertising model for search.
As they explained at the time to, “we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.”
And yet, the intersection of search with a scalable advertising machine (what today we call Google Ads), combined with built-in network effects (both from Google AdSense for publishers and users’ search intents), has created the tech giant we know today.
Thus, as usual, when a new technology comes out, even if a breakthrough, it’s not enough to become a paradigm shift.
We see a paradigm shift when a technology finds a scalable business model and a scalable (built-in) distribution model.
That generates a seismic shift of the business landscape, which doesn’t just change things; it flips them upside down, shaking entire industries and creating whole new ones able to swallow the existing ones.
This, I like to call the “Reverse Kronos Effect!”
Credit: Francisco de Goya, Saturno devorando a su hijo
Indeed, as I explained, inBusiness Engineering the Kronos Effect happens when the incumbent player in an industry tries to maintain its dominant position by swallowing early entrants in a market (a perfect example is the Facebook acquisition of Instagram).
Yet, the “Reverse Kronos Effect” happens when the insurgent startup, is able to move so fast, thanks to a radically new technology, and yet iterate even faster, in building a scalable business model and distribution, which shifts the business landscape quickly, thus leaving the dominant player off-balance, in a position of weakness.
And the momentum gets so strong for the insurgent, that the dominant player can hardly keep up, let alone, regain the lost ground.
That is a paradigm shift. When the old playbook won’t work anymore. And not only that, the old paradigm might actually be limiting, and play in favor of the disruptor.
When ChatGPT came out in November 2022, this was a breakthrough.
The interesting part of it?
A good chunk, of what made ChatGPT incredibly effective is a kind of architecture, called “Transformer” which was developed by a bunch of Google scholars!
“Attention Is All You Need” the paper which introduced a new AI architecture (Transformer) which finally made AI generalizable was created by a group of Google’s Scholars!
Thus, this, potential “Reverse Kronos Effect” is even more powerful when you think about the fact, that Google, might have had the technology to launch something similar to ChatGPT, probably already by 2021.
And yet it didn’t (here there are various considerations to make, from risk assessment of deploying AI at scale, but also risk aversion of Google, and fear to cannibalize its own core product, Google’s search engine, which to these days is a cash printing machine for the company).
Just like Google represented a breakthrough in the Internet paradigm back in 1998, ChatGPT represents a breakthrough in the current web paradigm.
A search engine experience is made of a user searching for an answer thanks to a crawling, indexing, and ranking system, which Google maintains at scale.
With a generative interface like ChatGPT, that paradigm is threatened as answers can be given on the fly without having to (necessarily) rely on a crawling, indexing, and ranking system.
Instead, OpenAI’s architecture relies on pre-training, fine-tuning and in-context learning.
Once this architecture finds its business model and built-in, scalable distribution, you get a paradigm shift!
Thus, this is what we’re looking at—a breakthrough product looking for its paradigm shift.
How did we get there?
Below you find the architecture that brought us here.
70+ business model examples in a nutshell
In this guide, we’ll look at 60+ business models, spanning several industries, monetization strategies, and ways to unlock value in the long run!
A mix of chain and franchise business model
Starbucks is a retail company that sells beverages (primarily consisting of coffee-related drinks) and food. In 2018, Starbucks had 52% of company-operated stores vs. 48% of licensed stores. The revenues for company-operated stores accounted for 80% of total revenues, thus making Starbucks a chain business model.
When 1983, Howard Schultz was walking through the streets of Milan and Verona he became “enamored” by the coffee experience people had in the Italian bars. He decided to bring that experience back home. That’s how Starbucks was born.
While McDonald’s makes money by primarily and heavily franchising its restaurants, Starbucks is a mix of operated vs. licensed stores. If we look at the revenue generation, company-operated stores make up 79% of the company’s revenues in 2017.
Ad-supported (subsidized) business model
Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated €9.66 billion in 2021. Of these revenues, 87.5% or €8.46 billion came from premium memberships, while over 12.5% or €1.2 billion came from ad-supported members.
Keeping a free product offering, especially when it comes to a consumer brand, like Spotify, can be quite expensive. It is true, that Spotify uses a sort of self-serving model where its free accounts are channeled to activate premium plans (the Family Plan has been the most popular in the last years).
On the other end, Spotify makes sure to support its free side of the business by running ads. Those ads, subsidize in part the free service for over 163 million accounts as of March 2020.
Therefore, instead of letting premium members support the free plans. The ad-supported side (representing 10% of its revenues as of 2019) becomes self-standing and viable.
In short, while the free/ad-supported side of the business is relevant to Spotify to convert those accounts in premium. At the same time, it works pretty well as a self-sustaining product tied into a digital business model.
However, as the ad-supported model scales, it also proses some threats to the scalability of the business model, as the licensing costs for the streamed content might grow quickly (Spotify will pay more royalties as more free users stream content on the platform).
That is also part of the transition of what I like to call from platform to brand.
Affiliate business model
Let’s say you have a website with a large amount of traffic each month. Yet you don’t sell any product or service, which is yours. How do you make money? Well, thanks to affiliate marketing you don’t need either a product or a service, you have many from other companies.
Thus, you’ll make money by merely featuring other products or services and getting a commission for that. Affiliate marketing done right can be a powerful source of income. Take, Pat Flynn from Smart Passive Income, which has been generating millions of dollars with affiliate marketing:
Aggregator business model
An aggregator business model can be classified as a sort of platform business model, however, with its specific features. For instance, the aggregator might act as a middleman. Still, it monetizes the eyeballs on the platform (advertisers subsidize the aggregator) while keeping tight control on the whole experience of users.
In this business model, the aggregator becomes the middleman by removing all the other middlemen from the market. To understand more about this model and how it differentiates from platform business models, read the guide on the aggregator business model.
Agency-based business model
neilpatel.com is one of the most successful sites in digital marketing. Neil Patel has also used his name as a brand, which has become recognized in the digital marketing space.
However, rather than selling tools or info products, Neil Patel is monetizing its traffic by generating leads for his digital agency. As he pointed out:
My model isn’t as scalable and it requires more headcount, but it can generate much more money. Just look at ad agencies like WPP and Dentsu. They generate billions in revenue!
In short, Neil Patel Digital is the SEO and digital marketing agency that allows Neil Patel to monetize its traffic primarily by offering free content and free marketing tools. This is a mixture of a freemium business model, combined with an agency-based business model.
Yet, the idea behind the agency-based business model is simple: you generate enough qualified leads, set up a lean team to manage those projects, and grow the agency based on on-coming projects! According to Neil Patel – at least in the digital marketing space – there is still space to grow a multi-billion turnover agency.
AIaaS business models
In the coming decade, every software company will be an AI company. And this trend is very very strong. Indeed the SaaS industry is already turning into an AI-based software industry. Thus, the AIaaS industry and its business models already turned into a multi-billion dollar industry:
Artificial Intelligence as a Service (AlaaS) helps organizations incorporate artificial intelligence (AI) functionality without the associated expertise. Usually, AIaaS services are built upon cloud-based providers like Amazon AWS, Google Cloud, Microsoft Azure, and IMB Cloud, used as IaaS. The AI service, framework, and workflows built upon these infrastructures are offered to final customers for various use cases (e.g., inventory management services, manufacturing optimizations, text generation).
Asymmetric business models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
Some examples of hidden revenue generation are Google and Facebook. The two most popular websites on planet earth have a similar monetization strategy. They offer free apps and platforms for a broad audience (billion people worldwide) while monetizing the data of the same users.
Each time you click through a link on Google that has the “ad” notation next to it. De facto you’re allowing Google to monetize on a keyword, while you’re making a business monetize on that keyword if you buy the service they provide.
A similar logic applies to Facebook. The news feed is the place where Facebook monetizes most of its ads. Both models both use a hidden revenue generation model as those services work so well that most users barely realize their data is getting sold for advertising.
Attention merchant business model
An attention merchant might be defined as a company that primarily makes money by harvesting human attention. While this definition is tough in practice (most companies make money by grabbing their target attention) the attention merchant’s primary asset is human attention.
That is also why companies operating with an advertising business model are defined, as attention merchants. While in the tech industry companies like Facebook and Google have become hugely profitable by using an advertising model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
For the sake of this article, I’m mentioning Snapchat Business Model as it probably represents the wildest evolution of where attention merchants can get. Just like Google allows businesses to bet on keywords. Businesses on Snapchat can create their Geofilters based on location and track the results of those Ggeofilters.
While Google and Facebook proved to have a solid business model, attention merchants usually also face many challenges. In fact, as those companies scale up, they also end up grabbing the attention of billions of people worldwide. When that happens, those tools become a threat to the political system which tries to kick back by regulating or fining them.
Another aspect of attention merchants is about keeping the users hooked. When those apps start losing users’ attention – if they don’t have a solid business model – a single Tweet from a Kardashian can make the company burn over a billion dollars in market cap!
sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad.
A Barbell strategy consists of making sure that 90% of your capital is safe, and using the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.
Author Nassim Nicholas Taleb explains this approach in his Incerto Series. It’s an approach where you invest most of your wealth in extremely conservative financial instruments to preserve the capital.
And on the other end, the remaining part of the capital is invested in extremely aggressive strategies with massive potential upsides, yet controlled downsides. In short, you make yourself prone to take advantage of positive Black Swans (rare events that can benefit you).
I want to take this further to apply that to business modeling. Here the company uses a barbell approach to product and distribution. You have a core product and business where most resources are spent and the whole organization is structured around. On the other end, you place bets on new products that might renew your business model and make the old irrelevant.
Grubhub is an online and mobile platform for restaurant pick-up and delivery orders. In 2018 the company connected 95,000 takeout restaurants in over 1,700 U.S. cities and London. The Grubhub portfolio of brands like Seamless, LevelUp, Eat24, AllMenus, MenuPages, and Tapingo. The company makes money primarily by charging restaurants a pre-order commission and it generates revenues when diners place an order on its platform. Also, it charges restaurants that use Grubhub delivery services and when diners pay for those services.
Grubhub is an extremely interesting case as the Company primarily charges restaurant partners a per-order commission (mostly percentage-based). The restaurants can choose (in most cases) their level of commission rate, at or above the base rate.
When a restaurant pays a higher rate, that positively affects its prominence and exposure to diners on the Platform. This approach combined with Grubhub’s brands enables restaurants to easily build up their delivery operations even if they lack that.
Thus, increasing the overall market value, as more restaurants can supply their food and people get more variety.
Blitzscaler-mode business model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services, Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.
Amazon’s continuous, massive, investment in growth to dominate multiple markets is a perfect example of a business model with built-in growth. This is the combination of several elements (platform’s network effects + branding power + scalable financial model).
That applies to the consumer e-commerce side of Amazon (excluding Amazon AWS) where the company, while generating low-profit margins for years, also generated substantial cash flows that it invested back to massive growth. A sort of continuous blitzscaler-mode, that while risky for most companies, has become a normal mode for Amazon. Thus, Amazon has been able to ingrain blitzscaling within its business model.
Blockchain-based business models
When on January 10th, 2009, a guy named Satoshi Nakamoto (it probably was only a pseudonym) sent an email to a man from Santa Barbara, Hal Finney, he announced a new currency, called Bitcoin, based on a new technology called Blockchain.
Merely put the Blockchain is a distributed ledger that relies on cryptography to handle transactions, interactions, or anything that implies an exchange between people, which is decentralized and anonymous.
That was a revolution. Since Bitcoin has become a global phenomenon, the technology that allows it to function, the Blockchain, has been evolving. To be sure, the Bitcoin Blockchain isn’t the only protocol.
Large numbers of Blockchain protocols have been created since the Bitcoin launch. This means that the combination of existing business and new Blockchain protocols will give rise to a countless number of innovative business models.
Those few that will pass the test of time might probably give rise to the next Blockchain Giants. A compelling case of innovation based on a Blockchain-based business model is Steemit:
In a Blockchain Economy, a good chunk of value is at protocol level. Therefore, you will have a Blockchain Protocol (in this case Steem is the protocol) which has a set of underlying rules. The Steem protocol reaches consensus, and it follows a proof-of-stake (contrary to Bitcoin where there is a proof-of-value mechanism). On top of the Steem protocol, several applications can be freely built. Those applications will be decentralized, as they will be based on a decentralized network in the first place. In the Steem Blockchain context, Steemit is among the largest and most important (Steemit was the first application launched as a use case for the Steem Protocol).
That is a decentralized social network, which rewarding system is based on a Blockchain protocol, called Steem. Like Steemit many others are trying to innovate in several fields. Thus, we might expect an explosion of Blockchain-based business models.
Proof of Work (ETH 1.0), switching to Proof of Stake (ETH 2.0). A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
ERC-20 Utility Token: Ethereum as the underlying protocol. An ERC-20 Token stands for “Ethereum Request for Comments,” a standard built on top of Ethereum to enable other tokens to be issued. Based on a smart contract that determines its rules, the ERC-20 enables anyone to issue tokens on top of Ethereum. As they are using a standard, those are interoperable. ERC-20 Tokens are critical to understanding the development of Ethereum as a business platform. Utility Tokens enable users’ participation in the network. Thus they work as a sort of built-in incentive mechanism for users to help the network grow.
The Graph is an ERC20 Utility Token (built on top of Ethereum) to enable consumers to freely query the blockchain through a fully decentralized database kept by indexers, incentivized by the payment of tokens (called GRT). The network is also ministered by curators and delegators that help maintain a high-quality index.
Brave is an open-source, privacy-centric web browser developed by Brave Software Inc. The company was founded by Brian Bondy and Brendan Eich in 2015. Brave makes the bulk of its revenue through banner advertising. In a rather unique arrangement, Brave users take 70% of the advertising revenue with the company taking the remaining 30%. Brave sells subscriptions to its video conferencing, VPN, and firewall products. It also makes money through affiliate commissions and merchandise sales in its decentralized web store.
Arbitrum Layer 2 Leveraging Ethereum’s protocol
A layer 2 solution can be applied as an additional protocol layer to solve various issues that the primary protocol can’t handle at scale. For instance, when it comes to Ethereum, when too many transactions go through the primary protocol, they can hardly go through, thus slowing down the main Ethereum protocol and making it not usable. In the case of Arbitrum, this works as a Layer 2 scaling solution. Meaning it helps manage transactions on top of this extra layer to help further scale the volume of transactions handled by the main protocol. Arbitrum works as the middle layer for various applications. For instance, Uniswap decentralized exchange is also, in part, relying on Arbitrum to scale the transactions that go through Uniswap.
One of the most popular Ethereum scaling solutions, Arbitrum aims to speed up transaction times and cut fees on the Ethereum blockchain
Uniswap is a decentralized exchange that enables users to exchange any ERC-20 token and more. Uniswap is a DeFi application and protocol which sits on top of Ethereum’s main protocol, and it leverages two Layer 2 scaling solutions (Optimistic Ethereum & Arbtrum). These underlying scaling solutions enable many transactions to go through the platform smoothly. When looking at Uniswap, it’s essential to distinguish between Uniswap as a token (which allows crypto users to exchange the UNI token) and Uniswap. This decentralized platform sits on top of Ethereum and leverages Optimistic Ethereum & Arbtrum to enable millions of transactions on top of the platform.
Uniswap is a decentralized cryptocurrency exchange founded by former Siemens mechanical engineer Hayden Adams in 2018. The exchange utilizes an automated market-making system rather than a traditional order book for transactions on the Ethereum blockchain.
Axie Infinity is a Non-fungible token (NFT). NFTs are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. non-fungible tokens contain identifying information that makes them unique.
Axie Infinity is an NFT-based online video game developed by Sky Mavis, a Vietnamese game studio founded by Trung Nguyen in 2018. Nguyen combined his interest in blockchain accountability and the CryptoKitties craze to launch the game in August 2018. Sky Mavis generates the bulk of its revenue via the 4.25% fee it charges on all in-game purchases. This includes land purchases, monster NFT trading, and monster breeding. Axie Infinity requires that all new players purchase three monsters to get started. Since the cost can run into hundreds of dollars, Sky Mavis will lend players the monsters and collect a 30% interest fee once the player starts earning currency.
Bundler model
Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.
In bundling, a strong distribution power combines several products in a single offer to extract more from the market. For decades Microsoft has been able to bundle several products under the same umbrella (Office has been coupled from time to time with several other products) so the company extracts more from the market, or if it were selling a single product.
Cash conversion cycle or cash machine model
Have ever wondered how some businesses survive, nonetheless the thin margin they have? One great example is Amazon.
A company that makes a low-profit margin yet it has been very disruptive. In reality, Amazon can get its partners to finance the business by playing on the short-term liquidity of the business.
Cloud-as-a-service (CaaS) business models
Cloud as a service is a business model that combines the cloud infrastructure delivered to customers as a subscription-based service, where the customer can access a cloud infrastructure without running it on-premise. Therefore, the whole premise of the cloud as a service business model is to offer a more agile cloud infrastructure at a fraction of the costs compared to on-premise software, and that can be scaled up according to the need of the business.
Cloud-based services have become the new standard. As the software paradigm has shifted from proprietary, to hosted, agile, and continuously improving, updating, and integrating within the company’s architecture, cloud-as-a-service business models (IaaS, PaaS, and SaaS), have become the new standard of the software industry.
The discount business model focuses on high quality
Leveraging on the price to gain a competitive advantage isn’t new. However, price wars are not the best way to create a sustainable business model. Instead, the supermarket chain – ALDI – has done just the opposite. One of the critical ingredients of the ALDI business model is to keep its prices low while maintaining its quality as high as possible.
How? With several strategies. For instance, ALDI limits its stores to 1,300 items, which generates minimum waste. Also, ALDI also features its brands, which makes it inexpensive to sell them, as there will be lower sales and marketing costs associated. 90% of ALDI brands have an exclusive agreement with the market chain!
It is important to notice that almost any business can be classified as a distribution-based business model, as there is no company that can survive without distribution.
However, in general, companies that tap into consumer markets need to be extremely good at creating distribution channels that are able to unlock long-term value. There are a few critical aspects:
The distribution channel has to be sustainable: this means that if you spend more money to maintain it that is what it generates might not work. It is fine in the short term to lose money on building up a distribution strategy. Yet in the medium term, it needs to be sustainable.
It needs to be diversified: relying on a single distribution channel might be too risky, especially if you don’t control it. Therefore, it is critical to focus on the main channel, yet the company needs to expand and tap into other channels.
It needs to scale: a distribution strategy is as good as its ability to stick also when the business scales up. Thus, the critical question is “would this strategy work if I go from €1 million to €10 million in revenues?” Many won’t and it’s fine. Yet as an entrepreneur, your goal should be to find a distribution strategy that scales.
Also, tech giants like Google spent billions to guarantee proper distribution. For instance, Google spends a good chunk of its revenues on distribution via acquiring traffic from several sources:
The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case, keep it stable. In 2021 Google spent 21.75% of its total advertising revenues (over $45.56 billion) to guarantee its traffic on several desktop and mobile devices across the web.
When you see companies with a large turnover, you need to always ask, “what’s their distribution strategy?” or “how did they get there?” You’ll find out that they spent massive resources to tap into channels that proved successful to scale up their business!
Direct-to-consumers business model
A direct-to-consumer business model is primarily based on direct access from a brand or company to its final customers. Indeed, the more a company is able to tap into its customers without the need of an intermediary, the more this model will work in favor of the brand, which is able to control the perception of its customers via massive marketing campaigns.
Indeed, this kind of model implies a massive activity of branding and marketing to make sure consumers have your product on top of their minds. A successful example of a direct-to-consumer business model is Unilever:
Unilever is the second-largest advertiser in the world in 2017, based on media spending. Alongside more conventional advertising, Unilever creates and delivers tailored content through several digital channels.
When building up a direct-to-consumer business model it is critical to emphasize marketing rather than sales processes:
Indeed, consumer products have a low pricing point. Thus, to make sure to generate enough revenues for the company, marketing activities will be the key ingredient.
Direct sales business model
Nowadays, with the advent of AI, machine learning, and a new form of advanced technologies, it might seem demode to talk about direct sales. In fact, for many, this is a thing of the past.
However, the opposite is true. In an era where everything is getting automated the personal touch is becoming critical. Of course, once technology produces machines to the point of seeming human (see the Google Duplex experiment) that might be a different story.
Yet as of now, companies like ConvertKit use direct sales as a powerful weapon to grow their business, fast! Below you can see a simple Trello board put up by Nathan Berry, founder of ConvertKit when he decided to create a mail marketing tool from scratch just to see it grow to over a million dollars in monthly recurring revenue in only six years:
Thus, direct sales can be a powerful way to develop a business if done correctly. One of the secrets to a successful direct sales strategy is the qualification of your target audience.
If you try to sell your service or product to anyone, this is more spamming. The more you qualify your audience, the more you create value.
E-commerce marketplace business model
With almost $23 billion in revenues and nearly $7 billion in profits. While in North America and the western world in general, Amazon is the synonym of “e-commerce.”
When it comes to the Chinese industry, Alibaba is the market leader! In 2016 the company recorded over 423 million active buyers. Alibaba, just like Amazon has a diversified business model, with many moving parts. However, as of 2017 most of its revenues still came from core commerce.
As building up a website and e-commerce has become inexpensive, and it buries no particular cost for the traditional brick-and-mortar business, more and more small businesses join in and make the marketplace their primary source of revenue following Amazon’s leadership at the global scale. In fact, in many cases brick-and-mortar stores opt to become Amazon sellers:
In fact, by becoming a seller on Amazon, you allow your products to be directly picked, packed and shipped. Amazon takes a cut of the revenue, and the seller retains the rest. As Amazon puts it:
We offer programs that enable sellers to grow their businesses, sell their products on our websites and their own branded websites, and fulfill orders through us. We are not the seller of record in these transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for our seller programs.
Built by one of the smartest persons on earth (Stephen Wolfram), Wolfram Alpha is a computational engine, able to provide complex mathematical questions and way more advanced (at least until a few years ago) compared to any other search engine.
Wolfram Alpha has built its business based on education. The primary targets remain students or teachers, which with a subscription can get unlimited access to Wolfram Alpha features.
Wolfram Alpha makes its computational engine free and open to anyone. Yet to get advanced features (such as full mathematical procedures) you will need to subscribe to the paid version. In short, that is a mixture of a freemium and subscription-based model that targets the educational industry.
Family-owned integrated business model
The family-owned integrated model starts from the assumption that even if you’ve built a multi-billion dollar company you can control it in its entirety, while you also keep an agile decision-making process based on an ownership structure that keeps the control of the organization in the hands of the family.
Prada generated over three billion euros in revenues in 2017, and it managed to integrate its overall chain, from the creative process to the distribution to consumers via its directly operated stores:
Source: Prada annual report for 2017
They’ve also managed to keep the ownership of the firm in the hands of its two founders and partners in life, Miuccia Prada and Patrizio Bertelli:
Source: Prada annual report for 2017
With 100% of Prada Holding, the couple controls 80% of Prada! Their word is law within the organization. Although Prada as a multinational has complex management systems, Miuccia Prada and Patrizio Bertelli are the key decision-makers on strategic initiatives.
Feeding model
HyreCar is a peer-to-peer marketplace where owners of cars can rent their idle vehicles to drivers that want to make an additional income via ride-sharing services like Uber, and Lyft. As a two-sided marketplace, HyreCar makes money by charging drivers for direct insurance and a 10% fee on the weekly rental expense. And by taking a 15% fee from owners’ weekly rental income.
As platforms arise, they create ecosystems, becoming unexplored markets. Those markets can be surfed by feeding your business model on top of that. A good example is how HyreCar feeds its business model on top of Lyft and Uber networks of drivers.
People that want to make some extra bucks can rent temporarily a car and connect to Lyft and Uber to generate some extra income. In a sort of “tit for tat” relationship HyreCar “cooperates” and surfs the drivers’ network of Uber and Lyft, to create more liquidity, by making more cars available on the road for drivers, thus improving the supply, and therefore generating more demand.
Franchising business models
We’ve already mentioned here a couple of franchising business models, however, it’s worth having an overview of how these evolved over the years.
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).
From the FourWeekMBA research, we identified three primary franchising models:
Heavy-franchised: where franchisees own the business operations, but the franchisor controls the land development and the lease, as a tweak to control the standards followed by franchisees over the franchising operations (McDonald’s).
Heavy-chained: where the franchising company takes care of the investment and costs to open a new unit, yet the company also takes higher royalties and profits get split up (Chick-fil-A).
And franchained (or reverse franchained): in a franchained model, a company leverages the ownership model to establish new operations. Once established, the company reverts back to franchising. This model is extremely suited for those operations that require extreme expertise and leverage on the company’s scale to open up new markets (Coca-Cola). In a reverse franchained model instead, the company leverages the franchising model in the short, and it reverts back to an ownership model in the long run. This is extremely suited to quickly testing new markets, by increasing speed and reducing the cost of growth. For the model to work, there must be built-in incentives for the franchisee to sell back the operations at a premium, if they turn out successful.
Franchained and reverse franchained
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model. In a reverse franchained business model, the franchising company can leverage franchising to test whether new markets are profitable, by reducing the operational costs required to open new units, and by speeding up the growth while internalizing them in the long run, if they turn out to be successful and strategic for the company by making it easy and convenient for franchisees to sell back the operations.
Freemium model (freemium as a growth tool)
The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting in customers help spread the brand.
Free can be a powerful weapon for growth. Many in the tech industry and more specifically in the SaaS business model use Freemium to grow their business. The freemium is a mix of free and paid services.
The company offers a basic version of the product that works just like the premium product but it either has limited usage, or it has limited features. Thus, the free version is used for lead generation (capture contacts of people) and invite them to upgrade to the paid version or have the users with a free account to advertise their product.
Take SumoMe, a tool that allows you t grow the audience of a blog through newsletter forms, pop-ups, A/B tests, and heat maps:
If you get the freemium version of the tool, you still have a lot of features for free. SumoMe will invite you to upgrade over time, and it will show a small link “powered by SumoMe.”
Source: jackpdean.com
In short, the free product can be leveraged in several ways. First, for lead generation. Second, as a way to trigger upsells for non-paying customers.
Third, as a virality tool, with CTAs and links placed in strategic places to have free publicity from non-paying users.
If appropriately implemented the freemium model can be a great way to grow a brand and a business fast.
While freemium can be considered in certain circumstances a key element of a business model, it influences all its aspects. In many other cases, a freemium model is a growth tool that has an incredible potential in spreading the brand of the company offering it.
Companies like MailChimp and Slack, have strengthened their brands and marketing funnels by leveraging the freemium model.
Free-to-play model
Fortnite developed by Epic Games is available in three modes. Save the World follows a premium model, where the game is sold, starting at $14.99- Battle Royale follows a free-to-play model, available for free. Still, gamers can buy things or customize characters with its digital currency (V-Bucks), and Creative Mode. As reported by Variety, Fortnite made $1.8 billion in 2019 and $2.4 billion in 2018.
The free-to-play model has become widely adopted in the gaming industry. Where companies like Microsoft and Sony sold their consoles at cost (Xbox and PlayStation) with a locked-in logic (gamers could not play in teams across those consoles) as they made money primarily by selling games.
Epic Games with Fortnite flipped this model. It made the game free, and up-sold products within the game.
Fortnite isn’t just a traditional freemium model, which we usually find in the software world. It had three modes of consumption, which helped shape its overall business model:
Save the World, premium model: built as a player vs environment game, is structured as a mission-based game. Contrary to the Battle Royal mode, which is the one that enabled Fortnite success, Save the World is available at $14.99.
Battle Royale, free-to-play model: built as a Player versus Player, or PvP, game mode this free-to-play game sparked virality and made Fortnite the success it is today. This game mode enabled up to 100 players, to play in several formats, alone, in duos, in squads, and more. The built-in group dynamics, and the fact it was freely available, helped sparkle the Epic Games’ ecosystem. And it is also lucrative for the company, as gamers can buy V-Bucks (Fortnite’s virtual currency) to customize their characters or else.
Creative mode: in the Creative mode, players gain access to a private island, where they can design the whole thing as they want and invite others. This mode is pretty interesting as it enables not only gamers but also creators or aspiring so to build their own gaming environment.
Freeterprise model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
As consumer brands showed the freemium model could be both a great go-to-market strategy and generate a continuous flow of qualified leads (however, only after the whole organization would be organized around identifying those opportunities), other B2B/Enterprise companies (those primarily selling to other companies or larger corporations) also mastered the freemium model but on a B2B scale.
That is why I like to call that “Freeterprise.” Companies like Slack and Zoom are great examples of how you can build a valuable business with a Freeterprise model.
Zoom is a video communication platform, which mission is to “make video communications frictionless.” Leveraging on the viral growth from its freemium model, Zoom then uses its direct sales force to identify the opportunity and channel those in B2B and enterprise accounts.
This sort of looks like magic, as you can start from a single free professional account, and pull a whole organization into that, to transform it into an enterprise
As I explained in the Zoom business model though, the whole organization needs to be structured around the freeterprise model, where on the one end the company seamlessly uses the free product as an entry point within companies.
And on the other end, salespeople with the ability to build a strong relationship with the account can get the whole company on board, thus transforming a free professional account into a potential enterprise customer.
Of course, this leads the organization to skew its resources toward building an army of qualified salespeople to handle the volume of leads generated by the free offering (in 2019 Zoom spent 54% of its revenues primarily in salespeople headcounts).
Gatekeeper model
In the gatekeeper model, the dominant company has become the main middleman between the market and millions if not billions of potential customers. In the previous era, many middlemen captured value and retained distribution power, by fragmenting the market.
In the gatekeepers’ era, the market has been unified, and as such, it has become much bigger, yet the single middleman (the gatekeeper) is also the one who locked the distribution pipelines, thus retaining control over the access to millions of consumers.
Thus, the whole gatekeeper business model is about becoming the unlocker to final customers for millions of small businesses.
Heavy-franchised business model
McDonald’s is a heavy-franchised business model. In 2021, over 56% of the total revenues came from franchised restaurants. The long-term goal of the company is to transition toward 95% of franchised restaurants (in 2020 franchised restaurants were 93% of the total). The company generated over $23 billion in revenues in 2021, of which $9.78 billion from owned restaurants and $13 billion from franchised restaurants.
McDonald’s follows what could be defined as a “heavy franchised business model.” 92% of its restaurants are franchised. With a long-term objective to reach 95% of franchised restaurants.
The franchising business model is quite effective for the expansion of the organization. A franchisor licenses its know-how (which might comprise procedures, training materials, brand, and more) for a franchisee, which has the right to sell the franchisor products and services in exchange for a royalty. In some cases, the franchisor also gets a percentage of the revenues.
Humanist enterprise business model
The most prominent advocate for the humanist enterprise business model is Brunello Cucinelli. Indeed, Brunello Cucinelli business model is based on three key pillars:
Italian Craftsmanship,
Sustainable Growth,
and Exclusive Positioning and Distribution.
The company generated over €503 million in 2017:
The humanist enterprise is based on the premise that “profit is made without harm or offense to anyone, and part of it is set aside for any initiative that can really improve the condition of human life: services, schools, places of worship, and cultural heritage.”
EdTech: enhanced education through digitalization ad tech platforms
EdTech is the attempt to make education more effective by leveraging on digital and tech. Several players are tackling this problem in different ways. Below are some examples.
For instance, the Udemy business model is trying to make everyone an instructor.
Udemy is an e-learning platform with two primary parts: the consumer-facing platform (B2C). And the enterprise platform (B2B). Udemy sells courses to anyone on its core marketplace, while it sells Udemy for Business only to B2B/Enterprise accounts. As such, Udemy has two key players: instructors on the marketplace, and business instructors for the B2B platform.
On the opposite spectrum, the Masterclass business model is trying to transform world-class experts into instructors:
Started as an attempt to transform education, MasterClass finds top talents and turns them into instructors. With a straightforward membership model of $180 per year, the streaming online education platform gives access to all its courses and the new releases on the platform. In 2020, it got valued at over $800 million.
Duolingo is an EdTech platform leveraging gamification to enable millions of users to learn languages. Duolingo leverages a hybrid between ad-supported and freemium models. Indeed, the free app makes money through advertising. Free users are also channeled into premium subscriptions with an ad-free experience and more features.
Udacity’s business model instead leverages partnerships with universities, to offer different kinds and formats of education, based on “nano-degrees.”
Udacity is a freemium EdTech platform, offering MOOCs (courses open to anyone for enrolment). Udacity partners up with companies and universities to offer nano-degrees (short-term online education programs focused on specialized skills in computer science). The user either pays a one-time or subscription fee to access one or all courses.
Enterprise business model built on complex sales
In an enterprise business model, a company focuses on large clients, usually Fortune 500 clients that have a massive budget of millions or billions of dollars. This kind of business is primarily based on complex sales.
As Peter Thiel explains in his book Zero to One, when it comes to a company’s distribution it is critical to understand where you stand. Indeed, in an enterprise business model, it’s all based on closing large deals.
Therefore, it is crucial to have senior salespeople with competence in managing those large deals to guarantee the success of the company.
In this respect, drawing a clear line between Marketing and Sales is the key point when trying to build up an enterprise business. That’s because you need to identify the right target with a laser focus.
Most of the time a large enterprise business might have only a few dozens of potential clients. Once identified those potential clients you need to put the proper resources to close those deals.
Fintech: digitalizing the financial system
Fintech business models leverage tech and digital to enhance the financial service industry. Fintech business models, therefore, apply tech to various financial service use cases. Fintech business model examples comprise Affirm, Chime, Coinbase, Klarna, Paypal, Stripe, Robinhood, and many others whose mission is to digitize the financial services industry.
Fintech business models have been tackling one of the hardest of all problems. How to transform the financial system through digitalization and technology. This is among the hardest problems because the financial industry is highly regulated, and very hard to transform.
Players like PayPal have been trying since the beginning of the digital era. Later on, other players like Stripe also tackled the problem. The wave of fintech is very strong. And with blockchain tech developing on the way, this might also help fintech take a leap forward in the coming decade.
Instant news business model
Twitter makes money in two ways: advertising and data licensing. In 2021, Twitter generated $4.5 billion from advertising and $570 million from data licensing. While Twitter generated $5 billion in total revenues, it lost 221 million.
Twitter has based its fortune on short messages (until 2017 140 characters, then extended to 280) which allows anyone to share the news but also updates that become news.
One of the most powerful aspects of Twitter is its immediateness, which although it might have also caused troubles in the media industry, also allowed news to be disintermediated.
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.
Last-mile delivery is one of the hardest problems to tackle, as it sits outside what we call network effects. In short, it doesn’t matter much the network effects a company has accumulated over the years. Last-mile is the last leg of the supply chain, and yet extremely important (it’s consumer-facing, thus the overall customer experience will depend on it).
Various companies are tackling “the last-mile problems.” And as the pandemic hit, their business models quickly evolved. Last-mile is also intertwined with on-demand. In fact, the more a product can be ordered and quickly delivered, the more the divide between retail/physical stores and digital stores will narrow down.
Beyond Amazon, a few other platforms are tackling the last-mile problem by starting with food, and transportation. Yet once those two use cases have been figured out. This can be extended to many other industries. This is why the last-mile problem is worth trillions.
In the food delivery business model companies leverage technology to build platforms that enable users to have the food delivered at home. This business model usually is set up as a platform and multi-sided marketplace, where the food delivery company makes money by charging commissions to the restaurant and to the customer.
Lock-in business model
Apple is a product-based company fueled by platform business models (like Apple Store), in which sales still primarily come from the iPhone. However, the company has also transitioned toward a service company (with Apple Store, iTunes now called Apple Music) and as a wearable product company, which is the fastest-growing segment.
Apple is famous in the business world (beyond launching beautifully crafted tech products) for its philosophy of keeping its ecosystem as enclosed as possible. Apple devices will talk to each other in a seamless way, to create a great experience.
While the smooth experience for users through Apple’s devices makes its products compelling for millions of people, the lack of integration with products outside its ecosystem can also be frustrating.
A locked-in experience can be great to have as much control over users’ experience and incentivize customers to purchase more products from the company. It can also be a disadvantage in the long run as those competitors leveraging on an open approach can grow more quickly.
As long as the company can keep investing back in developing great products, integrating them with each other to create a seamless experience, and maintaining a strong distribution pipeline, that model might work.
Long-tail business model
The long tail business model was popularised by former Wired Magazine editor Chris Anderson, who coined the phrase “long tail” and wrote a book on the subject called The Long Tail: Why the Future of Business Is Selling Less of More. The long tail business model suggests companies can profit from selling low-volume niche products. In theory, selling a significant number of these products is more profitable than selling fewer, more popular products.
A long-tail business model can be a very powerful way to break into an existing market dominated by incumbents. The long-tail player will be able to offer a compelling value proposition to users and customers as it will focus its effort on finding the most niche products of any category. This is how once startups, then turned into tech giants, reorganized entire industries. Amazon did it first with books, then with everything else. Netflix did it with movies and series. Google did it with information. And Facebook did it with networking.
Loss leader business model
A loss leader consciously loses money on a product item, in order to either enter a market or to attract customers to another segment of the business (ancillary business). Therefore, if well executed, the losses are offset by the gains in selling ancillary products, or in gaining market shares. Thus, it might translate into a long-term advantage.
The loss leader usually leverages on a hook product or service or set of products and services which are sold at cost, or a loss, but they serve as a way to enhance the customer base and channel it toward other products and services.
Management consulting business model
As one of the most successful consulting companies in the world, Accenture makes money by selling consulting services in several industries (from financial services to communication and technology). A consulting business model is often based on hiring talented people with hiring people and having them work on multiple client projects. The client pays a fee that can be assessed per hour or per day, according to the requirements of the service. Accenture was able to build a multi-billion dollar based on consulting services across the globe.
Market-maker model
Some platforms create liquidity by removing hundreds of intermediaries that are used to lock in the market. When that happens the market gets bigger and more liquid over time. That enables the platform to work as the market maker, or the maker of the price, by making it liquid.
Dynamic pricing is the practice of having multiple price points based on several factors, such as customer segments, peak times of service, and time-based consumption that allow the company is applying dynamic pricing to expand its revenue generation.
One of the major values of a platform like Uber is the fact that it is able to create liquidity on the platform by batching by time to time divers and riders, also with dynamic pricing.
Marketplaces business models
Marketplaces and platforms have become the most dominant business models of the digital era. And they have morphed into various types of platforms. From those offering products, services (or both). To those dealing only B2B, B2C, or C2B. And these marketplaces and platforms who primarily developed on a peer-to-peer basis, vs three or multi-sided ones.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C levels. And those marketplaces connect two core players or more.
Multi-brand business model
Back in the late 1990s, a war started in the fashion luxury industry to take over Gucci. That war saw an arm wrestling between Kering Group – a company founded as a lumber trading organization back in the 1960s – and LVMH Group – a company, started a few decades before primarily as a construction company just to become one of the most known luxury brands in the world.
The war was about who would become the largest luxury group – fought by the two wealthiest men in France – but also about who would be the most diversified luxury empire. Eventually, Gucci ended up within Kering Group, sold by LVMH at a high price.
At the same time, LVMH took over Fendi. Today, both Kering Group and LVMH have a massive portfolio of brands.
Kering Group’s portfolio of brands made over €15 billion in 2017
LVMH built a portfolio of brands and houses that made over €42 billion in sales in 2017
Both groups today follow a multi-brand strategy based on creating economies of scale at a central level; while keeping the Maison and Houses part of the portfolio operated and run independently.
This multi-brand approach leverages both centralization for certain aspects of the business (collaboration among the brands, economies of scale, better supply chain, shared branding initiatives) and decentralization for others (allow agile decision making, preserve the unicity of each brand to keep its creativity output high).
That approach to business modeling can be quite effective if you’re trying to build up an empire! It requires though massive resources to develop an acquisition campaign over the years. Indeed, both of those groups came from different industries and used the liquidity generated by their core activities to enter the luxury market.
Multi-business model
Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.
When you look at Amazon it’s tempting to talk about its “business model.” Yet Amazon is a set of combined business models that span across:
Consumer e-commerce platform.
First-party seller platform (Amazon owns a set of brands like AmazonBasics).
Third-party seller platform and services (Amazon hosts third-party sellers).
Amazon Prime.
Amazon Advertising.
Amazon AWC B2B/Enterprise Cloud platform.
The core of Amazon has always been the e-commerce platform, however over the years, as a side effect of developing adjacent parts of the business, to sustain its core. Amazon built successful programs (Prime and AWS are examples) that turned into self-standing businesses.
This is the fruit of a continuous mode of aggressive growth and business innovation that made Amazon expand, and reinvent its business model (AWS has a whole new logic than the core e-commerce business and could potentially be a spin-off of Amazon).
Multi-sided platform business model
If I saw, a professional social network, at least at the time of this writing, for sure you’ll think about LinkedIn. In fact, with over five hundred million users worldwide LinkedIn is a platform that offers value for several stakeholders.
In short, in a peer-to-peer marketplace, a company acts as an “invisible” middleman that makes transactions and interactions among sellers and buyers as smooth as possible.
For instance, LinkedIn sells subscription services to HR managers to find candidates to fill vacancies. At the same time, LinkedIn provides another subscription service to people looking for job opportunities.
As the value of the platform depends upon the ability of LinkedIn to offer skilled candidates to the HR manager, that is why LinkedIn also has an online teaching platform that offers together with a subscription, professional courses to people looking for a job.
Multimodal business model
Lyft is a transportation-as-a-service marketplace allowing riders to find a driver for a ride. Lyft has also expanded with a multimodal platform that gives more options like bike-sharing or electric scooters. Lyft primarily makes money by collecting fees from drivers who complete rides on the platform.
Lyft is a transportation-as-a-service on-demand marketplace that allows riders to quickly find a driver and get from one place to another. However, Lyft has also expanded with a multimodal platform that gives more options like bike-sharing or electric scooters.
Underutilization: vehicles are not used most of the time.
Inefficiency: the large ownership of vehicles also made cities build large parking spaces that occupy a good chunk of cities’ urban landscapes.
Inequality: car ownership while distributed is still a large issue for many people that can’t afford to buy a car.
From there it offers different options to customers that can switch from car to bike-sharing, or electric scooters, depending on their short-term transportation needs.
Multi-product (Octopus) business model
OYO’s business model is a mixture of platform and brand, where the company started primarily as an aggregator of homes across India, and it quickly moved to other verticals, from leisure to co-working and corporate travel. In a sort of octopus business strategy of expansion to cover the whole spectrum of short-term real estate.
In its expansion strategy, OYO started in India, yet it quickly moved to different verticals. From there it built up a portfolio of products, each launched in parallel to its expansion strategy, to cover larger geographical areas, but also different segments of the market.
From the low-end of the travel market to the higher-end with its Townhouse, a sort of modern boutique hotel. To further expand in co-working and corporate traveling.
This sort of business model is skewed toward a quick go-to-market strategy that moves in all the directions to expand and cover as much as possible of the end-to-end experience for travelers.
On-demand subscription-based business model
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. Leveraging on a streaming platform, Netflix generated over $29.6 billion in 2021, with an operating income of over $6 billion and a net income of over $5 billion.
We now give for granted that we must watch our favorite shows and series on-demand. Yet, for decades the traditional media business model has relied on fixed schedules. You either watched the Late Show at the time it was going on air, or you were supposed to wait for the next replica of that episode.
At times a business model only becomes possible when technology evolves. In some cases, it also requires some creativity when technology doesn’t help. For instance, in 1997 Reed Hastings, CEO, and founder of Netflix started a business based on the rental of DVDs.
This business today contributes to a small pie of Netflix revenues, yet at the time it was the core of the business, and it has been so for years. “On-demand” at the time was possible with the pay-per-rental business model.
Binge-watching is the practice of watching TV series all at once. In a speech at the Edinburgh Television Festival in 2013, Kevin Spacey said: “If they want to binge then we should let them binge.” This new content format would be popularized by Netflix, launching its TV series all at once.
One-for-one business model
Have you ever heard of TOMS Shoes? As you can understand from the name, this is a company making shoes. What’s new about it? The founder of TOMS Shoes founder has come up with a model, in which, for a pair of shoes sold, another pair is given to kids around the world that cannot afford them.
This kind of model might be seen as a sort of hybrid that combines profit with non-for-profit models. In reality, TOMS Shoes has proved to be profitable and sustainable over time.
Indeed, the non-profit side of the business model works as an excellent propeller for the business. Anyone wants to take part in the growth of a company that not only sells shoes but takes care of kids around the world.
Thus, it isn’t anymore just a pair of shoes; it is a story you want to be part of.
Open-Source Business Model
Fastly follows an enterprise business model, which offers an edge cloud platform. Fastly business model leverages an active community of developers. A good chunk of its revenues got spent on sales and marketing processes as an enterprise business. The company has dozens of field sales representatives and sales managers. For a monthly fee, enterprise customers get access to the platform, account management, and enhanced customer support. In 2021 the company generated over $354 million in revenues, of which over $313 came from 445 enterprise customers.
In terms of customer acquisition strategy, the open-source model is not that different from the freemium/freeterprise. There is the base service/product offered for free, and a business/enterprise version that is paid.
There is a key difference, though.
Whereas in a freemium and freeterprise, the free product is built, developed, and maintained by the company centrally.
On an open-source model, the free product is built, developed, and in part, maintained by an open community of developers.
Those developers are not employees of the company, but rather part of an independent community. This implies the company selling the premium version of the open-source software will need to be careful in how it monetizes it to prevent disappointing the community of developers that made the project possible in the first place.
Open Core Business Model
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
The central value proposition of open source core vendors has been freedom from vendor lock-in. After all, the core elements of the product are open source, developed by a global community. The core product isn’t owned by a single company, but, in almost every meaningful instance, by the Apache Software Foundation (ASF). If the worst happens and we go out of business, the code will live on in the ASF. You’re safe. If you don’t like us, it’s open-source. You’re protected. I don’t know what happens next but hey open source.
GitLab was created in 2013 by Ukrainian developers Dmitriy Zaporozhets, Valery Sizov, and Sytse Sijbrandij as a source code management solution for collaborative software teams. GitLab is a web-based, open-source DevOps tool providing issue-tracking and continuous integration and deployment pipeline features. It makes money via its main two paid plans (Premium & Ultimate) and via its subscription add-ons.
Peer-to-peer business model
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. Due to the pandemic, Airbnb is stretching its business model and experimenting with new formats like online experiences to transition toward fully digital experiences.
A peer-to-peer business model is built on the premise of creating value for both the demand and offer sides, while the company that acts as a middleman monetizes through commissions.
Companies like Airbnb have implemented the modern version of the peer-to-peer business model. As technology has quickly advanced, in Airbnb’s case, it won just because it allowed the transactions between hosts and the hostee smooth.
The platform works seamlessly, and Airbnb only intervenes to create trust and mitigate risk for the party involved.
Platform-agnostic model
Grammarly leverages on a freemium service, where free users are prompted to switch to a paid subscription. Grammarly makes money by selling premium plans starting at $11.66 to $29.95 per month. The company also makes money by selling human proofreading services to its paid users.
Grammarly’s CEO explained to TechCrunch as one of the key advantages of Grammarly is its “platform-agnostic approach.” In short, Grammarly focuses on being anywhere the user needs to be.
This approach makes Grammarly’s value proposition compelling in a tech world, dominated by the tech giants that are trying to cover the end-to-end experience of users, thus locking them in their walled gardens.
Grammarly instead is trying to be anywhere, independently from the platform, thus making the user free to choose the platform.
Platform business model
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model’s success.
While any business today with a minimum of a technological set-up wants to call itself a platform business model, the platform business model has specific features. It enjoys network effects; it enables interactions among its key participants. And to kick things off, it has to solve the so-called chicken and egg strategy problem, where the platform has to figure on which side to kick off the platform.
Definition Network Effects: The value of a service/platform increases for each additional user, as more users, join in.
Sub-type
Description – Example
Direct, Same Side, or One-Sided
As more users join, the platform’s value increases for each additional user. Take the case of a social media platform, like Facebook, Instagram, TikTok, LinkedIn, and Twitter. The more users join, the more the platform will be valuable for each additional user, as the new user might find exponentially richer and broader content (provided the platform can prevent congestion or pollution).
Indirect or Cross-Side
In this case, a user type joining the platform makes it more valuable for other user types. Take the case of LinkedIn. While LinkedIn enjoys the same-side network effects, the platform becomes more valuable to users looking to enhance their careers as more users join in. At the same time, LinkedIn enjoys indirect or cross-side network effects. More users who join the platform to grow their career make it more valuable for recruiters (so a different user type) as they can find more qualified candidates on top of the platform.
Two-Sided
Take the case of LinkedIn. While LinkedIn enjoys the same-side network effects, the platform becomes more valuable to users looking to enhance their careers as more users join in. At the same time, LinkedIn enjoys indirect or cross-side network effects. In this case, a user type joining the platform makes it more valuable for other user types. More users who join the platform to grow their career make it more valuable for recruiters (so a different user type) as they can find more qualified candidates on top of the platform.
Multi-Sided
In this case, more than two user types are driven by the network dynamics. Take the case of Uber Eats; the more restaurants join the platform, the more the platform becomes valuable for eaters. While at the same time, by leveraging on its existing platform, Uber drivers have additional riding options. So they can earn extra income by delivering food instead of giving rides. That makes the overall platform much more valuable for the three main user types: eaters, restaurants, and riders.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. Negative network effects (congestion or pollution) reduce the value of the platform for the next user joining.
Indeed, as the platform – usually – has two or more key players, its value proposition is also tuned for those several players. For instance, on a platform like Uber, drivers were the key to making the service value in the first place. On a platform, like Airbnb, hosts and the availability of a wide variety of homes were critical to kick the platform off.
Therefore, a platform business model has to figure out how to kick off the side of the platform that automatically will trigger network effects on the other side (for instance, the more drivers on Uber, the more the platform is valuable to riders).
Beware though, even when platform business models scale, they can get out of hand, very quickly, due to negative network effects.
Definition Negative Network Effects: The Value of the service/platform decreases for each additional user, as more users join in. This might be due to congestion (when increased usage can’t be handled by the platform) or pollution (when the increased size of the network makes it hard to incrementally add value, and instead its value shrinks).
Description – Example
Congestion (Increased Usage)
In this case, there is a reduced quality of the service when certain parts of the networks carry way more data than they can handle. That usually happens because of scale limitations and noise due to curation limitations. Since this is a technological issue, it manifests as service slowdown or perhaps the platform crashing. Take the case of services like YouTube crashing for too much traffic. Or, if you’re a professional, a service like Slack crashes as it cannot handle the traffic spikes. That becomes a disservice with potential negative network effects because you suddenly prevent a whole team from functioning properly. Therefore, a negative network effect can have exponential negative consequences. For instance, users would switch to alternatives en masse if this was repeatedly happening, thus creating structural damage to the network.
Network Pollution (Increased Size)
The case of pollution is more tied to the ability of the platform to keep its service relevant at scale. Thus, imagine the case of a platform like Twitter, in which the principal asset is the feed. As Twitter becomes more and more popular, it needs to make sure that the user-generated content is qualitatively on target. Otherwise, the risk is for the user’s Twitter feed to become less relevant and lose value. Or imagine the case that many user-generated platforms face today, where spambots take over. Here, suppose the platform cannot handle this automatically generated content. In that case, it can quickly lose value, as the service becomes worthless for users (take the case of a user who has to spend an hour a day cleaning up the feed because of spamming).
The play-to-earn model is a business model allowing gamers to farm or collect cryptocurrency and NFTs that can be sold on the market. This model has become a standard already in the “crypto gaming industry,” where the blockchain-based games enable token economics to kick in as an incentives mechanism at scale for users to play and be engaged.
The play-to-earn model is an evolution toward enabling community-based gaming, on top of the blockchain, through NFTs.
Privacy as an innovative business model
DuckDuckGo makes money in two simple ways: Advertising and Affiliate Marketing. Advertising is shown based on the keywords typed into the search box. Affiliate revenues come from Amazon and eBay affiliate programs. When users buy after getting on those sites through DuckDuckGo the company collects a small commission.
While humans have always looked for private moments in their lives, Privacy has gained a new and renewed meaning in modern times:
With the rise of the web and the rise of companies that make money by harvesting users’ data, privacy has become a concern. As many businesses start from people’s concerns, privacy has become an industry.
Part of it has been fueled by Google’s practice to gather users’ data. As more people become aware of the Google business model, they look for alternatives that respect privacy.
If you type “privacy” on the Google search box, among the most frequent related searches, you’ll find “privacy Google:”
If you click on “privacy google” you will get on the right-hand side a knowledge panel that highlights “privacy concerns regarding Google:”
In short, Google itself is revealing the existence of an industry that revolves around privacy online.
In this scenario, a search engine like DuckDuckGo, which has built its success on throwing the users’ data on the fly to allow private navigation, is growing quite fast.
Proptech, or real estate on steroids (through digital and tech)
PropTech stands for property technology, is a relatively recent movement in the real estate industry. A movement is an innovative approach that uses technology to optimize how consumers and real estate professionals interact with property. PropTech, therefore, leverages digitalization to help property managers, owners, builders, and landlords to manage their assets.
A key example of that is the Zillow business model. You can see the proptech business model type, as a way to innovate a very old industry, by automating the real estate value chain through technology.
Zillow is an online real estate marketplace, matching buyers and sellers and renters and landlords through a massive platform with personalized search and discovery experiences and simple UI for both buying/renting and selling/listing. The company makes money by charging a fee on the sales and additional services like premium agents and mortgage services for buyers.
Razor and blade model
The razor blade business model, also known as the razor-razorblade model, involves selling a product at a lower price to then selling a related product later for a profit. The razor and blade business model has been popularized by King C. Gillette, founder of the safety razor company Gillette, which sold a durable razor at cost while selling disposable blades at a premium.
Have you ever wondered why a blade costs more than a razor? This is the razor and blade revenue model in action. When a company makes its customers loyal to a product. Then that same company might leverage that product to sell related “accessories” for a premium price.
Companies like Apple, for instance, use an inverse razor and blade, business model. Apple has created platforms like the App Store and iTunes, which sell apps and songs, movies, or tv series at a convenient price. While Apple charges premium prices on its devices (iPhone, iPad, and Mac).
The logic is the same, but inverted. As consumers are locked in the Apple ecosystem, they feel compelled to buy Apple products at a premium price and with very low price elasticity.
Apple’s made over $365.8 billion in revenues in 2021, of which over $191.9 billion or over 52% of its total revenues came from the iPhone. Yet, the iPhone isn’t just a hardware product; it’s a business platform that combines hardware (iPhone), operating system (iOS), and a marketplace (the App Store). Thus, the company still makes most of its money around a single product which powers up an entrepreneurial ecosystem.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
As a classic example of a retail businessmodel, think of the local coffee shop or restaurant. The coffee shop owner buys a set of products in bulk from wholesalers (coffee beans, foods, drinks, etc.) thus paying these products at a low price and it sells them back in its store with a high markup.
Real-time insurance business model
A real-time insurance business model enables Tesla to build its own insurance arm, by dynamically adjusting the premiums, based on real-time driving behavior. Reduced insurance premiums hooked with the leasing arm, enable Tesla to scale its demand side of the business.
Elon Musk is a huge fan of Steve Jobs (so much so that he engaged Walter Isaacson to write his biography, just like Steve Jobs’ iconic book) and borrowed a good chunk of Apple’s playbook.
And now, he’s building two critical segments of Tesla’s business model, which will be vital in enabling a wide distribution of his cars: leasing and insurance.
In the last ten years, Tesla had to solve the supply side.
What Musk labeled “mass production hell” brought Tesla very near to bankruptcy on several occasions (in 2018, Tesla was a few days away from running out of cash!).
However, now that the company has figured that out, through the openings of the Shangai, Berlin, and Texas Gigafactories.
The coming decade will be all about enhancing the demand side.
In short, by enabling an expensive car, like a Tesla, to be potentially bought by hundreds of millions of drivers.
How is Tesla solving this?
Through the real-time insurance business model. In short, Tesla enables riders to have their safety score updated, on a monthly basis, through real-time driving behavior.
While traditional insurance has a fixed score, often based on factors that go way beyond the ability of the driver, Tesla is trying to hook again the insurance premiums based on the actual capability of the driver.
This is a key element of Tesla’s business model, because a better driving score, helps Tesla lower the insurance costs for drivers, and enables the company to also provide leases at a lower rate, thus making the Tesla affordable, for a much larger number of people!
This is the magic of a distribution strategy, built-into your business model!
Self-serving model
Dropbox generated over 90% of its revenue via its self-serve channels to convert users into paying customers through in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Dropbox generated over $2.1 billion in revenue in 2021, with an average revenue per paying user of $133, based on 16.79 million paying users.
A self-serving model is a freemium-based model able to convert quickly and with low-cost free users in paid accounts. Dropbox’s business model is a great example of acquiring new users efficiently and at relatively low costs through three tactics:
Word-of-mouth referrals.
Direct in-product referrals.
And sharing of content.
By following the freemium model when users create a free account those same users often share and collaborate with other non-registered users. This mechanism for which free users invite other non-users creates an automatic referral mechanism.
Built-in prompts in the products instead make it possible to convert, with a low-touch and automated funnel to users in premium accounts.
Slow, fast, ultrafast fashion and real-time retail
The fashion industry has evolved very quickly since the 1980s leading to various fashion movements and enabling the development of companies that would define our times. Among these, we can break them down into slow, fast, and ultrafast fashion players.
Slow fashion is a movement in contraposition with fast fashion. Where in fast fashion it’s all about speed from design to manufacturing and distribution, in slow fashion instead quality and sustainability of the supply chain are the key elements.
The slow fashion business model developed also in contraposition with the fast fashion business model:
Fash fashion has been a phenomenon that became popular in the late 1990s, and early 2000s, as players like Zara and H&M took over the fashion industry by leveraging on shorter and shorter design-manufacturing-distribution cycles. Reducing these cycles from months to a few weeks. With just-in-time logistics, and flagship stores in iconic places in the largest cities in the world, these brands offered cheap, fashionable clothes and a wide variety of designs.
Zara epitomized that movement. From there, other forms of fast fashion developed. They moved both upward and downward the supply chain. Thus, by cutting manufacturing time on the one hand, and by also leveraging digital distribution, in place of physical stores.
The Ultra Fashion business model is an evolution of fast fashion with a strong online twist. Indeed, where the fast-fashion retailer invests massively in logistics, and warehousing, its costs are still skewed toward operating physical retail stores. While the ultra-fast fashion retailer mainly moves its operations online, thus focusing its cost centers on logistics, warehousing, and a mobile-based digital presence.
Real-time retail involves the instantaneous collection, analysis, and distribution of data to give consumers an integrated and personalized shopping experience. This represents a strong new trend, as a further evolution of fast fashion first (who turned the design into manufacturing in a few weeks), ultra-fast fashion later (which further shortened the cycle of design-manufacturing). Real-time retail turns fashion trends into clothes collections in a few days cycle or a maximum of one week.SHEIN is an international B2C fast fashion eCommerce platform founded in 2008 by Chris Xu. The company improved on the ultra-fast fashion model by leveraging real-time retail, which quickly turned fashion trends in clothes’ collections through its strong digital presence and successful branding campaigns.
Space-as-a-service model
WeWork runs a membership model that gets monetized via a set of packages that include ancillary value-added products and services to enable companies to scale or shrink their workspace on-demand. WeWork defined its revenue model as space-as-a-service claimed to be more scalable than traditional commercial real estate.
While the main carrier of this model (WeWork) had massive backlashes due to its unsustainable business model. The question of whether this model will be possible in the future still holds.
True, that part of the problem is that of taking long-term leases to transform them into short-term opportunities by building services on top of them, to arbitrage on the difference.
Subscription-based business model
Subscription-based business models are built on a recurring customer base, where customers rather than own, usually have access to the product or service. The customer can have the upside of the service, without owning the good underlying it, which is maintained by the company running the subscription-based business.
Think about those two scenarios. You have a series of online courses that you sell as a one-off. You’ve sold 100 courses in one month at $100; you’d made $10,000. Next month to have the same level of revenue generation you’ll have to sell the other 100 courses.
This means you either find more students or you produce new courses. Imagine the second scenario. You have a few courses, and you make them available for a monthly subscription at $75. If you have 100 subscribers, this means that each month you’ll have $7,500 without having to find new students.
Given this example, you can understand why the subscription business model is so powerful. Today companies like Netflix, Amazon (with Prime), LinkedIn, and many others use subscription-based models to monetize part of their business. However, a subscription-based business model also needs a lot of resources.
Take Netflix. I’ll keep paying my subscription only if they will give me fresh content on a regular basis. That is why Netflix also produces series that are quite successful. Yet those series have massive production costs.
In other words, to sustain a subscription-based business model you also need a lot of the resources necessary to create new content, have awesome support or service that motivates subscribers to keep paying. The curse of the subscription business model is churn!
Surfer model: reverse-engineering the gatekeeper
In the gatekeeper model, we saw how the market got consolidated under a single middleman that, with its algorithms, could change the logic of the whole distribution pipelines for an entire industry.
Small businesses then will need to master how the gatekeeper works and aligns with its business model to reach potential customers. This is at the core of the surfer model, where the small or medium business builds a strong brand by complementing the gatekeeper’s value proposition.
For instance, for years, companies like Booking, TripAdvisor, and other vertical travel search engines have been able to build valuable companies on top of Google. Where Google couldn’t cover vertical areas, those companies complement that, by building multi-billion businesses indeed.
The same applies when you launch e-commerce on Amazon, a blog by leveraging Google, or a channel on YouTube. In all these circumstances you’re aligning your distribution model with that of the gatekeeper to reach potential customers.
Three-sided marketplace model
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner, and a customer with the Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay the small delivery charges, and at times, cancellation fees; Drivers earn through making reliable deliveries on time.
Uber Eats is a great example of a three-sided marketplace, where the company facilitates interactions between eaters, delivery partners, and restaurants to develop a solid marketplace.
While each of those interactions could happen independently. Uber Eats platform makes them smooth, as it provides a unique place for those players to connect and do business.
User-generated content business model
Among the 50 most popular sites in the US, Quora might be defined as a “social Q&A” site. Just like Reddit taps into users to generate content. Quora also draws on its writers to produce quality content that answers its users’ questions.
There are a few interesting aspects of Quora. First, it uses a mixture of AI combined with human intelligence. Quora allows users to write content while using advanced algorithms to make the platform scale up. Second, people writing on Quora do not get paid.
In fact, by introducing a social mechanism of ranking, Quora writers feel recognized for their work. Besides, earning the prize as Quora’s top writer might also mean the mention of popular publications.
Thus, if I had to describe the Quora business model in a couple of sentences, that would be “the social that taps into users – that aspire to become writers – to produce content, and it scales up thanks to a smart platform built on AI systems.“
In terms of monetization, Quora has received several rounds of investment and started to test text-based advertising.
User-generated AI-amplified model
TikTok is the Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.
For many, TikTok is just the next generation of social media. However, there is more to it. TikTok is a continuous feed, that shows short video formats, where users engage in all sorts of dances, memes, and more (for now).
Yet, what makes TikTok powerful is the curation performed by its AI. Whereas in Web 1.0 social media was all about the network. In AI-driven social apps, it’s all about engagement.
Users can find a continuous stream of hooking content in their feeds independently from their network, the AI replaces it. Yet, the AI + the network becomes an atomic weapon for growth. If the previous advertising machine is built on top of information retrieval (Google) and network (Facebook).
Those are the largest digital advertising machines as they managed to make advertising mostly invisible or at least relevant to users. What if that could be brought to the next level?
Where scaled user-generated platforms built powerful business models (Facebook, Twitter, Instagram). The web 2.0 version is the user-generated, AI amplified content that will take over with new video formats.
Unbundler model
Unbundling is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.
Unbundling is the process of breaking the value chain to take over the most valuable part of it, without owning or bearing the total cost of ownership of maintaining it. In phenomena like showrooming the customer browses the physical shop, yet it buys from the online retailer, which has more competitive pricing.
Therefore, the online retailer takes all the upside, without having the downside of maintaining a physical store. A classic example is when people browse in a local store, to then buy on online e-commerce like Amazon, where they can find more competitive pricing.
Showrooming is a pattern where consumers browse in a brick-and-mortar store but they finalize the purchase online. Webrooming is the reverse process. Consumers browse the product online, but they finalize the purchase in the physical store.
The unbundler, initially, is a sort of freeloader that takes the upside of a value chain without bearing the downside. Yet the overall value chain improves as customers get the most by combining the experience from the incumbent and the unbundler (ex. the consumer browse several physical stores, then buys online as it saves money).
Vertically integrated business model
From its humble beginnings in 1961, when Leonardo Del Vecchio started as a small shop that produced components and semi-finished products for the optical industry; that shop has reached over $9 billion in net sales in 2017.
With all the major brands from the eyewear industry licensed by Luxottica (Armani, Bulgari, Chan, l, Prada, and many others) it is the largest and most vertically integrated business in the world.
Leonardo Del Vecchio, one of the wealthiest people in Italy and among the wealthiest businessmen in the world, has built Luxottica piece by piece.
Started as a small shop producing semi-finished products for the optical industry it eventually acquired the whole supply chain, up to own retail stores across the globe. It took Leonardo Del Vecchio a few decades to build its vertically integrated business.
Yet now that is the most successful company in the optical industry. Instead of being acquired by a large American company, the Italian-based Luxottica was the one acquiring brands like Oakey (the California-based eyewear company).
Players like Warby Parker try to break down Luxottica’s vertical integrated supply chain, by initially owning only a part of the supply chain, thus having a more agile approach.
Warby Parker is a prescription and sunglasses retail company, which focuses on vertical integration to enhance the customer experience by owning the optical laboratories where lenses are developed, and by owning both physical and online stores to enable customers to choose from a variety of products. Warby Parker leverages programs like the Home-Try-On program and the “Buy a Pair, Give a Pair” to lower up long-term customer acquisition costs, incentivize recurring purchases and referrals from existing customers.
Wholesaler business model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
Whereas in the direct-to-consumer business models, the manufacturer goes straight to consumers. In the wholesale model, the company passes through middlemen to reach the final consumers. Usually, this type of business model implies that the wholesale company only needs to deal with certain aspects of the business (sourcing and logistics), while it won’t have to spend massive resources on other processes like distribution, and marketing, as it will primarily sell in bulks to fewer large customers.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
You can use the FourWeekMBA Business Analysis Framework to reverse engineer any business.
Many believe business modeling is about copying and pasting. Instead, that is about experimentation.
Business models can offer valid templates that we can test, yet only when those ingredients are combined, we get a unique model, hard to replicate, that is when a competitive advantage is created.
Business models are not business plans. While many startups consult business modeling right when it’s the time to build their pitch for investors. In reality, the business model strategy serves entrepreneurs to test their hypotheses, quickly and cheaply. So that when you have enough built-in mechanisms for sustainability within your business model, you will have enough cash at the bank to keep growing. Or perhaps the market will have proved your model to be successful, so ready to be taken to the next level.
In an era, where technology becomes commoditized over time, business model experimentation can prove more sustainable, as harder to reverse engineer (as it comprises many building blocks that sometimes are hard to understand also to the same company rolling out the successful business model).
Business modeling is a continuous journey of discovery. It never ends. As a company scales or it creates options to scale, the whole business model will transform and the question of whether it will be sustainable for the next stage of growth and scalability stays open.
There isn’t a right or wrong business model, but rather a model that will work in a certain context, and that will suddenly stop working in others. Business modeling is also a matter of life’s philosophy. The vision of founders or those who took the business from one stage to the next affects the long-term vision of the business, thus its direction in the long-run.
Business Models Types Database
Business Model Types Database
Description
Example
Ad-Supported
In the ad-supported model the basic, entry service is offered for free and subsidized by advertising served to free accounts. An example is Spotify, which is a mixture of ad-supported and premium. The ad-supported model is used as a self-sustaining model. At the same time, free accounts are also prompted to convert to premium accounts. Therefore, in this specific case, the ad-supported model works both as a self-sustaining and freemium model.
Spotify
Affiliate
In the affiliate model, the company can generate revenues by referring to other services and products, thus gaining a commission on each sale. At the same time, the affiliation program can be used as a growth engine for the company that enables affiliates to send referral traffic to the platform. Amazon has been among the tech companies that most have enjoyed initial traction thanks to affiliations.
Amazon
Aggregator
In this business model, the aggregator becomes the middleman by removing all the other middlemen from the market. To understand more about this model and how it differentiates from platform business models, read the guide on the aggregator business model.
Agency-based
In short, Neil Patel Digital is the SEO and digital marketing agency that allows Neil Patel to monetize its traffic primarily by offering free content and free marketing tools. This is a mixture of a freemium business model, combined with an agency-based business model.
neilpatel.com
Asymmetric
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
Google, Facebook
Attention-Merchant
The attention-merchant main product is represented by the eyeballs of millions if not billions of users. Usually, the attention-merchant makes its core product free, and as open as possible, then it monetizes it through targeted advertising.
Google, Facebook
Barbell
In this model, a company uses a barbell approach to product and distribution. You have a core product and business where most resources are spent and the whole organization structured around. On the other end, you place bets on new products that might renew your business model and make the old irrelevant.
Alphabet Other Bets
Bidding Multi-Brand
A perfect example is a company like Grubhub, an online and mobile platform for restaurant pick-up and delivery orders. The company charges restaurants a pre-order commission and it generates revenues when diners place an order on its platform.
GrubHub
Blitzsacler
Amazon e-commerce consumer platform (here we’re not referring to Amazon AWS). Amazon’s continuous, massive, investment in growth to dominate multiple markets is a perfect example of a business model with built-in growth. This is the combination of several elements (platform’s network effects + branding power + scalable financial model).
Amazon e-commerce
Bundler
In bundling, a strong distribution power combines several products in a single offer to extract more from the market. For decades Microsoft has been able to bundle several products under the same umbrella (Office has been coupled from time to time to several other products) so the company extracts more from the market if it were selling a single product.
Microsoft
Blockchain-Based
A blockchain is a distributed ledger that relies on cryptography to handle transactions, interactions, or anything that implies an exchange between people, which is decentralized and anonymous. Companies like Steemit have built a business model around enabling user-generated content by using a blockchain protocol.
Steemit
Chain-Mixed To Franchise
This model is used to scale restaurants or food businesses while keeping a tighter grasp on the brand. The company keeps a higher percentage of chain restaurants primarily to control the customer experience, to research new products, and also develop operational efficiencies that can be passed along to franchised restaurants as best practices. Starbucks is a mix of operated vs. licensed stores. If we look at the revenue generation, company-operated stores make up 79% of the company’s revenues in 2017.
Starbucks
Cash Conversion (Financial Model)
Have ever wondered how some businesses survive, nonetheless the thin margin they have? One great example is Amazon. A company that has made low-profit margins for most of its history and yet it has been very disruptive. In reality, Amazon can get its partners to finance the business by playing on the short-term liquidity of the business, what is called a cash conversion cycle. This unlocks short-term liquidity that coupled with massive investment back in the business made of Amazon an ever-expanding company (see also Blizscaler-Mode)
Amazon
Discount-High-Quality
Leveraging on the price to gain a competitive advantage isn’t new. However, price wars are not the best way to create a sustainable business model. Instead, the supermarket chain – ALDI – has done just the opposite. One of the critical ingredients of the ALDI business model is to keep its prices low while maintaining its quality as high as possible.
ALDI
Distribution-Based
A distribution-based business model is one in which a company’s survival depends on its ability to have one or a few key distribution channels to connect to its final user or customer. Most successful companies tie their business models with a core distribution channel, which becomes the so-called cash cow, for years if not decades.
Amazon, Apple, Google, Facebook, Microsoft and counting
Direct-To-Consumer
A direct-to-consumer business model is primarily based on direct access from a brand or company to its final customers. Indeed, the more a company is able to tap into its customers without the need of an intermediary, the more this model will work in favor of the brand, which is able to control the perception of its customers via massive marketing campaigns. While this is similar to the distribution-based model. The direct-to-consumer is mostly B2C (targeting mass markets). Where instead the distribution-based can be also B2B or enterprise.
Unilever
Direct Sales
In a direct sales model, the whole company is organized around a complex salesforce able to understand the motivations that drive customers to buy. This salesforce is also able to manage complex relationships which can involve entire departments of an organization, thus generating from simple to more complex deals. Thus, direct sales can be a powerful way to develop a business if done correctly. One of the secrets to a successful direct sales strategy is the qualification of your target audience.
Apple (in part), Tesla
E-Commerce
As building up a website and e-commerce has become inexpensive, and it buries no particular cost for the traditional brick-and-mortar business, more and more small businesses join in and make the marketplace their primary source of revenues following Amazon leadership at a global scale. In fact, in many cases, brick-and-mortar stores opt to become Amazon sellers. The e-commerce industry now has other key players that go from Shopify to Etsy. And many other tech players are entering the space. Also, Google has its Google Shopping and Facebook has Facebook Shops (a branded integration with Shopify).
Amazon, Shopify, Etsy, Google Shopping, Facebook Shops
Educational-Based
Built by one of the smartest persons on earth (Stephen Wolfram), Wolfram Alpha is a computational engine, able to provide complex mathematical questions and way more advanced (at least until a few years ago) compared to any other search engine.
WolframAlpha
Family-Owned
The family-owned integrated model starts from the assumption that even if you’ve built a multi-billion dollar company you can control it in its entirety, while you also keep an agile decision-making process based on an ownership structure that keeps the control of the organization in the hands of the family.
Prada, LVMH
Feeding
As platforms arise, they create ecosystems, becoming unexplored markets. Those markets can be surfed by feeding your business model on top of that. A good example is how HyreCar feeds its business model on top of Lyft and Uber networks of drivers.
HyreCar
Freemium
Free can be a powerful weapon for growth. Many in the tech industry and more specifically in the SaaS business model use Freemium to grow their business. The freemium is a mix of free and paid services.
Feeterprise
As consumer brands showed the freemium model could be both a great go-to-market strategy and generate a continuous flow of qualified leads (however, only after the whole organization would be organized around identifying those opportunities), other B2B/Enterprise companies (those primarily selling to other companies or larger corporations) also mastered the freemium model but on a B2B/enterprise scale.
Zoom, Slack
Gatekeeper
In the gatekeeper model, the dominant company has become the main middleman between the market and millions if not billions of potential customers. In the previous era, many middlemen captured value and retained distribution power, by fragmenting the market. The gatekeeper then becomes the provider, enabler, and also the pipe for millions of small businesses.
Amazon, Google, Facebook, Spotify
Heavy-Franchised
McDonald’s follows what could be defined as a “heavy franchised business model.” 92% of its restaurants are franchised. With a long-term objective to reach 95% of franchised restaurants.
McDonald’s
Humanist Enterprise
The most prominent advocate for the humanist enterprise business model is Brunello Cucinelli. Indeed, Brunello Cucinelli’s business model is based on three key pillars: 1. Italian Craftsmanship, 2. Sustainable Growth, 3. Exclusive Positioning and Distribution.
Brunello Cucinelli
Enterprise
In an enterprise business model, a company focuses on large clients, usually Fortune 500 clients that have a massive budget of millions or billions of dollars. This kind of business is primarily based on complex sales.
SalesForce
Instant News
Twitter has based its fortune on short messages (until 2017 140 characters, then extended to 280) which allows anyone to share the news but also updates that become news.
Twitter, Google News
Locked-In
Apple is famous in the business world (beyond launching beautifully crafted tech products) for its philosophy in keeping its ecosystem as enclosed as possible. Apple devices will talk to each other in a seamless way, to create a great experience.
Apple
Management-Consulting
As one of the most successful consulting companies in the world, Accenture makes money by selling consulting services in several industries (from financial services to communication and technology). A consulting business model is often based on hiring talented people and having them work on multiple client projects.
Accenture
Market-Maker
Some platforms create liquidity by removing hundreds of intermediaries that are used to lock in the market. When that happens the market gets bigger and more liquid over time. That enables the platform to work as the market maker, or the maker of the price, by making it liquid.
Uber
Multi-Brand
Luxury groups like LVMH and Kering today follow a multi-brand strategy based on creating economies of scale at a central level; while keeping the Maison and Houses part of the portfolio operated and run independently.
LVMH, Kering
Multi-Business Model
The core of Amazon has always been the e-commerce platform, however over the years, as a side effect of developing adjacent parts of the business, to sustain its core. Amazon built successful programs (Prime and AWS are examples) that turned into self-standing businesses.
Amazon (E-commerce, AWS, Prime)
Multi-Sided Platform
On a multi-sided platform, the company operates services to both sides. For instance, LinkedIn sells subscription services to HR managers to find candidates to fill vacancies. At the same time, LinkedIn provides another subscription service to people looking for job opportunities.
LinkedIn
Multimodal
Lyft is a transportation-as-a-service on-demand marketplace that allows riders to quickly find a driver and get from one place to another. However, Lyft has also expanded with a multimodal platform that gives more options like bike-sharing or electric scooters.
Lyft
Multi-Product
In its expansion strategy, OYO started from India, yet it quickly moved to different verticals. From there it built up a portfolio of products, each launched in parallel to its expansion strategy, to cover larger geographical areas, but also different segments of the market.
OYO
On-Demand
We now give for granted that we must watch our favorite shows and series on-demand. Yet, for decades the traditional media business model has relied on fixed schedules. You either watched the Late Show at the time it was going on air, or you were supposed to wait for the next replica of that episode.
Netflix
One-For-One
Have you ever heard of TOMS Shoes? As you can understand from the name, this is a company making shoes. What’s new about it? The founder of TOMS Shoes founder has come up with a model, in which, for a pair of shoes sold, another pair is given to kids around the world that cannot afford them.
TOMS
Open-Source
Where in a freemium and freeterprise the free product is built, developed, and maintained by the company centrally. On an open-source model, the free product is built, developed, and in part maintained by an open community of developers.
GitHub, Fastly, GitLab
Peer-To-Peer
A peer-to-peer business model is built on the premise of creating value for both the demand and offer side, while the company that acts as a middleman monetizes through commissions.
Airbnb
Platform
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
Platform-Agnostic
Grammarly’s CEO explained to TechCrunch as one of the key advantages of Grammarly is its “platform-agnostic approach.” In short, Grammarly focuses on being anywhere the user needs to be. Grammarly instead is trying to be anywhere, independently from the platform, thus making the user free to choose the platform.
Grammarly
Privacy-As-Business-Model
With the rise of the web and the rise of companies that make money by harvesting users’ data, privacy has become a concern. As many businesses start from people’s concerns, privacy has become an industry.
DuckDuckGo
Razor-And-Blade
Companies like Apple, for instance, use an inverse razor and blade, business model. Apple has created platforms like the App Store and iTunes, which sell apps and songs, movies, or tv series at a convenient price. While Apple charges premium prices on its devices (iPhone, iPad, and Mac).
Gillette
Self-Serving
A self-serving model is a freemium-based model able to convert quickly and with low-cost free users in paid accounts. Dropbox’s business model is a great example of acquiring new users efficiently and built-in prompts in the products instead make it possible to convert, with low-touch and automated funnels users in premium accounts.
DropBox
Space-As-A-Service
While the main carrier of this model (WeWork) had massive backlashes due to its unsustainable business model. The question of whether this model will be possible in the future still holds.
WeWork
Subscription-Based
In a subscription-based model, the company needs to build a continuous relationship with its users/members/customers, and in turn, the customer commits a subscription to sustain the business in the long-term
NYTimes/Netflix
Surfer-Model
Small businesses then will need to master how the gatekeeper works and aligns with its business model to reach potential customers. This is at the core of the surfer model, where the small or medium business builds a strong brand by complementing the gatekeeper’s value proposition.
SMBs
Three-Sided-Marketplace
Uber Eats is a great example of a three-sided marketplace, where the company facilitates interactions between eaters, delivery partners, and restaurants to develop a solid marketplace.
Uber Eats
User-Generated
There are a few interesting aspects of Quora. First, it uses a mixture of AI combined with human intelligence. Quora allows users to write content while using advanced algorithms to make the platform scale up. Second, people writing on Quora do not get paid.
Facebook, Quora, Reddit
User-Generates-AI-Amplified
For many, TikTok is just the next generation of social media. However, there is more to it. TikTok is a continuous feed that shows short video formats, where users engage in all sorts of dances, memes, and more (for now).
TikTok, Instagram, Facebook
Unbundler
Unbundling is the process of breaking the value chain to take over the most valuable part of it, without owning or bearing the total cost of ownership of maintaining it. In phenomena like showrooming, the customer browses the physical shop, yet it buys from the online retailer, which has more competitive pricing.
Amazon
Vertically-Integrated
Yet now that is the most successful company in the optical industry. Instead of being acquired by a large American company, the Italian-based Luxottica was the one acquiring brands like Oakey (the California-based eyewear company).
Luxottica
Business Models Examples Infographic
The business model examples infographic, from the FourWeekMBA Research.
Business models FAQs
Is a business model a business strategy?
A business model is a way to test part of a business strategy. For instance, within a business model, revenue streams are an essential building block. A good business strategy makes sure to test out the revenue streams that best suit that model, thus helping it become viable.
Why business models matter?
As a multi-faceted concept; business models can help entrepreneurs find the formula that works in the real world to build a sustainable company. Business models are also helpful for analysis to understand how businesses work. And to academics to study the available models of organizations present in the marketplace.
Why are business models important?
In the entrepreneurial world, business models help entrepreneurs test their ideas, monetization strategies, and value proposition to build a viable company by minimizing risks, assumptions, and time to market. Thus, offering entrepreneurs a framework for experimentation and a valid alternative to business plans, which can be hardly tested.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
Discover more from FourWeekMBA
Subscribe now to keep reading and get access to the full archive.
