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.
- What is a business model and why is it important?
- A quick history of business models
- A business model is not a business plan
- A business model is not a revenue generation strategy
- The importance of business model design
- Business modeling is about experimentation
- Technological innovation vs. business model innovation
- Why business model innovation matters so much
- Competitive moats are generated around business model innovation
- Business model innovation as a traction model
- How many types of business models exist?
- Vision vs. Mission: why understanding the difference between them is important
- 30 business model examples in a nutshell
- Hidden revenue business model
- One-for-one business model
- Razor and blade revenue model
- Cash conversion cycle or cash machine model
- Peer-to-peer business model
- Multi-sided platform business model
- Direct sales business model
- Freemium model (freemium as a growth tool)
- Affiliate marketing model
- Subscription-based business model
- (Management) consulting business model
- Agency-based business model
- Vertically integrated supply chain business model
- E-commerce marketplace business model
- The discount business model that focuses on high quality
- Attention merchant business model
- Privacy as an innovative business model
- The most successful franchising business model in the world
- On-demand subscription-based business model
- User-generated content business model
- The educational niche business model
- A mix of chain and franchise business model
- Instant news business model
- Blockchain-based business models
- Multi-brand business model
- Family-owned integrated business model
- Humanist enterprise business model
- Direct-to-consumers business model
- Enterprise business model built on complex sales
- Distribution based business model
- Summary and conclusions
- Business models PDF
- Business Models FAQs
- Why business models matter?
- Why are business models important?
- How many business models are there?
- What are business models and how are they built?
- Do business models change?
- How to use the business model canvas?
- What are digital business models?
- Which business model is best?
- Why do business models fail?
- Is a business model a business strategy?
- Can a business model be copyrighted?
- How are business models influenced by internal factors?
- How business models are changing?
- How do business models deal with uncertainty?
- Share this:
What is a business model and why is it important?
A business model is a critical element for any startup 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 it 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. However, it stayed asleep for a while, until the Internet proved commercially viable.
The rise of the Internet and the dot-com fell awakened the need for innovative business models:
Indeed, while 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 fell. That left the room to a few companies which not only would prove commercially viable. They would also become among the tech giants that dominated the web.
A business model is not a business plan
Among the top results, Google suggests “How to write a business model” when typing “how to … business model. When you click on the result that Google suggested, see what happens.
When you click on the Google suggested result for “How to write a business model,” you get “how to write a 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 friends and potential investors; hardly of any use for experimentation. Instead, as we will see business modeling is primarily about experimentation.
A business model is not a revenue generation strategy
How WeWork described its business model in the report before the IPO. You might notice that what they’re talking about is their revenue generation strategy. (WeWork Financials)
Another misconception around 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 .is to confuse them with the monetization
In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a. However, a implies the understanding of operations, customer acquisition, retention, supply chain management, besides monetization.
According to the over the years for your organization there will be a piece that plays a more critical role compared to others. For instance, a vital component of you designedthe Coca-Cola business model is its distribution strategy.
For other companies like McDonald’s, the key to its business model success is the heavy franchised restaurants that helped the company scale up all over the world.
Each company will develop a uniqueamong the many types of business models which is what makes your company robust in the long-run!
The importance of business model design
The primary aim of ais to create a sustainable chain, able to unlock value for several players in a market, industry or .
For instance, when PayPal started it didn’t look to dominate the whole market. It started from a. As Pether Thiel put it in his book, Zero to One:
The most successful companies make the core progression—to first dominate a specific and then scale to adjacent markets—a part of their founding narrative.
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. Thus, PayPal focused all its effort on acquiring those power users from eBay, fast!
Only after PayPal had drafted, tested and validated a clear for a , yet a critical group of power users, it could move on to take larger and larger segments of that market.
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.
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 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
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, business models of companies like Netflix would 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 a competitive advantage. Technology coupled with new ways of serving customers, a powerful distribution strategy and creative monetization strategies might create lasting competitive advantages.
That is when the business model innovation kicks in.
Why business model innovation matters so much
One of the people that I like to follow the most in the business world, venture capitalist, Fred Wilson, in a post, highlighted something that many are still missing today:
I believe business model innovation is more disruptive than technical innovation.
As Fred Wilson further explained:
The move from desktop computing to the web. We saw massive disruption as we went from a licensed software business model to an advertising-supported business model, which has evolved into an advertising/subscription freemium business model.
When new, revolutionary technology finally is widely adopted, that is when a massive phase of business model innovation happens. For instance, we’re still looking at how the Internet-enabled digital economy still an ongoing explosion.
That connects to another key point.
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 where 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.
This business playbook revolves around business model innovation.
Business model innovation as a traction model
Until it realized it needed to change its business playbook. Companies that didn’t make it to the fall of the dot-com, had an aggressive playbook, focused on reckless growth and grandiose business plans.
Instead, Amazon started to focus its efforts on building a platform that would have helped third-party sellers to host their own products and services. And at the same time, it started to follow a leaner playbook.
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.
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 to understand what are the pieces and moving parts of a company value creation chain. As highlighted in the business model canvas there are seven key ingredients for any business model to succeed:
- Key partners
- Key activities
- Value proposition
- Customer relationship
- Customer segment
- Key resource
- Distribution channel
- Cost structure
- Revenue stream
However, in a world where information technology has become predominant, being agile becomes critical. In that context, an evolution of the business model canvas, the lean startup canvas has become more accurate to design a business model for a startup. The key difference is how a startup “behaves” compared to a corporation:
The lean startup canvas started from the lean startup movement launched by Steve Blank in 2013. In short, while large companies relied and still relies primarily on elaborate planning, with business plans hundreds of pages long, 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 reach that kind of understanding.
In other cases, a framework like the Blitzscaling business model innovation canvas 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 to major growth limiters (lack of product/market fit and operational scalability).
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 2017. Yet, Microsoft has many other segments, that are independent of others, and some others that are complementary:
From a quick look at Microsoft revenues breakdown from 2015-2017, 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 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!
Take also LinkedIn, a social media network for professionals. If you look at it merely as a social network, you don’t realize the importance of LinkedIn on Microsoft’s overall business model. In fact, LinkedIn, which is powered by a knowledge graph might be playing a critical role in Microsoft’s search engine, Bing.
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 on 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.
Take the Google mission statement:
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 toward a certain direction.
Therefore, the vision is the”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. For instance, when Google announced its transition from mobile to AI-first that hasn’t changed its mission.
That only represented the mean to achieve its mission.
30 business model examples in a nutshell
In this guide, we’ll look at 30 business models, spanning across several industries, monetization strategies and ways to unlock value in the long run!
Hidden revenue business model
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.
In fact, when you do a search on Google or when you put a like on a Facebook post, this is data those companies are gathering to get you profiled. This data that gets collected anonymously get sold to businesses in the form of advertising.
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.
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 of TOMS Shoes 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.
Razor and blade revenue model
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 companies might leverage on 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 app 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.
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 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.
Peer-to-peer business model
A peer-to-peer business model is built on the premise of creating value for both demand and offer side, 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.
Multi-sided platform business model
If I saw, 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, on 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.
On a multi-sided platform, the company operating that offers 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.
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.
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 dollar 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 secret to a successful direct sales strategy is about 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.
Freemium model (freemium as a growth tool)
Free can be a powerful weapon for growth. Many in the tech industry and more specifically in the SaaS business model use the Freemium to grow their business. The freemium is a mix of free and paid service.
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.”
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, as 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.
Affiliate marketing 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:
Subscription-based business model
Think 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 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 motives subscribers to keep paying. The curse of the subscription business model is churn!
(Management) consulting business model
As one of the most successful consulting company in the world, Accenture makes money by selling consulting services in several industries (from financial services to communication and technology).
Agency-based business model
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 which 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.
Vertically integrated supply chain 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).
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 of the marketplace their primary source of revenues following Amazon leadership at the global scale. In fact, in many cases brick-and-mortar stores opt to become Amazon sellers:
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.
The discount business model that focuses on high quality
Leveraging on 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 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 wastes. 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!
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 primarily asset is human attention.
That is also why companies operating with an advertising business model are defined attention merchants. While in the tech industry companies like Facebook and Google have become hugely profitable by using an advertising model.
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 dollar in market cap!
sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad.
— Kylie Jenner (@KylieJenner) February 21, 2018
Privacy as an innovative business model
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 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 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 which highlights “privacy concerns regarding Google:”
The most successful franchising business model in the world
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.
On-demand subscription-based business model
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 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.
Until Netflix transitioned to the on-demand subscription-based business model; an old business model used by magazines for decades was successful and “innovative” in the TV industry, where the content was mainly distributed at fixed schedules.
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 into its writers to produce quality content that answers its users’ questions.
There are a few interesting aspects about 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 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.
The educational niche business model
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.
A mix of chain and franchise 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.
Instant news business model
Twitter has based its fortune to short messages (until 2017 140 characters, then extended to 280) which allows anyone to share news but also updates that become news.
One of the most powerful aspects of Twitter is its immediateness, which although might have also caused troubles in the media industry, it also allowed news to be disintermediated.
Twitter is an attention merchant, which primarily makes money via advertising, like Facebook and Google.
Blockchain-based business models
A Blockchain-based business model leverages on this new technology to allow decentralized systems to work on a global scale. If unleashed, those business models might be able to build the next world dominator, a Blockchain-based business.
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 which 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 the 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:
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.
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 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 central level; while keeping the Maison and Houses part of the portfolio operated and run independently.
This multi-brand approach leverages both on 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.
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.
An example of that is Prada business model:
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 the 100% of Prada Holding, the couple controls the 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.
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.”
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 spend. 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 on 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.
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 building up an enterprise business. That’s because you need to identify the right target with a laser focus.
Most of the times 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.
Distribution based business model
However, in general, companies that tap into consumer markets need to be extremely good in 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 what it generates it might not work. It is fine in the short-term to lose money on building up a distribution strategy. Yet it 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 millions in revenues?” Many won’t and it’s fine. Yet as an entrepreneur, your goals should be to find a distribution strategy that scales.
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!
Summary and conclusions
In this guide, we analyzed 30 successful business models and how they unlocked value in the long run. If we were to cover all the existing business models a book alone wouldn’t fit them all.
Does it mean that you can choose any of those business models alternatively? In reality, you can’t. Some business models are better suited for some context, not for others.
For instance, if I pay for a service, I don’t want to see advertising. Thus, in a way a paid service and advertising are in most cases not compatible.
Another critical aspect is that often business modeling is about trial and error. In fact, not only the business model is usually a choice of the founders of a company but also a choice of the users/customers.
Take Wikipedia; if Wikipedia was going to show ads would you still trust it? Probably not. Wikipedia might only make sense as a free, non-profit organization.
Was Wikimedia Foundation trying to cash on Wikipedia; chances are it would also lose the support of all its editors that have been working for free on its content, just because it was something meaningful to them.
A third aspect that is critical for business modeling is about experimentation. Take Google. When Bring and Page started it, they didn’t think at all about the advertising business model.
One of the reasons Google was so successful, even though it was one of the last movers in the search engine industry; was the fact that it offered more relevant results, with less spam and no advertising.
In fact, back then in a way advertising was associated with spam. Yet when Google came out with Google AdWords and AdSense, those mechanisms allowed several stakeholders to make money online.
In short, sometime a business model will be the result of a more sophisticated method of creating value for several players in an industry. Other times it might be as simple as just a one-off sale of a product.
Did you find your business model yet?
Business models PDF
If you want this guide in a compendium format, so you can read it later, get it below:
Business Models FAQs
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.
How many business models are there?
There isn’t a given number of business models, but as many as the companies existing out there. However, specific business models have been consistently used by companies in several industries. Business models like platforms, SaaS, ad-based, and more do show up consistently in today’s marketplace, but they continuously evolve.
What are business models and how are they built?
Business models help business people have a holistic understanding of an organization. From elements such as value proposition, distribution channels, cost centers, and revenue streams, successful business models are built when companies built on top of them survive and thrive in the marketplace by creating a competitive advantage.
Do business models change?
Business models continuously evolve to adapt to marketplace changes. When a business model is viable (one way to measure viability is profitability), they become fit to the marketplace. When market conditions change (due to competition, new technologies, and the changed needs of key customers), business models also need to evolve.
How to use the business model canvas?
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.
What are digital business models?
Digital business models are those of organizations built mostly on top of digital channels, technologies, and where the key customers primarily interact with these organizations on the Internet. Examples of these models include companies like Google, Amazon, Facebook, Airbnb, and others. Most companies today are in part digitalized.
Which business model is best?
The success of a business model will highly depend on the context, timing, and market conditions. Proven and profitable business models usually have substantial brand equity, coupled with a strong distribution network and a deep understanding of their key customers. Successful business models enjoy higher margins and competitive advantages.
Why do business models fail?
There isn’t a single reason for business model failures. Business models fail due to wrong assumptions related to monetization. In other cases, they fail for lack of resources before the key customer is found. According to Bill Gross, founder of Idealab, timing is the most important factor.
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.
Can a business model be copyrighted?
A business model isn’t necessarily a defined process and can be hardly patented. Instead, that is a set of building blocks loosely held together. Therefore, it’s hard to patent. Companies do patent business methods, but those are usually very defined and specifics (think of Amazon one-click as an example).
How are business models influenced by internal factors?
Depending on the company’s complexity, a simple change in the value proposition can affect the entire business model. That is why it is important to map and assess how those loosely held building blocks interact. Thus thinking of a company as a dynamic system always changing and evolving.
How business models are changing?
Business models are becoming more and more digital. And as other technologies evolve, business models that were once not viable become then sustainable. For instance, technologies like the blockchain can help companies work together as a single large entity, to help give rise to new models like super platforms.
How do business models deal with uncertainty?
Business models are continually evolving, as market conditions change. That means that a sustainable business model needs to have in a proper framework of experimentation to test and map the interactions across the several building blocks. That is how a business model can successfully deal with uncertainty.
- What Is Business Model Innovation And Why It Matters
- The Complete Guide To Business Development
- Business Strategy: Definition, Examples, And Case Studies
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- What Is Market Segmentation? the Ultimate Guide to Market Segmentation
- Marketing Strategy: Definition, Types, And Examples
- Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
- How To Write A Mission Statement
- What is Growth Hacking?
- Growth Hacking Canvas: A Glance At The Tools To Generate Growth Ideas