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.
List of business models
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.
You can jump directly to some of the main ones below or read the guide in order, where you’ll find also updated patterns:
- A mix of chain and franchise business model
- Ad-supported (subsidized) business model
- Affiliate business model
- Aggregator business model
- Agency-based business model
- Asymmetric business models
- Attention merchant business model
- Barbell business model
- Bidding multi-brand platform model
- Blitzscaler-mode business model
- Blockchain-based business models
- Bundler model
- Cash conversion cycle or cash machine model
- Discount business model focusing on high quality
- Distribution based business model
- Direct-to-consumers business model
- Direct sales business model
- E-commerce marketplace business model
- Educational niche business model
- Family-owned integrated business model
- Feeding model
- Freemium model (freemium as a growth tool)
- Free-to-play model
- Freeterprise model
- Gatekeeper model
- Heavy-franchised business model
- Humanist enterprise business model
- Enterprise business model built on complex sales
- Lock-in business model
- Instant news business model
- Management consulting business model
- Market-maker model
- Multi-brand business model
- Multi-business model
- Multi-sided platform business model
- Multimodal business model
- Multi-product (Octopus) business model
- On-demand subscription-based business model
- One-for-one business model
- Open-Source Business Model
- Peer-to-peer business model
- Platform-agnostic model
- Platform business model
- Privacy as an innovative business model
- Razor and blade revenue model
- Real-time insurance business model
- Self-serving model
- Space-as-a-service model
- Subscription-based business model
- Surfer model: reverse-engineering the gatekeeper
- Three-sided marketplace model
- User-generated content business model
- User-generated AI-amplified model
- Unbundler model
- Vertically integrated business model
Otherwise, feel free to read the whole book!
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.
Indeed the sixth force is about complementary 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.
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).
From there, when the PC dominating players tried to enter the Internet (see Microsoft vs. Netscape) they also faced unpredictable market forces.
Indeed, Andrew Grove, back in the late 1980s former Intel’s CEO and the father of the OKR 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 doing business.
And therefore, one of the forces that most (especially in the tech industry traveling at a faster speed compared to other sectors) had the ability to change business 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.
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.
The lean startup is born
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.
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.
Customer obsession as the North Star
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, 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.
In a research done in the Strategic Management Journal, in 2001, the authors explain:
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.
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 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
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.
Another misconception about strategy or the revenue model of a company.is to confuse them with the monetization
While this is an essential piece of the puzzle, it is just one of the components of a successful.
In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a.
However, aimplies the understanding of operations, customer acquisition, retention, supply chain management, besides monetization.
For instance, a vital component of the Coca-Cola business model is its distribution strategy.
For other companies like McDonald’s, the key to its business model success is the heavily 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.
Indeed, PayPal began identifying its most valuable partner, what at the time they called “power user.”
That was a choice driven by its business model design.
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 for a , yet 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.
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
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 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
As we saw, in 2019, Fred Wilson, in a post, highlighted something that many are still missing today:
I believe business model innovation is more disruptive than technical innovation.
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 is 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 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.
This business playbook revolves around business model innovation.
Business model innovation as a traction model
During the dot-com bubble, Amazon was a company that aggressively invested in growth.
While the company advocated for free cash flows; before the year the 2000s, Amazon was quickly burning cash.
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.
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.
What I named Business Engineering:
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:
- 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:
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
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:
- Simplicity: heuristics-based rather than complex models.
- 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 tech business models into four main components:
- Value model (value propositions, mission, vision),
- Technological model (R&D management),
- Distribution model (sales and marketing organizational structure),
- 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.
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!
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 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.
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 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.
For instance, when Google announced its transition from mobile to AI-first that hasn’t changed its mission.
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, in Business 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
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
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
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
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:
Asymmetric business models
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.
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.
— Kylie Jenner (@KylieJenner) February 21, 2018
Barbell business model
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.
An example of that is how companies like Google, keep investing most resources in their core business model while also placing other bets, prone to create not only a whole new business model but whole new industries.
Bidding multi-brand platform model
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’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:
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.
|Ethereum||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.|
|Ethereum [The Graph]||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.|
|Ethereum [BAT – Brave]||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 leveraging the Ethereum protocol||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 Leveraging Ethereum’s protocol||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.|
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-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!
Distribution based business model
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:
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.
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.
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 the 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 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.
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.
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
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 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.”
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.
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.
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.
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.
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).
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 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:
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.
On the opposite spectrum, the Masterclass business model is trying to transform world-class experts into instructors:
Udacity’s business model instead leverages partnerships with universities, to offer different kinds and formats of education, based on “nano-degrees.”
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 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 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.
Twitter is an attention merchant, which primarily makes money via advertising, like Facebook and Google.
Last-mile delivery, on-demand business models
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.
Lock-in business model
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.