business-model

What Is a Business Model? 54 Successful Types of Business Models You Need to Know

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.

Contents

List of business models

In this guide, we’ll see also 53 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. 

You can jump directly to any of them below or read the guide in order:

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 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-google-ngram-viewer

“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:

Internet-bubble

Source: internethistorypodcast.com

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.

Companies like Amazon, Google, and eBay built, tweaked, and consolidated their business playbook during that era.

A business model is not a business plan

google-autosuggests-business-model

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.

how-to-write-a-business-plan

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.

business-model-vs-business-plan

As reported by Google Ngram, by 2008, business model picked up as a key concept, compared to 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

airbnb-first-pitch-deck

An example of how Airbnb “confused” its business model for its monetization strategy (Slideshare)

wework-revenue-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 business models is to confuse them with the monetization strategy or the revenue model of a company. While this is an essential piece of the puzzle, it is just one of the components of a successful business model.

In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a business model. However, a business model implies the understanding of operations, customer acquisition, retention, supply chain management, besides monetization.

According to the business model you designed over the years for your organization there will be a piece that plays a more critical role compared to others. 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 unique model among the many types of business models which is what makes your company robust in the long-run!

The importance of business model design

strategic-analysis
Strategic analysis is a process to understand the organization’s environment and competitive landscape to formulate informed business decisions, to plan for the organizational structure and long-term direction. Strategic planning is also useful to experiment with business model design and assess the fit with the long-term vision of the business.

The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry or niche.

Therefore, this value chain will start from a value proposition, a promise you make to the key players and partners in that market, industry or niche depending on where you start.

For instance, when PayPal started it didn’t look to dominate the whole market. It started from a niche. As Pether Thiel put it in his book, Zero to One:

The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

Indeed, PayPal began identifying its most valuable partner, what at the time they called “power user.” 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. Thus, PayPal focused all its effort on acquiring those power users from eBay, fast!

Only after PayPal had drafted, tested, and validated a clear value proposition for a small, yet a critical group of power users, it could move on to take larger and larger segments of that market.

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

Business modeling is about experimentation

Business-Model-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

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

The misconception starts from the fact that nowadays, technological advancement is pushing toward new ways of doing business.

The Internet is still enabling new, untested models to pick up. For instance, 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. 

We might be looking at a similar change and blossoming of new business models with the advent of the Blockchain and crypto-based business models.

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.

porter-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:

amazon-flywheel

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

amazon-financials-1997-2001

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 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.

product-business-model-culture-framework

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.

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:

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:

lean-startup-vs-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 rely 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:

blitzscaling-business-model

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

fourweekmba-business-model-framework
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.

The key components of any business model according to the FourWeekMBA analysis are: 

  • A compelling value proposition: How do you want your people to think about your brand?
  • A unique brand positioning: What do you offer to your people that make them want more?
  • A 10x goal setting: Can you offer a 10X better product or service? (compared to existing solutions)
  • Customer segments: Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service)
  • Distribution channels: How do you get your product or service to your customers?
  • Profit formula: Is the business financially sustainable?

This business model framework by FourWeekMBA has four aims:

  • 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

Business Model Template - By FourWeekMBA

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 2017. Yet, Microsoft has many other segments, that are independent of others, and some others that are complementary:

microsoft-revenue-breakdown-by-product-or-service

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’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:

amazon-aws-growth-percentage

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:

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 “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.

54 business model examples in a nutshell

In this guide, we’ll look at 53 business models, spanning across several industries, monetization strategies and ways to unlock value in the long run!

A mix of chain and franchise business model

starbucks-business-model

When 1983, Howard Schultz was walking through the streets of Milan and Verona he became “enamored” by the coffee experience people had in the Italian bars. He decided to bring that experience back home. That’s how Starbucks was born.

While McDonald’s makes money by primarily and heavily franchising its restaurants, Starbucks is a mix of operated vs. licensed stores. If we look at the revenue generation, company-operated stores make up 79% of the company’s revenues in 2017. 

Ad-supported (subsidized) business model

spotify-business-model
Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated over €6.7 billion in 2019, almost 90% based on premium memberships, and around 10% is ad-supported.

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:

pat-flynn-business-model

Aggregator business model

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An aggregator business model can be classified as a sort of platform business model, however, with its specific features. For instance, the aggregator might act as a middleman. Still, it monetizes the eyeballs on the platform (advertisers subsidize the aggregator) while keeping a tight control on the whole experience of users.

In this business model, the aggregator becomes the middleman by removing all the other middlemen from the market. To understand more about this model and how it differentiates from platform business models, read the guide on the aggregator business model.

Agency-based business model

neil-patel-branded-keyword

neilpatel.com is one of the most successful sites in digital marketing. Neil Patel has also used his name as a brand, which has become recognized in the digital marketing space.

However, rather than selling tools or info-products, Neil Patel is monetizing its traffic by generating leads for his digital agency. As he pointed out:

My model isn’t as scalable and it requires more headcount, but it can generate much more money. Just look at ad agencies like WPP and Dentsu. They generate billions in revenue!

neil-patel-digital

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.

Asymmetric business models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Some examples of hidden revenue generation are Google and Facebook. The two most popular websites on planet earth have a similar monetization strategy. They offer free apps and platforms for a broad audience (billion people worldwide) while monetizing the data of the same users.

Each time you click through a link on Google that has the “ad” notation next to it. De facto you’re allowing Google to monetize on a keyword, while you’re making a business monetize on that keyword if you buy the service they provide.

A similar logic applies to Facebook. The news feed is the place where Facebook monetizes most of its ads. Both models both use a hidden revenue generation model as those services work so well that most users barely realize their data is getting sold for advertising.

Attention merchant business model

snapchat-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 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

barbell-strategy
A Barbell strategy consists of making sure that 90% of your capital is safe, and use the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.

Author Nassim Nicholas Taleb explains this approach in his Incerto Series. It’s an approach where you invest most of your wealth in extremely conservative financial instruments to preserve the capital.

And on the other end, the remaining part of the capital is invested in extremely aggressive strategies with massive potential upsides, yet controlled downsides. In short, you make yourself prone to take advantage of positive Black Swans (rare events that can benefit you).

I want to take this further to apply that to business modeling. Here the company uses a barbell approach to product and distribution. You have a core product and business where most resources are spent and the whole organization 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-business-model
Grubhub is an online and mobile platform for restaurant pick-up and delivery orders. In 2018 the company connected 95,000 takeout restaurants in over 1,700 U.S. cities and London. The Grubhub portfolio of brands like Seamless, LevelUp, Eat24, AllMenus, MenuPages, andTapingo. The company makes money primarily by charging restaurants a pre-order commission and it generates revenues when diners place an order on its platform. Also, it charges restaurants that use Grubhub delivery services and when diners pay for those services. 
grubhub-brands-portfolio

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-q1-profits-2020
In Q1 2020, Amazon’s net sales increased by 26.3%. Yet its operating income decreased by 9.7% primarily due to a higher cost of sales (30% increase), incurred by Amazon due to the COVID, due to increased shipping and fulfillment costs and marketing expenses.

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 generated low-profit margins for years, also generated substantial cash flows who it invested back to massive growth. A sort of continuous blitzscaler-mode, that while risky for most companies, it has become a normal mode for Amazon. Thus, Amazon has been able to ingrain blitzscaling within its business model.

Blockchain-based business models

blockchain-economics

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 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:

steemit-decentralized-social-network

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.

blockchain-for-business

Bundler model

bundling
Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.

In bundling, a strong distribution power combines several products in a single offer to extract more from the market. For decades Microsoft has been able to bundle several products under the same umbrella (Office has been coupled by time to time to several other products) so the company extracts more from the market, of 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 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.

amazon-business-cash-machine

Discount business model focusing on high quality

aldi-business-model

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 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! 

Distribution based business model

A distribution-based business model is one in which a company’s survival depends on its ability to have one or a few key distribution channels to connect to its final user or customer.

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 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 million in revenues?” Many won’t and it’s fine. Yet as an entrepreneur, your goals 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:

what-is-google-tac
TAC stands for traffic acquisition cost, and that is the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google percentage of revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.

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-business-model

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.

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:

trelloboard-nathan-berry-convertkit

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

amazon-vs-alibaba

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:

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.

As of 2016 Amazon still made almost 70% of its revenues from retail products.

Educational niche business model

wolfram-alpha-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-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: 

prada-business-model

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:

prada-ownership-structure

Source: Prada annual report for 2017

With 100% of Prada Holding, the couple controls 80% of Prada! Their word is law within the organization. Although Prada as a multinational has complex management systems, Miuccia Prada and Patrizio Bertelli are the key decision-makers on strategic initiatives.

Feeding model

hyrecar-business-model
HyreCar is a peer-to-peer marketplace where owners of cars can rent their idle vehicles to drivers that want to make an additional income via ride-sharing services like Uber, and Lyft. As a two-sided marketplace, HyreCar makes money by charging drivers for direct insurance and a 10% fee on the weekly rental expense. And by taking a 15% fee from owners’ weekly rental income. 

As platforms arise, they create ecosystems, becoming unexplored markets. Those markets can be surfed by feeding your business model on top of that. A good example is how HyreCar feeds its business model on top of Lyft an 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.

Freemium model (freemium as a growth tool)

freemium-business-model
The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting in customers help spread the brand.

Free can be a powerful weapon for growth. Many in the tech industry and more specifically in the SaaS business model use 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:

sumo-freemium

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.”

powered-by-sumome
Source: jackpdean.com

In short, the free product can be leveraged in several ways. First, for lead generation. Second, as a way to trigger upsells for non-paying customers.

Third, as a virality tool, with CTAs and links placed in strategic places to have free publicity from non-paying users.

If appropriately implemented the freemium model can be a great way to grow a brand and a business fast.

While freemium can be considered in certain circumstances a key element of a business model, 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.

Companies like MailChimp and Slack, have strengthened their brands and marketing funnels by leveraging on the freemium model.

freemium-model-decision-tree

Free-to-play model

how-much-money-has-fortnite-made
Fortnite developed by Epic Games is available in three modes. Save the World follows a premium model, where the game is sold, starting at $14.99- Battle Royale follows a free-to-play model, available for free. Still, gamers can buy things or customize characters with its digital currency (V-Bucks), and Creative Mode. As reported by Variety, Fortnite made $1.8 billion in 2019 and $2.4 billion in 2018.

The free-to-play model has become widely adopted in the gaming industry. Where companies like Microsoft and Sony sold their consoles at cost (Xbox and PlayStation) with a locked-in logic (gamers could not play in teams across those consoles) as they made money primarily by selling games.

Epic Games with Fortnite flipped this model. It made the game free, and up-sold products within the game.

Fortnite isn’t just a traditional freemium model, which we usually find in the software world. It had three modes of consumptions, 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, squads, and more. The built-in group dynamics, and the fact it was freely available, helped sparkle the Epic Games’ ecosystem. And it is also lucrative for the company, as gamers can buy V-Bucks (Fortnite’s virtual currency) to customize their characters or else.
  • Creative mode: in the Creative mode, players gain access to a private island, where they can design the whole thing as they want and invite others. This mode is pretty interesting as it enables not only gamers but also creators or aspiring so to build their own gaming environment.

Freeterprise model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

As consumer brands showed the freemium model could be both a great go-to-market strategy and generate a continuous flow of qualified leads (however, only after the whole organization would be organized around identifying those opportunities), other B2B/Enterprise companies (those primarily selling to other companies or larger corporations) also mastered the freemium model but on a B2B scale.

That is why I like to call that “Freeterprise.” Companies like Slack and Zoom are great examples of how you can build a valuable business with a Freeterprise model.

zoom-business-model
Zoom is a video communication platform, which mission is to “make video communications frictionless.” Leveraging on the viral growth from its freemium model, Zoom then uses its direct sales force to identify the opportunity and channel those in B2B and enterprise accounts. 

This sort of looks like magic, as you can start from a single free professional account, and pull a whole organization into that, to transform it into an enterprise

As I explained in the Zoom business model though, the whole organization needs to be structured around the freeterprise model, where on the one end the company seamlessly uses the free product as entry point within companies.

And on the other end, salespeople with the ability to built a strong relationship with the account can get the whole company onboard, thus transforming a free professional account into a potential enterprise customer.

Of course, this leads the organization to skew its resources toward building an army of qualified salespeople to handle the volume of leads generated by the free offering (in 2019 Zoom spent 54% of its revenues primarily in salespeople headcounts).

Gatekeeper model

gatekeepers-model

In the gatekeeper model, the dominant company has become the main middleman between the market and millions if not billions of potential customers. In the previous era, many middlemen captured value and retained distribution power, by fragmenting the market.

In the gatekeepers’ era, the market has been unified, and as such, it has become much bigger, yet the single middleman (the gatekeeper) is also the one who locked the distribution pipelines, thus retaining control over the access to millions of consumers.

Thus, the whole gatekeeper business model is about becoming the unlocker to final customers for millions of small businesses.

Heavy-franchised business model

mcdonald's-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:

brunello-cucinelli-business-model

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.”

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.

zero-to-one

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.

Instant news business model

how-does-twitter-make-money

Twitter has based its fortune to 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.

Lock-in business model

apple-business-model
Apple is a product-based company fueled by platform business models (like Apple Store), in which sales still primarily come from the iPhone. However, the company has also transitioned toward a service company (with Apple Store, iTunes now called Apple Music) and as a wearable product company, which is the fastest-growing segment.

Apple is famous in the business world (beyond launching beautifully crafted tech products) for its philosophy in 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 on users’ experience and to 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 on developing great products, integrating them with each other to create a seamless experience, and maintaining a strong distribution pipeline, that model might work.

Management consulting business model

accenture-business-model

As one of the most successful consulting companies in the world, Accenture makes money by selling consulting services in several industries (from financial services to communication and technology). A consulting business model is often based on hiring talented people with hiring people and have them work on multiple client’s projects. The client pays a fee that can be assessed per hour or per day, according to the requirements of the service. Accenture was able to build a multi-billion dollar based on consulting services across the globe.

Market-maker model

liquidity-network-effects

Some platforms create liquidity by removing hundreds of intermediaries that used to lock-in the market. When that happens the market gets bigger and more liquid over time. That enables the platform to work as the market maker, or the maker of the price, by making it liquid.

dynamic-pricing
Dynamic pricing is the practice of having multiple price points based on several factors, such as customer segments, peak times of service, and time-based consumption that allow the company is applying dynamic pricing to expand its revenue generation.

One of the major values from a platform like Uber is the fact that it is able to create liquidity on the platform by batching by time to time divers and riders, also with dynamic pricing.

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-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 a 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.

Multi-business model

amazon-case-study
Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.

When you look at Amazon it’s tempting to talk about its “business model.” Yet Amazon is a set of combined business models that span across:

  • Consumer e-commerce platform.
  • First-party seller platform (Amazon owns a set of brands like AmazonBasics).
  • Third-party seller platform and services (Amazon hosts third-party sellers).
  • Amazon Prime.
  • Amazon Advertising.
  • Amazon AWC B2B/Enterprise Cloud platform.

The core of Amazon has always been the e-commerce platform, however over the years, as a side effect of developing adjacent parts of the business, to sustain its core. Amazon built successful programs (Prime and AWS are examples) that turned into self-standing businesses.

This is the fruit of a continuous mode of aggressive growth and business innovation that made Amazon expand, and reinvent its business model (AWS has a whole new logic than the core e-commerce business and could potentially be a spin-off of Amazon).

Multi-sided platform business model

If I saw, 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.

LinkedIn is a source of value for a B2B that is trying to grow; it is a powerhouse for any business developer and a source of value for HR managers and candidates looking to grow their skills.

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.

knowledge-graph-linkedin-ai
linkedin-multi-sided-platform

Multimodal business model

lyft-business-model
Lyft is a transportation-as-a-service marketplace allowing riders to find a driver for a ride. Lyft has also expanded with a multimodal platform that gives more options like bike-sharing or electric scooters. Lyft primarily makes money by collecting fees from drivers that complete rides on the platform.

Lyft is a transportation-as-a-service on-demand marketplace that allows riders to quickly find a driver and get from one place to another. However, Lyft has also expanded with a multimodal platform that gives more options like bike-sharing or electric scooters. 

Lyft leverages on three key problems related to cost of ownership:

  • Underutilization: vehicles are not used most of the time.
  • Inefficiency: the large ownership of vehicles also made cities build large parking spaces that occupy a good chunk of cities’ urban landscapes.
  • Inequality: car ownership while distributed is still a large issue for many people that can’t afford to buy a car.

From there it offers different options to customers that can switch from car to bike-sharing, or electric scooters, depending on their short-term transportation needs.

Multi-product (Octopus) business model

oyo-business-model
OYO business model is a mixture of platform and brand, where the company started primarily as an aggregator of homes across India, and it quickly moved to other verticals, from leisure to co-working and corporate travel. In a sort of octopus business strategy of expansion to cover the whole spectrum of short-term real estate.

In its expansion strategy, OYO started from India, yet it quickly moved to different verticals. From there it built up a portfolio of products, each launched in parallel to its expansion strategy, to cover larger geographical areas, but also different segments of the market.

From the low-end of the travel market to the higher-end with its Townhouse, a sort of modern boutique hotel. To further expand in co-working and corporate traveling.

This sort of business model is skewed toward a quick go-to-market strategy that moves in all the directions to expand and cover as much as possible of the end-to-end experience for travelers.

On-demand subscription-based business model

netflix-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 the rental of DVDs.

This business today contributes to a small pie of Netflix revenues, yet at the time it was the core of the business, and it has been so for years. “On-demand” at the time was possible with the pay per rental business model. 

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.

One-for-one business model

Have you ever heard of TOMS Shoes? As you can understand from the name, this is a company making shoes. What’s new about it? The founder of TOMS Shoes founder has come up with a model, in which, for a pair of shoes sold, another pair is given to kids around the world that cannot afford them.

This kind of model might be seen as a sort of hybrid that combines profit with non-for-profit models. In reality, TOMS Shoes has proved to be profitable and sustainable over time.

Indeed, the non-profit side of the business model works as an excellent propeller for the business. Anyone wants to take part in the growth of a company that not only sells shoes but takes care of kids around the world.

Thus, it isn’t anymore just a pair of shoes; it is a story you want to be part of.

toms-business-model-explained

Open-Source Business Model

fastly-business-model
Fastly follows an enterprise business model, which offers an edge cloud platform. Fastly business model leverages on an active community of developers. As an enterprise business, a good chunk of its revenues is spent on sales and marketing processes. The company has 56 sales representative and sales managers across the company. For a monthly fee, enterprise customers get access to the platform and also account management and enhanced customer support.

In terms of customer acquisition strategy, the open-source model is not that different from the freemium/freeterprise. There is the base service/product offered for free, and a business/enterprise version which is paid.

There is a key difference, though. Where in a freemium and freeterprise, the free product is built, developed, and maintained by the company centrally. On an open-source model, the free product is built, developed, and in part, maintained by an open community of developers.

Those developers are not employees of the company, but rather part of an independent community. This implies the company selling the premium version of the open-source software will need to be careful in how it monetizes it to prevent disappointing the community of developers that made the project possible in the first place.

Peer-to-peer business model

airbnb-business-model
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. The platform also charges hosts who offer experiences with a 20% service fee on the total paid amount.
airbnb-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.

Platform-agnostic model

how-does-grammarly-make-money
Grammarly leverages on a freemium service, where free users are prompted to switch to a paid subscription. Grammarly makes money by selling premium plans starting at $11.66 to $29.95 per month. The company also makes money by selling human proofreading services to its paid users.

Grammarly’s CEO explained to TechCrunch as one of the key advantages of Grammarly is its “platform-agnostic approach.” In short, Grammarly focuses on being anywhere the user needs to be.

This approach makes Grammarly value proposition compelling in a tech world, dominated by the tech giants that are trying to cover the end-to-end experience of users, thus locking them in their walled gardens.

Grammarly instead is trying to be anywhere, independently from the platform, thus making the user free to choose the platform.

Platform business model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

While any business today with a minimum of a technological set-up wants to call itself a platform business model, the platform business model has specific features. It enjoys network effects; it enables interactions among its key participants. And to kick things off, it has to solve the so-called chicken and egg strategy problem, where the platform has to figure on which side to kick off the platform.

Indeed, as the platform – usually – has two or more key players, its value proposition is also tuned for those several players. For instance, on a platform like Uber, drivers were the key to making the service value in the first place. On a platform, like Airbnb, hosts and the availability of a wide variety of homes was critical to kick the platform off.

Therefore, a platform business model has to figure how to kick off the side of the platform that automatically will trigger network effects on the other side (for instance, the more drivers on Uber, the more the platform is valuable to riders).

Privacy as an innovative business model

duckduckgos-business-model

While humans have always looked for private moments in their lives, Privacy has gained a new and renewed meaning in modern times:

privacy-mentions-books-google-ngram

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:”

Google-searches-related-to-privacy

If you click on “privacy google” you will get on the right-hand side a knowledge panel which highlights “privacy concerns regarding Google:”

privacy-concerns-related-to-google

In short, Google itself is revealing the existence of an industry that revolves around privacy online. In this scenario, a search engine like DuckDuckGo, which has built its success on throwing the users’ data on the fly to allow private navigation, that is growing quite fast.   That’s because DuckDuckGo makes money primarily via affiliations and by selling local keywords. Thus, privacy becomes a propeller for DuckDuckGo business growth.    

Razor and blade 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.

amazon-razor-blade-business-model

Self-serving model

dropbox-business-model
Dropbox generated over 90% of its revenue via its self-serve channels to convert users in paying customers through in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Dropbox generated over $1.1 billion revenue in 2017, with an average revenue per paying user of $111, $305 million in free cash flow and 11 million paying users

A self-serving model is a freemium-based model able to convert quickly and with low-cost free users in paid accounts. Dropbox business model is a great example of acquiring new users efficiently and at relatively low costs through three tactics: 

  • Word-of-mouth referrals.
  • Direct in-product referrals.
  • And sharing of content.

By following the freemium model when users create a free account those same users often share and collaborate with other non-registered users. This mechanism for which free users invite other non-users, create an automatic referral mechanism.

Built-in prompts in the products instead make it possible to convert, with a low-touch and automated funnels users in premium accounts.

Space-as-a-service model

wework-business-model
WeWork runs a membership model that gets monetized via a set of packages which include ancillary value-added products and services to enable companies to scale or shrink their workspace on-demand. WeWork defined its revenue model space-as-a-service claimed to be more scalable than a traditional commercial real estate.

While the main carrier of this model (WeWork) had massive backlashes due to its unsustainable business model. The question of whether this model will be possible in the future still holds.

True, that part of the problem is that of taking long-term leases to transform them in short-term opportunities by building services on top of them, to arbitrage on the difference.

Subscription-based business model

salesforce-business-model

Think about those two scenarios. You have a series of online courses that you sell as a one-off. You’ve sold 100 courses in one month at $100; you’d made $10,000. Next month to have the same level of revenue generation you’ll have to sell the other 100 courses.

This means you either find more students or you produce new courses. Imagine the second scenario. You have a few courses, and you make them available for a monthly subscription at $75. If you have 100 subscribers, this means that each month you’ll have $7,500 without having to find new students.

Given this example, you can understand why the subscription business model is so powerful. Today companies like Netflix, Amazon (with Prime), LinkedIn, and many others use subscription-based models to monetize part of their business. However, a subscription-based business model also needs a lot of resources.

Take Netflix. I’ll keep paying my subscription only if they will give me fresh content on a regular basis. That is why Netflix also produces series that are quite successful. Yet those series have massive production costs.

In other words, to sustain a subscription-based business model you also need a lot of the resources necessary to create new content, have awesome support or service that motivates subscribers to keep paying. The curse of the subscription business model is churn!

Surfer model: reverse-engineering the gatekeeper

In the gatekeeper model, we saw how the market got consolidated under a single middleman that, with its algorithms, could change the logic of the whole distribution pipelines for an entire industry.

Small businesses then will need to master how the gatekeeper works and aligns with its business model to reach potential customers. This is at the core of the surfer-model, where the small or medium business builds a strong brand by complementing the gatekeeper’s value proposition.

For instance, for years, companies like Booking, TripAdvisor, and other vertical travel search engines have been able to build valuable companies on top of Google. Where Google couldn’t cover vertical areas, those companies complement that, by building multi-billion businesses indeed.

The same applies when you launch e-commerce on Amazon, a blog by leveraging on Google, or a channel on YouTube. In all these circumstances you’re aligning your distribution model with that of the gatekeeper to reach potential customers.

Three-sided marketplace model

uber-eats-business-model
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner and a customer with Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay the small delivery charges, and at times, cancellation fee; Drivers earn through making reliable deliveries on time.

Uber Eats is a great example of a three-sided marketplace, where the company facilitates interactions between eaters, delivery partners, and restaurants to develop a solid marketplace.

While each of those interactions could happen independently. Uber Eats platform makes them smooth, as it provides a unique place for those players to connect and do business.

User-generated content business model

quora-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.

User-generated AI-amplified model

tiktok-business-model
TikTok is the Chinese creative social media platform primarily driven by short-form video content. It launches challenges of various types to tap into the creativity of its users and generate engaging (if not addicting content) accessible via an infinite feed. TikTok primarily makes money through advertising, thus making it an attention-based business model.

For many, TikTok is just the next generation of social media. However, there is more to it. TikTok is a continuous feed, that shows short video formats, where users engage in all sorts of dances, memes and more (for now).

Yet, what makes TikTok powerful is the curation performed by its AI. Where in Web 1.0 social media was all about network. In AI-driven social apps, it’s all about engagement.

Users can find a continuous stream of hooking content in their feeds independently from their network, the AI replaces it. Yet, the AI + the network becomes an atomic weapon for growth. If the previous advertising machine built on top of information retrieval (Google) and network (Facebook).

Those are the largest digital advertising machines as they managed to make advertising mostly invisible or at least relevant to users. What if that could be brought to the next level?

Where scaled user-generated platforms built powerful business models (Facebook, Twitter, Instagram). In the web 2.0 version is the user-generated, AI amplified content that will take over with new video formats.

Unbundler model

unbundling
Unbundling is a business process where a series of products or blocks inside a value chain are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.

Unbundling is the process of breaking the value chain to take over the most valuable part of it, without owning or bearing the total cost of ownership of maintaining it. In phenomena like showrooming the customer browse on the physical shop, yet it buys from the online retailer, which has more competitive pricing.

Therefore, the online retailer takes all the upside, without having the downside of maintaining a physical store. A classic example is when people browse in a local store, to then buy on online e-commerce like Amazon, where they can find more competitive pricing.

webrooming-and-showrooming
Showrooming is a pattern where consumers browse on a brick-and-mortar store but they finalize the purchase online. Webrooming is the reverse process. Consumers browse the product online, but they finalize the purchase in the physical store.

The unbundler, initially, is a sort of freeloader that takes the upside of a value chain without bearing the downside. Yet the overall value chain improves as customers get the most by combining the experience from the incumbent and the unbundler (ex. the consumer browse several physical stores, then buys online as it saves money).

Vertically integrated business model

vertically-integrated-business-model

From its humble beginnings in 1961, when Leonardo Del Vecchio started as a small shop that produced components and semi-finished products for the optical industry; that shop has reached over $9 billion in net sales in 2017.

With all the major brands from the eyewear industry licensed by Luxottica (Armani, Bulgari, Chan, l, Prada and many others) it is the largest and most vertically integrated business in the world

Leonardo Del Vecchio, one of the wealthiest people in Italy and among the wealthiest businessmen in the world, has built Luxottica piece by piece.

Started as a small shop producing semi-finished products for the optical industry it eventually acquired the whole supply chain, up to own retail stores across the globe. It took Leonardo Del Vecchio a few decades to build its vertically integrated business.

Yet now that is the most successful company in the optical industry. Instead of being acquired by a large American company, the Italian based Luxottica was the one acquiring brands like Oakey (the California-based eyewear company).

ReadBusiness Strategy: Definition, Examples, And Case Studies

Reverse engineer any business model

business-analysis
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

You can use the FourWeekMBA Business Analysis Framework to reverse engineer any business.

Read: How To Analyze Any Business 

Key takeaways

  • Many believe business modeling is about copying and pasting. Instead, that is about experimentation. 
  • Business models can offer valid templates that we can test, yet only when those ingredients are combined we get a unique model, hard to replicate, that is when a competitive advantage is created.
  • Business models are not business plans. While many startups consult business modeling right when its the time to build their pitch for investors. In reality, the business model strategy serves entrepreneurs to test their hypotheses, quickly and cheaply. So that when you have enough built-in mechanisms for sustainability within your business model, you will have enough cash at the bank to keep growing. Or perhaps the market will have proved your model to be successful, so ready to be taken to the next level.
  • In an era, where technology becomes commoditized over time, business model experimentation can prove more sustainable, as harder to reverse engineer (as it comprises many building blocks that sometimes are hard to understand also to the same company rolling out the successful business model). 
  • Business modeling is a continuous journey of discovery. It never ends. As a company scales or it creates options to scale, the whole business model will transform and the question on whether it will be sustainable for the next stage of growth and scalability stays open.
  • There isn’t a right or wrong business model, but rather a model that will work in a certain context, and that will suddenly stop working in others. Business modeling is also a matter of life’s philosophy. The vision of founders or those who took the business from one stage to the next affects the long-term vision of the business, thus its direction in the long-run. 

business-model-examples

What to do next? 

Other resources: 

Business models FAQs

Is a business model a business strategy?

A business model is a way to test part of a business strategy. For instance, within a business model, revenue streams are an essential building block. A good business strategy makes sure to test out the revenue streams that best suit that model, thus helping it become viable.
Read the full guide on FourWeekMBA

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.
Read the full guide on FourWeekMBA

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.
Read the full guide on FourWeekMBA

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here