most important element of a business model & responsible for making the model work

Business Model Canvas (BMC)

What is the Business Model Canvas

Business Model Canvas (BMC) is a framework that helps determine how a business creates, delivers, and captures values. It is a visual representation of the important aspects or parts to consider when designing a Business Model.

BMC aids in constructing a shared understanding of a business by condensing it into a simple, relevant, and intuitively understandable one-page visual while not oversimplifying the complexities of how enterprises function.

This concept has been applied and tested around the world and is used in organizations such as GE, P&G, Nestlé, IBM, Ericsson, and Deloitte, including Government Services of Canada and many more [1],[2] .

The Nine Building Blocks

BMC describes a business through nine basic building blocks that show the logic of how a business intends to make money. These nine blocks cover the four main areas of a business: Customers, Offer, Infrastructure, and Financial Viability.

BMC acts as a shared language for describing, visualizing, assessing, and changing business models. It is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.

Each of these blocks is explained in more detail as follows:

1. Customer Segments (CS)

These are the groups of people or organizations that a business aims to reach and serve. Customers are the heart of a business model, and without (profitable) customers, a business cannot survive.

Customers are grouped into distinct segments with common needs, common behaviors, or other attributes. Customer groups represent separate segments if:

• Their needs require and justify a distinct offer.
• They are reached through different Distribution Channels.
• They require different types of relationships.
• They have substantially different profitability.
• They are willing to pay for different aspects of the offer.

An organization must make a conscious decision about which segment(s) to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.

The following two questions, if answered with clarity, help a business identify its CS.

• For whom are we creating value?
• Who are our most important customers?
• What are the customer archetypes?

Examples of some of the Customer Segments are shown in the figure:

2. Value proposition (VP)

Value Proposition describes the bundle of products and services that create value for a specific Customer Segment chosen by a business.

A VP is the reason why customers turn to one company over another. VP must solve a customer’s problem or satisfy a need. A business can have more than one VP, but each must consist of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment.

While some VPs may be innovative and represent a new or disruptive offer, others may be similar to existing market offers but with added features and attributes.

An organization’s VP must answer the following questions with clarity:

• What value do we deliver to the customer?
• Which one of our customer’s problems are we helping to solve?
• Which customer needs are we satisfying?
• What bundles of products and services are we offering to each CS?

Elements from some of the following can contribute to customer value creation:

3. Channels (CH)

Channels describe how a company communicates with and reaches its Customer Segments to deliver a Value Proposition.

Channels are customer touch points that play an important role in the customer experience and serve several functions, including:

• Raising awareness about a company’s products and services
• Helping customers evaluate a company’s Value Proposition
• Allowing customers to purchase specific products and services
• Delivering a Value Proposition to customers
• Providing post-purchase customer support

To establish an effective channel, a company must first answer the following:

• Through which Channels do our Customer Segments want to be reached?
• How are we reaching them now?
• How are our Channels integrated?
• Which ones work best?
• Which ones are most cost-efficient?
• How are we integrating them with customer routines?

There are five distinct phases (figure below) through which a channel passes, and it could cover more than one of these phases at a time.

Channels can be either direct, indirect or hybrid, as shown:

Finding the right mix of Channels to satisfy how customers want to be reached is crucial in bringing a Value Proposition to market and can create a great customer experience.

4. Customer Relationships (CR)

Customer Relationships describe the types of relationships a company establishes with specific Customer Segments. Relationships can range from personal to automated. An organization’s CR strategy may be driven by one of the following motivators:

• Customer acquisition
• Customer retention
• Boosting sales (upselling)

A business can arrive at the optimum CR by asking the following questions:

• What type of relationship does each of our Customer Segments expect us to establish and maintain with them?
• Which ones have we established?
• How costly are they?
• How are they integrated with the rest of our business model?

Several categories of Customer Relationships may co-exist in a company’s relationship with a particular Customer Segment. Some of which are:

5. Revenue Streams (RS)

Revenue Streams represent the company’s cash (earnings) from each Customer Segment and are like the arteries of any business.

There are two distinct categories of Revenue Streams:

• Transaction Revenues which are one-time customer payments
• Recurring Revenues that are ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support

A business can arrive at its ideal revenue stream by asking the following questions:

• For what value are our customers willing to pay?
• For what do they currently pay?
• How are they currently paying?
• How would they prefer to pay?
• How much does each Revenue Stream contribute to overall revenues?

There are several ways a business can generate revenue, such as:

A business may have one or more Revenue Streams, each with different pricing mechanisms. The choice of pricing mechanism greatly influences the revenues generated.

There are two main types of pricing mechanisms, Fixed and Dynamic, as follows:

6. Key Resources (KR)

The Key Resources describe the most important assets required to make a business model work.

These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues. Different Key Resources are needed depending on the type of business model.

For example, a chip fabrication business like TSMC [9] requires capital-intensive facilities worth billions of dollars, while a chip designer like NVIDIA [10] would need skilled manpower as its Key Resource.

Key Resources can be owned or leased by a business or acquired from its key partners. They can be identified by answering the following questions:

• What Key Resources do our Value Propositions require?
• What resources are required to sustain our Distribution Channels, Customer Relationships and Revenue Streams?

Key Resources can be categorized as follows:

7. Key Activities (KA)

Key Activities describe the most important things a company must do to make its business model work. They are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues.

Key Activities differ depending on the business model type. For example, Microsoft’s Key Activity is software development, while for Dell, it is Supply Chain Management. For a consultancy firm like McKinsey, Key Activity is problem-solving.

A business can identify its Key Activities by answering the following questions:

• What Key Activities do our Value Propositions require?
• What activities directly contribute to maintaining our Distribution Channels, Customer Relationships and Revenue Streams?

Key Activities can be categorized as follows:

8. Key Partnerships (KP)

The Key Partnerships describe the network of suppliers and partners that make the business model. There are four types of partnerships:

A business must ask the following questions before forming partnerships:

• Who are our key partners?
• Who are our key suppliers?
• Which Key Resources are we acquiring from partners?
• Which Key Activities do partners perform?

Primarily, there are three motivations for a business when creating partnerships, as shown:

9. Cost Structure (CS)

Cost Structure describes all costs incurred to operate a business model. A business incurs costs in creating and delivering value, maintaining customer relationships, and generating revenue. Costs are business-specific, where some are more cost-driven than others.

A business must answer the following questions to arrive at an optimum cost structure:

• What are the most important costs inherent in our business model?
• Which Key Resources are most expensive?
• Which Key Activities are most expensive?

While costs should be minimized in every business model, it is useful to distinguish between two broad classes of business model Cost Structures:

• Cost Driven : This model focuses on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible Cost Structure, using low-price Value Propositions, maximum automation, and extensive outsourcing. Examples: No frills airlines like Southwest & easyJet, Fast food joints such as McDonald’s & KFC.
• Value Driven: Premium Value Propositions and a high degree of personalized service usually characterize value-driven business models. Examples: Luxury hotels, Expensive Cars like Rolls-Royce

Cost Structures can have the following characteristics:

Putting-it-all together

The nine business model Building Blocks form the basis for a handy tool, which is called the Business Model Canvas (figure below). This tool resembles a painter’s canvas preformatted with nine blocks that allow painting pictures of new or existing business models. It is a hands-on tool that fosters understanding, discussion, creativity, and analysis.

BMC works best when printed out on a large surface such that groups of people can jointly note, sketch, and discuss business model elements.

Example of Business Model Canvas

Nespresso [17] , a fully owned daughter company of Nestlé, changed the dynamics of the coffee industry by turning a transactional business (selling coffee through retail) into one with recurring revenues (selling proprietary pods through direct channels).

The two-part strategy involved selling their patented coffee machine to retail customers first to lock them into the brand. This generated a recurring demand for coffee refills (pods) that led to constant revenues. These pods were sold directly through mail/website/own stores, thereby eliminating middlemen/dealers, which further increased profits [1] .

Nespresso’s strategy plotted on a Business Model Canvas looks as follows:

Business Model Canvas helped Nespresso establish a solid and enduring foundation by engaging consumers directly and bringing a barista-like experience within the reach of a home or an office.

Advantages & Limitations

• Encourages Collaboration – collaborative framework, which helps put different business stakeholders in sync. This improves the likelihood of generating new ideas and their quality.
• Facilitates testing of ideas before launch – allows business owners, strategists, and managers to think through business ideas as well as test concepts that would otherwise get tested with potential customers where the stakes are higher.
• Customer-centered approach – Key customer segments, relationships, activities, and value propositions are all elements that focus on creating, delivering, and capturing value for customers.
• Clarity – Analyzing the business through the lens of nine blocks brings better clarity and structure to the business model.

Limitations

• Lacks a section for defining the start-up’s mission statement, which is crucial to understanding the goals and objectives of any business.
• Overlooks the importance of a profit mechanism beyond costs and revenues, including decisions on how to use potential profits.
• The order of the canvas is not intuitive, making it difficult to read and understand the strategic decisions in a logical sequence.
• Does not depict interconnections between different elements, which can have a significant impact on the overall business model.
• Fails to acknowledge the company’s role within its ecosystem, including its impact on the environment and local communities.
• External factors such as competition, history, and other industry-specific factors are absent from the canvas, which can greatly influence the success of a business model.

1. “A Better Way to Think About Your Business Model”. Harvard Business Review, https://hbr.org/2013/05/a-better-way-to-think-about-yo . Accessed 01 Aug 2023

2. “Business Model Generation”. Alexander Osterwalder, https://www.strategyzer.com/books/business-model-generation . Accessed 28 Jul 2023

3. “The Apple M1 is a revolution that is changing the computing world”. Citymagazine, https://citymagazine.si/en/apple-m1-is-a-revolution-that-changes-the-computer-world/ . Accessed 29 Jul 2023

4. “Mass Customization”. Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/management/mass-customization/ . Accessed 29 Jul 2023

5. “Moka Pot”. Wikipedia, https://en.wikipedia.org/wiki/Moka_pot . Accessed 29 Jul 2023

6. “NetJets Homepage”. NetJets, https://www.netjets.com/en-us/ . Accessed 01 Aug 2023

7. “Distribution Channels – Definition, Types, & Functions”. Feedough, https://www.feedough.com/distribution-channels-definition-types-functions/ . Accessed 30 Jul 2023

8. “Lease from Hertz”. Hertz, https://www.hertz.com/rentacar/rental-car/car-lease . Accessed 30 Jul 2023

9. “TSMC”. Wikipedia, https://en.wikipedia.org/wiki/TSMC . Accessed 30 Jul 2023

10. “NVIDIA”. Wikipedia, https://en.wikipedia.org/wiki/Nvidia . Accessed 30 Jul 2023

11. “BMW, Daimler, Ford and Volkswagen team up on high-power charging network”. Techcrunch, https://techcrunch.com/2017/11/03/bmw-daimler-ford-and-volkswagen-team-up-on-high-power-charging-network/ . Accessed 31 Jul 2023

12. “Honda And Sony Combine Talents To Build Electric Vehicles”. Forbes, https://www.forbes.com/sites/peterlyon/2022/06/26/honda-and-sony-announce-joint-venture-to-build-electric-vehicles/ . Accessed 31 Jul 2023

13. “Uber and Spotify launch car music playlist partnership”. BBC, https://www.bbc.com/news/technology-30080974 . Accessed 31 Jul 2023

14. “Walmart Has the Scale and Infrastructure to Generate Positive Gains”. Yahoo Finance, https://finance.yahoo.com/news/walmart-scale-infrastructure-generate-positive-201822628.html . Accessed 31 Jul 2023

15. “Demand-Side Economies of Scope in Big Tech Business Modelling and Strategy”. MDPI, https://www.mdpi.com/2079-8954/10/6/246 . Accessed 31 Jul 2023

16. “The Business Model Canvas”. Strategyzer, https://www.strategyzer.com/canvas/business-model-canvas . Accessed 31 Jul 2023

17. “HomePage”. Nespresso, https://www.nespresso.com/us/en/ . Accessed 01 Aug 2023

18. “Business Model Canvas of Nespresso”. Alex Osterwalder, https://www.youtube.com/watch?v=dhQh-tryXOg . Accessed 01 Aug 2023

19. “Nespresso Capsule”. Electromall, https://electromall.net/product/nespresso-capsule/ . Accessed 01 Aug 2023

20. “The Best Nespresso Machine (But It’s Not for Everyone)”. Newyork Times, https://www.nytimes.com/wirecutter/reviews/best-nespresso-machine/ . Accessed 01 Aug 2023

21. “Business Model Canvas”. Think Design, https://think.design/user-design-research/business-model-canvas/ . Accessed 01 Aug 2023

22. “6 Problems with the Business Model Canvas”. The Pourquoi Pas, https://www.thepourquoipas.com/post/problems-with-the-business-model-canvas . Accessed 01 Aug 2023

• McKinsey 7S Model
• Elaboration Likelihood Model of Persuasion
• The Johari Window Model

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Business Model Components: Business Model Canvas Explained

The Business Model Canvas is a strategic management and entrepreneurial tool that allows you to describe, design, challenge, invent, and pivot your business model . It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances. This glossary article will delve into the various components of the Business Model Canvas, providing a comprehensive understanding of each element and its significance in the overall business model.

Understanding the Business Model Canvas is crucial for entrepreneurs, business strategists, and anyone involved in business planning and decision-making. It provides a holistic view of the business, highlighting the interconnections between different aspects , and helps in identifying potential areas of improvement or innovation. This tool is particularly useful in today's dynamic business environment, where adaptability and continuous innovation are key to achieving sustainable growth and success.

Key Components of the Business Model Canvas

The Business Model Canvas consists of nine key building blocks that cover the four main areas of a business: customers, offer, infrastructure, and financial viability. Each building block represents a specific aspect of the business model and plays a crucial role in the overall functioning and success of the business.

These components are not standalone entities; they are interconnected and influence each other. A change in one component can have a ripple effect on others, altering the overall business model. Therefore, understanding each component in detail is essential for effective strategic planning and decision-making.

Value Proposition

The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each value proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this context, the term ‘value’ refers to the benefits that customers expect from a product or service.

The Value Proposition is the core of the Business Model Canvas. It is the unique mix of product, price, service, relationship, and image that a business offers its customers. It is what distinguishes a company from its competitors and is often the deciding factor for customers when choosing between different products or services.

Customer Segments

Customer Segments define the different groups of people or organizations an enterprise aims to reach and serve. Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, behaviors, or other attributes.

A company's market can be segmented in various ways, including demographic, psychographic, geographic, and behavioral segmentation. Understanding these segments is crucial for developing effective marketing strategies and delivering value propositions that meet the specific needs and preferences of each segment.

Channels describe how a company communicates with and reaches its Customer Segments to deliver a Value Proposition. Communication, distribution, and sales Channels comprise a company's interface with customers. Channels are customer touch points that play an important role in the customer experience.

Channels can be direct or indirect and can involve various stages, such as awareness, evaluation, purchase, delivery, and after-sales services. The choice of channels can significantly influence a company's business model and can be a source of competitive advantage.

Customer Relationships

Customer Relationships describe the types of relationships a company establishes with specific Customer Segments. A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated, and may be driven by various motivations, such as customer acquisition, customer retention, or boosting sales.

Customer relationships can be built and maintained through various means, such as personal assistance, self-service, automated services, communities, and co-creation. The choice of customer relationship strategy can significantly influence customer satisfaction and loyalty, and hence the overall success of the business.

Revenue Streams

Revenue Streams represent the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings). If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, for what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment.

Revenue streams can be generated in many ways, including asset sales, usage fees, subscription fees, lending/renting/leasing, licensing, brokerage fees, advertising, and others. The choice of revenue stream can significantly influence the profitability and sustainability of the business.

Key Resources

Key Resources describe the most important assets required to make a business model work. Every business model requires Key Resources. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues.

Key resources can be physical, financial, intellectual, or human. They can be owned or leased by the company or acquired from key partners. The type and quantity of key resources can significantly influence the functionality and efficiency of the business model.

Key Activities

Key Activities are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues.

Key activities can be categorized into three types: production, problem-solving, and platform/network. The choice of key activities depends on the company's business model and can significantly influence the company's operations and competitive positioning.

Key Partnerships

Key Partnerships describe the network of suppliers and partners that make the business model work. Companies forge partnerships to optimize their business models, reduce risk, or acquire resources. We can distinguish between four different types of partnerships: strategic alliances between non-competitors, coopetition (strategic partnerships between competitors), joint ventures to develop new businesses, and buyer-supplier relationships to assure reliable supplies.

Key partnerships can provide access to essential resources and capabilities, enable risk sharing, and create synergies that enhance the overall value proposition. They can significantly influence a company's competitive positioning and growth prospects.

Cost Structure

The Cost Structure describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships.

Business models can have two different types of cost structures: cost-driven and value-driven. Cost-driven business models focus on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible cost structure, using low price Value Propositions, maximum automation, and extensive outsourcing. Value-driven companies, on the other hand, are less concerned about the cost implications of a particular business model design, and focus on value creation. Premium Value Propositions and a high degree of personalized service usually characterize this business model design.

In conclusion, the Business Model Canvas is a powerful tool for designing, analyzing, and innovating business models. It provides a comprehensive view of the key components of a business model and their interconnections, facilitating strategic planning and decision-making. Understanding each component in detail is essential for leveraging this tool effectively and achieving sustainable growth and success in today's dynamic business environment.

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Business Model Canvas: The 9 Elements Explained

This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.

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What are the nine elements of the Business Model Canvas? How are the elements related?

There are nine elements in the Business Model Canvas: 1) customer groups, 2) customer touchpoints, 3) customer interactions, 4) value proposition, 5) key resources, 6) network, 7) key activities, 8) revenue streams, 9) expenses. These elements are interdependent components that impact the effectiveness of the other elements. So, changes to one element can reduce or amplify the effects of other elements.

In this article, we’ll first briefly define what the Business Model Canvas is. Next, we’ll explore each of the nine overarching elements that you need to consider to create a successful business model.

What Is the Business Model Canvas?

Osterwalder and Pigneur developed a flexible template that they refer to as the “ Business Model Canvas ” to help you understand and focus on the nine overarching elements that they believe make up any successful business model. The template offers a visual framework to describe, assess, update, or design business models. You can use it to analyze the strategies of your competitors, to evaluate or to create new strategies for your existing business, or to design an entirely new business.

(Shortform note: The Lean Canvas is a popular adaptation of the Business Model Canvas. Developed by Ash Maurya, the author of Running Lean , it’s designed specifically for action-orientated start-up companies that rely on continuous experimentation to develop their products and services. Consequently, it places more emphasis on defining customer problems and identifying competitive solutions .)

The 9 Elements of the Business Model Template

Osterwalder and Pigneur encourage you to consider each of the nine Business Model Canvas elements as interdependent components that impact the effectiveness of the other elements. In other words, changes to one element can impose constraints or amplify the effects of other elements. Therefore, as you work on your business models, consider how you can leverage all of your elements to work together.

As you work on your business models, consider how you can leverage all of your elements to work together.

Element 1: Define Your Customer Groups

Define the different groups of customers your business intends to target—Osterwalder and Pigneur refer to this element as “Customer Segments.” You may serve one group of customers or several groups of customers depending on the needs you intend to fulfill. The authors state that your customers represent different groups if you need to:

• Create different products and services to meet their needs
• Reach them through different channels of distribution
• Develop different types of relationships with them
• Adapt your pricing structures to accommodate their needs

Once you’ve categorized your customers into distinct groups based on their needs or the way they interact with you, you can target these groups by designing your business model around their specific customer needs.

(Shortform note: The Four Steps to the Epiphany , by Steve Blank, emphasizes the importance of identifying and validating your customer groups before you develop your business model. The book includes a four-step customer development process to help businesses effectively define and target customer groups: 1) discover customers for your product or service, 2) validate your product and touchpoints, 3) create demand for your product or service, and 4) build strategies focused on customer management.)

Osterwalder and Pigneur argue that you need to approach each of your customer groups in specific ways when planning your business model. They provide the following examples of different types of customer groups:

Mass Market

For Mass Markets, the focus is on one large customer base with similar needs. Therefore, it isn’t necessary to distinguish between different customer groups when planning each of the other elements in your business model. For example, Colgate doesn’t need to differentiate its customers since toothpaste is an essential, widely-used personal care product. Therefore, Colgate can align all of its business model elements towards appealing to and engaging as many people as possible.

Niche Market

For Niche Markets, business models need to cater to specific customer groups and tailor each of the other elements to effectively target these specialized needs. For example, Lush targets customers who care about vegetarian products (no animal testing) and eco-friendly practices. Therefore, they align all of their business model elements to ensure the business focuses on environmentally friendly methods.

Subdivided Market

For Subdivided Markets, business models offer slightly different products and services to accommodate the needs of each of their customers. The way that they position each different product and service defines how they approach each of the elements. For example, an estate agent’s customers all want to buy or rent property. The estate agent can segment these customers into groups based on their income and on whether they wish to buy or rent. The higher the customer is willing to pay, the more emphasis the estate agent may have to put on developing customer relationships. This in turn affects the overall costs involved in targeting individual customer groups.

Diversified Market

Businesses that cater to two or more unrelated customer groups with different needs, have to base their business models around distinct products and services. All of the elements need to accommodate these distinct products and services. For example, Johnson & Johnson provides healthcare products and services to consumers. However, they also provide medical devices and equipment for hospitals. Johnson & Johnson has to target both of these customer groups separately to effectively cater to them.

Multi-Sided Market

Businesses that serve interdependent customer groups need to create products and services of equal value for each customer group. For the business model to function, each element needs to accommodate the full range of products and services on offer to both parties . For example, online marketplaces need to accommodate both buyers and sellers to operate efficiently—they can’t serve one group without the other group’s active participation.

Element 2: Define Your Touchpoints

Define your touchpoints, how you’ll communicate with your customers and deliver your products and services—Osterwalder and Pigneur refer to touchpoints as “Channels.” For your communication, sales, and distribution touchpoints, you have the option of using your own touchpoints (assets under your direct control such as your website or your store), or partner-owned touchpoints (external touchpoints that result from cooperation with marketing agencies or distribution partners), or a mix of both. In addition, the authors also make a distinction between direct touchpoints (communication you control such as your blog), and indirect touchpoints (communication you can’t control such as user reviews). 

The authors state that there are five distinct stages to consider when defining your touchpoints:

• Advertise your products and services to customers
• Differentiate the value your products and services offer to customers
• Enable transaction processes so customers can buy your products and services
• Distribute your products and services to your customers
• Support customers after they’ve bought your products and services

Touchpoints and Interactions (Element 3) are closely linked—consider the level of interaction you want to have with your customers when defining your touchpoints.

Element 3: Define Your Interactions 

Define the type of interactions you want to establish for each of your customer groups—Osterwalder and Pigneur refer to this element as “Customer Relationships.” The authors advise that you consider what your motivations are for communicating with your customers as your approach will differ depending on whether you intend to acquire new customers, retain existing customers, or upsell to existing customers. 

It’s important to note that the interactions customers have with your business deeply influence how they experience your products and services, so you need to carefully consider how you can meet their needs and create the right balance. The authors provide a list of ways to interact with your customers:

• Dedicated customer representatives for specific customers
• Customer representatives
• Self-service
• Automated services
• Communities and Forums
• Content co-creation

Element 4: Define Your Value Offer

Define how you intend to offer value to these customers—Osterwalder and Pigneur refer to this element as “Value Propositions.” Your value offer outlines the benefits you intend to provide in the form of products and services. The authors state that successful value offers align with the needs of your customers and differentiate themselves from existing solutions.

When creating your value offer, consider these questions:

• Do you intend to disrupt the market with an innovative value offer, or do you intend to improve upon what’s already out there?
• What specific value do you intend to deliver to the customer?
• How will you adapt your value offer for each of your customer groups?
• What makes your value offer more appealing than that of your competitors?

(Shortform note: Osterwalder and Pigneur’s Value Proposition Design delves further into the topic of creating, testing, and improving your value offer.)

Element 5: Define Your Resources

Define what resources you need to create and deliver your products and services to your customer—Osterwalder and Pigneur refer to this element as “Key Resources.” According to the authors, you can own, lease, or acquire the resources you need. All resources fall into the following categories:

• Material: raw materials, buildings, factories, vehicles, and machinery
• Monetary: cash, credit, and stock options
• Intellectual: brand equity, copyrights, patents, and knowledge databases
• Human: experienced staff members and specialists

Element 6: Define Your Network

Define the alliances you need to form to optimize your business model and increase market share, acquire resources, or reduce risk—Osterwalder and Pigneur refer to this element as “Key Partnerships.” In other words, what alliances will provide you with a sustainable competitive advantage and help you to grow quickly? The authors distinguish between four different types of alliances:

• Alliances between non-competitors (eBay and Paypal)
• Alliances between competitors (Apple and Microsoft’s patent-licensing agreement)
• Joint Alliances to develop new products and services (Ford and Toyota develop hybrid trucks)
• Buyer-supplier Alliances (Samsung supplies Apple)

(Shortform note: Innovation expert, Rosabeth Moss Kanter, author of Think Outside the Building , compares strategic alliance relationships to marriage—like marriage, many strategic alliances fail to live up to expectations. In other words, both suffer from a high failure rate. However, Kanter argues that strategic alliances are more likely to succeed if businesses focus on creating strong foundations built on shared values and mutual benefits .)

Element 7: Define Your Critical Actions

Define the core actions you need to take to operate successfully and meet customer demands—Osterwalder and Pigneur refer to this element as “Key Activities.” The authors state that your actions will fall into the following categories:

• Production: designing, manufacturing, and delivering products
• Troubleshooting: finding solutions to problems
• Infrastructure management: managing interactions between multiple applications and parties

(Shortform note: Osterwalder and Pigneur don’t provide practical advice here since different business models rely on different activities to operate successfully. Measure What Matters provides an effective goal-setting process that you can use to define the objectives (your end goal) and key results (how you will achieve your end goal) for each of your business model elements. For example, if you intend to manage platform interactions between different customer groups, your objective could be to acquire X number of customers in each group. Your key results could be: grow platform visitors by 5% every month, increase organic traffic by 10% every six weeks, and so on.)

Element 8: Define Your Profit Sources

Define how you intend to profit from the value you provide to your customers—Osterwalder and Pigneur refer to this element as “Revenue Streams.” The authors state that there are two types of income streams to consider, profits from single transactions , and profits from ongoing payments such as subscriptions . You may have multiple income streams for each of your customer groups. Further, each of these income streams may involve different pricing mechanisms depending on whether you choose to set a fixed or variable price for your products and services.

The authors include the following ways to generate profits:

• Selling physical products
• Charging a usage fee for a product or service
• Supplying services for subscription
• Leasing products and assets
• Licensing intellectual property 
• Providing an intermediation or brokerage service

Element 9: Define Your Expenses

Define the expenses of operating all of the elements you’ve defined in your business model—Osterwalder and Pigneur refer to this element as “Cost Structure.” Your expenses will vary depending on whether you choose to minimize costs and offer an inexpensive product or service, or if you choose to create premium-priced products and services. The authors state that your costs structures will include at least one of the following characteristics:

• Fixed costs: salaries, rents
• Variable costs: costs vary in proportion to the volume of goods or services produced
• Economies of Scale: bulk purchase rates lessen cost per unit rates
• Economies of Scope: a single resource or activity supports multiple operations or services

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• The nine elements that make up any successful business model
• Different ways you can combine these elements to create business model patterns
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Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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Business Model Canvas: Explained with Examples

Got a new business idea, but don’t know how to put it to work? Want to improve your existing business model? Overwhelmed by writing your business plan? There is a one-page technique that can provide you the solution you are looking for, and that’s the business model canvas.

In this guide, you’ll have the Business Model Canvas explained, along with steps on how to create one. All business model canvas examples in the post can be edited online.

What is a Business Model Canvas

A business model is simply a plan describing how a business intends to make money. It explains who your customer base is and how you deliver value to them and the related details of financing. And the business model canvas lets you define these different components on a single page.   

The Business Model Canvas is a strategic management tool that lets you visualize and assess your business idea or concept. It’s a one-page document containing nine boxes that represent different fundamental elements of a business.  

The business model canvas beats the traditional business plan that spans across several pages, by offering a much easier way to understand the different core elements of a business.

The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.

The business model canvas was originally developed by Alex Osterwalder and Yves Pigneur and introduced in their book ‘ Business Model Generation ’ as a visual framework for planning, developing and testing the business model(s) of an organization.

What Are the Benefits of Using a Business Model Canvas

Why do you need a business model canvas? The answer is simple. The business model canvas offers several benefits for businesses and entrepreneurs. It is a valuable tool and provides a visual and structured approach to designing, analyzing, optimizing, and communicating your business model.

• The business model canvas provides a comprehensive overview of a business model’s essential aspects. The BMC provides a quick outline of the business model and is devoid of unnecessary details compared to the traditional business plan.
• The comprehensive overview also ensures that the team considers all required components of their business model and can identify gaps or areas for improvement.
• The BMC allows the team to have a holistic and shared understanding of the business model while enabling them to align and collaborate effectively.
• The visual nature of the business model canvas makes it easier to refer to and understand by anyone. The business model canvas combines all vital business model elements in a single, easy-to-understand canvas.
• The BMC can be considered a strategic analysis tool as it enables you to examine a business model’s strengths, weaknesses, opportunities, and challenges.
• It’s easier to edit and can be easily shared with employees and stakeholders.
• The BMC is a flexible and adaptable tool that can be updated and revised as the business evolves. Keep your business agile and responsive to market changes and customer needs.
• The business model canvas can be used by large corporations and startups with just a few employees.
• The business model canvas effectively facilitates discussions among team members, investors, partners, customers, and other stakeholders. It clarifies how different aspects of the business are related and ensures a shared understanding of the business model.
• You can use a BMC template to facilitate discussions and guide brainstorming brainstorming sessions to generate insights and ideas to refine the business model and make strategic decisions.
• The BMC is action-oriented, encouraging businesses to identify activities and initiatives to improve their business model to drive business growth.
• A business model canvas provides a structured approach for businesses to explore possibilities and experiment with new ideas. This encourages creativity and innovation, which in turn encourages team members to think outside the box.

How to Make a Business Model Canvas

Here’s a step-by-step guide on how to create a business canvas model.

Step 1: Gather your team and the required material Bring a team or a group of people from your company together to collaborate. It is better to bring in a diverse group to cover all aspects.

While you can create a business model canvas with whiteboards, sticky notes, and markers, using an online platform like Creately will ensure that your work can be accessed from anywhere, anytime. Create a workspace in Creately and provide editing/reviewing permission to start.

Step 2: Set the context Clearly define the purpose and the scope of what you want to map out and visualize in the business model canvas. Narrow down the business or idea you want to analyze with the team and its context.

Step 3: Draw the canvas Divide the workspace into nine equal sections to represent the nine building blocks of the business model canvas.

Step 4: Identify the key building blocks Label each section as customer segment, value proposition, channels, customer relationships, revenue streams, key resources, key activities, and cost structure.

Step 5: Fill in the canvas Work with your team to fill in each section of the canvas with relevant information. You can use data, keywords, diagrams, and more to represent ideas and concepts.

Step 6: Analyze and iterate Once your team has filled in the business model canvas, analyze the relationships to identify strengths, weaknesses, opportunities, and challenges. Discuss improvements and make adjustments as necessary.

Step 7: Finalize Finalize and use the model as a visual reference to communicate and align your business model with stakeholders. You can also use the model to make informed and strategic decisions and guide your business.

What are the Key Building Blocks of the Business Model Canvas?

There are nine building blocks in the business model canvas and they are:

Customer Segments

Customer relationships, revenue streams, key activities, key resources, key partners, cost structure.

• Value Proposition

When filling out a Business Model Canvas, you will brainstorm and conduct research on each of these elements. The data you collect can be placed in each relevant section of the canvas. So have a business model canvas ready when you start the exercise.  

Let’s look into what the 9 components of the BMC are in more detail.

These are the groups of people or companies that you are trying to target and sell your product or service to.

Segmenting your customers based on similarities such as geographical area, gender, age, behaviors, interests, etc. gives you the opportunity to better serve their needs, specifically by customizing the solution you are providing them.

After a thorough analysis of your customer segments, you can determine who you should serve and ignore. Then create customer personas for each of the selected customer segments.

There are different customer segments a business model can target and they are;

• Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.  
• Niche market: Here the focus is centered on a specific group of people with unique needs and traits. Here the value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
• Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
• Diversified: A diversified market segment includes customers with very different needs.
• Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.

Use STP Model templates for segmenting your market and developing ideal marketing campaigns

Visualize, assess, and update your business model. Collaborate on brainstorming with your team on your next business model innovation.

In this section, you need to establish the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company.

There are several types of customer relationships

• Personal assistance: you interact with the customer in person or by email, through phone call or other means.
• Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.  
• Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
• Automated services: this includes automated processes or machinery that helps customers perform services themselves.
• Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
• Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.

You can understand the kind of relationship your customer has with your company through a customer journey map . It will help you identify the different stages your customers go through when interacting with your company. And it will help you make sense of how to acquire, retain and grow your customers.

This block is to describe how your company will communicate with and reach out to your customers. Channels are the touchpoints that let your customers connect with your company.

Channels play a role in raising awareness of your product or service among customers and delivering your value propositions to them. Channels can also be used to allow customers the avenue to buy products or services and offer post-purchase support.

There are two types of channels

• Owned channels: company website, social media sites, in-house sales, etc.
• Partner channels: partner-owned websites, wholesale distribution, retail, etc.

Revenues streams are the sources from which a company generates money by selling their product or service to the customers. And in this block, you should describe how you will earn revenue from your value propositions.  

A revenue stream can belong to one of the following revenue models,

• Transaction-based revenue: made from customers who make a one-time payment
• Recurring revenue: made from ongoing payments for continuing services or post-sale services

There are several ways you can generate revenue from

• Asset sales: by selling the rights of ownership for a product to a buyer
• Usage fee: by charging the customer for the use of its product or service
• Subscription fee: by charging the customer for using its product regularly and consistently
• Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
• Licensing: customer pays to get permission to use the company’s intellectual property
• Brokerage fees: revenue generated by acting as an intermediary between two or more parties
• Advertising: by charging the customer to advertise a product, service or brand using company platforms

What are the activities/ tasks that need to be completed to fulfill your business purpose? In this section, you should list down all the key activities you need to do to make your business model work.

These key activities should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue.

There are 3 categories of key activities;

• Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
• Problem-solving: finding new solutions to individual problems faced by customers.
• Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.

This is where you list down which key resources or the main inputs you need to carry out your key activities in order to create your value proposition.

There are several types of key resources and they are

• Human (employees)
• Financial (cash, lines of credit, etc.)
• Intellectual (brand, patents, IP, copyright)
• Physical (equipment, inventory, buildings)

Key partners are the external companies or suppliers that will help you carry out your key activities. These partnerships are forged in oder to reduce risks and acquire resources.

Types of partnerships are

• Strategic alliance: partnership between non-competitors
• Coopetition: strategic partnership between partners
• Joint ventures: partners developing a new business
• Buyer-supplier relationships: ensure reliable supplies

In this block, you identify all the costs associated with operating your business model.

You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.  

Businesses can either be cost-driven (focuses on minimizing costs whenever possible) and value-driven (focuses on providing maximum value to the customer).

Value Propositions

This is the building block that is at the heart of the business model canvas. And it represents your unique solution (product or service) for a problem faced by a customer segment, or that creates value for the customer segment.

A value proposition should be unique or should be different from that of your competitors. If you are offering a new product, it should be innovative and disruptive. And if you are offering a product that already exists in the market, it should stand out with new features and attributes.

Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design).

What to Avoid When Creating a Business Model Canvas

One thing to remember when creating a business model canvas is that it is a concise and focused document. It is designed to capture key elements of a business model and, as such, should not include detailed information. Some of the items to avoid include,

• Detailed financial projections such as revenue forecasts, cost breakdowns, and financial ratios. Revenue streams and cost structure should be represented at a high level, providing an overview rather than detailed projections.
• Detailed operational processes such as standard operating procedures of a business. The BMC focuses on the strategic and conceptual aspects.
• Comprehensive marketing or sales strategies. The business model canvas does not provide space for comprehensive marketing or sales strategies. These should be included in marketing or sales plans, which allow you to expand into more details.
• Legal or regulatory details such as intellectual property, licensing agreements, or compliance requirements. As these require more detailed and specialized attention, they are better suited to be addressed in separate legal or regulatory documents.
• Long-term strategic goals or vision statements. While the canvas helps to align the business model with the overall strategy, it should focus on the immediate and tangible aspects.
• Irrelevant or unnecessary information that does not directly relate to the business model. Including extra or unnecessary information can clutter the BMC and make it less effective in communicating the core elements.

What Are Your Thoughts on the Business Model Canvas?

Once you have completed your business model canvas, you can share it with your organization and stakeholders and get their feedback as well. The business model canvas is a living document, therefore after completing it you need to revisit and ensure that it is relevant, updated and accurate.

What best practices do you follow when creating a business model canvas? Do share your tips with us in the comments section below.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

FAQs About the Business Model Canvas

• Use clear and concise language
• Use visual-aids
• Customize for your audience
• Highlight key insights
• Be open to feedback and discussion

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Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

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The Essential Components of a Business Model

A business model is a fundamental concept that underpins the success of any organization. It serves as a blueprint for how a company creates, delivers, and captures value in the marketplace. Understanding the key components of a business model is essential for entrepreneurs and business leaders alike.

In this article, we will explore the concept of a business model, its importance, key elements, interplay with company goals, evaluation and improvement, as well as future trends.

Understanding the Concept of a Business Model

A business model refers to the way in which a company operates and generates revenue. It encompasses various aspects, including the products or services offered, the target market, the distribution channels, and the pricing strategy. Essentially, a business model outlines how a company plans to create value for its customers and stakeholders.

At its core, a business model is a hypothesis about how an organization can create sustainable economic value. It serves as a guide for making critical decisions and setting strategic direction. By understanding the concept of a business model, entrepreneurs can establish a solid foundation for their ventures.

When developing a business model, it is important to consider the competitive landscape and industry trends. Conducting market research and analyzing customer needs and preferences can provide valuable insights for designing a successful business model.

One key aspect of a business model is the value proposition. This refers to the unique value that the products or services offer to customers. A compelling value proposition sets a company apart from competitors and attracts customers. It should address customer pain points and provide solutions that are superior to what is currently available in the market.

Another important element of a business model is the revenue model. This outlines how a company plans to generate revenue from its products or services. There are various revenue models to consider, such as subscription-based models, one-time sales, licensing fees, or advertising revenue.

The Importance of a Solid Business Model

A strong business model is crucial for several reasons. Firstly, it helps to clarify the company's value proposition - the unique value that the products or services offer to customers. A compelling value proposition sets a company apart from competitors and attracts customers.

Secondly, a solid business model enables efficient resource allocation. By defining the target market and customer segments, companies can focus their efforts on serving the right audience. This leads to cost savings and higher profitability.

Furthermore, a well-defined business model facilitates effective decision-making. It provides a structured framework for evaluating opportunities and making strategic choices. By aligning actions with the business model, companies can enhance their chances of success and manage risks.

Developing a solid business model requires continuous evaluation and adaptation. As market conditions change and customer preferences evolve, companies must be willing to adjust their strategies and offerings. This flexibility allows businesses to stay relevant and competitive in a dynamic business environment.

The Evolution of Business Models over Time

Business models have evolved significantly over time, driven by technological advancements, changing customer expectations, and market dynamics. Traditional business models focused primarily on product-centric approaches, where companies manufactured and sold physical goods.

In recent years, however, there has been a shift towards more customer-centric models. Companies now understand the importance of customer experience and satisfaction in driving growth. This shift has led to the rise of subscription-based models, service-oriented approaches, and digital platforms.

As technology continues to advance, business models are expected to undergo further transformations. Concepts such as the sharing economy, peer-to-peer platforms, and blockchain-based business models are gaining traction. Companies must stay adaptable and embrace innovation to thrive in an ever-changing landscape.

In conclusion, understanding the concept of a business model is essential for entrepreneurs and businesses. It provides a framework for creating value, making strategic decisions, and adapting to market changes. By continuously evaluating and refining their business models, companies can position themselves for long-term success.

Key Elements of a Business Model

To build a successful business model, it is essential to consider several key elements. These include the value proposition, customer segments, channels for distribution and communication, and revenue streams and cost structure.

Value Proposition and Its Role

The value proposition is the unique combination of products, services, and benefits that a company offers to its customers. It articulates why customers should choose a particular brand over competitors. A compelling value proposition addresses customer needs and pain points, solves problems, and creates tangible value.

Understanding the role of the value proposition is crucial for designing an effective business model. It provides the basis for differentiation, customer acquisition, and long-term customer relationships. Companies should continuously refine and enhance their value propositions to stay relevant in the market.

Customer Segments and Market Analysis

Identifying the target customer segments is another critical element of a business model. Companies must analyze the market and understand the characteristics, needs, and preferences of their target audience. By segmenting the market, companies can tailor their offerings and marketing efforts to specific customer groups.

Market analysis involves gathering relevant data, such as demographic information, purchasing behavior, and market trends. This information helps companies make informed decisions and create effective marketing strategies. By understanding their customers, companies can deliver products and services that meet their needs and exceed their expectations.

Channels for Distribution and Communication

Effective distribution and communication channels are essential for reaching customers and delivering value. Companies must identify the most efficient channels for getting their products or services into the hands of customers. This may involve direct sales, partnerships with retailers, e-commerce platforms, or digital marketing.

Communication channels play a vital role in building brand awareness, engaging customers, and conveying the value proposition. Companies should leverage various communication channels, such as social media, email marketing, content marketing, and traditional advertising, to establish strong relationships with customers and drive sales.

Revenue Streams and Cost Structure

Revenue streams are the sources of income for a company. It is essential to identify and diversify revenue streams to ensure long-term sustainability. Companies may generate revenue through product sales, subscription fees, licensing, advertising, or other monetization strategies.

Equally important is the cost structure of a business model. Understanding the costs associated with producing and delivering products or services is crucial for financial viability. By optimizing costs and managing expenses efficiently, companies can improve profitability and maximize value creation.

The Interplay of Business Model Components

The various components of a business model are interconnected and influence each other. It is essential to align all elements to ensure a coherent and effective approach.

Aligning Your Business Model with Company Goals

A successful business model aligns with the company's overall goals and objectives. It should support the organization's mission, vision, and values. By integrating the business model into the broader strategic framework, companies can ensure consistency and focus.

When designing or refining a business model, it is crucial to assess how each component contributes to the achievement of company goals. This alignment enables companies to make resource allocation decisions, set performance metrics, and establish a clear direction for growth.

Adapting Your Business Model to Market Changes

Business models should be flexible and adaptable to market changes. Companies must monitor industry trends, competitors, and customer preferences to identify opportunities and challenges. By regularly assessing the external environment, companies can make necessary adjustments to their business models.

Adapting to market changes may involve modifying the value proposition, expanding into new customer segments, exploring alternative distribution channels, or exploring innovative revenue streams. By staying ahead of the curve, companies can maintain their competitive edge and capitalize on emerging trends.

Evaluating and Improving Your Business Model

Continuous evaluation and improvement are critical in ensuring the long-term viability of a business model. Companies must regularly review their strategies and assess performance to identify areas for enhancement.

Regular Review and Update of Your Business Model

Business environments are dynamic, and what worked yesterday may not work tomorrow. It is essential to conduct regular business model reviews to assess its effectiveness and relevance. Companies should analyze market trends, customer feedback, financial performance, and operational efficiency to identify potential areas for improvement.

An effective business model review involves gathering feedback from employees, customers, and industry experts. By soliciting different perspectives, companies can gain valuable insights and identify blind spots or potential growth opportunities.

Pitfalls to Avoid in Business Model Design

When designing or redesigning a business model, it is crucial to avoid common pitfalls. Some common mistakes include overcomplicating the model, overlooking customer needs, neglecting competitive analysis, and underestimating the importance of financial sustainability.

Companies should also be mindful of the potential risks associated with their business models. This includes dependency on a single revenue stream, lack of diversification, and vulnerability to disruptive technologies or market shifts. By anticipating and mitigating risks, companies can enhance the resilience and longevity of their business models.

The Future of Business Models

Looking ahead, business models will continue to evolve in response to emerging trends and technological advancements.

Emerging Trends in Business Model Development

One emerging trend is the rise of platform business models, where companies facilitate connections between customers, suppliers, and other stakeholders. Platform businesses, such as Uber and Airbnb, have transformed industries and disrupted traditional models.

Another trend is the increasing emphasis on sustainability and social responsibility. Companies are incorporating environmental and social considerations into their business models, aligning with consumer demands for ethical and environmentally-friendly practices.

The Impact of Technology on Business Models

Technology plays a vital role in shaping future business models. Innovations such as artificial intelligence, blockchain, and the internet of things have the potential to revolutionize industries and create new opportunities.

Companies that embrace technology and leverage it to enhance their business models will be well-positioned for success. The ability to harness data, automate processes, and deliver personalized experiences will be crucial in staying competitive in the digital age.

In conclusion, understanding the essential components of a business model is foundational to building a successful and sustainable organization. By comprehending the concept, recognizing the importance, and focusing on key elements, companies can design business models that create value for customers and stakeholders. Furthermore, the interplay of business model components, alignment with company goals, continuous evaluation, and adaptability to market changes are crucial for long-term viability. Embracing emerging trends and leveraging technology will shape the future of business models. As the business landscape continues to evolve, companies must stay agile, innovative, and customer-centric to thrive.

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The Bottom Line

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

• A business model is a company's core strategy for profitably doing business.
• Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
• There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
• The two levers of a business model are pricing and costs.
• When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

Investopedia / Laura Porter

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

• Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
• Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
• Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
• Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
• Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
• Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
• Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

• Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
• Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
• More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

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8 Key Elements Of A Business Model that You Should Understand

There are many benefits to creating a business model, even if you’re not looking for investors. For example, setting up a business model helps you stay on target when setting up a company or revamping it. These elements can help you succeed as it enhances business growth. 

The business model is the primary aspect of your business plan. It not only helps you stay organized and focused but is needed if you’re looking for investors or loans.  They do vary, and by choosing the best model for your business , you can easily fill in the blanks when it comes to your specific business type. 

The following elements of the business model will help you consider various important factors. Then, as you reflect on these elements, you can see what points you may have missed. All in all, it’s an important part of starting up your own business . For example, if you’re looking for investors or a bank loan, putting together a business model will help you to articulate clearly what your product or service is about and how it will succeed.

1. Value Proposition

It is the description of what your product or service does to fulfill the customers’ needs. It should clearly define why a customer would buy from your company. The value proposition should be personalized and customized to include the reduction of product search, discovery costs on price, and how you’ll manage product delivery.

2. Revenue Model

This portion relates to how you plan to make money from your business through revenue and producing a good return on capital invested. It could potentially include advertising revenue, subscription revenue, transaction fees, sales revenue, and affiliate revenue. The type of revenue you bring in depends on your business, of course, but whatever your income plan is, it’s important to lay it out clearly for yourself and investors.

3. Market Opportunity

You want to lay out your company’s market space and include your target market and the overall number of people in this audience. If there is a lot of demand for your services/products across a large demographic, it warrants creating a business around this demand. In addition, the market opportunity allows you and others to understand the potential financial possibilities, and it’s essential to do enough research to have realistic financial numbers.

4.  Competitive Environment

If you’ve determined that you have a large target audience, you also want to ensure that the market isn’t saturated with your product or service. For example, you want to figure out who your competition is. Who is offering a similar product or service in your market space? Then, find out who they are and how big they are. Know their market shares, what they provide, and how much they charge for the product they sell.

5. Competitive Advantage

By knowing who your competition is, what they offer, and how much they charge, you can work to differentiate yourself from them. First, figure out how you’re different to encourage customers to choose your company. It might be selling a similar product or service for less or having a specific company culture that resonates with people. 

6. Market Strategy

You want to figure out how you plan to enter the market and attract customers, so it’s important to know how you will make your first impression. It needs to be a well-thought-out process, and you may wish to follow a sales funnel process .

Think of your target audience and how you can reach them with the most impact. You may choose to use social media influencers, do a campaign with a social media platform that makes the most sense for your business, and, of course, create a brand.

7. Organization Development

It’s also imperative to organize how your business will run to avoid chaos and keep things streamlined. You want to have organizational structures in place as this will help ensure that essential work is completed. In addition, you want to have a process that defines functions in the workplace, which will make it easy for employees to understand their roles and help them be as efficient as possible. Finally, organization development will directly influence how satisfied your customers are as orders and support are dispatched as quickly as possible.

8. Management Team

This business model aspect will explain the experiences and background that a company leader should look for. Whether you have your management team together or not, you want to consider what you need from them. If you have a strong team, they can change the business model and the business when necessary. Knowing how to pivot gives a management team credibility to investors. 

The business model you create will ensure your business is set up properly from the very beginning. It will help your business run smoothly, and it also helps get investors to believe in your company. This business model consists of all the aspects an investor or bank will want to look at. So, properly setting it up shows these investors that you know what you’re doing and have looked at all factors. It allows them to see how successful your business can be while allowing you to reflect on how well you’ll run your business. Check out our article explaining different types of business models here .

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Staff writer: Loraine Couturier is a jet set writing chick from Canada that travels around the globe. Her writing and marketing skills are what keeps her eating exotic meals and jumping on planes. Loraine loves writing about pretty much anything and likes to pass on the knowledge she has to others. Visit her at https://www.facebook.com/jetsetwritingchick

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What Is a Business Model?

• Andrea Ovans

A history, from Drucker to Christensen.

A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition. Many people believe Peter Drucker defined the term in a 1994 article as “assumptions about what a company gets paid for,” but that article never mentions the term business model. Instead, Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy. Businesses make assumptions about who their customers and competitors are, as well as about technology and their own strengths and weaknesses. Joan Magretta carries the idea of assumptions into her focus on business modeling, which encompasses the activities associated with both making and selling something. Alex Osterwalder also builds on Drucker’s concept of assumptions in his “business model canvas,” a way of organizing assumptions so that you can compare business models. Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. Rita McGrath offers that your business model is failing when innovations yield smaller and smaller improvements. You can innovate a new model by altering the mix of products and services, postponing decisions, changing the people who make the decisions, or changing incentives in the value chain. Finally, Mark Johnson provides a list of 19 types of business models and the organizations that use them.

In The New, New Thing , Michael Lewis refers to the phrase business model as “a term of art.” And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.

• AO Andrea Ovans is a former senior editor at Harvard Business Review.

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8 Types of Business Models & the Value They Deliver

• 26 May 2016

You want to start a company but aren’t sure about a viable business model. How might you create something that people are willing to pay for and could earn you a profit?

Before diving into potential strategies, it’s important to understand what a business is and does. At its heart, a business generates value for its customers. A business model is a specific method used to create and deliver this value.

What Is Value in Business?

A successful business creates something of value . The world is filled with opportunities to fulfill people’s wants and needs, and your job as an entrepreneur is to find a way to capitalize on these opportunities.

A viable business model is one that allows a business to charge a price for the value it’s creating, such that the business brings in enough money to make it worthwhile and continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and quality expectations.

It’s important to note that value is subjective. What’s valuable to one person may not be to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, some professional athletes make far more money than the average brain surgeon.

Nonetheless, the concept of value provides a useful bedrock on which to begin building your business model. In particular, consider what forms of value people are willing to pay for. Here are eight potential business models and the forms of value they deliver—as well as the pros and cons of each—to help you get started.

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8 Types of Business Models to Explore

A product is a tangible item of value. To run a successful product-focused business, try to produce the item for as low a cost as possible while maintaining a reasonable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profit.

Products are all around us. From laptops to books to HBS Online courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.

• Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
• Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a service.

Related: How to Create an Effective Value Proposition

A service involves offering assistance to someone else for a fee. To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality.

Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.

• Pros: If you have a skill in high demand or a skill that very few others have, you can charge a fair price for your time and stand out in your field.
• Cons: If you don’t charge enough for your services, or many people have your skill, your business may not be as lucrative.

3. Shared Assets

A shared asset is a resource that many people can use. Such resources allow the owner to create or purchase the item once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience.

For instance, think of a fitness center. A gym typically buys treadmills, ellipticals, free weights, bikes, and other equipment and charges customers monthly membership fees for access to these shared assets. The key is to charge customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.

• Pros: This model provides people access to a lot of assets they wouldn’t otherwise have access to. In addition, many people are willing to pay a lot for access to trendy social spaces.
• Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough in your budget for quick fixes, if necessary.

4. Subscription

A subscription is a type of program in which a user pays a recurring fee for access to certain specified benefits. These benefits often include the recurring provision of products or services. Unlike a shared asset, however, your experience with the product or service isn’t affected by others.

To have a successful subscription-based offering, build a subscriber base by providing reliable value over time while attracting new customers.

The number of subscription services has exploded in recent years. From magazines to streaming services to grocery and wine delivery subscriptions, businesses are turning to the subscription-based model, often with great success.

• Pros: This model provides certainty in the form of predictable revenue streams, making financial forecasting a bit easier. It also benefits from a loyal customer base and customer inertia (for instance, customers may forget to cancel their subscription).
• Cons: To run this model, your business operations must be strong. If you can’t deliver value consistently over time, you may want to consider a different business model.

5. Lease/Rental

A lease involves obtaining an asset and renting it out for an agreed-upon amount of time in exchange for a fee. You can lease virtually anything, but it’s in your best interest to rent assets that are durable enough to be returned in good condition. This ensures you can lease the good multiple times and, perhaps, eventually sell it.

To profit from leases, the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price. This requires you to price the rental of the item strategically and potentially not lease to those who may not return it in good condition. This is why many rentals of high-value items require references, credit checks, or other background information that can predict how someone may return the leased item.

• Pros: You don’t have to have a novel idea to make money using a lease business model . You can purchase assets and rent them to others who wouldn’t buy them for full value and earn a premium.
• Cons: You need to protect yourself from unexpected damage to your assets. One way to do so is through insurance.

6. Insurance

Insurance entails the transfer of risk from a customer to a seller of an insurance policy. In exchange for the insurance company (the seller of the policy) taking on the risk of a specified event occurring, they receive periodic payments ("premiums" in insurance lingo) from the policyholder. If the specified event doesn’t happen, the insurance company keeps the money, but if it does, the company has to pay the policyholder.

In a sense, insurance is the sale of safety—it provides value by protecting people from unlikely, but catastrophic, risks. Policyholders can take insurance out on almost anything: life, health, house, car, boat, and more. To run a successful insurance company, you have to accurately estimate the likelihood of bad events occurring and charge higher premiums than the claims you pay out to your customers.

• Pros: If you calculate risk accurately, you’re guaranteed to make money using the insurance business model.
• Cons: It can be difficult to accurately calculate the likelihood of specific events occurring. Insurance only works because it spreads risk over large numbers of policyholders. Insurance companies can fail if a large portion of policyholders is impacted by a widespread, negative event they didn’t see coming (for example, the Global financial crisis in 2007 and 2008).

Related: 5 Steps to Validate Your Business Idea

7. Reselling

Reselling is the purchasing of an asset from one seller and the subsequent sale of that asset to an end buyer at a premium price. Reselling is the process through which most major retailers purchase the products they then sell to buyers. For example, think of farmers supplying fruits and vegetables to a grocery store or manufacturers selling goods to a hardware store.

Companies make money through resale by purchasing large quantities of items (usually at a bulk discount) from wholesalers and selling single items for a higher price to individuals. This price raise is called a markup.

• Pros: Markups can often be high for retail sales, enabling you to earn a profit on the items you resell. For example, a bottle of water might cost 10 cents to produce, whereas a customer may be willing to pay $1.50 or more for the same bottle.
• Cons: You need to be able to gain access to quality products at low costs for the reselling business model to work. You’ll also need the physical space to store inventory to manage sales cycles.

8. Agency/Promotion

Agents create value by marketing an asset, which they don’t own, to an interested buyer. They then earn a fee or a commission for bringing the buyer and seller together. Thus, instead of using their own assets to create value, they team up with others to help promote them to the world.

Running a successful agency requires good connections, excellent negotiation skills , and a willingness to work with a diverse set of individuals. One example is a sports agent who promotes players to teams and negotiates on their behalf to get the best deal. In return, they typically receive compensation equal to a certain percentage of the contract.

• Pros: You can highly profit from expertise and connections in your industry, be it publishing, acting, advertising, or something else.
• Cons: You only get paid if you seal the deal, so you have to be able to live with some uncertainty.

Setting Your Business Up for Success

These eight types of business models each have pros and cons and deliver value in their own ways. If you’re looking to start a business and need a place to start, one of these could be the best fit for your venture and entrepreneurial skill set .

Interested in honing your entrepreneurial skills? Explore our four-week online course Entrepreneurship Essentials and our other entrepreneurship and innovation courses to learn the language of the business world.

This post was updated on February 19, 2021, and is a compilation of two posts, previously published on May 26, 2016, and June 2, 2016.

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What is the business model canvas and why do i need it.

Starting a small business is a monumental task. It seems like there are a million things you have to take care of before you can make your first dollar. You need to register your business, set up your website, work out your budget, figure out your marketing plan, test your products, and establish good relationships with your manufacturers and suppliers.

You also need to create your business plan and your business model. So much to do.

You know what a business plan is. It’s your step-by-step guide on how your business will achieve its objectives. What you might not fully understand is you business model.

A business model is simply a design for the successful operation of a business. It’s how you create value for yourself (e.g. make money) while delivering products or services to your customers.

There are numerous types of business models, and they can all be mapped onto physical chart called the “business model canvas”.

The business model canvas and was developed by Alex Osterwalder, and if you don’t have a business model canvas it’s a great tool to use to improve the focus and clarity of what your business is trying to achieve.

It eliminates all of the fluff from the traditional business plan and lets you zero in on what’s important.

The Business Model Canvas Explained

The business model canvas is broken into nine building blocks for your customers.  We’ll break down each of those segments so you can get a better understanding of what each of them means for your company.

#1 – Value Propositions

The first section is about your value proposition. Your value proposition is what your company is making and who they’re making it for. It’s not about your specific idea or product, it’s about solving a problem or filling a need. It’s also about who you are solving that problem for.

Once you know what problem your solving and who you’re solving it for, you can get into what exactly your product or service is. This is where you list all the benefits and features of your product and what they do to solve the problem.

#2 – Customer Segments

Perhaps the most important part of your canvas is the customer segments. If you don’t know who your business is catering to you’ll never be able to sell to them. You need to figure out who your customers are and why they would buy from you. You want to get very specific and figure out where your customer lives, what their social habits are, how old they are, if they’re male or female, etc. You want to be so detailed that you could draw a picture of your customer, put it on a wall, and have it detail their exact persona.  On day one this is nothing but a hypothesis, but as you start testing and selling your products, you will be able to change this accordingly.

#3 – Channels

Your channels are what you use to deliver your product from your company to your customer. In the old days you really only had one channel and that was the physical channel. You had a storefront and your goal was to get people to visit your store.

With the rise of technology, a storefront is no longer necessary. Now many people use the internet and mobile devices as their channels. Even if you have a physical channel setup, you’re most likely still going to have a web presence. You need to decide which outlet or outlets are best for you to get your product to the customer.

#4 – Customer Relationships

Your customer relationships are the fourth piece in your business model canvas. This section is about how you get your customers, how you keep your customers, and how you grow your customer. The channel you choose to distribute your product will also help determine your customer relationships.

A physical store will acquire its customers differently than an online store. If you’re using a website as your main channel, you need to figure out how to get them to your website, how to get them to buy once they are there, and how to get them to hang around and buy more of your products. Just like previous steps this is only a hypothesis on day one and will be figured out as your business grows.

#5 – Revenue Streams

Your revenue streams are how you will actually make your money from your value proposition. What value is your customer paying for and how are you going to capture that value?

Depending on your company it could be a direct sales model, a freemium model, a subscription model, or a licensing model. Again, the model you choose depends on your business, and your business could use multiple revenue models. Your revenue streams aren’t about the actual pricing of your product, it’s just your way of capturing revenue.

#6 – Resources

The next section of your business model canvas deals with is your resources. This is what you need to sell your product, the assets that are required for you to be successful.

The most important resource for many new companies is financing. Do you have enough cash on hand to fund your business? WIll you need funding or a line of credit?  There are also physical needs like a store, manufacturing plant, or delivery trucks. You might need intellectual properties as patents and customer lists. You might also need a good, strong workforce of salesmen, programmers and manufacturers.

#7 – Key Partners

Your key partners are the people and companies who are going to help you grow your business. There are some things you aren’t going to be able to do and some you just won’t want to do on your own, so you’ll want to partner with people that can do them for you. Two of the most common partnerships are suppliers and buyers.

The two main questions you need to ask yourself before forming a partnership is what you’re going to get from them and what activities they are going to perform. If you have a one man startup, your partnerships will likely be different than the partnerships a larger company has.

In your first year you might choose to do everything yourself just to save money. As your business grows, you will be able to invest in partnerships that can save you time and help grow profits.

#8 – Key Activities

Your key activities are the most important things your business must do to make your business model work. If you’re in the production business you’ll be making products.  Maybe you’re a consultant and you’re in the business of solving problems. You could also be in sales and be responsible for getting people to buy various products.

Whatever it is that your business does, your key activities are what you need to become an expert in for your business to be successful.

#9 – Cost Structure

Your cost structure is what it’s going to cost you to keep the business running. You have to think beyond the obvious costs like your payroll, rent, and materials and be sure you are including everything.

You need to know what the most important costs are, what your most expensive resources are, and how much your activities and partnerships cost. Then you will need to ask the typical accounting questions like what your fixed and variable costs are, and any economies of scale. Anything that is going to cost you money to keep your business operational needs to be included here.

The Lean Business Model Canvas

Something that has become increasingly popular over the last few years is the “lean business” or “lean startup.” The lean business is essentially a business method that gets you from idea to business as fast as possible.

In a lean business you put out wh at is called your “minimum viable product”. This is your product in its most basic form with none of the extra bells and whistles. You put that product out to a select group of people to see if they like it. If they like it you can move on with that product, if they don’t you either pivot or scrap the idea all together.

The lean model allows you to get to market as fast and as cheaply as possible. The lean business model canvas was made in the spirit of the lean business. It’s more actionable and entrepreneur based and focuses on the way time can affect the revenue stream of a business. When the lean business model canvas was created, four more elements were added.

#1 – Problem

A problem box was created because many businesses spend a lot of time and money on a product that isn’t needed or doesn’t solve a problem. It’s important to know what problem you are solving before you do anything else.

#2 – Solution

Once you know what problem you are solving, it’s time to work on your solution. This is where you would describe your MVP (minimum viable product).

#3 – Key Metrics

Your key metrics are the range of products or services you want to provide.  It is key to choose the right metrics because choosing wrong could lead to disaster for your business.

#4 – Unfair Advantage

Your unfair advantage is just that – any unfair advantage you might have over your competitors. It is very important to know if you have any unfair advantages over your competitors, or if they have any over you.

To truly make it the “lean” canvas, they had to remove the elements they didn’t think were necessary. They removed:

• Key activities
• Key resources
• Key partnerships
• Customer relationships.

They were removed because they were either a waste of time to a lean startup, covered in another element, or they were more outside focused and not focused directly on the business.

Whether you’re an established business or just getting started, a business model canvas is an amazing tool to help you reach your goals. It provides you with a one page document that cuts out the fluff lays everything out right in front of you. It’s easily editable so as your business changes you can change your canvas to match. And if you’re creating a lean startup, there is a business model canvas made just for you.

For other Canvas Models check out  Toptal’s Technology Product Canvas

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What is a Business Model? A Short Guide to Developing Successful Business Models

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You’ll often hear professionals discuss how important it is to have a clearly defined business model . A company’s business model can literally make or break their chances of success

But what is a business model exactly? Let’s take a look.

What is a Business Model and Why is It Important?

In essence, a business model is how a company plans to make a profit. This scope includes the business’s value proposition, key expenses, products or services, and its target market.

The value proposition, a central part of any business model, defines the company’s key offering or offerings, whether products or services. Importantly, it also describes what differentiates this offering from existing products, and what makes it attractive to the business’ target market.

Business models can be broadly grouped into categories, such as:

• Manufacturer
• Marketplace
• Subscription
• Fee-for-Service

It’s also important to note that one company may operate more than one business model concurrently. For example, eCommerce giant Amazon acts as both a retailer and a marketplace.

It is essential for new companies to define their business model, as it allows them to attract more investors and talent, as well as develop effective strategies . 

However, it’s equally important that established businesses regularly review and update their business model in the face of changing market trends and as their company grows.

What Makes a Strong Business Model?

A strong business model must clearly lay out how your business is going to generate revenue, including drilling down into your target market and value proposition.

Key elements of a good business model include:

• A well-defined value proposition
• The business’ target market
• Start-up costs anticipated expenses
• Revenue projection
• Key competitors and how they measure up against the company
• Marketing strategy
• Key stakeholders and partnership opportunities

Additionally , the business models of successful companies generally share certain common characteristics. They often have a unique selling point, or unique selling proposition (USP), that sets them apart from their competition and meets their target customers’ needs, which they offer at an attractive price point. 

Furthermore, successful business models are financially sustainable and adapt to meet changes in the market or in the business’s own needs.

How to Create a Successful Business Model

1. conduct market research.

The best business models are based on a thorough understanding of current market trends, opportunities, and challenges. Start by conducting research into the latest trends, your top competitors, and what is and isn’t currently working well in the industry.

2. Define your Target Market

Next, you’ll need to identify who your business’ target market or customer base will be. Dig deeper into your ideal customer’s needs, and especially their key pain points. These will become the problems that your product or service will solve.

3. Develop Your Service Offering

Once you have a clear picture of your target audience and their main pain points, you can use this to develop a service offering that will most effectively address this.

Be sure to tie this back to your business’s value proposition: what makes your products or services not only desirable to your target market, but what differentiates you from your competitors?

4. Make a Road Map

Once you’ve defined your target market and the product or service you’re going to offer them, the next step is to work out what you need to make that happen. It’s essential to create a clear picture of the resources you’ll need to get your business up and running. 

At this point, you should also consider potential challenges you may face along the way, and how you plan to address them. 

Document all of these elements as part of a well-defined road map to launch your business.

5. Start Developing Partnerships

Another essential part of any business model is the partners who will help the company achieve success. This could be suppliers, service providers, contractors, advertising partners, collaborators, or other stakeholders. 

Having an idea of who these partners will be and how you will work together will help you to shape your business model.

6. Define Revenue Streams

Revenue is central to any business, and any strong business model must clearly define where revenue will come from. You’ll also need to consider how you will increase revenue over time, such as specific strategies to build your customer base and close sales.

7. Do Testing

The final step of this process is testing your business model to ensure you’re in the strongest possible position to go live. This could involve test surveys within your target market, or soft launches. The idea is to gauge how well your business model will perform and help you to reach your goals.

8. Continually Review and Adapt

Avoid taking a “set it and forget it” approach to your business model. There are many reasons why you may need to adapt your business model over time. Not only may the market change, but as your business begins to operate and grow, you may find you need to reassess some of your original ideas and assumptions.

Therefore, it is essential to take a flexible position and continually review and adapt your business model to reflect evolving circumstances, whether internal or external to your business.

What does a business development manager do?

Get the Skills You Need to Develop a Successful Business Model

It’s not enough to understand what a business model is: you also need to be familiar with the various push and pull factors that will allow you to create a winning model.

Experience is an essential part of being able to develop a successful business model. Knowledge of the latest industry trends, data insights , and strategic thinking are also critical. 

EDHEC Online Master of Science in International Business Management can help you develop your strategic thinking in order to use data insights to create business models that are sustainable, inclusive, and impactful.

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Business model types and components

By Michael Feder

This article has been vetted by University of Phoenix's editorial advisory committee.  Read more about our editorial process.

This article has been reviewed by Kathryn Uhles, MIS, MSP , Dean, College of Business and IT

At a glance

• A business model includes product types, financial plans and other information that, taken together, outline a path toward operational success.
• Existing companies should update business models regularly in anticipation of any changes in customer behaviors or market trends.
• There’s a wide variety of business models to choose from, including crowdsourcing, franchising, leasing, pay-as-you-go and marketplace.
• Aspiring entrepreneurs can learn about business models, business plans and more at University of Phoenix, which offers a variety of online business degrees .

Virtually all businesses have at least one thing in common: They depend on effective business plans. A business plan serves as a road map for your company, outlining the steps you will take to reach customers and generate profit.

But before you create a business plan, you must first determine your business model. This is the type or platform your business will engage to become profitable. Business models might include product types, financial plans, sales forecasts and other details that outline your plan for success.

Whether you’re an established CEO or an entrepreneur starting your own business , a business model and a business plan form important steps toward defining your company’s future. Partners, company executives and any other business professionals invested in a company’s future can regularly reference their business model and plan to maintain progress toward goals.

It’s never too early to begin studying, building or optimizing your business’s success plan. Even if you only recently obtained your business degree , you can advantageously influence your company’s business model and plan in several important ways.

A business model is just one step in starting your own business. Explore the complete guide to entrepreneurship on our blog!

Understanding business models

Your business model is meant to serve as a comprehensive guide — one that leads your business toward success. The best business models and plans also help companies navigate their market while identifying potential risks and avoiding setbacks.

Put simply, your company’s business model outlines the ways you plan to add value or grow and maintain a business. You’ll likely include details like employees, available resources, price points, competition, customer behaviors and potential expenses in your business model — all to help you forecast how your company might perform in the future.

If you’ve completed a business degree, you can use your business experience to help inform your company’s business model. In addition, earning an MBA can give you the tools to handle investments and high-level decisions that come with deciding on or switching up your business model. However, whether you’re a business management student or an experienced executive, it’s important to consistently evaluate your company’s progress and discover new business models that could propel that growth.

Learn more about online business degree programs!

The importance of business models

Business models also might have a direct impact on your company’s success. If you’re starting a new company, your business model should help you attract talent and generate sales. Existing companies should update business models regularly in anticipation of any changes in customer behaviors or market trends.

Among other critical points, your business model should allow your organization to offer high-quality, affordable products or services. This key component will allow your business to change, scale and evolve as necessary. Include figures like cash flow, gross sales and net income in your business plan to maintain companywide accountability as you grow.

Business models provide more than just fiscal direction for your company. Your business model should also outline short- and long-term goals and provide a foundation for corporate culture. Take the time to include details about your organization’s identity in your business model.

Types of business models

Depending on the type of business you operate, you can choose from a wide selection of business models. Some business models primarily outline costs and anticipated sales; others include processes, formulas, workflows and other details that contribute toward corporate success.

Here are a couple of the most common components of a business model:

• Advertising — The use of advertising channels like social media, email and TV commercials to reach a specific customer segment. Companies can use this business model to remain familiar with customers who may be potentially interested in their products.
• Affiliate — The use of third-party individuals who generate leads or sell products on a company’s behalf and are compensated for their sales. Businesses may develop a model that focuses on enlisting consultants to sell popular products.
• Crowdsourcing — Online communities collectively fund a business’s product, service or platform. Some businesses use crowdsourcing to obtain ideas, not funding, from customers or other interested individuals. For example, a snack food company may launch a campaign asking customers to help them determine a name for a food item or determine their next flavor.
• Fractionalization — The sale of partial access to a specific product or service. For example, a resort may allow guests the opportunity to purchase permanent access to the room for a small portion of the year.
• Franchise — A recognizable company allows individual business owners to use its branding, processes or other assets. Businesses can use the franchise business model to support their growth into new markets.
• Leasing — Companies purchase products and then lease them to paying customers for some time. A rental car company, for example, may use this business model by purchasing vehicles and then renting them to customers for personal or business use.
• Marketplace — This model connects retailers with customers searching for their products. These companies exist not to sell their services but to securely connect buyers and sellers.
• Pay-as-You-Go — Customers pay companies for the use of company-owned goods until those goods are returned to the company. This business model may include charging customers a per-hour rate for the use of company-owned vehicles or equipment.
• Razor blade/Reverse razor blade — The sale of a product for a loss, and the sale of replacement products for a profit. Originally made popular by Gillette, this business model is also used by printer companies like HP ® , which make much wider margins on replacement ink cartridges than they do the printers.
• Subscription — The sale of products or services to customers who are billed on a per-week, per-month or per-year basis. Online streaming providers use the subscription model, where customers pay each month for access to television shows, movies and other media programs.

These and other business model types can help you identify the purpose and direction of your organization.

9 components of a business model

No matter the type of business model you’ve elected to create or follow, most include similar elements. A quality business model or plan often includes several unique elements, where each element helps to further define your vision and direction.

Your comprehensive business plan should contribute to your company’s business model. Ideally, your business model contains the following nine components:

• Customer relationships — This encompasses any of your ongoing interactions with consumers, including customer service conversations, phone calls, email correspondence and other engagement.
• Customer segments — By analyzing your customers and dividing them into market segments, you can target each segment’s common characteristics.
• Value propositions — This is a promise of value to customers in the form of a product, service or another asset, which persuades consumers to choose your organization.
• Channels — The individuals or activities that deliver your products or services to customers, also known as “distribution channels.”
• Key activities — The most important tasks your business needs to do to remain successful.
• Key partners — Important partnerships and networking opportunities that contribute to your company’s ongoing success.
• Key resources — Cash, investments, materials and other assets that help your company capitalize on its business model.
• Revenue streams — The different ways your company earns money and remains profitable.
• Cost structures — Financial aspects of a company, such as structuring sales, commissions and labor to reduce overall expenses over time.

These essential pieces of a business model help you define every aspect of your company’s operations. When you understand your company’s available resources, liquid capital, recurring revenue, customer demographic and related details, you’ll position the business itself for long-term success.

ABOUT THE AUTHOR

Michael Feder is a content marketing specialist at University of Phoenix, where he researches and writes on a variety of topics, ranging from healthcare to IT. He is a graduate of the Johns Hopkins University Writing Seminars program and a New Jersey native!

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