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What Is a Business Model?

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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.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2023 ."

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How to Define Your Business Purpose, Models, and Strategies

Understanding your business is key to building a digital presence. Here's how to define its purpose, model, and strategy.

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“Where the needs of the world and your talents cross, there lies your vocation.” Aristotle

Luckily for you, we’re not here to delve into that contentious philosophical wormhole. We’re here to set the stage for a much easier, but still important topic - the topic of knowing thy business .

So you considered the benefits of going online and decided to capitalize on this opportunity. But how? First, for both prospective and established business owners, it’s vital to completely understand and define your business before creating a digital presence.

"Defining my business? I know my business well! My business does X", you may be thinking right now, as you’re scratching your head. "X" is great. But why?

Why do you do X? How do you do X? Why do you do X this way? Who does X serve? You think you’re in the X business, but are you sure your clients don’t use your offer to solve problem Y? How do you stay ahead of other businesses that do X? In 5 years will you also be doing X? Where are you headed?

Don’t be intimidated by this barrage of questions. It is only to illustrate how multi-dimensional your business is. Although not an exhaustive list, the questions above all matter to achieve a quality online presence.

Now we are aware such questions can be approached in several ways. Don’t fret, however. You don’t have to reinvent the wheel. Below, we discuss the importance of developing a comprehensive understanding of your business and offer a few templates and strategies that help the cause. Approaching this endeavor methodically is bound to yield you great results.

As such, we provide methods to understand the value you deliver to people, write vision and mission statements, and come up with an innovative business model and strategy. Most importantly, we help you articulate the great "why" question that is the motor force behind every action at your business.

What’s The Purpose Of Being Online? What Do You Want To Achieve? 🔗

First things first: before launching into the online wilderness with guns blazing, you must define your purpose for going online.

What do you want to achieve by starting an online business or taking your existing business to the web?

Perhaps, for those starting a brand new business, the point of starting online is to grow your business faster than if it were offline. Maybe it’s to tap into more diverse markets and attract customers from around the world.

These reasons also apply for those with existing businesses making the jump to the online world. You may want to improve your growth, reach new markets, improve your marketing efforts, or add new features to your business.

Whatever the reason, it’s crucial to nail it down before delving into important elements - such as what online platforms you want to be present on and what kind of website you will have.

But why is taking the time to define your business and your purpose so important before creating an online presence?

Taking a business online is a step in the direction of growth. But business growth begins with understanding your business’s purpose .

Generally speaking, the ideal business revolves around three primary elements.

One: the business provides value for people.

Two: the business involves doing something you enjoy and excel at.

Three: the business is something that earns you money.

The optimal business blends all three of these factors. But no matter what, for a legitimate business to exist and be successful, it must provide value for its customers. This element, providing value for people, is the core around which everything about your business revolves.

To define their core focus, companies often resort to creating a vision statement and a mission statement.

A mission statement is a concise explanation of the organization’s reason for existence. It describes the organization’s purpose and its overall intention. Meanwhile, a vision statement is inspirational and aspirational - it looks forward and conjures the ideal state that the organization wishes to achieve.

As far as mission statements go, Tesla keeps it short and to the point, without being boring:

"Tesla’s mission is to accelerate the world’s transition to sustainable energy."

While expressing the obvious concern for the global energy challenge, the phrase also subtly captures the focus on the automotive industry as a means of tackling it.

IKEA is a good example of a business with a well-constructed vision statement:

"Our vision is to create a better everyday life for many people."

It is concise without losing the aspirational value. It does a great job of setting the company’s tone, as well as making it clear that they offer low-priced but high-quality furnishings that can match everybody’s lifestyle.

While the line between the two can get blurry in practice, the important thing to recognize is that a business will benefit greatly from a statement that defines what the company is, what it stands for, and what everyone can expect from it - employees and customers alike.

To be fair, pausing to create a "vision statement" and "mission statement" may sound somewhat abstract or cliche - like something that is destined to end with a few buzzwords on a whiteboard labeled "company values."

Indeed, any exercise performed to gain a more profound understanding of your business must involve the underlining of company values. It must also involve a deep dive into the details of your product or service, as well as the delivery process of said product or service.

However, the key area to hone in on when pausing to "know your business" has to do with your customers. In taking the time to comprehensively understand or reassess your business before moving forward with an online presence, your aim should be to look beyond your customers’ outward wants and focus on understanding their needs .

Consider a bike company. A customer of the company wants a new bike. But buying a bike is just the surface level expression - it’s the means to solve a deeper need. The customer may need a way to get to and from work, a way to exercise daily, or a mode of transportation that complies with his or her environmental stance. There is far more driving a customer’s behavior and decision-making process than their expression of want for a certain product.

Furthermore, an important thing to keep in mind is that people don’t always recognize their needs when it comes to making purchases. Consumers can be so preoccupied with a particular desire or a long-standing technology that they don’t realize what they need. Going back to the bicycle example, consumers way back in the late-1800s wanted a personal mode of transport like a horse-drawn carriage but didn’t necessarily realize they needed something cheaper, safer, and more convenient than anything dependent on horses. Indeed, sometimes even the most brilliant and elegant solutions face the adversity of method evangelism.

As illustrated by these examples, you can better understand the value your business provides and its purpose by taking the time to ask more questions about your customers’ motivations. What do my customers hope to accomplish with my product or service? Why do customers choose my business over my competitors?

Another important item to note is that taking the time to examine the purpose of your business before creating an online presence has absolutely nothing to do with how long your business has been around or how much success it has had in attracting customers.

If you have little more than an idea for an online business and are serious about making it a reality, devoting time to fully understand how your business will provide value to customers is a crucial step in the development process.

If you’re in the early stages of building an online business and already have some interest from possible customers, it’s a good idea to think about why those people are interested in becoming customers.

Even if your business has existed offline for some time and already has customers, it’s still crucial to revisit its purpose and reevaluate why you’ve had success or lacked success in attracting customers before going online.

This is particularly beneficial before going online, as the insight into your business’s purpose and how to connect with your customers will play a huge role in shaping your digital presence and organizing your business moving forward. Otherwise, you run the risk of investing in a sub-optimal online presence, which might even hinder your efforts to build a strong connection with your prospects and clients.

The Golden Circle 🔗

There are many ways to go about gaining a comprehensive understanding of your business, but one of the best methods for defining the purpose of your business is using an approach known as the “Golden Circle.”

The Golden Circle originates from a book by motivational speaker Simon Sinek, as he sought to explain the essential element of companies that exceed expectations and find overwhelming success. For Sinek, it all stems from the concept he calls “ Start With Why .”

The concept boils down to the assertion that a business doesn’t attract customers based on what it does, but rather, why it does what it does. While it’s true that the product a business makes or service it provides must be valuable for the business to succeed, the pure functionality of what a business does is not the main reason customers are drawn to it.

Much more than a good product or service, customers are attracted to a company that shares their core values and beliefs. This is where an emotional or personal connection is created between company and customer, as nothing builds a stronger bond between a business and consumers than a shared purpose.

In most areas of business, consumers looking to fulfill a want or solve a problem have an abundance of options to select from. There are very few businesses out there that are so novel that consumers are all but forced to go to them. Be it cars, computers, consulting, or pretty much any product or service you can come up with, multiple companies are competing for the same customers.

In many, if not most industries, the difference in quality or functionality between the products offered by top businesses is marginal. The most important element of attracting customers, therefore, isn’t emphasizing the subtle differences in your product, but emphasizing the purpose and values your business stands for that underlie the creation of your product.

For example, Apple sells neither for its hardware, nor its price point. What distinguishes the iPhones and Macs from their competitors is the customers’ emotional bond to the brand. Apple doesn’t sell consumer electronics. They sell the genuine passion for premium design blending art with technology . They sell a member pass to a community “for creators, by creators”, as Steve Jobs’ originally positioned the product line. To some, they sell the social status that comes from belonging to that community. And the unrivaled, seamless user experience in their ecosystem truthfully makes their clients fall in love with the brand and become loyal evangelists.

Their continued success owes to the fact that they are the past two decades’ masters of the underlying “why”. Apple will successfully maintain premium prices until one of their competitors will succeed at achieving the same level of depth when answering this question (although Google has been notably becoming better at it in the past decade).

At the center of the diagram lies the “Why” circle. The “Why” circle is filled out by answering the following questions:

• Why does your business exist?
• Why does your business make the product it makes? Or provide the service it provides?
• Why does your business have the culture it has?

Answering these questions as thoroughly as possible allows you to define the fundamental purpose and core beliefs of your business. What ends up in your “Why” circle is key because it’s what will resonate with customers and create strong connections with those that share such values.

Roughly everything about your business should stem from what you decide fits in your “Why” circle. From the build of your product to your branding and marketing efforts, to your entire company culture, everything starts with “Why.”

After grappling with the “Why,” the next step is “How” - how will your business accomplish its purpose? To complete the “How” circle, you need to ask the following questions:

• How does your business create value? How does it create its product or service?
• How does your business deliver its product or service?
• How does your business create and maintain its culture?

Although some of these questions may seem easy to answer, it’s important to define exactly how your business operates on all levels to maximize your chances of success.

The outer ring of the circle is the “What” - what is it your business does? What does your business offer to customers?

This circle should be fairly straightforward to complete. What your company makes or what service it provides is the most basic component of the operation and is generally the most visible component of any business. It’s often a fairly straightforward task for businesses to communicate what they do. But even when done with skill, communicating what your business does is not the ticket to lasting success as a business.

This brings us to the big benefit of the Golden Circle: organizational harmony through better communication.

By using the Golden Circle model to better understand your own company, you gain a leg up in understanding how to better communicate the value of your business to employees, investors, and the public. Whereas most companies can communicate what they do, the most successful brands are those that master the art of communicating why they exist, and why they do what they do in the particular manner they do it.

Being able to communicate these facets of your business is hugely beneficial to building emotional connections and lasting loyalty with both customers as well as collaborators. Thus, by taking the time to understand and define the underlying purpose of your business, you also uncover better ways to communicate and connect with customers.

It’s useful to remember that this type of process requires all sorts of input. A board of executives far removed from the back offices or client-facing employees might lack a deep understanding of qualia surrounding their products or services. By qualia, we understand individual subjective, conscious experiences. For example, Alice Walton, the richest woman in the world, owning US$26 billion in her family’s business, Walmart, lives in New York City . There are no Walmart stores in NYC.

Therefore, it is unlikely that Mrs. Walton truly understands how working and shopping at Walmart feels. Surely, she can guess by glossing over data-driven reports. But those, as useful as they may be, are mere numbers. And numbers can hardly ever help you answer the question of “why”, beyond the simple “because it nets more money”.

To obtain genuine results, you must ensure you integrate the subjective experiences of your customers and employees through qualitative research. Remember, you need a diversity of voice to nail down your Golden Circle. A grounded process with diverse inputs reveals how it feels to bring about the company’s offer, personal insights over how the customers perceive it in reality, how they actually use the product, and what their motivations are.

One of the most telling examples is the case of Campbell Soup’s vegetable juice V8. In his book “Competing Against Luck” , Clayton M. Christensen of Harvard Business School shows how such varied input helped V8’s marketers to discover that their product wasn’t perceived as a regular drink, consumed to quench one’s thirst. Instead, they found that people bought the drink because it was an easier alternative to eating vegetables . They were interested in being healthy on the go, being able to get all the vitamins and nutrients from veggies without the efforts of carrying and cooking fresh produce.

You may end up with a surplus of information from your teams that might not directly help you answer the questions of "why", "how", and "what". Fear not, for one man’s trash is another man’s treasure. This information can help you better understand and review your company’s culture. If you succeed at aligning your company’s culture with your golden circle, your staff will feel energized and proud of the work they are accomplishing.

Business Model 🔗

Once you have a clear understanding of your company’s core purpose, it’s important to define a foundation upon which business decisions are made. Choosing a business model will not only act as a framework for decision-making. It will also work as an effective description of the values employees are expected to uphold.

A business model is a conceptual structure that describes the way an organization creates and delivers value.

The most prominent model for online businesses is e-commerce: the selling of products or services online. E-commerce can be further split into several categories.

B2C: businesses that sell directly to consumers.

B2B: businesses selling to other businesses.

B2G : businesses delivering their products to governments.

A more recent class of e-commerce that’s gained immense success is C2C : where a business platform helps consumers sell their goods or services directly to other consumers. Examples of C2C include eBay, Airbnb, Uber, and Etsy.

Within these sub-categories of e-commerce, entrepreneurs have successfully transferred offline business models to the online environment, creating a variety of new models.

Freemium : Giving away a part of your product for free and charging customers money for additional features once they recognize the value that you offer. Examples include Slack, Skype, and Spotify.

Marketplace : A platform where you charge a fee or percentage whenever a sale is made. Examples include eBay, Amazon, and Airbnb.

Subscription : Offering customers ongoing access to a product or service in exchange for a regular fee. Examples include Netflix, Spotify, and Audible.

Disintermediation: Selling directly to consumers allows manufacturers to cut costs and build a stronger relationship with their customers. Examples include Dell, Uber, and Apple.

Franchising: Licensing the use of your brand and the rights to sell your products or services. Examples include McDonald’s, Coca-Cola, and 7 Eleven.

Low touch : Selling products or services with minimal interaction between customers and your company. Examples include IKEA, SurveyMonkey, and Mailchimp.

Razorblade: Selling a low-profit margin product that requires expensive or frequent companion products. Examples include razorblades, ink-jet printers, and coffee capsules.

Advertising : Rather than selling to consumers, businesses sell access to an audience to promote or sell products, services, or ideas. Examples include Google, podcasts, and television.

While this list isn’t exhaustive, it briefly covers the most widely adopted models up to this day.

To be clear, it isn’t necessary to decide on a single model to run with. Many, many companies find great success in implementing multiple business models simultaneously. In fact, it is difficult to find companies conforming to only one of these abstractions. In practice, most successful businesses find ways of blending these models in innovative, synergic ways.

To do this, you can use one of most popular tools for developing and documenting business models - the Business Model Canvas.

However, now that you came up with a unique business model, you must figure out how it fares in practice. Concretely, how do you plan to thrive considering the competition?

Business Strategy 🔗

As a concept, your business strategy is simply how your business plans to create value and achieve financial success better than your competitors. Naturally, it’s likely that you won’t be the only one operating in a market using a certain model. In other words, your business strategy is how you plan on “winning” in the business world.

In his 1985 classic “Competitive Advantage: Creating and Sustaining Superior Performance”, Michael Porter outlines the three main business strategies which continue to guide entrepreneurs everywhere today. These are:

Cost Leader : sell your products or services at a lower price than the competition.

Create Differentiation: in other words, be unique. Sell a specialized product or service.

Target a Niche Customer Group: make an effort to be the only provider of a very specific need.

Consider the marketplace model. American tech giant Amazon is going head to head against its Chinese competitor Alibaba. But there are some key differences in the specifics of their models as well as strategies.

Unlike Alibaba, which is a true marketplace, Amazon is actually a reseller . Amazon owns the inventory and supply chain, selling directly to its customers (B2C), whereas Alibaba simply connects buyers and sellers (C2C).

The relatively small overhead of Alibaba’s model enables it to pursue the cost leader strategy. By minimizing the costs associated with infrastructure such as Amazon’s warehouses, the company can charge a smaller commission on transactions.

Amazon, on the other hand, is creating differentiation by ensuring consistency across all online shopping experiences and multiple convenient delivery options. Owning their stock, Amazon is also able to vouch for it more credibly than Alibaba. The latter’s offer, although more financially attractive, puts customers through a lot of trouble when they aren’t satisfied with their purchase.

Conclusion 🔗

People don’t buy stuff. They buy brands. If you can’t articulate why your company exists, I have some bad news for you. Conventional strategy and tactics alone are great, but if your competition can sell their why , convincing your mutual prospects that their story gives them more reason to take their offer, you can be sure they won’t think twice. It will hardly ever matter how cheap, unique, or well-targeted your product is.

You might say that this isn’t universally true. Strategies also depend on a market’s maturity and region’s level of wealth, and the why is just first world millennial confetti. Well, chances are you are selling to millennials in the first place, due to demographic changes.

But the really important thing is that these things are not mutually exclusive. You enter a market with a purpose. There’s nothing about this idea that makes it incompatible with offering an affordable service or product.

In fact, if you conclude that affordability is why your business does what it does, and that’s the story you want to tell, you’re all set. You will 100% fare better than those who completely disregard this, and your sales funnel will be significantly larger than theirs. You will be better suited to accomplish your goals.

When clevver.design was born, we decided we don’t want to compromise on our boldness in favor of convenience. As such, we advise you to follow suit and reject the outdated funnel model. We promise this is the last time we’ll mention it. But what did we replace it with? Our next article revolves around that exact question. We also teach you to set goals and measurable objectives for your business that enable that sweet sustainable growth you’re probably after.

In the meantime, we’d be happy to hear about the conceptual aspects of your business or help you nail them down. Your customers deserve the same level of satisfaction even when online. Get in touch with us to let us know why your offer makes your clients smile. We’ll take it from there and ensure those smiles aren’t lost through screens.

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What is a business model? (Plus, how to define yours)

Last updated: March 2024

Business models distill the potential of a business down to its essence. Companies across every industry and at all stages of maturity need business models. Some rely on lengthy processes to build complicated models, while others move quickly to articulate the basics and take action. Either way, having the discipline to work through this planning tool forces internal alignment.

You must build something that real people with real needs will find value in and pay for — otherwise you do not have a lasting business. Brian de Haaff Aha! co-founder and CEO

For established enterprises, a business model is often a living document that is reviewed and adapted over the years. For companies launching products and services or entering new markets, a business model helps ensure that decisions are tied back to the overall business strategy . And for early-stage startups, a simple one-page business model enables founders to explore the mechanics of a business and how you anticipate it will be successful.

Defining and documenting a business model is an essential exercise. Whether you are starting a new venture, expanding into a new market, or shifting your go-to-market strategy , you can use a business model to capture fundamental assumptions about the opportunity ahead and tactics for addressing challenges.

Forward-thinking companies integrate their business model into all aspects of the organization — from recruiting talent to motivating employees. That is why many choose tools that make it possible to quickly build and share a business model. In Aha! software, for example, there are multiple ways to build a model and connect it to everyday work. One of the quickest ways is by using our whiteboard template — featured below.

Get this business model whiteboard template — with a free trial .

Start using this template now

You can also try a similar template that is built into the product strategy section of Aha! Roadmaps . Or you can download free Excel and PowerPoint business model templates in this guide .

This article covers the basics of business models, from core concepts to best practices. Jump ahead to any section:

Definition of a business model

Business model components

Business model vs. business plan.

Different types of business models

Pros and cons of different models

Analyzing competitor business models

Business model templates

How to build a business model

What is the definition of a business model?

A business model defines how a company will create, deliver, and capture value.

A business model answers questions that are crucial for strategic decision-making and business operations. Creating a business model for your startup or product means identifying the problem you are going to solve, the market that you will serve, the level of investment required, what products you will offer, and how you will generate revenue. Pricing and costs are the two levers that affect profitability within a given business model.

A business model is part of your overall business strategy. Some business models extend beyond economic context and include value exchange in social or cultural terms — such as the intangible impact the company will have on a community or industry. The process of constructing and changing a business model is often referred to as “business model innovation.”

15 elements of a brilliant business strategy

This is why innovation programs fail

There are three main areas of focus in a business model: value proposition, value delivery, and value capture. The proposition outlines who your customers are and what you will offer. The delivery details how you will organize the business to deliver on the proposition. And the capture is a hypothesis for how the proposition and delivery will align to return value back to the business.

The components of a business model include everything the organization needs to document and internalize so that the team can implement all three value focuses. This includes the market in which you operate, organizational strengths and challenges , essential elements of your product or products, and how you will generate revenue.

Below are some components to include when you create a business model:

Vision and mission : Overview of what you want to achieve and how you will do it.

Objectives: High-level goals that will support your vision and mission, along with how you will measure success.

Customer targets and challenges: Description of target customers (written as archetypes or personas ) and their pain points.

Solution: How your offering will solve customer pain points.

Differentiators: Characteristics that differentiate your product or service.

Pricing: What your solution will cost and how it will be sold.

Positioning and messaging: How you will communicate the value of your offering to customers.

Go-to-market: Proposed approach for launching new offerings and services.

Investment: Resources required to introduce your offering.

Growth opportunity: Ways that you will grow the business over time.

Positioning vs. messaging

• What is value-based product development?
• What is a go-to-market roadmap?

What is a business roadmap?

Business models and business plans are both elements of your overall business strategy. But there are key differences between a business model and a business plan.

A business model is seen as foundational and will not usually be reworked in reaction to shorter-term shifts — whereas a business plan is more likely to be updated based on changes in the economy or market.

Related: Business plan templates

What is the benefit of building a business model?

Innovation is about more than the products or technologies that you build. The way that you operate your business is a critical factor in how you stand apart in a crowded marketplace. The benefit of building a business model is that you can use the exercise to expose and exploit what makes your company unique — why choosing your offering is better for customers than any alternatives and how you will grow the business over time.

Many people associate business models with lengthy documents that describe a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast. But business models do not need to be a long treatise.

A one-pager is just as effective for distilling and communicating the most important elements of your business strategy. The concise format is useful for sharing with broader teams so that everyone understands the high-level approach. Done right, a business model can become a touchstone for the team by outlining core differentiators to promote and defend in the market.

Related: A more comprehensive business model builder

What are the different types of business models?

There are many different types of business models. Below are some of the most common business models with example companies for reference (take note of the companies that appear in several categories):

Did you keep track of the companies that appeared in several of the business model examples? Good. You now have a grasp of how complex enterprises with vast portfolios of products and services often employ many business models within the same organization.

Consider a company like Apple, which manufactures and sells hardware products as well as offering cloud-storage, streaming subscriptions, and a marketplace for other applications. Amazon, whose offerings range from retail (with the acquisition of Whole Foods) to marketplace (Amazon.com) to subscription services (Amazon Prime and Amazon Music) to affiliate, also features in different categories. Each division or vertical will have a distinct business model that reflects the nuances of how it operates while also supporting the corporate business model.

Related: The product manager vs. the portfolio product manager

Pros and cons of different business models

Some types of business models work better for certain industries than others. For example, software-as-a-service (SaaS) companies often rely on freemium business models. This makes it easy for potential users to experience the value of the product and incentivizes paid conversions via access to additional features.

Many social media platforms make money through advertising. By providing full access to the platform for free, these companies attract more users. In turn, this creates a more valuable audience for advertisers and increases revenue for the business.

How do you analyze a competitor’s business model?

Business analysts and investors will often evaluate a company’s business model as part of due diligence for funding or market research . You can apply the same tactics to analyze a competitor’s business model — with a few caveats.

Public companies are subject to reporting requirements. This means that the business must regularly disclose financial and performance data to the public — these disclosures occur quarterly and annually. The data includes everything from gross revenue, operating costs and losses, cash flow and reserves, and leadership discussions of business results. Designed to protect and inform investors, these reports can provide you with the information you need to understand the basics of the company’s business model and how well it is performing against the model.

Private companies are not required to reveal business data publicly. Investors or partners may be privy to certain aspects of the company’s performance, but it can be difficult to understand exactly what is happening from the outside. Some analysts or business websites will attempt to “size” a business or market by looking at a variety of factors — including the number of employees, volume of search terms related to the core offering, estimated customer base, pricing structure, partnerships, advertising spend, and media coverage.

Once you have identified relevant alternatives to your offering and gathered all of the information that you can find, a good way to analyze a competitor’s business model is to conduct a competitive analysis.

You do not want to spend too much time thinking about other companies when you could be focused on your own. A simple SWOT analysis is a helpful way to map out strengths, weaknesses, opportunities, and threats that were revealed during your research.

Competitor analysis templates

• How to price your product
• How to position your product

Below are three types of business model layouts available in Aha! software that you can use to succinctly assess what is possible and what challenges could arise for your business.

Whiteboard business model template

Articulate the foundation of your product or service in a whiteboard-style format. The focus is on capturing key elements like why the solution is worth buying (messaging), pain points of the buyers (customer challenges), and ways you will grow the business (growth opportunities).

Business model canvas

This business model canvas included in Aha! Roadmaps uses drag-and-drop components within a flexible layout. You can rename or hide components as needed. And you can create as many strategic models in your workspace as you would like.

How to craft a product strategy in Aha! Roadmaps

How to use the strategic model template in Aha! Roadmaps

Free Excel and PowerPoint business model templates

• Lean canvas

Similar to the business model canvas, the lean canvas in Aha! Roadmaps takes a problem-focused approach to create an actionable business plan. It is most commonly used by startups and entrepreneurs to document business assumptions. The focus is on quickly creating a concise, single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money.

How to build a business model in 10 steps

Crafting a business model is part of establishing a meaningful business strategy. But a business model is essentially a hypothesis — you need to test yours to prove that it will actually provide value. Many startup founders especially underestimate the costs and timeline for reaching profitability.

1. Identify your target market

Who will benefit from your offering? What characteristics do prospective customers share?

2. Define the problem you will solve

What is the problem that you are solving? What are the pain points of your potential customers?

3. Detail your unique selling proposition (USP)

What will you build and how will you support it?

4. Create a pricing strategy

How much will you charge for your offering? What factors will go into choosing your price point?

5. Develop a marketing approach

How will you market your product and reach target customers? What channels will you choose for go-to-market?

6. Establish operational practices

How will you streamline processes and procedures to reduce overhead and fixed costs?

7. Capture path to profitability

How will your business generate revenue? What level of investment will be required and what fixed costs exist?

8. Anticipate challenges

Who are your competitors? What opportunities and threats exist for your business?

9. Validate your business model

Was your hypothesis correct? Does your business model solve a problem the way you thought it would?

10. Update to reflect learnings

What can you do differently in the future to ensure greater success?

Your business model will ultimately guide your organization and influence your product roadmap. Give it the deep thought it deserves — questioning your core assumptions about how you will generate value and how your team will work towards achieving shared goals.

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Build a winning strategy with your team

You need a winning strategy, a clear roadmap, and a strong team.

How to build a strategy roadmap

Make adjustments as plans change, show progress, and create tailored views for different audiences.

Competitive analysis template

Capture and share high-level observations about competitors in your space.

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What Is the Purpose of a Business Model?

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The Relationship Between the Business Model and Strategy

What is the importance of "garbage in garbage out" in developing a financial model, concepts of business planning.

• Difference Between a Business Plan & a Business Proposal
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Shorter than a business plan and longer than a mission statement, a business model is high-level plan for how a company is going to make money. A core component of a business model is your company's value proposition, which describes what your company offers to customers and why they would buy from you rather than the competition.

The purpose of a business model is threefold. First, it is used as a tool to describe your business venture in about one page, which can then be developed into a complete business plan. Secondly, it serves as a summary of your company's focus, which can be shared with potential investors, employees, and can even serve as a reminder for yourself to prevent you from losing sight of your company's direction while managing daily tasks.

Determining Your Company's Business Model

In addition to your company's value proposition, a business model should also include things like your company's key objectives and your market. If your venture requires capital to get it up and running, the business model should also include costs and financing sources.

The software company Aha! has developed a 10-point roadmap for developing a business model:

• Vision: an executive summary of your company's mission and business model.
• Key objectives: your main business goals
• Target customers: who you will sell to and their pain points.
• Solution: how your company will solve the target customers' pain points.
• Value Proposition: key differentiators of your solution compared to the competition.
• Pricing: how much your solution will cost and how it will be sold.
• Message: an explanation of how your solution will help your customers.
• Market: how you will reach your target customers to sell to them.
• Investment: the costs required to get your solution to market and financing sources.
• Opportunities: specific ways how your business will grow.

Examples of Traditional Business Models

While the specifics of a business model vary from one company to another, most can be categorized into one of several types. Maryland University , for example, describes four types of traditional business models.

​ Manufacturer: ​ creates products from components or raw materials. It can sell directly to consumers (B2C) or directly to business clients (B2B). It can also use distribution channels, such as a distributor or wholesaler, who then sells the products to customers.

​ Distributor: ​ buys products from a manufacturer to resell to retailers or other businesses. A clothing distributor, for example, may sell clothing to retail stores, while a distributor of hydraulic equipment might sell its products to manufacturers.

​ Retailer: ​ buys products from manufacturers, wholesalers or distributors and then sells directly to consumers. Retailers may have brick-and-mortar stores, or sell online.

​ Franchise: ​ a business that sells its business model. This could be in addition to any other business model, and can be a combination of the three other models. A retail franchise, for example, can sell its business model to franchisees across the country, then manufacture and distribute its products to those stores.

Business Models and Innovation

Regardless of what market your small business is in, taking an innovative approach to your business model can pay huge dividends. As innovation experts at Northeastern University point out, Amazon was just a small online bookstore back in 1995. By taking an innovative approach to their business models over the years, it's now a trillion-dollar organization: a leader in cloud computing, web hosting services, grocery retailer, delivery service and a movie production company.

As technology continues to change, creating changes in societal norms, and as unexpected events cause massive changes across the world, most companies are in a perpetual state of adapt-or-die. It's often a good idea to look at changes in other markets to see how new ideas can apply to your market.

• Northeastern University: Business Model Innovation: What It Is and Why It’s Important
• Aha! What Are Some Business Model Examples?
• Maryville University: Traditional Types of Business Models

A published author and professional speaker, David Weedmark has advised businesses on technology, media and marketing for more than 20 years. He has taught computer science at Algonquin College, has started three successful businesses, and has written hundreds of articles for newspapers and magazines and online publications including About.com, Re/Max and American Express.

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The Ultimate Guide to Understanding Business Models 2023

The term “business model” has only been around since the 1990s, so there’s still some confusion about exactly what it means. In short, a business model defines your business’s plan to make money. You can also use business models to your business’s advantage if you know how they work. 

In this article, learn what business models are, why they matter for your business, the most common types of business models, and how to choose the right business model for your business. 

What Are Business Models?

Business models detail your business’s plan to make an income. The most basic components of a business model answer the following questions:

• What products or services will your business sell?
• Who do you plan to sell to?
• Which marketing channels will you use for your business?
• How much will it cost to run your business?
• How will your business make a profit?

There are a variety of business models you can use, like a subscription business model, freemium business models, retailer business model, bundling model, leasing model, and more. 

Understanding business models is useful for both new businesses and established businesses. If your business has multiple revenue streams, you may utilize several business models.

The Importance of Understanding Business Models for Small Businesses

A business model defines how you will create a profitable business. A successful business model allows a business to fulfill the needs of its customer base with an affordable cost structure and competitive pricing. It’s a good idea for established businesses to evaluate their business model to make sure it still holds up to changes in the business environment and the target market needs.

If you want to bring on investors to your business idea, you’ll need a business model outline that shows exactly how you plan to (or continue to) bring in revenue. A detailed business model reassures investors that you have a solid business plan in place. 

Additionally, you can use business models to strengthen the foundation of your business and create “virtuous cycles,” which we define below, that allow your business to streamline its revenue-making process.

What Is the Difference Between Business Strategies and Business Models?

A business model and a business strategy sound very similar, but there is a big difference: A business model outlines how your business will make money, while a business strategy explains how you’ll make more money than the competition.

As an example, let’s say you run a boutique clothing business that offers your customers hand-picked items. That’s your business model. When another business that runs on a similar model opens nearby, your business strategy comes in. You’ll need to decide how you’re going to stand out from the competition — maybe it will be through offering discounts, a loyalty program, or adding new products to your line.

While the decisions you make about your business goals make up your business model, the decisions you use to beat the competition make up your business strategy. Your model is more stable than your strategy. It’s likely not going to change at a moment’s notice, but your business strategy might.

Types of Business Models

There are 19 types of business models that companies use as a baseline or template for creating their business’s revenue plan. Any business model innovation outside of these standard models is considered “disruptive.” This phrase often applies to the tech industry but can be applicable elsewhere. 

We highlighted some of the most common business model examples below. 

1. Product-based business model

A product-based business sells physical items to solve its customers’ problems. This is a business at the end of the supply chain that provides customers with products directly, like your local retailer or bakery. A product-based business model serves as the middleman between manufacturers and customers. 

Entrepreneurs looking to finance a product-based business model plan often turn to business credit cards or small business loans . These financing options can provide capital support to build up inventory, sell a new product, or open a brick and mortar location.  

2. Service-based business model

Also called a fee-for-service model, it’s as simple as it sounds: You offer a service that your customers pay for. Your business may charge a per-service fee, an hourly fee, a retainer per month, or commission. A freelancer, barber, or accountant could all fit into this business model, as well as a software as a service (SaaS) business. 

Small business owners who need funding for the service-based business can also look into business credit cards or business loans. The amount of funding you’ll need depends on your business — a freelancer will likely need much less capital to operate than a barber, for example.

3. Subscription-based business model

A subscription-based business model allows customers to pay a recurring monthly fee to receive ongoing services or products. Netflix and other streaming services are good examples since they provide on-demand movies for customers who pay a subscription fee, as well as business services like Salesforce or QuickBooks. Subscription boxes that mail physical products are other examples. 

Small business funding like lines of credit or term loans can be perfect for providing support for startup costs, raw materials, or key resources for subscription-based businesses.

4. Advertising-based business model

To run an advertising-based business, you’ll form partnerships with advertisers and key partners who pay for the attention your audience gives you. This can come in the form of advertising on social media, in a magazine, or the side of a truck. Affiliate marketing is a kind of advertising-based business model, where a business owner receives commission when one of their audience members purchases it.

Working with small business credit card providers can help businesses working in this revenue model to pay for subscriptions that enhance customer relationships, like LinkedIn or Instagram services that make customer connections easier and faster.

5. Distribution business model

A business running under a distribution model will put manufactured products on the market. They’ll use their distribution channels to dispense products from manufacturers directly to the customer. Amazon is an example of a distributor at its core, although they also have many other revenue streams that they have added over the years that makes them a combination of multiple business models.

Small business loans can provide enough capital to get a distribution business up and running — and flourishing. Financing can give your business a competitive advantage because they may allow you to afford to add to your inventory and grow as needed, as well as offer lower prices to edge out the competition.

6. Marketplace business model

A business using the marketplace business model provides an ecommerce platform for its customers to conduct business on, like eBay or Shopify. Other businesses pay to use this online ecosystem to sell their own goods and get easier access to new customers and a smoother checkout process. 

Business credit cards and small business loans can also work well for a marketplace business to pay for startup costs or customer acquisition costs.

7. Franchise-based business model

A franchise-based business recreate their existing business model in additional locations. A franchisee will pay to get access to a proven business model and setup support, and the franchisor will get part of the earnings from the new location. Restaurants and fitness companies often operate under a franchise business model. 

Small business loans can provide necessary capital for a franchise business to ramp up operations as needed.

Additional business models include:

• Pay-as-you-go model, like utility companies
• Brokerage model, like real estate companies
• Razor blade model, like razor blade companies that require ongoing purchases of replacement parts)
• Reverse razor blade, like Apple selling a high-price iPhone upfront and then low-cost apps
• Bundling model, like telecommunications companies that sell internet and phone services

How to Choose the Right Business Model for Your Small Business

The best business model for your business depends on your individual needs and goals. First think through who you’re planning to sell to. The model you choose depends largely on your target customer segments. If your target market is moms who are too busy to shop for clothes, opening a retail store might not make sense. Your target customers may prefer a curated subscription box, so you’ll want to re-evaluate your business model.

Next, define the problem you’re trying to solve. What you’re selling is the solution to the problem. This could be a physical product (or products), a service, or a subscription. With the clothing business, the problem you’re trying to solve is that moms don’t have time for self-care. To solve this problem, you could make online shopping an option (under a product-based business model), offer styling services (under a service-based business model), or send out subscription boxes (under a subscription-based business model). While you can combine several business models in one business, each of these options would operate under separate business models.

A business model works if it makes sense for your business’s offering and the customer you’re trying to reach — and it’s profitable. You’ll want to test out the business model you choose and evaluate whether it’s the right fit for you. 

Getting financing is often necessary, no matter which business model you choose. One of the best ways to increase your financing options is to establish and build business credit. Learn how to establish business credit in this Nav guide.

Avoid These Common Mistakes When Choosing a Business Model

There are a few big mistakes to avoid when you’re picking a business model. According to the Harvard Business Review , you’ll want to make sure that you aren’t looking at your business and the chosen model in isolation — a lot of your success depends on how it interacts with other companies in the marketplace. Not paying attention to how your business model works against other players in your industry only works if you’re the only one (which is highly unlikely, at least for a long time). 

Also, you’ll need to make sure your business model lines up with your company’s goals and reinforces itself. Say you have an affordable motel chain that operates using a franchise business model. Deciding to offer high-end breakfast options or luxury bath products, for example, would eat into your profits. 

Instead, you’ll want to offer cost-effective products that fit your business model and create what is called a “virtuous cycle.” A virtuous cycle starts with a business decision (giving clients affordable bath products) that supports your business’s goals (to offer low-cost motel rooms to customers) — and allows you to keep your business’s expenses down. Lower expenses come full circle to allow you to offer lower-priced stays. 

Businesses can use these cycles to compete with others in their industry by making their own virtuous cycles stronger, making competitors’ cycles weaker by limiting their growth, or using rivals with different business models to form a symbiotic relationship. 

Importance of Understanding and Optimizing Your Business Model

Having a deep understanding of your business model and how it informs your business goals will help you make appropriate decisions moving forward. If a business decision doesn’t flow with your business model, it will become apparent quickly. For example, say you run a barber shop on a fee-for-service business model. If your customers are asking for virtual appointments where you teach them to cut their own hair, you can turn to your business model to help you decide. In this case, an additional does fit under your current business model and may be an easy addition to your offerings.

On the other hand, if you’re considering creating and selling your own hair care products to your customers, you’ll quickly see that that is a different business model altogether. While it can work to have two business models inside of one business (and many companies manage this well), you’ll need to understand that the two are separate types of businesses. Having this knowledge will give you the tools to examine how the two will work together and whether you’re ready to add a second business model or not. 

Your business model is just your template — it’s up to you to personalize it. And although you won’t want to change it once a week, your business model isn’t set in stone. If your business fails to become profitable, it might be time to choose a new business model. Maybe you move from selling retail products in store to delivering subscription boxes because your target market prefers that. Or maybe you decide to switch from selling physical goods to selling services because the services provide more revenue.

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This article was originally written on March 9, 2023.

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Tiffany Verbeck

Tiffany Verbeck is a Digital Marketing Copywriter for Nav. She uses the skills she learned from her master’s degree in writing to provide guidance to small businesses trying to navigate the ins-and-outs of financing. Previously, she ran a writing business for three years, and her work has appeared on sites like Business Insider, VaroWorth, and Mission Lane.

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• Building Your Business

What Is a Business Model?

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A business model is a plan describing how a business will make money. It is an outline that explains the company’s revenue and cost structure, and how it expects to turn a profit—or at least sustain itself as a going concern.

Key Takeaways

• A business model is an outline of how your business will generate a profit. The plan includes important information like target market, market need, and details on business expenses.
• There are lots of types of business models, and models can be combined as well. You’re probably familiar with some of the more common ones like manufacturer, distributor, retailer, and franchise. 
• When creating a business model, you should be clear about who your target customer is and how you’ll reach them. You’ll also want to know specifics about what you’re selling, and what sets you apart from your competition.

Definition and Examples of a Business Model

A business model is an outline that breaks down the ways that a company makes its profit. It identifies the target market, the market’s need, and how the business will serve its customers. The plan also includes the costs incurred from expenses like producing and marketing the product. There are multiple types of business models, each tailored to fit the unique needs of various businesses.

An example of a business model is one in which the concepts are split into two categories—business ideas and business resources. Under the business idea category lies products and services, target audience, competition, differentiation, advertising, and sales. Business resources, meanwhile, are what’s needed to make the idea work and can be divided into ownership, staffing, facilities, financial model, funding, and balance sheet.

A business is unlikely to be successful unless all facets of the business model provided in the example above allow it to be competitive in its marketplace. 

Types of Business Models

Here are a few commonly used business models that you’re probably familiar with. 

Manufacturer

This type of business model is when a company makes a product from raw materials or assembles prefabricated items to create new merchandise. The business can sell the items directly to consumers itself, which is a business-to-consumer (B2C) model, or it can use a business-to-business (B2B) model in which it sells to other businesses. 

An example of a B2C manufacturer would be a shoe company that sells its products directly to customers. A B2B manufacturer would be a business that sews dresses and only sells its products wholesale to other businesses, which then sell the dresses to the general public. 

Distributor

The distributor business model is when a company purchases inventory from a manufacturer and sells it to either a retailer or directly to the public. A common challenge that distributors face is picking the right price point that allows them to make a profit on the sale, but still offers competitive pricing. An example of a distributor would be a company that buys soft drinks from a manufacturer and sells those beverages to restaurants at a higher price.

There are many different types of business models and multiple models can be combined to create a new approach.

Retail business models are those used by companies that buy inventory from a manufacturer or distributor and sell those products to the public. Retailers can range from a single mom-and-pop shop to huge chain stores—they often have brick-and-mortar locations, an online store, or both. 

An example of a retailer would be a hat store that buys the products from a distributor. A limited selection of the hat store’s products is available at its brick-and-mortar storefront, but its full inventory can be purchased online. 

The franchise business model can be applied to other business models, like the ones we just discussed. The franchisee takes on the business model of the franchise and with it, the latter’s pre-established processes and protocols. Examples of popular franchises include McDonald’s, KFC, Burger King, and 7-Eleven.

When developing your business model, identify your target customer and how you’ll reach them. You’ll also want to familiarize yourself with what you’re selling (costs, margins, features, benefits, etc.) and what your competitive advantage is .

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What Is a Business Model? Explained With Types & Examples

Free Business Model Canvas Template

Ayush Jalan

• December 15, 2023

Capital is the lifeblood of any business. From building a startup to sustaining an MNC, your business model affects every decision you take. It’s one thing to have a great business idea and a whole other thing to turn it into a long-term profitable mechanism.

In this article, we’ll see what is a business model, factors to consider when choosing one, and 15 of the most successful business models to look into.

What is a Business Model?

A business model is the DNA of a company. It dictates how you earn profits, price your products, and manage costs. It envelops all the necessary processes that need to happen to convert returns on your investments.

Picking a business model for startups is especially tricky as it greatly influences the funding they raise. Investors study your business model to evaluate its viability, profitability, and sustainability.

A business model answers these six important questions:

• Who is your target audience?
• What are you planning to offer them?
• How are you going to market your offerings?
• What are the costs involved?
• What is your pricing strategy?
• What are your revenue streams?

Which Business Model Should You Choose?

A few things to consider while choosing a business model are:

• Consumer buying behavior: Analyze the actions your target audience takes before making a purchase. For instance, watching YouTube reviews before buying a smartphone or scrolling through Instagram before buying shoes.
• Costs: Understand the costs involved in developing, marketing, and delivering the solutions you intend to offer.
• Flexibility: As your business grows, the business model you opted for needs to adapt to your changing business environment.
• Competitors: An easy fix is to copy your rival’s business model if they have proven to be successful. However, this doesn’t give you any competitive edge and leaves you vulnerable to the same risks as them.
• Industry leaders: Examine the business models used by leading brands even if they’re from other industries. You can tweak their models as per your needs to pioneer a new model in your industry.

15 Types of Business Models with Examples

1. brick and mortar.

Brick and mortar is a traditional business model. Any business that sells its products directly in physical stores or offices uses this business model.

While this business model has been the standard for ages, the rise in internet access has led to an increase in online stores—negatively affecting physical counterparts.

Examples: grocery stores, restaurants, and coffee shops.

2. E-commerce

The polar opposite of the brick-and-mortar model is the e-commerce business model . It is opted for by companies that sell their products or services on the internet via e-stores.

Since these businesses operate virtually, they don’t need a physical outlet. Over the years, e-commerce has transformed how people shop , making it convenient, easy, and seamless for consumers.

Examples: Shopify, Alibaba, PayPal.

3. Bricks and clicks

A hybrid of the above two is the bricks-and-clicks business model. Companies that use this model sell their products online as well as in physical stores.

Many traditional brick-and-mortar businesses have started selling online to steal a piece of the e-commerce pie. Conversely, e-commerce companies are setting up physical stores to increase visibility and brand loyalty .

Examples: Zara, Walmart, Amazon, and Target.

4. Manufacturer

The manufacturer business model refers to the companies that use raw materials to produce goods or assemble parts to create finished products. These companies either sell directly to customers or intermediaries.

Examples: Toyota, General Motors, Samsung, LG, Sony.

5. Wholesale

Wholesalers buy large quantities of finished products from manufacturers and sell them to multiple retailers or distributors in smaller quantities. They are a key intermediary in the supply chain.

Examples: Costco, Walmart, and Johnson & Johnson.

Retailers are the last intermediary in the supply chain. They buy products from wholesalers, distributors, or even directly from manufacturers and sell them to consumers.

Nowadays, there are many businesses and individuals who make money through Amazon, for example, while also using many of its benefits.

Examples: Target, The Home Depot, Best Buy, Casper.

7. Subscription

The increasingly popular subscription business model allows companies to charge their customers a recurring fee for continual benefits. Think SaaS companies and subscription box companies.

Examples: Netflix, Disney+, Amazon Prime Video, FabFitFun, BirchBox, and Dollar Shave Club.

8. Freemium

The freemium business model is quite similar to a subscription model. Except, it includes a free version on top of the paid service. The latter is usually displayed as a premium variant.

For instance, Hulu offers a 7-day free trial while Spotify offers a free version that can be used indefinitely.

Examples: MailChimp, Evernote, LinkedIn, and DropBox.

9. Franchise

In this model, a franchisor company grants the rights over its brand identity, intellectual rights, and resources to a franchisee company in exchange for a fee called royalty.

For instance, McDonald’s permits its franchisees to run their restaurants under its brand name. In exchange, the franchisee pays an initial fee and a cut of the revenue incurred.

Examples: Subway, Domino’s, UPS Store, Coca-Cola, Nestlé, and Hyundai.

10. Razor and blades

The name ‘razor and blades’ comes from the pricing tactic used by the popular Boston-based company Gillette. The company sold its razor handles at a lower price to increase the sales of its razor blades.

In a nutshell, companies sell a primary ‘razor’ product at a low margin to boost the sales of its complementary ‘blade’ products which are sold at a high margin.

Examples: Microsoft Xbox, Sony PlayStation, Nespresso.

11. Reverse razor and blades

Contrary to the above, in the reverse razor and blades business model, companies sell the primary ‘razor’ product at a high margin and sell complementary ‘blade’ products at a bargain.

For instance, Amazon sells the Kindle Paperwhite at a high price because it allows buyers to further purchase ebooks at a discounted price.

Example: Apple sells iPhones at a premium price and allows users access to affordable complementary services like Apple Music and App Store.

12. Advertising

Advertising is one the oldest business models wherein an advertiser pays to get their product promoted on a publisher’s platform. Earlier, this used to be limited to newspapers, magazines, and storefronts.

Today, advertising is a highly saturated business model covering platforms such as social media, video games, job portals, billboards, email, mobile apps, etc.

Examples: Google, YouTube, TikTok, Meta, Twitter, and LinkedIn.

13. Crowdsourcing

In this model, a company solicits contributions like ideas and services from a crowd of unaffiliated providers. These contributions are then pooled into a unified platform controlled by the company to create something of value.

There are multiple types of crowdsourcing but perhaps the most recognizable one is used by Wikipedia. Here, volunteers contribute to creating and adding value to the platform accessible to everyone. The hosting company, Wikimedia Foundation, makes money via donations.

Example: McDonald’s asked fans to create new burger recipes under its “My Burger” campaign. The most acclaimed ones were then added to the menu to try and increase sales.

14. Hidden revenue model

All social media companies use the hidden revenue model. Unlike other models, this business model allows companies to offer their products to consumers for free—concealing their revenue.

Instead, they make money via third parties in the form of advertising. This helps keep the product free to use or subsidized enough to be available at a very low price.

Examples: Google, YouTube, TikTok, Facebook, Twitter, and LinkedIn.

15. Peer-to-peer

In this model, companies provide a platform for two parties to collaborate or make transactions. The company acts as a middleman overseeing the trade by establishing regulations to reduce the risks for both parties.

A perfect example is Airbnb; it allows hosts to rent out their properties to hostees. The company makes money via commissions from both parties.

Examples: Uber, Freelancer, OLX, Craigslist.

Actualize Your Potential with a Tailored Business Model

Choosing the right business model can be quite tricky since there’s so much at stake. However, with adequate research and testing, you can be sure to find a model or combination of models that work best for you.

Opting for a business model that has a proven track record can be a safer choice if you’re unsure of your startup’s viability. Although, if you’re willing to take some risk, creating a new model or tweaking existing ones can prove to reap more profits eventually

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About the Author

Ayush is a writer with an academic background in business and marketing. Being a tech-enthusiast, he likes to keep a sharp eye on the latest tech gadgets and innovations. When he's not working, you can find him writing poetry, gaming, playing the ukulele, catching up with friends, and indulging in creative philosophies.

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What Is a Business Model? Business Models Explained

by Mike Vestil  

A business model is a detailed plan that outlines how a company plans to generate revenue and profit. It describes the products, how they will be produced, and how they will be marketed and sold, as well as how the company will interact with its customers and other external stakeholders. It also outlines the company’s financial targets and the strategies for achieving them. In other words, it is an outline for how a business intends to function to turn a profit.

Business Model As a Concept

The business model is a concept that has revolutionized the modern business environment. It not only provides a means of predicting performances in the competitive market, but also serves as a way to improve the competitive advantage of small and medium businesses.

In this article, we will explore the concept of a business model, discuss its defining characteristics, and analyze the strategies and applications of the model. We will focus special attention on the Significance of business models and the ways through which it can be utilized for the benefit of businesses and their customers.

Significance of a Business Model

A business model encompasses the framework of how a company plans to generate revenues and profits. It focuses on the products and services offered, along with the associated costs, revenue streams and expenses.

A business model effectively outlines the specific actions a company must take in order to bring in customers and generate profits. It acts as a blueprint of how the company plans to create value , while also brainstorming the potential challenges and opportunities associated with their goods and services.

The main elements of a business model can involve customer segmentation, competitive analysis, value proposition, revenues and cost structures, business strategies, and competitive strategies. Knowing how to create, implement and adjust a business model is a vital component of any successful business.

All You Need To Know About Business Model

Business model is one of the most important topics in modern business strategy. It is the blueprint for a company’s competitive strategy and plays a critical role in the way businesses design, implement and measure success. In this article, we’ll discuss the definition, types, components, benefits, challenges and applications of a business model.

A Business Model is a framework that organizations use to analyze and determine how a product or service is created, delivered, and sustained. It forms the blueprint for how a company envision its future and sets out the direction for the development of a business.

A business model defines the relationship between a company, customers, and partners that enables it to gain competitive advantage. It details all aspects of the products or services the company will provide and how they will be marketed, delivered, and monetized.

The business model also outlines the primary activities of the business, the cost structure, and the level of customer acceptance. It also defines the strategic positioning of the business, the customer relationships, and the partner ecosystem. This can help identify the resources and capabilities needed to succeed in the markets they serve. Ultimately, the success of a business model is judged by how well it meets a company’s objectives.

A business model describes the rationale of how an organization creates, delivers, and captures value. It typically outlines the methods and processes utilized to achieve organizational objectives, including customer base, revenue streams, and operational processes.

There are several types of business models; for instance, the asset-based, the value-based, and the service-based. Through an asset-based model, a business can produce or acquire physical or intellectual property to generate profit. A value-based model is focused on the market structure, identifying and maintaining the most effective ways to attract, retain, and serve customers.

Finally, there is a service-based model which centers around offering expertise, labor, or products for a fee. This model is best for capitalizing on acquired knowledge or specialized skills. All of these models have the same goal — to generate profit. The type of business model used to operate a business should be based on the scope and context of the enterprise.

A business model can be broken down into several components, including both the product and the market in which it is being sold. The product itself is comprised of the goods and services being offered, as well as the pricing and delivery methods used.

The market is comprised of the target customers and the competition in the surrounding area. It is also important to consider the resources, including financial investments, labor, materials, and technology, and the legal environment in which the business model is operating. When all components are taken into consideration and balanced the business model is put into place.

The Business Model is a useful tool for understanding how a business is structured and how it delivers profits and value to stakeholders. A business model provides a comprehensive view of how the different elements—resources, activities, capabilities, and partner relationships—interact to generate revenues and profits.

Benefits of understanding the Business Model include gaining clarity on a firm’s competitive position, reducing risk through understanding which resources are the most valuable to a particular business, and enabling strategic decision making.

It is also essential for organizational efficiency and accurate financial planning. For example, by understanding the inputs and outputs involved in the Business Model, a company can understand the costs associated with different activities such as purchasing materials or advertising, and make more informed decisions about resources and cost allocation. Additionally, by understanding the partners and stakeholders that are essential for success, a business can ensure those relationships are mutually beneficial and sustainable for the long-term.

When discussing a business model, one of the biggest challenges is developing a sustainable strategy for long-term success. Companies need to anticipate changes in the economic landscape and proactively evaluate their current strategies to determine if future adjustments are necessary. Additionally, understanding customer needs and adapting service offerings is critical to success.

Businesses must identify gaps or opportunities in their current offerings and create new products and services to meet customer needs. Companies must also understand the potential of cutting edge technology and determine if they should implement such solutions to improve their current business models.

Finally, a well-rounded business model should have appropriate metrics in place to measure performance, including focusing on customer satisfaction, quality of products and services, operational efficiency, and financial growth.

Business models are the foundation for any company’s success. A well developed business model ensures that all parties involved, from investors to employees, are satisfied with its function. In this article, we will discuss the strategy that goes into developing a business model. We will look at the definition, development, and implementation of the strategy.

Business Model is a term that refers to the company’s strategy for achieving its objectives and objectives. It describes how the company will position itself in the market and how it will generate revenues and profits. This strategy typically involves a combination of identifying customer needs and developing a product or service to meet those needs, and implementing a range of marketing activities to reach the customers.

The Business Model also includes decisions regarding pricing and customer segmentation, along with a financial strategy that considers costs, revenue, and profits. In order to succeed, a business needs to constantly monitor and review its plan to ensure that it reflects customer needs, market trends, and changing technology. Through a well-implemented and successful business model, a company can create long-term value for its stakeholders.

Development

Developing a business model is essential for long-term success. It includes creating a strategic plan to identify a market opportunity and analyze the competitive landscape. Building a competitive advantage is critical for success, and this is accomplished by leveraging resources such as pricing strategies, distribution models, and scalability.

While a company should aim for a customer-centric model, there should be allowance for experimentation to discover what works best. Additionally, building partnerships with other businesses could open up new areas of opportunity. Lastly, an effective business model should have an easy to understand solution with an appropriate value proposition for stakeholders to operationalize quickly.

Implementation

Business model implementation is the process of leveraging existing resources and capabilities to achieve strategic objectives. It includes the development of a clear understanding of the organizational processes and systems needed to deliver the desired business model.

It also involves creating an appropriate mix of resources, including staff, equipment, technology, and infrastructure, as well as organizational structures. In addition, companies need to define the roles and responsibilities of key stakeholders, including customers, suppliers, and other stakeholders such as funders, regulatory agencies, and industry associations, who are critical in the successful implementation of a business model.

Furthermore, it is important to design and implement the appropriate policies and processes to ensure organizational resilience. Finally, organizations should consider internal and external data sources to inform their decision-making and optimize deployment of resources for successful adoption of new models.

Organizational Structure

Organizational structure plays a major role in the success of a business model. An organization’s structure defines the way in which tasks, departments and responsibilities are allocated to create a functional, efficient system. In this section, we will discuss the definition of organizational structure, its different types, and the benefits it provides.

We will also explore the importance of organizational structure and how it impacts business models. Finally, we will discuss the various sub-sections including the definition, types, and benefits of an organizational structure.

A business model is a framework that provides the structure for a business to develop, execute, and measure its operations. It identifies the customer segments and products/services that a business offers, the resources and capabilities it deploys, the means by which it generates revenue, the sources of costs and expenses, and how it achieves customer loyalty.

The components of a business model, when working together, create the foundation for a sustainable organization. Customer segments can be identified through various methods, including market analysis, market segmentation, and customer persona development. Products and services offered should be tailored to customer needs, offering value and convenience.

Resources and capabilities needed to launch, maintain, and scale the business should be adequately mapped out. Revenue-generating activities such as pricing and promotion must be established. Cost structures should be detailed to understand their impact on profitability. Strategic initiatives should be identified to operate successfully, drive market share and customer loyalty, and create competitive advantage.

The organizational structure of a business model is the set of structures that defines the relationships between individuals, departments, and the entire business. There are several types of business models, each with their own specific characteristics.

The two most common types are hierarchical and networked. In hierarchical models, there are clear layers of authority with each layer controlling the decisions made within its domain. On the other hand, in a networked model, decisions, roles, and responsibilities are shared across different levels of the business.

Furthermore, in networked models, stakeholders can have fluid roles and the focus is on collaboration and autonomy. In addition, a hybrid model combines the two to ensure greater flexibility and efficiencies. Client-franchise and inverse models are also other types of business models that organizations may use based on their individual needs.

Organizational structures are a key component of any successful business model. The structure of an organization can help to create greater efficiency, clarity of process and roles, and the development of sustainable long-term strategies.

The benefits associated with this type of structure are extensive. Many organizations find that their operational costs are reduced, enabling them to open new projects or venture into new markets faster. Companies can also take advantage of their structure to improve communication and collaboration across departments and teams.

Clearly defined roles and expectations boost productivity and can minimize any confusion that may arise when departments and teams collaborate. A well-structured organization can ultimately lead to increased innovation, predicting any potential future changes in the competitive landscape and adapting accordingly.

Furthermore, a well-structured organization allows companies to better align the goals of the organization with the purpose of the business, thus promoting a greater sense of ownership and more focused direction.

Business models are the frameworks that organizations use to generate revenue, establish competitive advantages, and align operations with customer needs. This article will focus on the marketing section, with subsections on Definition, Strategies and Tactics. We will look at key practices and trends involved in developing successful marketing plans to maximize the potential of an organization’s business model.

A business model is the structure of a business that defines how it operates and creates value. Generally, the model describes the organization’s value proposition, its revenue streams, its markets, its competitive advantage, and its operating strategy.

At its core, a business model outlines how a company generates revenue by providing a product or service, connecting with customers, and creating marketing and distribution channels. By understanding a business model’s components, investors and entrepreneurs can get an idea of how a company works and whether it can create value for customers. Additionally, an understanding of the business model can help owners and managers make informed decisions about their operations.

Business models are fundamentally based on marketing strategies, which focus on the development of products and services that are attractive to customers. These strategies are used to attract and retain customers, enhancing brand awareness and generating revenue.

To develop a successful marketing strategy, businesses must identify and understand their target audience, research the competition, identify market opportunities, and carry out detailed market research. Businesses must also employ tactics such as customized pricing, product placement, search engine optimization (SEO), influencer marketing, and customer service.

Additionally, data analytics can be used to track customer behavior and preferences, and to identify areas where the product or service is underperforming, allowing businesses to adjust their strategies accordingly. To ensure success of a marketing strategy, businesses must monitor and evaluate results regularly, learn from mistakes, and remain flexible while constantly striving to keep up with changing market needs and trends.

Effective marketing tactics are essential for a successful business model. Companies must have a solid understanding of the target audience and be able to execute campaigns that reach and resonate with the right people at the right time. Companies should analyze the market and gain insights into their competitors to determine the best way to position their brand.

They should consider factors such as price points, channels, market share, customer segmentation, and product capabilities when formulating their marketing plan. Different online and offline marketing channels may be used to introduce the brand and create recognition.

Content marketing should also be employed to educate, inform, and inspire potential customers to become actively engaged with the product or service. Social media provides the opportunity for companies to interact directly with their customers and build relationships that can be leveraged for product promotion.

Additionally, performance marketing can provide useful insights into customer behavior and how to optimize conversions. Companies should continuously monitor and track their marketing efforts to adjust their tactics a according to changes in the market.

Business models shed light on how companies create, deliver, and capture value through the design of a financial system. Business models can be analyzed with regard to their ability to ensure a healthy financial balance and contribute to a company’s competitive advantage.

In this article, we will discuss the definition of a business model, various strategies and tactics employed by companies, and the importance of finance in the overall business plan. We will discuss the importance of finance and its relation to the business model, and how both can be used to ensure the ongoing viability of a business.

We will talk about Section |Finance, which includes definition, strategies, and tactics.

A business model is a framework designed to align a company’s activities with its strategic goals. It defines the strategies, processes, resources and structure used to produce value and outlines the relationships between the company and its partners, customers, suppliers, and other stakeholders. Finance is a key component of any business model, and is a central focus of strategy and profitability for an organization.

Financing is an essential element for firms and can be obtained through debt, equity, or other financial instruments. To remain profitable and keep up with industry trends, businesses must continually adjust their financial models and positions.

Companies must also analyze the short- and long-term effects of financial decisions to determine their overall impact on the business. Financial models are central to the company’s strategy and performance, and play an important role in mitigating risk, increasing efficiency and maximizing profitability.

The finance strategies involved in a business model are integral for success. For example, developing a budget helps to allocate funds in a way that optimizes resources and maximizes gains. Additionally, creating a financial plan and incorporating smart investments can ensure stability and growth.

A financial model also helps with decision making by considering the cost, benefit, and risk associated with various scenarios. It is also important to have proper accounting, as it will allow you to accurately track cash flows, perform strategic financial analysis, and identify potential issues quickly.

Lastly, effective forecasting and forecasting analytics models allow firms to anticipate potential events and forecast outcomes in order to better prepare for them. Financial strategies are essential for companies that desire to remain competitive and thrive in their industry.

When it comes to the financial aspect of a business model, tactics are the key components. Tactics are strategies developed to obtain short-term objectives and ensure long-term success. This can be achieved by setting a budget and curbing expenditure, focusing on increasing sources of income and cost containment, as well as utilizing key financial principles such as liquidity, leverage, and capitalization.

Tactics should focus on innovative ways to generate income and maintain cash flow. Other tactics may include optimizing inventory and delivery systems, focusing on customer satisfaction and improving customer loyalty, and the implementation of fiscal policies for long-term stability. Additionally, taxes should be considered in order to optimize cash reserves and avoid penalties or unnecessary fees. Through meticulous planning and a clear understanding of their business model, entrepreneurs can generate income and achieve financial stability.

A business model is the blueprint for a successful organization. It outlines the strategies, operations, and tactics needed to successfully run an organization. In this paper, we will explore the concept of a business model by providing a definition and exploring the strategies, tactics, and operations needed to attain success.

A business model refers to the operational procedures of a company. It outlines the processes involved in defining and delivering value to customers, and provides a framework to measure progress and performance.

The main components of a business model are operations, strategy, finance, marketing, and management. Operations are used to create and deliver the company’s products and services. They manage input and output, and ensure that products and services meet customer needs.

Operations encompass activities such as designing, producing, assembling, packing, storing, and delivering the products. This includes developing processes that optimize the activities to increase efficiency, reduce costs, and improve service. Additionally, operations also involve controlling quality and selecting suitable suppliers. As such, a business’ operations play a key role in its success.

A business model’s main objective is to determine how an enterprise will generate revenue, maximize profits, and attain its objectives. Strategies are the best way to bring the target to life. They set the overall direction of a business and help in making tactical decisions. By having well-defined strategies, a company can develop a roadmap to success that outlines how to achieve their objectives.

Business strategies can be divided into four distinct categories: growth orientation, market focus, customer focus and resource efficiency. Growth orientation strategies involve a company both expanding geographically and increasing its product or service offerings.

Market focus strategies concentrate on expanding an existing market, such as entering new segments or connecting to new customer groups. Customer focus approaches strive to increase customer satisfaction and loyalty. Lastly, resource efficiency strategies involve the optimization of operations and resource utilization. Properly designed and implemented strategies can support businesses in the achievement of their objectives.

A business model often refers to the system in which a company earns revenues over time. It dictates how the company creates, delivers, and captures value. Operations is one of the key components of any successful business model. It covers the tactics for producing and distributing goods and services, as well as the means of tracking and managing the associated costs.

Tactics involve the processes and routines that the company uses to achieve the goals of operations. These might include inventory control, quality assurance, employee training, and customer service initiatives.

Companies may also establish metrics to measure the effectiveness of their operational tactics, such as productivity, efficiency, or progress towards operational goals. By using these metrics, businesses can monitor the success of their tactics and make adjustments accordingly to optimize their operations.

A business model is the cognitive framework of an organization which establishes its success through its resources, capabilities, and structure. Technology plays a major role in the business model and its key to the organization’s success. In this article we will discuss the definition of technology, various strategies and tactics of using technology in a business model.

Technology plays a prominent role in defining a business model. It is used to facilitate the activities, processes, and functions necessary to establish, operate, optimize, and grow businesses. For example, technology can automate data entry, streamline internal processes, analyze customer data in order to identify new opportunities, and optimize back-end operations.

Through the implementation of technology, businesses are able to increase their efficiency, reduce costs, and maximize production of products and services. Additionally, technology can enhance customer experience, provide access to better data analysis and insights, and increase the overall potential for increased revenues and profitability. As the world evolves and technology advances, the way businesses design, develop, and maintain their business models will become more reliant on technology than ever before.

Technology plays an integral role in most businesses today as it is generally necessary in order to develop and implement effective business models. Technologies such as rapid product development practices, cloud computing, big data analytics, artificial intelligence, and the Internet of Things (IoT) have all enabled businesses to iterate their business models more quickly and rapidly adapt to changes in the market.

Strategies for leveraging technology for business model innovation are at the heart of this process. Organizations need to identify the most suitable technology solutions for the business model in order to enable innovation and enable the company’s business teams to rapidly develop, deploy, and monitor the new model.

Additionally, businesses must also focus on developing and leveraging an effective strategy for managing data, as this is often the starting point for many business model advancements. Lastly, successful strategies for deploying and managing technology solutions should ensure that the new technology is adopted and embraced by stakeholders, employees, and customers. By investing in technology and developing appropriate strategies, businesses can ensure that their business models are adaptive, agile, and effective.

Businesses frequently use technology as part of their business model to become more efficient, stay competitive, and keep up with the demands of the market. Tactics such as automation, cloud computing, mobile computing, and analytics are utilized to drive down costs, improve customer service, and stay agile.

Automation can help reduce the overhead cost associated with labor and human error, while cloud computing can provide quicker deployment and faster scalability for increased demand. Additionally, mobile computing allows for greater access to data and faster response times, while analytics helps businesses make better decisions, identify new areas of opportunity, and measure progress.

The combination of these strategies can help any business optimize their business model and ensure they are properly positioned to take advantage of the latest technological breakthroughs.

Business Model — FAQ

What is a business model.

A business model is an overall strategy that outlines the goals and methods of an organization or individual to earn a profit. It defines the framework for generating revenue and describes how the organization will interact with customers and deliver value.

How do you create a business model?

Creating a business model requires research and analysis to determine the target market, the services or products to be sold, pricing strategy and costs. Additionally, risks and competencies should be assessed and a plan made for long-term sustainability.

What are the key components of a business model?

The key components of a business model are the customer segments, value proposition, kind of revenue stream, partnerships, and resources to develop and maintain the business. Additionally, it should outline the costs, risks and stakeholders involved.

What are the different types of business models?

The three most common types of business models are product, sharing, and subscription models. These models create value by producing or selling products, sharing resources and providing access on a subscription basis, respectively.

How does a business model generate revenue?

Business models generate revenue by selling products or services to customers, gaining commission through partnership deals, and encouraging customers to subscribe to paid services.

Who is responsible for developing the business model?

The business model is typically developed by the owner, management team and/or other stakeholders with a vested interest in the success of the business. They should collaboratively identify the strategy, values, and actions needed to operate and generate profits.

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Business Model

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• First Online: 07 January 2023
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• Kathrin Weidner 7  

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Business Case ; Business process model ; Commercial model ; Company’s plan ; Economic model ; Enterprise/Corporate model ; Management model ; Operating model

Definition/Description

This chapter provides an understanding of the business model concept in different settings. Starting with a focus on traditional business model , an overview of the range of definitions is given. Generally, a business model represents the relevant activities of a company and their relations with each other in order to create, deliver, and capture value (Zott & Amit, 2010 ; Osterwalder & Pigneur, 2010 , Richardson, 2008 ; Wirtz, Pistoia, Ullrich, & Göttel, 2016 ). Business models consist of several elements which are discussed in the following section. The Business Model Canvas (Osterwalder & Pigneur, 2010 ) is known as a prominent tool in practice and academia alike and introduced in detail. Subsequently, the most prominent patterns of business models which are freemium, long-tail, and multi-sided platforms are...

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11.2 Designing the Business Model

Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.

Learning Objectives

By the end of this section, you will be able to:

• Define a business model and its purpose
• Describe a business model canvas
• Describe a lean model canvas
• Describe a social business model canvas

According to Alexander Osterwalder and Yves Pigneur , the authors of Business Model Generation , a business model “describes the rationale of how an organization creates, delivers and captures value.” Nevertheless, there is no single definition of this term, and usage varies widely. 29

In standard business usage, a business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.

Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.

A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used. There are hard-copy canvases modeled after an art canvas as well as digital versions. The original physical canvases are meant to serve as visual tools, used with sticky notes and sketches.

As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in Figure 11.6 .

Link to Learning

Visit this site to see examples of completed Business Model Canvases for a variety of industries for a deeper understanding of how the different categories are filled in.

Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation . Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains. The complementary and accompanying activities and resources can be useful for a deeper dive into and understanding of customer value creation in the form of value proposition, although there are other approaches to conceptualizing your value proposition. For Christensen, the originator of the disruptive innovation and jobs-to-be-done theories, a value proposition is a product that helps customers do a job they’ve been trying to do more effectively, conveniently, and affordably.

Finding the intersection of your customers’ problems and your solutions is how you create a unique value proposition, according to the entrepreneur Ash Maurya , the author of Scaling Lean and Running Lean . In Running Lean , Maurya offers the following formula for creating an initial value proposition in the canvas, as shown in Figure 11.7 .

Maurya deviated from the standard business model canvas to create the lean canvas. It overlaps the business model canvas in five of the nine components: customer segments, value proposition, revenue streams, channels, and cost structure ( Figure 11.8 ]. Rather than addressing key partners, key activities, and key resources, the lean canvas helps you tackle problems, solutions, and key metrics instead.

Visit this site to see examples of completed Lean Model Canvases from some major companies for a deeper understanding of how the canvas can be applied.

While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business.

Watch this Railsware video that demonstrates how the lean canvas model might be applied to startups to learn more. In the case example in the video, the lean canvas model is applied to the successful P2P ride-sharing app Uber, as if it were a startup.

Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities. 30 The customer empathy map is a portrayal of a target customer —the most promising candidate from a business’s customer segments—that explores the understanding of that person’s problems and needs ( Figure 11.9 ). Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as:

• With whom are we empathizing?
• What do they need to do?
• What do they see?
• What do they say?
• What do they do?
• What do they hear?
• What do they think?

Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur , every transaction can be turned into a meaningful and valuable customer interaction. 31 Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants.

For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data. 32

On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map. 33 Thus, empathy mapping for Yeti is part of its product development process.

Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams). 34

Strategyzer offers six videos outlining the business model canvas that total about 12 minutes; specifically they cover the prototyping journey from ideation to visualization of conceptualization.

Business Model Canvas 35

As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship , their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships.

Early on, your greatest focus should be on the right side of the canvas because:

• These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams).
• The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change).
• These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers).

In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side. 36

Read this blog that provides a walk-through of how to fill in a value proposition canvas to learn more.

When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability Figure 11.10 ). This framework forces the entrepreneur to address broad questions about the startup concept:

• Desirability: How desirable is the product? Who will use it and why?
• Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept?
• Viability: Will this idea remain viable? How will it make money? How will it be sustained over time?

These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future.

The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation.

The business model canvas is not an exhaustive planning tool by any means. 37 , 38 The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless.

The Lean Model Canvas

The lean model canvas is Ash Maurya ’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success . The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan. 39

Social Business Model Canvas

As you’ve noticed by now, the core canvas components are common throughout the various versions. Many of the blocks of the social business model canvas are similar to those used in the business model canvas and the lean model canvas. 40 A few differences, as developed by Tandemic , focus on areas unique to social entrepreneurship ventures. For example, the new areas added include measures of what kind of social impact you are creating or developing, measures of surplus to address what happens with profits and where you intend to reinvest them, and measures of beneficiary segments, and social and customer value propositions. 41 These could be measures such as the number of trees planted, number of refugees housed and fed, jobs created, or investments made—depending on the venture. Social impact looks at an organization’s social mission beyond the bottom line. Measurement can differ among social entrepreneurs, but in terms of the canvas, impact measures are an effort to establish quantifiable metrics.

Social impact can be hard to measure, but nonetheless, many social entrepreneurs aim for long-lasting impact. 42 A 2014 report by the think tank, consultancy, and member network SustainAbility lists cooperative ownership, inclusive sourcing, and the “buy one, give one” model as three forms of social impact. 43 In addition to the Tandemic social business model canvas, there are other versions of similar canvases used for social entrepreneurship. For instance, Osterwalder adapted the business model canvas for mission-driven organizations into a mission model canvas. 44 There’s also a social lean canvas that adds purpose (explaining your reason for creating the venture in terms of social or environmental problems) and impact sections (describing the intended social or environmental impact). 45

This completed social business model canvas for the popular peer-to-peer lending platform Kiva illustrates how the business model canvas can and perhaps should be adapted for social entrepreneurship ventures.

What Can You Do?

Toms Shoes is perhaps one of the best-known companies for adopting a social entrepreneurship purpose into its business model. Part of its early success hinged on the fact that for every pair of shoes a customer bought, the company donated a pair of shoes to someone in need. The company won a prize in 2006 for its innovative solution to poverty. This “ 1-for-1 business model ,” sometimes commonly called the “Toms model” after the shoe company that popularized it, gained traction among other companies that followed suit in similar fashion, seeing both the social and the financial successes in the Toms model. Warby Parker is another example of a company that does essentially the same: A customer purchases a pair of eyeglasses, and the company donates a pair (although Warby Parker pays a third party to procure the glasses, as eyeglasses require an individual prescription, whereas shoes do not).

• Can you think of an innovative social entrepreneurship business model?

The Birthday Party Project

Paige Chenault wanted homeless children in Dallas to feel special on their birthdays. Many have never experienced a birthday party. So this professional event planner sprang into action in January 2012. She launched the Birthday Party Project (https://www.thebirthdaypartyproject.org/), a nonprofit group whose mission is to celebrate the lives of homeless children (ages one to twenty-two). The group organizes monthly birthday parties with partner shelters. Since its inception, the concept has spread beyond Texas to cities across the United States, including Atlanta, Chicago, Los Angeles, New York, and San Francisco. In six years, the Birthday Party Project has celebrated 4,800 birthdays with 30,000 kids in attendance, eaten 40,000 cupcakes, cracked 30,000 glow sticks, and performed 1,100 renditions of “Happy Birthday.”

• Identify a need in your community that could become a social entrepreneurship business, as Paige discovered with an initial passion project.
• 29 Alexander Osterwalder and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Hoboken, NJ: Wiley, 2010.
• 30 Charlene Perrin. “Create A Customer Empathy Map in 6 Easy Steps!” Conceptboard . March 28, 2019. https://conceptboard.com/blog/create-a-customer-empathy-map-in-6-easy-steps/
• 31 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
• 32 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
• 33 Mike Godlewski. “The Secret to Knowing What a Client Is Thinking? Empathy Maps.” Yeti. February 8, 2016. https://yeti.co/blog/the-secret-to-knowing-what-your-client-is-thinking-empathy-maps/
• 34 Germán Coppola. “What Is an Empathy Map, and Why Is It Valuable for Your Business?” Medium . November 28, 2017. https://medium.com/swlh/what-is-an-empathy-map-and-why-is-it-valuable-for-your-business-14236be4fdf4
• 35 This material is based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
• 36 Michelle Ferrier and Elizabeth Mays. Media Innovation and Entrepreneurship . The Rebus Foundation, 2017. https://press.rebus.community/media-innovation-and-entrepreneurship/.
• 37 Jennifer van der Meer. "Do You Suffer from Value Proposition Confusion?" Linkedin . October 19, 2016. https://www.linkedin.com/pulse/do-you-suffer-from-value-proposition-confusion-jennifer-van-der-meer/
• 38 “The Value Proposition Canvas.” Strategyzer . n.d. https://strategyzer.com/canvas/value-proposition-canvas
• 39 Ash Maurya. “Why Lean Canvas vs Business Model Canvas?” Medium . February 27, 2012. https://blog.leanstack.com/why-lean-canvas-vs-business-model-canvas-af62c0f250f0
• 40 "Social Business Model Canvas.” Business Model Toolbox . 2013. https://bmtoolbox.net/tools/social-business-model-canvas/
• 41 “The Business Model Canvas Reinvented for Social Business.” Tandemic . n.d. http://www.socialbusinessmodelcanvas.com
• 42 Ayse Guclu, J. Gregory Dees, and Beth Battle Anderson. “The Process of Social Entrepreneurship: Creating Opportunities Worthy of Serious Pursuit.” Duke/Fuqua case . 2002. https://centers.fuqua.duke.edu/case/knowledge_items/the-process-of-social-entrepreneurship-creating-opportunities-worthy-of-serious-pursuit/
• 43 Lindsay Clinton and Ryan Whisnant. “Model Behavior: 20 Business Model Innovations for Sustainability.” SustainAbility . February 2014. https://sustainability.com/wp-content/uploads/2016/07/model_behavior_20_business_model_innovations_for_sustainability.pdf
• 44 Alexander Osterwalder. “The Mission Model Canvas: An Adapted Business Model Canvas for Mission-Driven Organizations.” Strategyzer . February 25, 2016. https://blog.strategyzer.com/posts/2016/2/24/the-mission-model-canvas-an-adapted-business-model-canvas-for-mission-driven-organizations
• 45 Social Lean Canvas. n.d. https://socialleancanvas.com/

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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.

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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.

Business Model Canvas Explained: Definition, Pros, Cons, and Building Blocks

So, here's the thing. We all know that we need structure to work effectively, but where do we start with so many options available? One tool worth considering is the Business Model Canvas (BMC) . Used effectively, it can give solid structure to your planning. 

In this article we will examine how the model works and a few ways to use it effectively. Then, we will describe its best practices and some recommendations on getting started. Finally, we will explore possible alternatives. 

Ready to get to know all about the BMC? Let's begin.

The Business Model Canvas, explained

The Business Model Canvas is a strategic management tool that helps businesses visualize and analyze their business models. It consists of 9 fundamental building blocks that describe the core aspects of a company's value proposition, infrastructure, customers, and finances (more on that later, we promise). 

By using it, organizations can gain a deeper understanding of their overall business model , identify areas for improvement, and develop new strategies for growth. One of the key benefits of the BMC format is that it's very visual. Used adequately, it allows organizations to create a display of their business model in alignment with strategic business objectives and the overall value proposition.

The nine BMC building blocks were initially presented in 2005 by Alexander Osterwalder. They were based on his Ph.D. work on business model ontology, supervised by Yves Pigneur. Since its release, the authors have developed other related tools, such as the Culture Map and the Value Proposition Canvas, which have helped the BMC tool to evolve and added value to it.

Business Model Canvas examples

Some examples of the BMC include:

• Strategy planning
• Business planning
• Business modeling

Lean Canvas vs. Business Model Canvas

Both the Lean and Business Model Canvas enable you to capture your entire model on a single page. The primary difference between them is that the Lean Canvas focuses mainly on solving a particular problem. The Business Canvas Model, on the other hand, is more sales orientated and usually focuses on selling products or services. 

Advantages and disadvantages of the Business Model Canvas

Even though the BMC offers a series of features in order to effectively visualize and analyze your organization's business model, there are also some possible drawbacks to be aware of – and avoid. 

To start on the right note, the benefits of the Business Model Canvas include:

• A clear and comprehensive business model overview in a single visual format. This makes it easier to understand, articulate, and communicate.
• Strong collaboration and breaking down silos. Using the BMC approach incentives people to work as one team, as it involves all stakeholders, and enables them to actively participate in developing, improving, and refining the business model.
• Colleagues constantly progressing with feedback (to borrow from an ITIL principle). The BMC approach allows for a fast and efficient testing of different business model configurations, speeding up the innovation process and reducing the time to market.
• A structured and systematic approach to analyzing and designing business models, which helps identify areas for improvement and innovation.
• A flexible approach that enables innovation instead of limiting it. The framework can be adapted to different types of businesses, industries, and customer groups.

However, if you choose to work with this management tool, you need to consider its potential disadvantages :

• Using the BMC approach effectively can be challenging without prior knowledge of business modeling concepts and terminology. You will need to put the work in and do some pre-reading to get the most out of it.
• Because it's so visual, it may oversimplify the complexity of a business model, making it more challenging to articulate some of the aspects of the organization's operations and performance. This makes it unsuitable for highly-specialized or complex businesses.
• Because it's a framework rather than a prescriptive standard that must be strictly adhered to, it doesn't provide detailed guidance on implementing or executing the business model, which can lead to difficulties in translating the canvas into action.
• It can rely on assumptions and hypotheses, which may not always be accurate or relevant for real-world situations.

The 9 building blocks of a Business Canvas Model

The Business Model Canvas is organized in nine  building blocks that represent a business model's key elements. These building blocks are:

• Value Proposition - The unique value the business provides to its customers and how it differentiates itself from competitors. In other words, it’s what sets your business apart, what makes it special, and what value it brings.
• Customer Segments - The different groups of customers the business targets with its products or services. This building block looks at your most important customers.
• Customer Relationships - The business' relationships with its customers and how it interacts with them. This is a fundamental building block as not only does it help you build and maintain a relationship, it also enables you to map out the cost and deliverables needed to continue to improve that relationship.
• Channels - T he different channels that the business uses to reach and interact with customers, including physical and digital channels.
• Key Partnerships - The relationships and collaborations that the business has with its suppliers, vendors, and other external partners.
• Key Activities - The key activities that the business must perform to deliver its value proposition and operate successfully. This building block helps you to define your most mission-critical actions and prioritize them accordingly.
• Key Resources - The key resources the business requires to operate, including human resources, physical assets, and intellectual property. This can also include relationships, distribution channels, and virtual assets.
• Revenue Streams - The different sources of revenue that the business generates from its customers, including one-time sales, recurring revenue, and other revenue streams. This building block also helps determine how each stream contributes to the business profit.
• Cost Structure - The various costs that the business incurs to operate, including fixed costs, variable costs, and other expenses. It also helps you identify your most expensive assets and activities to make effective financial plans for the future.

How to build a Business Model Canvas in 14 steps

The Business Model Canvas is flexible – no one size fits all. But for our money, there are 14 steps to effectively build it.

Step 1: Define the purpose 

The first step is to define the purpose of the Business Model Canvas. Where are you now, and where do you want to be? What do you hope to achieve? Who is the target audience? Have you double-checked to ensure what you want to achieve is in line with the strategic objectives of the rest of the business?

Step 2: Identify the nine building blocks

Identify the nine building blocks of the BMC, review each in relation to your business, and understand their purpose.

Step 3: Define the Value Proposition

What will add value? Start by defining the unique value that your business offers to customers. This will be the foundation of your canvas.

Step 4: Identify your Customer Segments 

Define the different groups of customers your business targets and their specific needs and preferences so you can focus and direct your efforts accordingly.

Step 5: Define Customer Relationships 

Identify your business' relationships with its customers and how it interacts with them. You can also use this step to identify your most important relationships so you can focus more effort on maintaining and improving them.

Step 6: Determine the Channels

Identify your business's channels to reach and interact with its customers, including physical and digital channels. From a service desk perspective, this could be offering a tier 0 channel with self-service or AI-enabled support capabilities before providing tier 1 and level 2 channels which offer a more people-centric user experience .

Step 7: Define Key Partnerships

Identify your business's relationships and collaborations with its suppliers, vendors, and other external partners. Remember, it's not just relationships with customers and stakeholders that matter, your suppliers are part of your team, so manage those relationships appropriately.

Step 8: Identify Key Activities

Define the key activities that your business must perform to deliver its value proposition and operate successfully.

Step 9: Determine Key Resources

Identify the key resources that your business requires to operate, including people, knowledge and wisdom, financial assets, and IT assets.

Step 10: Determine Revenue Streams 

Identify the different sources of revenue that your business generates from its customers. If you have a finance team,  work with them to identify current revenue streams and plan for future ones.

Step 11: Determine Cost Structure

Work with your finance team to identify the various costs that your business incurs to operate, CAPEX, and OPEX costs. 

Step 12: Build the Canvas

Once you have defined all of the building blocks, you can start creating the canvas to visualize what you are planning to accomplish.

Step 13: Review and refine

The BMC isn't a one-and-done approach. Review your model and seek feedback from your stakeholders to correct the course when needed.

Step 14: Keep going! 

In the words of Walt Disney, "Keep moving forward." Build and refine your model over time to reflect current and future activities more accurately. 

How to complete a Business Model Canvas

No one likes a blank page, do they? The difficult part is always getting started, but I promise, if you follow these steps, you'll be off to a great start: 

• Start with the Value Proposition - Before you do anything else, fill in the Value Proposition block in the center of the canvas. This should describe the unique value that your business provides to customers and how it differentiates itself from competitors. Focus on getting this point right because value is everything in terms of the BMC.
• Add in your enablers - This will include your key activities, customer segments, relationships (both customer and supplier relationships) assets, key activities, and channels.
• Add in your financials - Put in your revenue dreams and your cost models to make your BCM more transparent and ensure there are no hidden costs.
• Progress iteratively with feedback - Once you have filled in all the building blocks, review your canvas, iterate, and redefine  as needed. Seek input from stakeholders and make adjustments.
• Give the gift of clarity - Remember, this is a visual model, so don't get too stuck on the details or use too much jargon. The effect you're looking for is clear, concise, and visual.
• Relationships matter - We are talking about the relationship between each building block, so ensure they are correctly represented in your diagram.

Six alternatives to the Business Model Canvas

While the Business Model Canvas is a popular tool for developing and communicating a business model, other options are available too. Some alternatives include:

• Lean Canvas - This tool is similar to the BMC but focuses on startups and small businesses. It includes fewer blocks and focuses on validating hypotheses and testing assumptions quickly.
• SWOT Analysis - This tool helps to identify a business's strengths, weaknesses, opportunities, and threats. This can be a valuable tool for assessing the current state of a company and identifying areas for improvement.
• Business Model Innovation - This involves developing a new business model that is different from the traditional one used in the industry. It can be done through creative thinking, exploring new technologies, or adopting a new approach to customer relationships.
• Blue Ocean Strategy - This framework helps businesses to create new markets and uncontested market space. It involves identifying and focusing on areas of innovation that competitors have not explored.
• Value Proposition Canvas - This tool helps businesses to define and communicate their value proposition to customers. It focuses on the customer's needs, desired outcomes, challenges, and how the company can better meet those needs than its competitors.

Key takeaways

The Business Model Canvas or BMC is a strategic management tool that helps businesses visualize, design, and analyze their business models. Some of its common applications include business planning, value propositions, and modeling.

If you want to give it a shot to plan your organization’s strategy, make sure that you have your BCM template ready with the nine key elements that need to be completed. And don’t forget to follow through our six tips on how to get started!

  Frequently Asked Questions

How do you make a good business model canvas .

To make a good Business Model Canvas, clearly define the unique value proposition of your business and ensure that the key building blocks of the canvas (such as channels, revenue streams, and cost structure) are aligned with the overall strategic objectives of the business. Review and improve the canvas as needed to continue improving and aligning with business needs.

What are the four types of business models? 

The four types of business models are product, service, platform, and sub-subscription-based.

What are the three sections of the Business Model Canvas? 

Value Propositions, enablers, and financial planning.

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Setting up a new company a business model that suits your idea.

The business model is the foundation for all of a company’s future goals and strategies. But what factors need to be considered when developing a functioning business model? We explain.

The key points in brief:

• A focused business model helps companies to concentrate on their core objectives.
• The various components of the business model influence each other.
• There are different approaches to developing a suitable business model.
• The business model is the basis for a detailed business and financial plan.

Behind every successful company is a good idea. But a business idea can only become a flourishing company if it has the right business model. The business model determines how a company generates value, how products or services are placed on the market, how customers are acquired, and how revenue is generated.

The choice of a suitable business model is the basis for strategic planning. It should be flexible enough to respond to changes in market conditions or new insights, which often only become apparent in the course of business activities.

1. Definition and content of a business model

1.1. Value proposition

At its core, the value proposition defines what a company offers its customers and, in particular, how its offering differs from that of its competitors. This requires in-depth knowledge of the market concerned.

A winning value proposition addresses the needs, wishes, or problems of (potential) customers and comprises the following features:

• Uniqueness: The product or service is clearly different from other competing offers on the market.
• Relevance: The product or service solves specific problems or needs faced by the target customers.
• Clarity: The benefits of the product or service are immediately apparent to customers.
• Availability: The target group understands how to access the product or service.

As an example of a value proposition, let’s take a fictitious company that offers a mobile app for managing personal finances. This is how the value proposition could look:

• Uniqueness: The app uses Artificial Intelligence to personalize savings tips and automate transaction categorization.
• Relevance: It addresses the general need for simpler financial management and helps users to manage their budget more effectively and achieve their savings goals.
• Clarity: The benefits offered by the service are clear: simplified financial management and personalized savings.
• Availability: Being easy to use, the app can benefit every user, regardless of their previous financial experience. The app can be downloaded from the Apple and Android app stores by all prospective users, and the basic version is free of charge.

1.2. Customer segments and target groups

Another key aspect when developing a business model is to identify the relevant customer segments. A precise definition of the segments is helpful in aligning a product or service, as well as the marketing and sales, to the specific needs, behaviors and preferences of potential customers .

As a rule, customer segments are defined by the following attributes:

• Demographic characteristics: age, gender, level of education, income, occupation, etc.
• Geographical characteristics: location, urban or rural areas, etc.
• Psychographic characteristics: interests, hobbies, values, attitudes, lifestyle, etc.
• Behavioral characteristics: purchasing habits, usage rate, brand loyalty, price sensitivity, media behavior, etc.

By thus permitting entire groups with similar preferences to be addressed rather than individual persons, marketing campaigns can be better controlled, higher sales achieved, and advertising costs saved, because there is less coverage waste.

1.3. Sales channels

The choice of the right sales channels to reach (potential) customers also determines the success of a business model. The channels are used not only to market and sell the products or services , but also to support and retain customers . They can be real-world (retail stores or events) or digital (websites, social media, or email marketing). By using these channels effectively, it is possible to communicate with customers, build relationships, and ultimately achieve the defined sales targets.

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1.4. Revenue model

The revenue model defines  how a company plans to generate revenue . Different business models generate income from a variety of sources, depending on their product or service range, their market, and their strategic orientation. The most common sources of income are the direct sale of products and services, subscription models, or usage-based models such as pay-per-use.

1.5. Key resources

To be successful, a company needs the right resources: they make it possible to define the value proposition and market, sell, or deliver the products or services.  Identifying and managing these key resources is crucial to the performance and sustainability  of a business model. Key resources can be divided into different categories: physical, intellectual, human, and financial resources. For a software company, for example, the key resources could look something like this:

• Intellectual: software code, databases, and patents.
• Human: development experts with specialized knowledge of programming languages and system architecture.
• Physical: server infrastructure for the provision of cloud services.
• Financial: capital for research and development as well as for marketing campaigns.

A company’s costs  include all expenses required to operate and maintain the business . The cost structure forms the basis for pricing, profitability analysis, and strategic planning, and costs can be divided into different categories:

• Fixed costs: expenses that remain constant regardless of production volume, e.g., rent for business premises, wages, insurance, and the cost of services or software. These costs are incurred on a regular basis and can therefore be planned.
• Variable costs: expenses that vary directly in proportion to the production quantity or service volume, e.g., material costs, direct labor costs, sales commissions, or shipping costs. The more products a company manufactures or the more services it offers, the higher the variable costs.
• One-off costs: non-recurring expenses incurred for special projects, purchases or events. These include the cost of setting up the company, major investments in equipment or technology, relocation costs, or major marketing campaigns.
• Cost of capital: the cost of financing the company – through equity or borrowed capital, e.g., interest on loans taken out and dividends.
• Operating costs: ongoing expenses for day-to-day business operations, including administrative costs, sales and marketing costs, as well as maintenance and repairs.

2. The scalability of a business model

The crucial question is how quickly a business model can be scaled up – i.e., enable rapid sales growth – without the need for major investments. This allows the margin to be increased as the turnover rises. Scalable business models are often characterized by a comparatively low fixed cost base and generally have a high proportion of variable costs.

3. Methods for developing a business model

There is no single or perfect way to develop a business model: The best approach depends on the company’s goals and strengths as well as the nature of the business, the industry, and the market environment. Below are a few examples of formal methods:

3.1. Business Model Canvas

The Business Model Canvas is a strategic management tool that helps to visualize and analyze a business model. It includes key elements such as value proposition, customer relationships, sales model, and more. The tool is particularly useful for startups and new business ideas, as it enables the rapid customization and testing of different business models.

3.2. SWOT Analysis

The SWOT Analysis helps companies to understand their internal strengths and weaknesses as well as external opportunities and risks. This method can be applied across all industries and offers valuable insights that can help to refine the business model.

3.3. Lean Startup

This method focuses on the rapid testing and adaptation of the business model through the Build-Measure-Learn cycle. It is ideal for technology startups and other business models operating in a rapidly changing market, as it reduces the risk of investing time and resources in products or services that may not meet customer needs.

3.4. Design Thinking

Design Thinking is an iterative process that helps teams to focus on users and develop creative solutions to their problems. This process typically involves planning, implementing, reviewing, and analyzing feedback, after which adjustments are made before the cycle begins again. The method is particularly well suited to service companies or products that focus strongly on the user experience.

4. The business model versus the business plan

In a nutshell, the business model is the foundation on which a company is built; it describes how the company creates value. The business plan, on the other hand, builds on the business model and contains specific, time-dependent objectives and plans for implementing the business model. The business plan is used to present the business idea, marketability, financial planning, and growth potential of the company to investors and banks.

5. General tips for developing your business model

It is well worth getting to grips with the question of the right business model. A well-thought-out business model lays the foundation for the success of your company. Here are a few general tips to help you develop the right business model:

• Customer focus: Understand your target customers in detail – their needs and wishes must be at the center of your business model.
• Flexibility: Be prepared to adapt your business model based on feedback and market research.
• Simplicity: A complex business model is difficult to communicate and implement. Strive for simplicity wherever possible.
• Sustainability: Consider how your company can create and maintain value in the long term.
• Make use of networks: Build relationships with mentors, industry experts, and potential partners to get the support you need.

6. Are you setting up a company? Then let us advise you

We see ourselves as a genuine partner for startups and scale-ups. We not only offer attractive banking packages for young companies , but also support you with startup and growth financing – by helping you to find investors, for example.

We are not just your bank. Whatever you are dealing with in your day-to-day business – whether you’re setting up your company, in the growth phase, or facing strategic challenges – talk to us. With the help of our experts and our extensive network, we can offer you solutions to almost any challenge your company may face.

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Creating a Meaningful Corporate Purpose

• Hubert Joly

Five factors to consider.

Today, most company leaders believe that their companies’ larger purpose is to make a positive difference in the world — not just to maximize shareholder value. Defining a corporate why and making sure it guides decisions and operations has therefore become a cornerstone of doing business. According to author Hubert Joly, former chairman and CEO of Best Buy, Best Buy’s purpose has been central to the way the company has grown and evolved — and continues to. It’s what helped inspire previously discouraged and anxious employees and boosted the company’s share price about tenfold since 2012. Although the idea of a company guided by purpose is simple to understand, it is very hard to turn into reality. Joly presents five considerations that are critical for defining a powerful corporate purpose.

In 2015, shortly after I became chairman of Best Buy (in addition to being the company’s CEO), I decided to visit all board members. I headed to Michigan to sit with Patrick Doyle, who back then was the CEO of Domino’s Pizza, and one of his colleagues. The most memorable moment of that visit, which also turned out to have the biggest impact on Best Buy, was a question from Patrick’s colleague at the end of our discussion. He asked me, “Have you watched Simon Sinek’s TED Talk about how great leaders inspire action?” I had to admit I had not. Shortly afterward, I did watch it. As Sinek put it, “People don’t buy what you do; people buy why you do it.”

• Hubert Joly is the former chairman and CEO of Best Buy, a senior lecturer at Harvard Business School, and the coauthor of The Heart of Business .

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Business Purpose Definition, Examples and 12-Step Guide

This tool helps you define your Business Purpose, the critical strategic objectives that will orient your entire innovation project. Nailing your business purpose is critical – else, you will be missing that guiding North Star.

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Table of Contents

The ability to adapt, innovate, and strategize effectively has become the cornerstone of success. From dynamic local startups to expansive global enterprises, the imperative remains the same: to cultivate the mission and vision required to thrive amidst constant change. As the business environment continues its metamorphosis, one undeniable truth takes centre stage – the journey of digital innovation and transformation is not a mere event but an ongoing expedition that demands insightful strategic planning.

A business purpose serves as the North Star, guiding organizations through the complexities of the modern landscape. It encapsulates the fundamental “ why ” behind an organization’s existence and defines its role in society. A well-crafted purpose aligns the business goals with societal needs, fostering a sense of direction and significance. It becomes the driving force that propels innovation, shapes strategies, and rallies employees and stakeholders around a shared mission.

In this article, we embark on an exploration that delves into the vital significance of crafting a purpose statement that resonates harmoniously with your business objectives. This statement becomes more than just a guiding principle; it evolves into a strategic linchpin that reinforces your overarching planning endeavours. In our journey through these insights, we aim to illuminate how this purpose statement interweaves seamlessly with elements like business strategy , innovation, the concept of “ jobs to be done ,” and valuable tools like the Business Model Canvas . Together, these components create a holistic framework that navigates the complex waters of contemporary business dynamics, propelling your enterprise toward a future of not just resilience, but enduring prosperity.

What is Business Purpose?

The business purpose also known as organizational purpose or company purpose , is the core rationale behind the establishment of your company, condensed into a concise statement, often just a sentence or two. This statement can be tailored to a specific industry or broad enough to encompass supplementary and prospective business endeavours. It’s essential to discern the business purpose from your company’s vision or mission to fully comprehend its significance.

Human motivation is intricately woven into the collective aspirations of the groups we associate with. The key query lies in the alignment between these shared objectives and each individual’s personal sense of purpose.

In the context of innovative teams, the essential factor is intrinsic motivation, driven by the desire to effect tangible positive changes in the world. Such teams flourish within organizations that share a business purpose. Hence, the optimal functioning of an innovation endeavour and the cultivation of a team culture that is personally gratifying and globally impactful necessitate the synchronization of individual and collective aims.

The term “ purpose ” encapsulates an organization’s highest-level goal. For innovation teams, this might range from a straightforward objective like “Discover an optimal solution for our customer’s needs ” to an audacious aspiration like Google’s “ Massive Transformative Purpose (MTP) “, of making information universally accessible and valuable.

The purpose essentially forms the nucleus of an organization’s existence. The purpose of an organization ideally reflects the sum of the individual meanings of its members. Each individual within the organization should discern their personal significance reflected in this overarching purpose. The organization’s efficacy is inherently compromised if its members lack a personal connection to its purpose.

Beyond the internal scope, the concept of meaning profoundly impacts how your organization is perceived externally. In today’s market, customers increasingly inquire about the driving purpose behind a company and whether it resonates with the right mindset. This customer curiosity stems from their search for alignment between the company’s purpose and their own sense of significance. Both employees and customers are becoming progressively discerning of organizations that claim noble purposes while adhering to self-serving approaches.

People are now asking what implications your organization and product have for society or even the world as a whole. Being attentive to what really matters to employees and customers will lead to an organization that is continually asking itself, “Am I still relevant?” This is a question that is absolutely necessary in times of exponential change.

Business purpose encompasses several key aspects:

• Mission: The company’s mission statement articulates its purpose succinctly. It outlines the core activities, values, and goals that drive the organization’s operations.
• Values: These are the guiding principles and ethical beliefs that shape the company’s behaviour and culture. Values help establish the moral compass for decision-making and interactions within the organization.
• Long-Term Vision: A well-defined purpose includes a long-term vision that describes the desired future state the company aims to achieve. This vision provides direction and inspiration for employees and stakeholders.
• Social Impact: Business purpose considers the positive impact the company strives to make on society, whether through its products, services, sustainability efforts, community involvement, or other initiatives.
• Stakeholder Consideration: A purpose-driven organization recognizes the importance of addressing the needs and interests of all stakeholders, including employees, customers, investors, suppliers, and the broader community.
• Differentiation: Business purpose can set a company apart from its competitors by offering a unique value proposition that resonates with customers and stakeholders.
• Employee Engagement: Clearly defined purpose can foster employee engagement and motivation by providing a sense of meaning and alignment with their personal values.
• Adaptability: A strong purpose can guide the organization through changes and challenges, helping it adapt while staying true to its core identity.

1- Crafting a Mission Statement in Business Purpose

Crafting a mission statement within a business purpose requires careful consideration and clarity. A mission statement succinctly communicates your organization’s core activities, values, and goals. Here are steps to guide you through the process:

• Reflect on Core Activities: Begin by reflecting on what your organization does. Identify the primary products, services, or solutions you offer. Consider how these offerings provide value to customers or address specific needs.
• Define Your Values: Your mission statement should align with your organization’s core values. Identify the guiding principles and ethical beliefs that shape your company’s behavior and decisions.
• Articulate Goals: Outline the specific goals your organization aims to achieve. These could be related to growth, innovation, customer satisfaction, or any other key objectives.
• Be Concise: Keep your mission statement concise and to the point. Aim for a few sentences that capture the essence of your organization’s purpose.
• Address “Why” and “How”: While your business purpose answers the “Why” of your existence, your mission statement can touch on the “How.” Explain how your organization plans to achieve its purpose through its core activities.
• Consider Stakeholders: Think about how your mission statement resonates with various stakeholders, including employees, customers, and investors. It should convey a clear and compelling message to all.
• Inspire and Motivate: Craft a mission statement that inspires both internal and external audiences. It should motivate your team and communicate the value you bring to customers.
• Avoid Generic Language: While your mission statement should be concise, avoid using generic or clichéd language. Make sure it uniquely reflects your organization’s identity.
• Review and Revise: Once you draft your mission statement, review it carefully. Ensure it accurately represents your organization’s purpose, values, and goals. Revise as needed for clarity and impact.
• Share for Feedback: Share your mission statement with colleagues, stakeholders, and external parties. Gather feedback to ensure that it resonates and effectively communicates your organization’s essence.
• Align with Business Strategy: Your mission statement should align with your overall business strategy. It should guide your decision-making and strategic direction.
• Capture Essence: Like your business purpose, your mission statement should capture the core essence of your organization’s reason for being. It should be a guiding light for your actions and endeavours.

Distinguishing between a mission statement and a vision statement reveals subtle distinctions. Our perspective is that a vision statement tends to cast a more outward gaze. It signifies the potential societal impact that a company’s endeavours can generate.

On the other hand, a mission statement outlines those actions, at least broadly. A company’s mission should seamlessly align with its values, purpose, and vision, all while pledging to undertake specific measures. Gaining insight from various vision statement examples can prove beneficial.

The most famous recognized mission statement is Google’s: “To organize the world’s information and make it universally accessible and useful.” The correlation between Google’s products, services, and its mission is palpable. The organization behind TED Talks embodies a succinct mission statement, yet it resonates seamlessly with their output: “ Spread ideas .”

The American Red Cross’s mission statement beautifully encapsulates hope and altruism: “To prevent and alleviate human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.” Examining company websites serves as a facile means to explore how they articulate their mission. Such insights shed light on industry and consumer priorities.

Purpose statements, visions, missions : these foundational documents epitomize the roadmap a company treads upon. They galvanize and harness a company’s resources, guiding them cohesively toward a shared objective.

Values are built upon the foundation of an organization’s purpose and assume a pivotal role in steering behaviours. They serve as a navigational tool for actions, even amid uncertain circumstances. Especially within the realm of innovation teams, where autonomy is abundant, values emerge as guiding tenets for conduct. As an illustration, if your team upholds the value of financial responsibility, there’s no necessity for a specific policy against costly first-class flights; team members are naturally inclined toward budget-friendly choices to conserve resources.

It plays a pivotal role in shaping an organization’s identity, culture, and actions. They are the fundamental principles and ethical beliefs that guide how the company operates, interacts with stakeholders, and makes decisions. Here’s more information about the significance and impact of values within an organization:

• Foundation of Culture: Values define collective beliefs, attitudes, and behaviours that shape the work environment and interactions among employees.
• Behavioural Guidelines: Values act as behavioural guidelines, providing a framework for decision-making and aligning actions with ethical standards.
• Consistency: Values foster consistency by promoting uniformity in actions and decisions across the organization.
• Ethical Framework: Values establish an ethical framework that ensures integrity and adherence to ethical standards in all interactions.
• Decision-Making: Values act as a moral compass, guiding employees’ decisions to align with organizational principles.
• Employee Engagement: Clear values contribute to employee engagement, creating a stronger connection between employees and the company’s mission.
• Attraction and Retention: Values attract like-minded individuals and play a role in retaining employees who align with the company’s principles.
• Reputation: Values influence an organization’s reputation, enhancing trust and standing through ethical behaviour.
• Differentiation: Values differentiate the company by showcasing its unique approach and priorities, resonating with customers seeking alignment.
• Long-Term Sustainability: Values contribute to sustainability by building lasting relationships with stakeholders and fostering trust.
• Cultural Alignment: Values promote alignment among diverse teams, creating a sense of unity and shared purpose.
• Continuous Improvement: Values drive commitment to continuous improvement, fostering adaptation and growth in changing environments.

Values extend a more explicit framework for actions compared to purpose. They translate our all-encompassing worldview into actionable principles that navigate behaviour. This hierarchy extends to vision —the team’s long-term aspiration, encompassing achievements envisioned for the next five to ten years. Goals, positioned at a more tactical level, function as the means to realize the vision and span from weeks to years. Additionally, our vision and goals dictate the strategic assets and capabilities a company invests in.

3- Crafting a Vision Statement

Crafting a vision statement is a forward-looking endeavour that paints a picture of your organization’s desired future. A well-crafted vision statement encapsulates your aspirations and guides your strategic direction. Here’s how to create an impactful vision statement:

• Envision Success: Imagine what your organization looks like in the future, typically five to ten years ahead. Visualize the achievements, impact, and growth you aim to realize.
• Be Inspirational: A vision statement should inspire and motivate. Use language that evokes enthusiasm and excitement among your team and stakeholders.
• Relate to Purpose: Align your vision statement with your business purpose. Ensure it reflects how your organization plans to fulfill its purpose and make a positive impact.
• Stay Realistic: While aspirational, your vision statement should also be realistic and achievable. It should stretch your organization’s capabilities without becoming unattainable.
• Focus on Outcomes: Highlight the outcomes and changes your organization seeks to create. Describe the improvements you want to bring to your industry, community, or the world.
• Embrace Innovation: If innovation is a core value, express it in your vision statement. Emphasize how you plan to innovate and lead in your field.
• Consider Stakeholders: Craft a vision statement that resonates with stakeholders, from employees to customers to investors. It should reflect their interests and aspirations.
• Be Timeless: Aim for a vision statement that remains relevant over time. While specific goals and strategies may evolve, the overarching vision should endure.
• Link to Strategy: Ensure your vision aligns with your business strategy. It should provide guidance for decision-making and strategic planning.
• Make it Memorable: Craft a statement that’s easy to remember and repeat. A memorable vision statement becomes ingrained in your team’s mindset.
• Test for Alignment: Share your vision statement with various stakeholders and gather feedback. Ensure it resonates with their expectations and aligns with your organization’s identity.
• Revise and Refine: Crafting a vision statement might involve several iterations. Revise and refine until you capture the essence of your organization’s future aspirations.

Business News Daily says that a company’s vision statement should explain the “Why” of a business purpose. In other words, what is the company’s plan for remaking the world?

Every business purpose ought to be crafted in collaboration with its corresponding vision statement. The strength of business purposes is inherently linked to the moral core that supports them. We hold that a company’s presence should be validated by the positive impact generated by the products and services it offers. Effectively, values operate as a social compact within a team, fostering collective engagement in shaping core values. There are no inherently incorrect values; instead, values are tailored to harmonize with the specific requirements of distinct cultural environments .

4- Social Impact in Business Purpose

Business purpose that incorporates a focus on social impact goes beyond financial success to contribute positively to society. This approach acknowledges the role of businesses in addressing social and environmental challenges. Here’s how social impact intersects with business purpose :

• Purposeful Direction: A business with a social impact purpose is driven by a commitment to create meaningful and positive changes in the world. This purpose guides the company’s strategies, decisions, and actions.
• Aligned Initiatives: Socially responsible businesses align their initiatives, products, and services with societal needs. They seek to provide solutions that improve lives, address issues, and contribute to the greater good.
• Sustainable Practices: Businesses with a social impact purpose often adopt sustainable practices to minimize their environmental footprint. They consider the long-term consequences of their operations on the planet.
• Community Engagement: Socially conscious companies actively engage with local communities through initiatives, partnerships, and support. They strive to make a positive impact on the areas where they operate.
• Ethical Standards: Social impact businesses uphold high ethical standards in their interactions with employees, customers, suppliers, and other stakeholders. They prioritize fairness, transparency, and responsible practices.
• Employee Fulfillment: A purpose that emphasizes social impact can enhance employee engagement and satisfaction. Employees are motivated by contributing to a larger cause beyond profit.
• Stakeholder Alignment: Businesses focused on social impact resonate with stakeholders who share similar values. Customers, investors, and partners are drawn to organizations that prioritize social responsibility.
• Innovative Solutions: A social impact purpose encourages innovation to address societal challenges. Companies develop products and services that tackle pressing issues in creative and effective ways.
• Reporting and Transparency: Social impact businesses often report on their efforts and progress, demonstrating accountability to stakeholders and showing the tangible results of their initiatives.
• Long-Term Vision: A commitment to social impact involves a long-term perspective. Businesses aim for sustainable growth that benefits society over time, contributing to a better future.
• Reputation and Trust: Organizations with a strong social impact purpose build a positive reputation and earn the trust of stakeholders. This trust translates into brand loyalty and enduring relationships.
• Global Contribution: Socially conscious businesses recognize that their impact extends beyond borders. They may engage in global initiatives to address widespread issues and contribute to international causes.

5- Stakeholder Consideration in Business Purpose

A purpose-driven business recognizes the importance of its stakeholders and their diverse interests. Stakeholder consideration involves understanding and addressing the needs, expectations, and impacts of various groups that are influenced by the company’s actions. Here’s how stakeholder consideration is integral to a meaningful business purpose :

• Holistic Approach : A purpose-driven business takes a holistic view of its stakeholders, considering not only shareholders but also employees, customers, suppliers, local communities, regulators, and more.
• Needs and Expectations : Understanding stakeholder needs and expectations is crucial. A purposeful business aligns its actions with what matters most to its stakeholders.
• Responsiveness : Businesses with stakeholder consideration are responsive to feedback and concerns. They engage in open communication and adapt their strategies based on stakeholder input.
• Ethical Accountability : Purpose-driven companies uphold ethical standards in their interactions with stakeholders. They prioritize transparency, honesty, and fairness in all engagements.
• Win-Win Mindset : A business purpose that takes stakeholders into account and aims for outcomes that benefit both the company and its stakeholders. This fosters positive relationships and long-term sustainability.
• Social Responsibility : Purposeful businesses recognize their social responsibility to the communities they operate in. They engage in activities that contribute positively to local well-being and development.
• Employee Well-Being : Employees are significant stakeholders. A business purpose that considers employees’ well-being fosters a positive work environment, job satisfaction, and talent retention.
• Customer Focus : Understanding customer needs and preferences is essential. A purpose-driven business delivers products and services that align with customer expectations, building trust and loyalty.
• Environmental Impact: Stakeholder consideration extends to environmental impact. Purposeful businesses adopt eco-friendly practices to reduce negative effects on the environment.
• Innovation Collaboration: Businesses that consider stakeholders collaborate with them on innovative solutions. Stakeholders often provide valuable insights that drive the creation of products and services that meet their needs.
• Regulatory Compliance: Purpose-driven companies ensure compliance with regulations and standards that impact their stakeholders. This builds trust and demonstrates a commitment to responsible practices.
• Long-Term Relationships : Businesses that prioritize stakeholder consideration build strong and lasting relationships. These relationships contribute to the company’s reputation and success over time.

6- Differentiation in business purpose

A strong business purpose is key to differentiation. It helps create a unique position in the market that resonates with customers and stakeholders. Guided by this purpose, companies develop offerings that stand out, going beyond price-focused competition.

Porter’s generic strategies highlight Differentiation, as a strong purpose enhances differentiation strategy. For instance, a purpose centered on sustainability can be integrated through eco-friendly offerings that attract environmentally-conscious customers.

By embedding differentiation into its purpose, a company strives to stand out in the market and build a distinct brand image. This purpose-driven differentiation involves:

• Distinct Identity: A differentiated business purpose gives a company a clear identity that separates it from competitors. It showcases the company’s unique values, goals, and aspirations, creating a strong impression.
• Customer Connection: A purpose that resonates with customers on a personal level fosters a deeper connection. It goes beyond products or services, addressing customer needs and desires at a fundamental level.
• Innovation: A purpose that emphasizes innovation sets the stage for novel solutions. It encourages the company to constantly evolve and create products or services that address challenges in creative ways.
• Long-Term Sustainability: Purpose-driven differentiation contributes to long-term sustainability. When customers align with a company’s purpose, they are more likely to remain loyal, even in the face of short-term market shifts.
• Employee Engagement: Differentiation in purpose creates an engaging environment for employees. They become part of a meaningful journey, working towards a unique mission that sets their company apart.
• Brand Loyalty: A distinct business purpose cultivates brand loyalty. Customers who connect with the purpose are more likely to remain loyal and become advocates for the brand.
• Market Resilience: Purpose-driven differentiation helps a company weather market changes. Customers who identify with the purpose are less likely to switch to competitors, providing stability even in turbulent times.
• Strategic Direction: A differentiated purpose serves as a North Star for decision-making. It guides strategic choices that align with the company’s unique identity and resonates with stakeholders.

7- Employee Engagement in business strategy

Employee engagement within a business purpose signifies creating a work environment where employees feel deeply connected to the company’s mission, values, and goals. It goes beyond job satisfaction and involves fostering a sense of purpose, ownership, and commitment among employees. When employee engagement is aligned with the business purpose, several key benefits emerge:

• Aligned Efforts: Engaged employees understand and embrace the business purpose . They align their efforts with the company’s overarching goals, working together towards a common mission.
• Shared Identity: A strong business purpose creates a sense of identity and belonging among employees. Engaged employees see themselves as integral parts of a meaningful journey, leading to a more cohesive and united team.
• Intrinsic Motivation: Engaged employees are intrinsically motivated. They find meaning and satisfaction in contributing to a purpose they believe in, which leads to higher job enthusiasm and motivation.
• Higher Performance: Engaged employees consistently perform at their best. Their dedication and sense of ownership drive them to excel in their roles, positively impacting overall company performance.
• Innovation: When employees feel engaged with the business purpose , they are more likely to think creatively and contribute innovative ideas that align with the company’s mission.
• Improved Collaboration: Engaged employees are more likely to collaborate effectively. They share knowledge, ideas, and support, fostering a collaborative work environment.
• Higher Retention: Employees who feel engaged are more likely to stay with the company. They are invested in the purpose and values, leading to lower turnover rates.
• Enhanced Adaptability: Engaged employees are more adaptable to change. They are willing to embrace new strategies and directions that align with the business purpose .
• Positive Culture: A business purpose that resonates with employees contributes to a positive company culture. Engaged employees embody the purpose, of influencing others and promoting a sense of positivity.
• Employee Advocacy: Engaged employees become advocates for the company. They speak positively about the organization, both internally and externally, contributing to a strong employer brand.
• Customer Satisfaction: Engaged employees provide better customer service. Their commitment to the business purpose translates into delivering superior experiences to customers.
• Long-Term Growth: Engaged employees are more likely to invest in their professional growth within the company. They see a future aligned with the purpose and are more committed to their career development.

8- Adaptability for business purposes

Adaptability within a business purpose involves crafting a purpose that enables the organization to respond effectively to changes, challenges, and evolving market dynamics. An adaptable business purpose recognizes that the world is constantly changing and seeks to remain relevant and impactful despite uncertainties. Here’s how adaptability is integrated into a business purpose:

• Change Readiness: An adaptable business purpose acknowledges that change is inevitable. It emphasizes the need to be prepared and proactive in responding to shifts in the industry, technology, and customer preferences.
• Future-Focused: An adaptable purpose is forward-thinking, anticipating trends and developments that might impact the business. It ensures the company is poised to capitalize on emerging opportunities and mitigate potential risks.
• Continuous Improvement: An adaptable purpose values ongoing improvement. It encourages a culture of learning, experimentation, and innovation to refine products, services, and processes over time.
• Resilience: An adaptable purpose builds resilience in the face of setbacks. It fosters the mindset that challenges are opportunities for growth and learning, rather than insurmountable obstacles.
• Customer-Centricity: An adaptable purpose centers around customer needs and preferences. It encourages the organization to evolve and tailor offerings to stay aligned with changing customer expectations.
• Flexibility: An adaptable purpose allows for flexibility in strategies and approaches. It acknowledges that the path to achieving the purpose might require adjustments and pivots based on new information.
• Agility: An adaptable purpose promotes organizational agility. It encourages the ability to quickly respond to changes, make decisions, and reallocate resources as needed.
• Inclusive Decision-Making: An adaptable purpose involves diverse stakeholders in decision-making. It recognizes that different perspectives enhance the ability to navigate uncertainty effectively.
• Scenario Planning: An adaptable purpose incorporates scenario planning to anticipate various future scenarios. This helps the organization be better prepared to handle different outcomes.
• Employee Empowerment: An adaptable purpose empowers employees to contribute to change initiatives. It fosters a culture where employees feel comfortable suggesting improvements and driving innovation.
• Open Communication: An adaptable purpose emphasizes transparent and open communication. This facilitates the exchange of information and ideas, helping the organization navigate change more effectively.
• Long-Term Vision: An adaptable purpose maintains a long-term vision while being flexible in short-term strategies. It provides a sense of direction while allowing adjustments to achieve that vision.

Benefits of Creating Business Purpose

Creating a business purpose offers a range of benefits that can positively impact your organization, its stakeholders, and the broader community. Here are some key advantages:

• Clear Direction: A well-defined purpose provides a clear sense of direction for your organization. It helps align everyone’s efforts toward a common goal, reducing ambiguity and enhancing focus.
• Inspiration and Motivation: A compelling purpose inspires employees, customers, and stakeholders. It fosters a sense of motivation and passion, driving increased engagement and commitment.
• Differentiation: A distinct purpose sets you apart from competitors. It helps you stand out by offering a unique value proposition that resonates with customers and stakeholders.
• Employee Engagement: A meaningful purpose gives employees a sense of meaning and fulfillment in their work. It enhances job satisfaction, morale, and overall well-being.
• Strategic Decision-Making: A clear purpose guides strategic decisions. It ensures that every choice, from product development to partnerships, is aligned with your core identity and values.
• Cohesive Culture: A purpose-driven organization often develops a strong and cohesive company culture. It creates a shared sense of identity and values among employees.
• Customer Loyalty: When customers resonate with your purpose, they’re more likely to become loyal advocates. They feel a deeper connection to your brand beyond just products or services.
• Innovation: A purpose can fuel innovation by inspiring creative solutions to address challenges that align with your purpose. It encourages thinking outside the box.
• Community Impact: A purpose that focuses on social responsibility and positive impact contributes to the well-being of local communities and the broader society.
• Attracting Talent: A purpose-driven organization attracts like-minded individuals who align with your values. It helps you recruit and retain employees who share your vision.
• Long-Term Sustainability: Organizations with a clear purpose tend to have a longer-term perspective. They prioritize sustainability and responsible practices.
• Positive Reputation: A purpose that aligns with positive societal impact enhances your reputation. It builds trust and goodwill among customers, partners, and stakeholders.
• Adaptability: A strong purpose can guide your organization through changes and challenges. It helps you adapt while staying true to your core identity.
• Measurable Goals: Your purpose can guide the setting of measurable goals that reflect your desired impact. It provides a framework for tracking progress.
• Overall Alignment: A well-crafted purpose aligns your organization’s various elements, from mission and values to strategy and operations, creating a harmonious whole.

And a profound impact of thoroughly comprehending your business purpose is the ability to articulate your intentions clearly. Purpose statements play a pivotal role in charting the company’s trajectory by highlighting priorities and forging a guided path ahead. Furthermore, purpose statements steer managerial decisions in alignment with the business’s aspirations.

“We intend to have success,” of course every manager says. But what steps will be taken to further that success? Answering the following questions as you develop clear goals for your business:

• What constitutes your ultimate Business Intention? What pinnacle achievement do you ultimately seek?
• What fuels your motivation? (elaborating on the legacy you aim to leave behind)
• What is your Vision? (illustrating the destination you aspire to reach)
• What encompass your key objectives? (outlining tangible targets you aspire to accomplish)
• How are your actions synchronized with your business purpose? Does your company’s purpose statement resonate with how the business generates revenue?

In the world of digital transformation, businesses usually define their intentions in a few specific ways. Consider these examples:

• Leveraging new technology
• Preparing to unleash innovations
• Recreating your value proposition
• Developing new products

Business Purpose Examples

• Google: Google’s purpose emphasizes the democratization of information. Their aim is to organize the vast amount of information available online and make it universally accessible and useful. This purpose underlies their search engine, but it also guides their development of various tools, technologies, and services that empower people with knowledge.
• Tesla: Tesla’s purpose is centred around sustainability and reducing dependence on fossil fuels. By accelerating the transition to sustainable energy, they’re not only creating electric vehicles but also pushing for advancements in energy storage and solar power, contributing to a cleaner future.
• Patagonia: Patagonia’s purpose goes beyond profitability. They aim to produce high-quality products while minimizing environmental harm. Their commitment to environmental activism and encouraging responsible consumption is a testament to their purpose.
• Warby Parker: Warby Parker’s purpose combines affordability with social consciousness. By offering affordable eyewear and following a “buy a pair, give a pair” model, they’re addressing both the accessibility of eyewear and making a positive impact in underserved communities.
• Airbnb: Airbnb’s purpose focuses on fostering connections and a sense of belonging. Their platform allows people to experience local culture while providing hosts an opportunity to earn income. This sense of community aligns with their purpose of enabling people to belong anywhere.

Integration of Business Model Canvas and Business Purpose

The Business Model Canvas is a powerful tool that complements and interacts with a company’s business purpose. It provides a visual framework for understanding how various components of a business work together to create and deliver value to customers, while the business purpose defines the fundamental reason for the company’s existence. These two elements are intricately connected, with each informing and influencing the other.

Your download is now available!

You can now access the complete Business Model Canvas Package, including a full presentation, related models and instructions for use.

The UNITE Business Model Canvas

A clear business purpose serves as the North Star that guides decisions made across the Business Model Canvas . It shapes the key building blocks of the canvas, including customer segments , value propositions , channels , customer relationships, and more. For instance, a purpose-driven company aiming to provide eco-friendly products will reflect this commitment in its customer segments and value propositions, tailoring its canvas to cater to environmentally conscious consumers.

And, Business Strategy outlines how a company plans to achieve its goals, and these goals should be directly linked to the overarching purpose. A purpose-driven organization’s strategy might involve sustainable sourcing, ethical production, and responsible marketing practices. These strategies then influence components of the Business Model Canvas, such as key partnerships, resources, and revenue streams.

Furthermore, the business goals set within the business strategy act as milestones that reflect the realization of the business purpose. These goals, whether they involve market share growth, societal impact, or financial success, guide the operational choices captured in the Business Model Canvas. The canvas, in turn, provides a tangible way to visualize how these goals translate into actionable components, enabling the alignment of resources, processes, and activities toward achieving the desired outcomes.

Adding to this framework, the “Jobs to be Done ” concept addresses the fundamental needs that products or services fulfill. Integrating this approach enhances the alignment between canvas components and purpose. This integration not only enhances customer-centricity but also strengthens the alignment between canvas components and the overarching business purpose .

Finding Your Business Purpose

Finding your business purpose is a transformative process that involves deep introspection and strategic exploration. It’s about discovering the fundamental reason for your organization’s existence and the positive impact it aspires to make.

What problem do you want to solve? Do you want to spread brilliant ideas all over the globe, like TED ?, Make transportation as reliable as running water, like Uber? Or help humankind reach its potential, like the non-profit organization AIESEC? Or do you just want to build a more fuel-efficient car? If you said the latter, your team has a purpose. If you’re more drawn to the former, you have a Massive Transformative Purpose (MTP).

The UNITE Business Intentions

The UNITE Business Intentions model underscores the vital significance of aligning a company’s business purpose with broader societal and environmental considerations. This approach places a strong emphasis on integrating ethical and responsible practices into the core of a business’s purpose. It serves as your compass for defining your Business Intention – the pivotal strategic goals that will guide your entire innovation project. Precisely articulating your business intentions is of utmost importance; otherwise, you risk losing that essential guiding North Star. You can download it now.

You can now access the complete Business Intentions Package, including a full presentation, related models and instructions for use.

A Massive Transformative Purpose (MTP) triggers a fundamental shift in perspective by addressing a global issue, aiming to contribute to its resolution and create a distinct, potentially improved future. Echoing the words of Peter Diamandis, “Find something you would die for, and live for it.” An MTP holds the potential to foster exponential growth by instilling an entirely new mindset and facilitating customers in aligning their personal significance with your purpose. Indeed, in their book “ Exponential Organizations ,” Salim Ismail, Michael Malone, and Yuri van Geest contend, “An exponential organization simply doesn’t work if not driven by a Massive Transformative Purpose.”

Every decision-making process is subjected to daily scrutiny to ensure it authentically represents the organization’s essence. However, even the purpose itself requires periodic examination. Thus, even an MTP is subject to constructive evaluation from time to time, to gauge its continued relevance. As serial entrepreneur Marc Degen, a contributor to this book aptly phrases it:

“Change is standard, so you better accept what’s happening, adapt, and enjoy the ride!” Marc Degen

Your company should possess a single, well-defined purpose statement that serves as a guiding force, influencing collective decisions. This statement elucidates the underlying reason for the company’s existence.

It’s pivotal to distinguish the business purpose , and this differentiation from your company’s vision or mission holds significance. While the latter terms are indispensable for your business’s triumph, they carry distinct legal implications from the business purpose.

Steps of Creating a Business Purpose

Developing a meaningful business purpose is a deliberate and strategic undertaking that extends beyond the creation of a simple declaration. It demands a profound grasp of your organization’s values, ambitions, and its position within the larger scope. An intricately crafted purpose acts as a navigational guide, steering your strategic choices, igniting inventive thinking, and nurturing a collective identity among stakeholders. The following table of steps outlines a systematic approach to crafting a purpose that genuinely connects with your organization and those it serves:

Thinking Through a Business Purpose Statement

In the ever-evolving landscape of business, the question of whether to prioritize stability or adaptability becomes crucial. Is your organization more inclined towards being a stable entity or does it lean towards embracing change and innovation? Does your structure foster a culture of continuous learning or does it value permanence and security above all? Moreover, how does your organization perceive change – as a necessary part of growth or as a potential threat to the established order?

Regardless of where your organization currently stands, the imperative for all is to reassess operational approaches, organizational structures, and the business environment that cultivates change. It’s vital to create a business ecosystem where change isn’t seen as disruptive but as a catalyst for progress. A successful company’s purpose transcends profit-seeking and shareholder interests; it encompasses a broader vision that speaks to societal needs and positive impact.

Deliberating upon a business purpose statement involves a thoughtful contemplation aimed at distilling the essence of your organization’s reason for existence. This process goes beyond mere words and delves into the core values, aspirations, and impact your business seeks to make. A well-crafted purpose statement serves as a beacon, guiding your actions, shaping your identity, and resonating with stakeholders. Below are the key considerations to navigate this introspective journey:

• Reflect on Values: Begin by reflecting on the core values that underpin your organization. Identify the principles that guide your decisions, define your culture, and differentiate you from others.
• Clarify Aspirations: Consider the long-term aspirations of your business. Envision the positive changes you aim to bring to your industry, community, or the world at large.
• Align with Impact: Think about the impact you wish to create through your products, services, or initiatives. How do you intend to improve lives, solve problems, or contribute positively to society?
• Engage Stakeholders: Involve your stakeholders in the process. Understand their expectations, concerns, and what they value most about your organization.
• Embrace Uniqueness: Embrace what sets your organization apart. How does your uniqueness contribute to the greater good? How can you leverage it for a meaningful purpose?
• Unify Passion and Expertise: Explore the intersection of your team’s passion and expertise. How can these strengths be harnessed to fulfill a purpose that aligns with your values?
• Visualize Impact: Envision the world or industry as it would be if your purpose were fully realized. What positive changes would you witness?
• Craft Concisely: Condense your insights into a concise statement that captures the essence of your purpose. Make it emotionally resonant, impactful, and reflective of your values and aspirations.
• Test for Resonance: Share the statement with diverse stakeholders and gather their feedback. Does it resonate with them? Does it capture the essence of your organization’s identity?
• Ensure Alignment: Ensure that the purpose statement aligns with your organization’s goals, actions, and intended impact. It should serve as a touchstone for decisions and initiatives.
• Foster Commitment: Communicate the purpose statement widely within your organization. Cultivate a sense of commitment and ownership among employees, encouraging them to embody the purpose.
• Evolve and Adapt: Recognize that your purpose statement can evolve as your organization grows and circumstances change. Regularly review it to ensure alignment with your trajectory and values.

A common pitfall to avoid is viewing innovation and digital transformation as destinations themselves. These terms have been echoing since the early days of the dot-com era (and crash!), It’s imperative to steer clear of the common mistake many businesses make: understanding that innovation and transformation are means to an end, not ends in themselves. The same principle holds true for technology. All of these are tools employed to achieve a comprehensive Business Intention.

To change requires a belief in one’s own ability to be able to carry out that very change. Large corporations often feel that they lag behind start-ups on aspects related to innovation, for example, speed, agility, costs, etc. But the more we have worked with clients and compared large organizations to start-ups, the more we are convinced that scale if properly exploited , can actually be an advantage, not a liability for innovation.

Sizeable enterprises possess a multitude of assets and capabilities in their core and distinct domains, empowering them to stand out in the market and scale innovations beyond the scope of any startup. It’s our collective responsibility to help them uncover and leverage these strengths. While large organizations may appear rigid today, it’s important to recognize that this rigidity isn’t inherent but rather a product of design. If an organization seeks different outcomes, it must alter its design. This transformation is entirely achievable

Final Thoughts

That’s a lot. But then again, writing a company’s governing documents is a task not to be taken lightly.

If you’d like help in understanding how your business purpose is or isn’t setting you up for success, we’d love to talk to you. We’ll help connect people who understand business purposes at work to you so your vision and intentions are clear.

You’ll find contact information elsewhere on our website.

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How to Build a Product Roadmap Based on a Business Model Canvas

Could you list all of the key building blocks you need to develop, manage, maintain, market, and sell a product on a single sheet of paper? With the business model canvas, you can! Using the business model canvas approach is a great way to force yourself to focus on the most strategically important elements of your product. As the name suggests, the typical use case for this tool is to outline the fundamental building blocks of a business, but it also can work really well for a product.

Today we’ll show you how the business model canvas works and how you can use it to come up with a high-level product strategy.

What is a Business Model Canvas?

As you can see from the sample example below (thanks, Strategyzer.com), a business model canvas is a one-page summary describing the high-level strategic details needed to get a business (or product) successfully to market.

The categories or buckets contained in a canvas can be customized. But most will look similar to the one here—covering such key areas as:

• The product’s value propositions (what it does and promises)
• Customer segments (who it’s for)
• Key activities (the steps the team must complete to make it successful)
• Key resources (what personnel, tools, and budget the team will have access to)
• Channels (how the organization will market and sell it)
• Customer relationships (how the team will support and work with its customer base)
• Key partners (how third parties will fit into the plan)
• Cost structure (what it costs to build the product as well as how to sell and support it)
• Revenue streams (how the product will make money)

If you think about it, that’s a fairly comprehensive set of building blocks you’ll need to think through for your product before you begin developing it. There will certainly be additional factors that’ll affect your strategy, but if you can fill in these high-level details—which, as you can see, should fit comfortably on a single page—you’ll have a useful strategic guide for developing your product roadmap.

Why Should I Use a Business Model Canvas to Develop a Product Roadmap?

Okay, but why? What’s the benefit of building a business model canvas (or the, even more, stripped-down variation, the lean canvas) to guide my product roadmap ?

There are plenty of reasons. But simply put, you can think of a business model canvas as a mission statement for your product roadmap. It’s a handy reference you can refer to, to make sure your roadmap always reflects all the strategic elements needed for your product’s success.

Tweet This: “Think of a business model canvas as a mission statement for your product roadmap.”

Our co-founder Jim Semick has a couple of great short videos explaining the business model canvas concept, which you can check out in the player below.

As Jim explains, here are a few of the benefits of using a business model canvas to think through product strategies:

1. You can use a business model canvas to roadmap quickly.

You can use this canvas approach in just a few hours (and as Jim says, you can even do it with sticky-notes).

This way, rather than trying to write out every detail about your product plan beforehand, you can just document the highlights—and then you can get rolling translating the canvas into your product roadmap.

2. A business model canvas will be more agile.

One problem with the old structure of documenting a business model—the traditional business plan—was that it was almost always inaccurate as soon as the author finished drafting it.

These meaty plans included detailed cost estimates, revenue projections going years into the future, and long-term plans for growing the staff. How could any of that remain accurate for long?

In product terms, you can think of the business plan as resembling an MRD (Market Requirements Document). It’s long, detailed, and probably mostly untrue by the time it’s done.

But because you can put a canvas together so quickly, it will much more accurately reflect your strategic thinking and your company’s current reality. And if things change, it’ll be easier than a long and detailed plan to adjust. This brings us to Jim’s third benefit…

3. Business model canvas roadmaps allow you to pivot as needed.

If you build a business model canvas to guide your business roadmap , and something happens that forces you to re-prioritize or pivot your product , it will be a lot easier to update this short, high-level document than it would be if you had some monster MRD or business plan to tear apart and edit.

With a one-page business model canvas acting as the strategic undergirding for your roadmap, you’ll always be able to quickly spot any items or plans that need updating whenever priorities change or new realities demand that you adjust your approach.

How Can I Use A Business Model Canvas to Guide My Product Roadmap?

The alexa example.

Let’s talk through a hypothetical example, using Amazon’s Echo device (“Alexa”) as our guide.

Imagine that as they were talking through what belonged in the “Revenue Streams” bucket of the business model canvas, Amazon’s Echo team came up with three sources of revenue to start with:

1) Selling Echo devices.

2) Using the device to sell other stuff as customers ask it to connect to the Amazon marketplace. (“Alexa, please add laundry detergent pods to my shopping cart.”)

3) Licensing Echo’s proprietary speech-recognition technology to other businesses.

Now, if the Echo product team put these on their business model canvas, they’d know that they need to make room for budget, time, and resources on their product roadmap for all of these revenue streams.

Another Hypothetical Example of the Business Model Canvas: Channels

Or think about the Channels bucket in the business model canvas. If your team was building out a canvas, maybe you’d have several ideas for reaching customers:

1) The in-house sales team. 2) Affiliate partners. 3) Word-of-mouth advertising from users.

It’s easy to write. But how are you going to translate that “word-of-mouth” strategy into an actual plan?

Maybe you’ll need to budget time and resources for developing things right into your product that make it easier for users to share their experiences with friends, such as a handy tool to help them tweet about it. Maybe you’ll even want to include an “Invite a friend” feature that lets users easier send a trial license to friends, or a couponing feature that offers some reward to a user who brings in two more users.

The point is, your business model canvas can serve as a great strategic reminder of the things you’ve determined are important enough to make it onto your product roadmap .

So you can always look back and see immediately—it’s just one page, after all—if you’re still working on all of the essential elements of your product, or if you’ve inadvertently strayed from them and gotten lost in the wrong details.

That’s why we’re big proponents of the business model canvas approach to guiding your product roadmap .

Do you have an opinion about using the business model canvas approach for developing and documenting your product’s strategy? Feel free to share them in the comments section.

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The Business Model Canvas

What is the business model canvas.

The business model canvas is a tool designers use to map out a business or product’s key actors, activities and resources, the value proposition for target customers, customer relationships, channels involved and financial matters. It gives an overview to help identify requirements to deliver the service and more.

“A business model describes the rationale of how an organization creates, delivers, and captures value.” — Alexander Osterwalder, Co-creator of the Business Model Canvas  

Learn about the business model canvas and how it helps in design.

• Transcript loading…

The Business Model Canvas – Flexible Chart, Early-Warning System and More 

In service design , two tools are essential to use early in your design process: the business model canvas and the value proposition canvas . You can use the business model canvas to build an overview of changes to be made to an existing business (e.g., a merger) or of a totally new business opportunity or market gap . At the start of your design process, it’s vital to map out the business model of your service to see how it will fit into the marketplace. You’ll also need to ensure what you propose can bring maximum value to both your customers and business, and keep doing so in terms of customer retention, profitability and more.

To gain the most accurate vision of a proposed product or service, it’s essential to understand all the components and dynamics of not only the customer experience but also the service as a whole ecosystem . This ecosystem contains all the channels and touchpoints that must work together to deliver and sustain maximum value to the customer.

This canvas gives you several important advantages, namely these:

It’s collaborative – so you can bring the various partners together on the same page to generate and analyze ideas, and have an early testing ground for concepts before you advance to service staging a prototype.

It’s human-centered – so you can keep close track on how to create and maximize value for customers as well as stakeholders and other partners.

It makes it easier to collect rich data – if you have a clear purpose and strategy in mind. 

A business model canvas typically contains 10 boxes:

Key Partners – The people who will help you fulfill the key activities, using the key resources. 

Key Activities – Those vital actions that go into the everyday business to get things done; these are all the activities needed to realize and maintain the value proposition, and to power everything else involved.

Key Resources – The tools needed to get those things done, stretching across all areas the canvas covers to include, for example, customer retention.

Value Proposition – The item you think will create value for your customer: e.g., a new idea, a price drop. This is a summary of what your business will deliver to customers, and feeds into the value proposition canvas, the tool you’ll use to expand this.

Customer Relationships – Where you envision the relationship each customer segment expects: e.g., customer acquisition, retention and upselling (i.e., How do you get customers? How do you keep customers? How do you continue to create value for them?).

(Note: boxes 5 and 4 are closely linked as everything you do revolves around retaining the customer and considering the customer lifecycle.)

Customer Segments – Your most important customers (e.g., seniors); consider the value of personas here.

Channels – How you deliver the value proposition. Will it be online, through physical means or a combination? Here, you identify which channels are the best (both desirable for customers as well as cost-efficient and cost-effective for the brand).

Cost Structure – Here you find the most essential cost drivers. This allows you to consider the return on investment (ROI).

Revenue Streams – Where you find potential revenue sources (e.g., advertising). 

Sustainability – How sustainable your offering is overall, to the environment, to the social good, etc.

© Strategyzer AG, modified, CC-BY-SA-3.0

How to Build a Business Model Canvas

For the best results, follow these guidelines and aim to fill in all the gaps, looking out for cause-and-effect relationships that run between boxes/throughout:

Complete the top seven boxes (Key Partners to Customer Segments) – using all the information you can gather from your research.

Complete the next boxes:  

Cost Structure – Determine the cost drivers from the Key Partners, Activities and Resources boxes; and

Revenue Streams – Determine these from the Customer Relationships, Customer Segments and Channels boxes.

Once you have established these, you can work to estimate them in monetary terms.

Complete the Sustainability box – according to the insights you’ve found.  

Here’s an example of a business model canvas as a work in progress:

© Interaction Design Foundation, CC BY-NC-SA 3.0

Overall, remember your canvas is a flexible tool. It’s also a living document that you can revisit and use to find the most effective alternatives. With a clear sense of goals, a keen eye for detail and ear for input, and a readiness to refine this canvas, you can use it to fine-tune the best service prototype every time.

Learn More about The Business Model Canvas

Take our Service Design course , featuring a template for service blueprints.

Read this example-rich piece by experienced strategy designer Justin Lokitz for tips on using the business model canvas .

Find some additional tips on how to make the most of your business model canvas here .

Literature on the Business Model Canvas

Here’s the entire UX literature on the Business Model Canvas by the Interaction Design Foundation, collated in one place:

Learn more about the Business Model Canvas

Take a deep dive into Business Model Canvas with our course Service Design: How to Design Integrated Service Experiences .

Services are everywhere! When you get a new passport, order a pizza or make a reservation on AirBnB, you're engaging with services. How those services are designed is crucial to whether they provide a pleasant experience or an exasperating one. The experience of a service is essential to its success or failure no matter if your goal is to gain and retain customers for your app or to design an efficient waiting system for a doctor’s office.

In a service design process, you use an in-depth understanding of the business and its customers to ensure that all the touchpoints of your service are perfect and, just as importantly, that your organization can deliver a great service experience every time . It’s not just about designing the customer interactions; you also need to design the entire ecosystem surrounding those interactions.

In this course, you’ll learn how to go through a robust service design process and which methods to use at each step along the way. You’ll also learn how to create a service design culture in your organization and set up a service design team . We’ll provide you with lots of case studies to learn from as well as interviews with top designers in the field. For each practical method, you’ll get downloadable templates that guide you on how to use the methods in your own work.

This course contains a series of practical exercises that build on one another to create a complete service design project . The exercises are optional, but you’ll get invaluable hands-on experience with the methods you encounter in this course if you complete them, because they will teach you to take your first steps as a service designer. What’s equally important is that you can use your work as a case study for your portfolio to showcase your abilities to future employers! A portfolio is essential if you want to step into or move ahead in a career in service design.

Your primary instructor in the course is Frank Spillers . Frank is CXO of award-winning design agency Experience Dynamics and a service design expert who has consulted with companies all over the world. Much of the written learning material also comes from John Zimmerman and Jodi Forlizzi , both Professors in Human-Computer Interaction at Carnegie Mellon University and highly influential in establishing design research as we know it today.

You’ll earn a verifiable and industry-trusted Course Certificate once you complete the course. You can highlight it on your resume, CV, LinkedIn profile or on your website.

All open-source articles on the Business Model Canvas

Service design - design is not just for products.

The Relationship Between Visual Design and User Experience Design

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Purpose: Shifting from why to how

Only 7 percent of Fortune 500 CEOs believe their companies should “mainly focus on making profits and not be distracted by social goals.” 1 Alan Murray, “The 2019 Fortune 500 CEO survey results are in,” Fortune, May 16, 2019, fortune.com. And with good reason. While shareholder capitalism has catalyzed enormous progress, it also has struggled to address deeply vexing issues such as climate change and income inequality—or, looking forward, the employment implications of artificial intelligence.

But where do we go from here? How do we deliver a sense of purpose across a wide range of environmental, social, and governance (ESG) priorities? Doing so means moving from business as usual to a less traveled path that may feel like “painting outside the lines.” Are we going too far beyond our core mandate? Does it mean we’ll lose focus on bottom-line results? Will transparency expose painful tensions better left unexamined? Will our boards, management teams, employees, and stakeholders want to follow us, or will they think we have “lost the plot”? There are no easy answers to these questions; corporate engagement is messy, and pitfalls, including criticism from skeptical stakeholders, abound.

Yet when companies fully leverage their scale to benefit society, the impact can be extraordinary. The power of purpose is evident as the world fights the urgent threat of the COVID-19 pandemic, with a number of companies doubling down on their purpose, at the very time stakeholders need it the most (for more, see “ Demonstrating corporate purpose in the time of coronavirus ”). Business also has an opportunity, and an obligation, to engage on the urgent needs of our planet, where waiting for governments and nongovernmental organizations to act on their own through traditional means such as regulation and community engagement carries risk (for more, see “ Confronting climate risk ”).

Fortunately, a “how to” playbook is starting to emerge as a growing number of companies lead. In this article, we try to distill some inspiring steps taken by forward-looking companies. In doing so, we don’t pretend to have all the answers. What we present here is some early thinking about the road ahead from our research and engagement with clients around the world. We hope this will help you wherever you are on your journey.

Confronting the purpose gap

The August 2019 Business Roundtable Statement, which elevated stakeholder interests to the same level as shareholders’ interests, represents both a reappraisal of purpose and a reflection of tensions that have been boiling over. Customers are boycotting the products of companies whose values they view as contrary to their own. Investors are migrating to ESG funds. And the majority of employees in the corporate world feel “disengaged”; they are agitating for decisions and behaviors that they can be proud to stand behind and gravitating toward companies that have a clear, unequivocal, and positive impact on the world.

Organizations turning a blind eye will face inevitable blowback. In just the past year, companies have witnessed hundreds of thousands of employees walking out over climate issues and recurrent high-profile petitions about business practices that have raised the ire of socially conscious interest groups. Digital platforms are powerful amplifiers. As historian Niall Ferguson warns in a recent McKinsey Quarterly interview , “If your company has not been on the receiving end of a Twitter storm, then don’t worry, it soon will be.”

Despite all this, the potential is extraordinary for business to serve as a force for good. Corporate social responsibility (CSR) initiatives remain a powerful lever. We also see burgeoning opportunities for businesses to contribute that extend beyond traditional CSR—such as deploying digital tools and advanced analytics to address global challenges, as well as mobilizing diverse ecosystems of players to pursue goals that no individual business (or government) could realize on its own. To take just one example, apparel giants such as H&M, Kering, Nike, and PVH have joined forces to create Global Fashion Agenda, a not-for-profit organization that promotes sustainable fashion , from the efficient use of resources and secure work environments to closed-loop recycling. Often, though, these opportunities feel tangential. Many executives tell us they feel their own companies do great CSR work but wish those efforts could extend into the core, adding meaning to the day-to-day experience of their employees and themselves.

We’d suggest that the disconnects between public perceptions of business and its potential for good, or between employees’ desire for meaning at work versus what they experience, reflect a purpose gap. In a recent McKinsey survey comprising a representative sample of more than 1,000 participants from US companies, 82 percent affirmed the importance of purpose, but only 42 percent reported that their company’s stated “purpose” had much effect (exhibit). That shouldn’t be surprising. Many companies’ purpose statements are so generic that they do little to challenge business as usual, and others don’t emphasize the concerns of employees. Contributing to society and creating meaningful work, the top two priorities of employees in our survey, are the focus of just 21 percent and 11 percent of purpose statements, respectively.

Chart: Employees feel that purpose is important—but many say their companies don't have one, let alone one that makes a difference

Chart summary.

• 82% of respondents reported that it is important to have a purpose, while 18% were neutral, disagreed, or strongly disagreed.
• 72% of respondents reported that purpose should receive more weight than profit, while 28% were neutral, disagreed, or strongly disagreed.
• 62% of respondents reported that their organizations have a purpose statement, while 38% were neutral, disagreed, or strongly disagreed.
• Only 42% respondents reported that their organizations' purpose statements drive impact, 1 while 58% were neutral, disagreed, or strongly disagreed.

Note: segments displayed in gray reflect respondents who were neutral, disagreed, or strongly disagreed.

1 Impact score, which is based on subset of respondents reporting presence of organizational purpose, derived on basis of responses to questions about achievements of purpose and positive change associated with purpose.

Source: McKinsey Organizational Purpose Survey of 1,214 managers and frontline employees at US companies, October 2019

We’d further suggest that there is a frustratingly simple reason why business leaders have struggled to square all these circles with coherent statements and credible actions: it’s difficult to solve, simultaneously, for the interests of employees, communities, suppliers, the environment, customers, and shareholders. Tensions and trade-offs abound as we strive to align our business and societal goals; to integrate that identity into the heart of our organizations; and to deliver on our purpose, including its measurement, management, and communication.

Placing purpose at the core

What’s needed is relatively clear: it’s deep reflection on your corporate identity—what you really stand for—which may well lead to material changes in your strategy and even your governance (such as your status as a public company, a private company, or a public-benefit corporation).

But how do you pull this off? What are the mechanics of getting it done and making it real? How do you embrace challenging trade-offs and uncomfortable truths that, if unaddressed, are likely to perpetuate the purpose gap and give rise to rhetoric that’s not accompanied by credible action?

We don’t yet have complete answers to these difficult questions. One thing we are convinced of, though, is that the only way to bridge a purpose gap is to embed your reflection, exploration, discussion, and action in the heart of your business and your organization. We describe here a necessary precondition for any of that, and then four steps for moving ahead: sizing up where you are, including your vulnerabilities; clarifying how your purpose connects with your company’s “superpower”; organizing with purpose in mind; and measuring and managing purpose so that it really becomes part of your core DNA.

Employees are agitating for decisions and behaviors that they can be proud to stand behind and gravitating toward companies that have a clear, unequivocal, and positive impact on the world.

Understand that purpose is personal and emotional

The precursor to action is embracing the emotion and complexity associated with hard work on purpose. There is no simple, input/output equation, which makes it hard to address purpose in the context of prevailing shareholder models. Purpose also is deeply intertwined with the people who make up an organization and who, like all of us, are messy at times. Founder-driven companies, such as Starbucks, sometimes find it easier to put purpose at their core, because their leaders connect with and shape purpose emotionally as well as logically. The rest of us need to make this personal, too.

1. Get real: Create a baseline from your stakeholders’ perspectives

Connecting purpose with the heart of your company means reappraising your core: the strategy you pursue, the operations driving you forward, and the organization itself. That’s hard work, and you can’t do it without deep engagement from your top team, employees, and broader stakeholders. But there’s no substitute. Your stakeholders care about the concrete consequences of your lived purpose, not the new phrase at the start of your annual report.

Questioning purpose

Purpose defines our core reason for being and the positive impact we have on the world. It shapes our strategy, inspires our people, engages our customers and community, steers choices at moments of truth, and is fully embedded in our culture. Living purpose authentically should feel uncomfortable and new. It may mean surfacing fresh questions in meetings, engaging in difficult conversations about some of our businesses, and reevaluating our partners based on a clear-eyed view of their practices.

Whether we are reappraising an existing purpose or designing one for the first time, we need to wrestle with challenging questions such as the ones below. These questions can help test whether we are acting with the necessary authenticity and boldness. In exploring such questions, some companies we know have found it helpful to use the accompanying framework to help them assess how far they’ve gone and how much room there is left to run.

Start by taking a hard look at the relationships among your social and environmental impact, your strategy, and your purpose, which may be misaligned. Such a reappraisal could lead you to reevaluate some of those hard-to-reverse choices about where and how to compete that represent the core of an effective strategy. The resulting friction is uncomfortable, but also extremely valuable. You can encourage it on an ongoing basis by building purpose-linked questions into your key strategy, budgeting, and capital-investment discussions, for example: “Which pillars of our strategy are most and least congruent with our purpose? How would a ranking of our products and services according to purpose compare with one based on profitability?” Questions such as these cause everyone to pause, legitimize healthy introspection, and boost the odds of spotting instances when taking a short-term revenue or margin hit is a small price to pay for being true to who you are or want to be. (For a more complete set of purpose-related questions, see sidebar, “Questioning purpose.”)

Your self-assessment must go well beyond strategy. Measure your social and environmental impact, starting with a review of your supply-chain and supplier risks. Society now holds you responsible for your entire business chain, beyond your corporate walls, including what your suppliers do. If you, as a senior leader, have not been personally involved with supplier issues recently, go and see for yourself. You don’t need another report; you need deep conviction—either that your supply chain is healthy and sound today or that you have a plan to make it so tomorrow. You need to recognize your vulnerabilities in the eyes of society and tackle them.

Dig deep into the makeup of your products. If you make cell phones, how much plastic in the product is recycled versus new, and how easy are your phones to repair versus replace, which carries additional environmental cost? Your impact also extends to the resources, including energy, that are required for the consumption of your products, in their entirety. Starbucks recently estimated that about 20 percent of its total carbon footprint was related to the production of dairy products consumed with its coffee.

Engage a wide range of stakeholders early as a key input into the process. A basic-materials company we know interviewed 150 external stakeholders, including investors who had chosen not to invest in its industry, as well as CEOs in other industries, all with an eye toward understanding their posture and process related to purpose. Such engagement brings out new perspectives, mitigates risk, and avoids surprises later on. What would an activist discover by digging deeply? Where are you most vulnerable? What is the central thing that critical stakeholders believe society expects from you, and are you doing enough about that? Are you focusing on only a couple of the United Nations’ Sustainable Development Goals, while critics would emphasize others at the bottom of your to-do list? Or are you “doing good” in some areas of your business, while hoping this makes up for negatives in others? All these can be calibrated and assessed, to some degree. At times, doing so may demand the courage to let your stakeholders’ perceptions of where you are trump your own views.

The only way to bridge a purpose gap is to embed your reflection, exploration, discussion, and action in the heart of your business and your organization.

2. Connect purpose with your company’s ‘superpower’

As you take stock and tackle your company’s vulnerabilities, you also need to set bold aspirations and push for specificity on the alignment between purpose and value. It’s often present. Research by author and professor Raj Sisodia suggests that purpose-led companies significantly outperformed the S&P 500 between 1996 and 2011. 2 Rajendra Sisodia, Jagdish N. Sheth, and David Wolfe, Firms of Endearment: How World-Class Companies Profit from Passion and Purpose, second edition, Upper Saddle River, NJ: Pearson Education, 2014. More than 2,000 academic studies  have examined the impact of environmental, social, and governance propositions on equity returns, and 63 percent of them found positive results (versus only 8 percent that were negative).

Such outcomes don’t arise magically because a company decides to be purpose-driven. They take shape most effectively when purpose connects with a company’s “superpower”—its unique ability to create value and drive progress across ESG themes. For example, the multinational retailer H&M, whose CEO was previously its chief sustainability officer, has embraced the superpower of its supply chain by opening it up to rival brands that can use it to accelerate their own sustainability efforts.

Identifying and building around unique assets, capabilities, or points of leverage with the potential for outsize impact on social challenges can create value  in a variety of ways:

• Purpose can generate topline growth (or serve as an insurance policy against revenue slippage) by creating more loyal customers, fostering trust, and preserving your customer base at a time when 47 percent of consumers disappointed with a brand’s stance on a social issue stop buying its products—and 17 percent will never return.
• Purpose-driven environmental stewardship can reduce costs—for example, by improving energy or water efficiency.
• Purpose can unleash employee potential—helping you win the war for talent, retain your best people, and boost employee motivation. Today, about two-thirds of millennials take a company’s social and environmental commitments into account when deciding where to work.
• Purpose can make you more aware of shifting external expectations, policy directions, and industry standards—thereby helping you identify risks you might otherwise miss. If a crisis does strike, preexisting alignment on the organization’s core reason for being will enable a coordinated, values-driven response that is authentic to your people and compelling to stakeholders. “Trusted” brands bounce back faster after product mishaps and economic shocks, particularly when they respond effectively. This remains as powerful a truth as it was in 1982, when Johnson & Johnson recalled and repackaged Tylenol following a tampering tragedy.
• Purpose can improve your balance sheet. Danone, the French food multinational, has achieved materially lower capital costs by meeting a set of ESG criteria, including the registration of certain brands to B Corps over time. This move is backed by a syndicate of banks that have committed to rewarding purposeful business with cheaper capital.

The role of the leader is first to inspire creative thinking about what makes you unique, how it links to purpose, and why it could be valuable—and then to encourage rigor in embedding it in your company’s core. As you strive to connect the superpower of your business with its impact on society, you’re likely to identify a rich constellation of potential purpose initiatives. Some are near-term win–wins, delivering immediate societal and financial benefits. Others clearly help society now but take longer to yield bottom-line results. There also are bigger, “moon shot” bets, whose potential benefit to society is enormous but, for shareholders, perhaps unclear. If you have already built momentum with initiatives in the first two categories, it’s easier to stretch for moon shots—which are the most meaningful, generate the most internal satisfaction, and also capture external attention (including motivating others to act). For example, Patagonia’s commitment to repairing jackets, to encourage reusing them, has been emulated by other makers of outdoor wear.

The role of the leader is first to inspire creative thinking about what makes you unique, how it links to purpose, and why it could be valuable—and then to encourage rigor in embedding it in your company’s core.

3. Organize to keep purpose at the top of everyone’s mind, every day

Then there’s the organization itself. Do your people routinely reflect on purpose? Do your critical organizational building blocks—whether they are business units, agile squads, or pockets of functional expertise—have the autonomy and incentives to do their work with purpose? Are your purpose-driven functions (such as philanthropy) self-contained silos, or are they connected with the core of your business?

What about your culture? That, too, is part of your social impact. Just because you deliver good service to customers doesn’t legitimize a toxic culture in your organization that excludes people. Dig deep to assess your own culture, the level of engagement of your own people, and the degree to which they feel empowered to bring their best selves to work.

Above all, do you understand what your employees care about—their sources of meaning, aspirations, and anxieties around social issues? Many CEOs are concerned that the majority of their employees are not actively engaged. What would it take for employees to bring enthusiasm, creativity, and collaboration to work, in addition to discipline? Connecting your people’s individual purpose with organizational purpose is the critical link. An Asian insurer provides explicit space in its leadership programs to reflect on this connection. Meanwhile, a US-based healthcare company has prototyped an app with which people can explore their values and purpose and make workplace connections to enable the pursuit of those aims.

Making that link—in other words, achieving a truly purpose-driven culture—requires listening and being very open to what you hear. According to the leader of a recent effort to reexamine purpose at Nordea, a large bank in Scandinavia, it was indispensable to spend time “listening to more than 7,000 people in and around our organization over a period of six months . . . in workshops . . . online with surveys . . . [and] in more than 1,500 coffee-corner discussions. . . . We discussed deeply why people had joined us, why they stayed, and what they see as impact for a financial institution.” That’s what it looks like when organizations move purpose past slogans and buzzwords.

Connecting purpose with the heart of your company means reappraising your core: the strategy you pursue, the operations driving you forward, and the organization itself.

4. Measure what you can, and learn from what you measure

We all know that what gets measured gets done. But when it comes to purpose, what metrics best reflect impact across the ESG playing field? For complex, far-flung organizations, it can be easy to feel overwhelmed by the seemingly endless array of conflicting reporting standards. Different geographies demand different levels of rigor, and keeping up with the range of voluntary reporting initiatives can be taxing. Popular frameworks such as the United Nations’ Sustainable Development Goals or the Global Reporting Initiative framework are useful touchstones, but they cannot serve as the sole basis of measurement efforts.

Instead, you should ask yourself and your peers questions like the following: What data and evidence are critical to understanding your organization’s total social, environmental, and financial impact? How much insight are your current reporting outputs generating about your efforts to deliver on purpose? When was the last time you took action in response to a metric about your purpose? Perhaps even more important: What is not currently being measured or reported that society will hold you accountable for in the future—such as the greenhouse-gas emissions associated with your industry? And what metrics do your performance-management systems take into account? Seventh Generation, a maker of cleaning and personal-care products, recently built sustainability targets into the incentive system for its entire workforce, in service of its goal of being a zero-waste company by 2025.

Changing how you incentivize people, including the integration of societal-impact goals into compensation, is a “proof point” taken seriously by stakeholders. What other proof points can you build in? Measuring and reducing your carbon footprint and making substantial, measurable investments in reskilling are good examples. Ideally, such proof points become mutually reinforcing. Shell, for example, has plans to set short-term carbon-emissions targets and link executive compensation to performance against them.

You may need to create new metrics that more precisely reflect the tensions you are seeking to reconcile for you and your stakeholders. At PayPal, CEO Dan Schulman and his leadership team became concerned when they realized that a significant portion of their nearly 25,000 employees, particularly at the entry level and in hourly positions, were struggling to make ends meet despite the fact that the company was paying wages at or above market rate. To Schulman, this “seemed ridiculous” for a company whose purpose focuses on improving the financial health of its customers. As he put it, the “market wasn’t working” for these employees—or for many others similarly situated.

PayPal surveyed its employees to assess their financial wellness, developed and began tracking metrics such as a new “net disposable income” calculation for its employees, and took immediate action to improve these metrics and provide its employees with financial security. By significantly lowering the cost of medical benefits, making every employee a shareholder, raising wages in certain instances, and delivering financial-wellness training, PayPal set a target to raise the net disposable income of its employees and improve their financial health. In a world where, as McKinsey Global Institute research has shown, a majority of the next generation in advanced economies is “ poorer than their parents ,” the impact of such initiatives cannot be overstated.

Leading from the front

Purpose puts a premium on leadership. Move too fast, and you will be criticized for swinging too far. Move too slowly, and you will be viewed as a corporate ostrich. Most dangerous of all, if you claim to be delivering on purpose but are ultimately viewed as inauthentic, you will lose credibility in front of your employees and society alike. For example, will you stick to your purpose during economic turbulence, or only when times are good?

To be authentic, you must be unrelenting in elevating and stimulating debate about uncomfortable truths and tensions you may be tempted to sweep under the rug. You also need your own genuine way of talking about the symbiotic relationship between corporate purpose and corporate performance. Aetna CEO Mark Bertolini has a simple mantra: “No margin, no mission.” Feike Sijbesma, former CEO of life-sciences company DSM, simply says, “You cannot be successful, nor call yourself successful, in a society that fails.”

Our recent survey indicated that 33 percent of managers experienced trade-offs between purpose and profit, and 72 percent of all employees hoped that purpose would receive more weight than profit. These findings underscore both the top team’s role in mediating tensions, and the point we made earlier that some purpose initiatives require a leap of faith. At times, senior leaders will need to embolden their managers to take that leap, which is likely to be easier if some purpose-driven priorities are self-funding, setting the stage for subsequent, bolder bets. Pixar director Brad Bird describes these dynamics eloquently in a Quarterly interview : “[M]oney is just fuel for the rocket. What I really want to do is go somewhere.”

What would it take for employees to bring enthusiasm, creativity, and collaboration to work, in addition to discipline? Connecting your people’s individual purpose with organizational purpose is the critical link.

In pushing your company to define and live its purpose consistently, you will be challenging the status quo in ways that may be unsettling for your people, and even for you. Championing such change requires leading with empathy—which, according to McKinsey research , means developing a broad future vision that extends beyond the problem at hand, inspiring and building trust with others by finding common ground, and leading by example. These findings suggest that a reset of leadership norms may be important as you strive to define and live your organization’s purpose, which must feel congruent and fit the style and actions of you, your senior team, and your employees. Remember, purpose is personal. By embracing that reality, you can create alignment between people and the organization that enables and ennobles everyone.

Decisions about purpose may be some of the more difficult decisions of your career. There will be a cacophony of opinions; adjudicating them will take discipline and conviction. There may be thinner evidence to guide your actions than you would like. Don’t let yourself be rushed. Establish a fact base to help you weigh trade-offs and mitigate risks.

Above all, don’t settle for “generic” on purpose. You do have a superpower to discover, and unique impact to deliver. Your company’s role stretches far beyond the confines of your employees and customers. Your suppliers will look to you for guidance. Your peers will look to you for inspiration. And society will hold you accountable for leaving the world a better place than it was when you started.

The authors wish to thank Naina Dhingra, Miklós Dietz, Eric Falardeau, Arnie Ghatak, Kimberly Henderson, Sascha Lehmann, Tracy Nowski, Robin Nuttall, Adam Sabow, Richard Steele, Matt Stone, and Lynn Taliento for their contributions to this article.

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