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What Is a Business Model?

  • Andrea Ovans

the first component of a business model

A history, from Drucker to Christensen.

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

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

the first component of a business model

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

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

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the first component of a business model

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 first component of a business model

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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The 9-Step Business Model Canvas Explained (2023 Update)

the first component of a business model

Written by Raquel Alberdi

Business | entrepreneurship, 16 comments(s).

Business Model Canvas

Blog » The 9-Step Business Model Canvas Explained (2023 Update)

the first component of a business model

“A major mistake made by many start-ups around the world is focusing on the technology, the software, the product, and the design, but neglecting to ever figure out the business . And by “business” we simply mean how the company makes money by acquiring and serving its customers”.

-Reid Hoffman

After meeting with hundreds of entrepreneurs and business owners over the years I believe the LinkedIn co-founder and Blitzscaling author Reid Hoffman’s got it spot on.

People tend to focus on specific parts of their business, such as which software packages are being used, which is the cheapest supplier, how to optimize internal processes…?

They get so bogged down in the details of the day-to-day running that they lose the overall vision of their business.

Without this vision they are unable to scale, they make marginal profits, miss opportunities, struggle to innovate, and end up running “just another” business.

Another handy metaphor in understanding this common mistake is the soldier in the trenches .

Every meter of ground gained comes at a heavy cost, mistakes are made, and progress is hard-fought and slow…a day-to-day experience for 99% of entrepreneurs and businessmen.

But when you do have that 360 vision you see the entire battlefield. Decisions are much clearer, fewer mistakes are made, and progress is fast and methodical.

Fortunately, a business model framework exists that gives you both vision and clarity .

The Business Model Canvas provides entrepreneurs, business owners, and strategists with a tool to analyze, structure, and evolve a business while always keeping the bigger picture front of mind.

So let’s take a closer look at how it works.

Table of Content

What is the Business Model Canvas?

Created by Swiss entrepreneur and Strategyzer co-founder, Alexander Osterwalder, the Business Model Canvas is a visual representation of the 9 key building blocks that form the foundations of every successful business. It’s a blueprint to help entrepreneurs invent, design, and build models with a more systematic approach.

Why is it so popular within the business community?

Its simplicity. The business model canvas allows us to carry out a high-level analysis without drilling down and getting lost in the details. You just draw out the 9 building blocks on a blank canvas, fill them in as each concept relates to your business, and hang it somewhere everybody can see.

It’s a visual overview of your entire business on a single canvas.

While the Business Model Canvas is an extremely fluid concept and hyper-specific to individual companies, each canvas is still broken down into these 9 key building blocks:

Customer Segments

Value propositions, customer relationships, revenue streams, key resources, key activities, key partners.

When laid out on the canvas the model will look something like this:

 Scheme of business model in which 9 important fields are developed for its execution.

While you’ve probably come across each of the 9 building blocks before, the attractiveness of the Business Model Canvas is that it confines them to a single page , not a traditional 42-page document.

This makes it a lot easier to digest, as well as assess existing business models or map out new ideas.

How do I fill out the Business Model Canvas?

To start your Business Model Canvas you will need to breakdown and analyze each of the 9 building blocks.

A good way to approach this is to gather the heads from marketing, sales, operations, finance, and manufacturing (if product-based) and pencil-in a morning where you can all meet together.

Then, after drawing a mock canvas onto a whiteboard, proceed to dissect and discuss each of the 9 building blocks as they relate to your business. You can use sticky notes to better organize your thoughts around the canvas.

If you are an entrepreneur or new business owner working alone and don’t have a team to bounce your ideas off, not to worry. You can still carry out your analysis before sharing it with a like-minded entrepreneurial community or forum, like those found on ThePowerMBA , to get useful, insightful feedback.

Whichever way you decide to approach it, I recommend you complete each block in the following order:

  • Cost structure

For continuity, I’m going to use the fashion retail giant Zara when analyzing each of the 9 key building blocks.

If you’d like to skip to another case study similar to your own business, navigate to the table of contents at the top of the page and select one of the other business model canvas examples.

Customer segment business model canvas for Zara company

The first block of the Business Canvas Model is about understanding who is the most important customer(s) you’re delivering value to. Or, in other words, who are they? What do they do? And why would they buy your product or service?

Not a single company exists without its clients, making customer segments the best block to start with while drawing out your business model canvas.

A great exercise to define your customer segments is to brainstorm and create your company’s buyer persona (s) .

Buyer personas are fictional depictions of an ideal or hypothetical client. Typically when brainstorming a buyer persona you’d want to define certain characteristics (age, demographic, gender, income, industry, pain points, goals, etc.)

However, remember at this stage we want a snapshot of our customer segment. There’s no need to jump into great detail just yet.

In the case of Zara, there are three distinct customer segments to whom they offer different products.

The products created for each of these customer segments (clothing, shoes, and accessories) are not trans-consumable. That is to say, a woman’s dress is highly unlikely to be worn by a 7-year-old child.

Once we know exactly who it is we are targeting, it’s time to look at what we as a company have to offer.

Zara Customer Segments business model canvas template showing the development of the 9 fields

The second phase is about figuring out your company’s value propositions , and importantly, your UVP (unique value proposition). The “what” that makes customers turn to you, over your competitors? Which of their problems are you best at solving?

Each value proposition consists of a bundle of products or services that fulfill the needs of a buyer persona from your customer segment. It’s the intersection between what your company offers, and the reason or impulse customers have for purchasing.

Some popular questions to ask while determining your UVP are:

  • Which specific customer pain point are you trying to solve?
  • What job are you helping customers get done?
  • How does your UVP eliminate customer pain points?
  • What products or services do you provide that answer this specific pain point?

So let’s try and apply this to Zara. Why do people choose to purchase from them, over their competitors?

Zara’s principal value propositions are fairly clear. They offer various ranges of stylish men’s, women’s, and children’s clothing and accessories at an affordable price.

But there’s more to it than that.

If we dive a little deeper we see Zara’s value propositions are more complex, which are behind the success of the brand:

Fast fashion

Zara adds new clothes and designs to its collections every 2-3 weeks, both in its stores and online. It keeps the brand updated, fresh, and modern while maintaining its all-important medium price point

Great eCommerce experience

Once you enter Zara’s online store you’re presented with a clean, easy-to-navigate, and high-end feel. The customer segments are visible on the left navigation bar with a search tab to further aid customers with their online experience.

Zara's Canvas business model where you can see the innovative presentation of its image

Localized stores

You can find a store in nearly all major retail locations (shopping malls, retail outlets, airports, etc.) meaning accessibility is not an issue for the majority of consumers.

Flagship stores

Zara demonstrates its aesthetic evolution to customers through its flagship stores. The recent opening of their Hudson Yards , New York City flagship is a great example of this. Customers shop around its vivid, minimalist layout offering them an experience aligned with the brand’s deeper, eco-friendly values.

Zara's Canvas business model where you can see the innovative presentation of the image of its stores

Zara Hudson Yards, New York

Business Model Canvas Template Zara - Value Propositions

The next step is to ask yourself how you are reaching your customers, and through which channels ?

This includes both the channels that customers want to communicate with you as well as how they’ll receive your products or services.

Is it going to be a physical channel? (store, field sales representatives, etc.) Or is it a digital channel? (mobile, web, cloud, etc.).

Zara has 3 primary channels in which they communicate and deliver products to its customers:

  • Direct sales through their stores
  • Online (both app and website)
  • Social media

Customers can go to a traditional “bricks and mortar” store to browse, model, and purchase different items of clothing at one of their retail stores.

Alternatively, they can shop online or through their mobile application and have the product delivered straight to their door or nearest store. The choice is completely up to them!

So that covers Zara’s commercial channels, but what about how they communicate with customers?

While they do communicate through their mobile app, their predominant channel is social media.

What’s more, they’re really, really good at it.

For example, did you know that Zara invests less than 0.3% of its sales revenue into advertising?

This is only possible due to an A-rated social media presence . Customer queries are not only dealt with quickly, but recommended re-works are sent back to HQ, forwarded onto in-house designers who then apply the feedback to future collections.

This customer-first approach through fluid communication channels has saved them thousands of dollars in marketing, strengthened their brand, and created a loyal customer base.

You should only step away from this building block once you’ve decided how each of your customer segments want to be reached.

Zara Channels business model canvas template where its components are developed

Once you have acquired customers, you will need to think about how you can build , nurture, and grow those relationships.

Now, this can be automated and transactional like large eCommerce brands Amazon or Alibaba. Or, it could be at the complete opposite end of the scale and require a more personal relationship you’d typically have with a bank or your local bike shop.

Zara’s relationship with its customers is threefold, and lies somewhere in the middle of transactional and personal:

  • Salesperson at store
  • Brand through social media
  • Sentimental attachment to a product

Yes, you have the initial transactional touchpoint at the store or online, something relatively impersonal and for many the only interaction they’ll have with the brand.

However, customers (especially in the fashion industry) are encouraged to continue to interact with a brand through social media platforms.

As we mentioned before when discussing channels, Zara has a very effective communication system in place. Not only can people instantly get in touch with the brand, but also engage with new posts, images, and collections uploaded to social media.

This personal approach to customer relationship building can, in some cases, lead to the natural growth of brand ambassadors and communities .

An attachment can also develop between customers and particular garments or accessories from one of their collections. The sentimental attachment to these products also creates another potential form of brand loyalty.

The relations with Zara's clients to give a Business Model Canvas where the 9 points to be developed are seen

Now that you’ve described how you are going to create real value for your customers, it’s time to look at how you plan to capture that value.

What are your revenue streams? Is it going to be a transactional, direct sales strategy ? Are you going to consider a freemium mode l, where you give a portion of your product or service away for free with the idea of converting later on down the line?

If you’re a SaaS company such as SalesForce or Strava , then it’s likely that a licensing or subscription revenue model will be more appropriate.

At Zara, it’s extremely simple. They make their money by selling clothes and accessories either at a store or online.

Zara business model canvas template for the development of Revenue streams within the 9 points to work

As you can see, we’ve filled in the entire right-hand side of our business model canvas. We touched upon:

Customer segments

  • Value propositions
  • Revenue streams
  • Distribution channels

Now it’s time to move over to the left side of the business canvas model and look at what we need, internally , to deliver our value propositions.

Key resources of the Zara Business Model Canvas

To start with, let’s take a look at key resources.

The key resources are all things you need to have, or the assets required to create that value for customers.

This could be anything from intellectual property (patents, trademarks, copyrights, etc.) to physical holdings (factories, offices, delivery vans, etc.) right down to finances (the initial cash flow perhaps needed to start your brand).

Another key resource every company needs to consider is its human capital . Are you going to need highly specialized software engineers? Or field-based sales teams?

They are relatively capital-heavy resources that need to be factored into your business model.

In the case of Zara, they are going to need a number of key resources if they hope to deliver their propositions:

  • Stock management
  • A large, interconnected network of physical stores
  • A strong brand
  • Logistics and supply chain infrastructure

Stock is vital for both online and offline customers.

If they are unable to supply their range of products and meet customer demands, satisfaction levels fall and they have a serious problem on their hands.

A large distribution network of brick and mortar stores combined with a strong brand name help mitigate these factors, as well as reinforce any ongoing marketing activities and communication efforts.

Finally, an efficient logistics process within Zara is critical, especially when you consider the complexities involved with such a large-scale operation.

They will require the necessary technology to analyze data on inventory, storage, materials, production, and packaging, with the staff to execute each of these stages and manage the delivery of the final products.

Zara business model canvas template where the Key Resources are developed

The next step is to define the key activities – the areas you need to be good at to create value for your customers.

To mix it up a little let’s take a look at a slightly different business in Uber .

Their key activities can be broken down into:

  • Web and mobile app development
  • Driver recruitment
  • Marketing: customer acquisition
  • Customer service activities : drivers’ ratings, incidents, etc.

They need a fast, clean UX for their customers using the app, drivers to carry out their service, and the ability to both market the product and deal with any customer queries.

Zara’s key activities will differ to those of Uber. Some of the things they need to consider would be:

  • Manufacturing
  • Retail process (point of sale and 3rd party management)
  • Distribution channel / logistics

Design is a key activity as Zara’s value proposition is to provide stylish garments at an affordable price. Their collections need to be constantly updated to follow the latest fashion trends at the time.

To produce their collections Zara will also require manufacturing capabilities. Now Zara doesn’t own their own factories (we will get to that in the Key Partners section) but they still need to be involved in the garment manufacturing process.

Everything from fabric selection to pattern making, to detailing and dyeing affects the outcome of the final product which of course they have to then go on and sell.

The effective management of the retail and distribution channels (online, offline, shipping, and communication with providers) is also key. A breakdown in either of these activities, such as a poor relationship with an important provider will have serious consequences for the business.

Zara business model canvas template showing the key activities for its development

Most modern business models now require brands to build out and work with various key partners to fully leverage their business model.

This includes partnerships such as joint ventures and non-equity strategic alliances as well as typical relationships with buyers, suppliers, and producers.

A great example of a strategic partnership would be between ThePowerMBA and Forbes . In exchange for exposure of our brand to the magazine’s global audience, we provide expertise and content on high-level business education programs.

As we touched upon when discussing key activities , Zara requires strategic partnerships with many different providers if they are to design and produce their collections.

Another key partner is their major holding company, Inditex .

Inditex has several subsidiaries including Massimo Dutti , Pull & Bear , and Oysho . Being a subsidiary of Inditex means they share a consolidated balance sheet, stakeholders, management and control, and various legal responsibilities.

While as a subsidiary Zara is afforded certain freedoms when it comes to design, delivery, and the general running of the company, the overall strategy will need to be aligned with Inditex and its other subsidiaries.

Zara Key Partners business model canvas template where the eighth point is developed

The final step of the Business Model Canvas is to ask yourself, how much is it going to cost to run this model?

This includes some of the more obvious needs such as manufacturing costs, physical space, rent, payroll, but also areas such as marketing activities.

If you are unsure of exactly what to include in your cost structure take a look at a Profit and Loss statement ( P&L ) from a competitor or company in a similar industry to yours. You’ll find many items overlap such as research and development ( R&D ), cost of goods sold, admin expenses, operating costs, etc.

Once that’s done you should prioritize your key activities and resources and find out if they are fixed or variable costs .

As Zara is such a large, corporate business they are going to have both fixed costs (rent, payroll, point of sales personnel) and variables, such as costs associated with the fluctuating sale of goods, purchase of materials and, manufacturing costs.

Once you’ve completed these 9 steps, your Business Canvas Model should look something like this:

Business Model Canvas Examples

Hopefully, you were able to get a good feel for the effectiveness of the business model canvas with our run-through of Zara.

However, if you found it difficult to follow due to the stark difference between your industries, I’m going to quickly go through 3 more companies to demonstrate the tool’s flexibility:

  • Netflix (Media service/production)
  • Vintae (Vineyard)

Even if these business model canvas examples don’t align exactly with your industry, I honestly believe that studying different models gives you a competitive advantage in your professional career regardless.

If you’re currently employed by a company, you’ll better understand how your specific role helps the company achieve some of its “long-term” goals.

Alternatively, if you are a business owner yourself (or perhaps thinking of starting your own business) you’ll have a better understanding of your business and where potential opportunities lay.

I’m sure you’re familiar with our next business model canvas example candidate, Netflix .

The global media company offers an online streaming service of various movies, documentaries, and TV programs produced in-house or licensed 3rd-party content. Their success sparked a revolution in the online media world with the likes of Amazon, Apple, Disney, HBO, and Hulu all rushing to launch their own online video streaming platforms.

Netflix started life as an online DVD rental company, basically a web version of the more popular (at least at that time) “bricks and mortar” Blockbuster.

Co-founder Reed Hastings predicted as far back as 1999 that the future of media was in online streaming, saying “postage rates were going to keep going up and the internet was going to get twice as fast at half the price every 18 months.”

It wouldn’t be until 2007 that Hasting’s prediction would become true when Netflix, as we now know it, was born.

So let’s take a current look at their business model canvas:

Netflix business model in which the 9 topics are taken into consideration

As you probably know, there are very few people out there who haven’t subscribed, watched, or at least heard of Netflix. There is content for everybody: wildlife documentaries, sci-fi movies, rom coms, action-thrillers, you name it – it’s there.

That’s why their customer segment can be classified as a “ mass market ” as the base is just so diverse.

All people require is a computer, TV, internet, and/or smartphone and they’re good to go. For most developed markets, that covers just about everybody.

Value Proposition

Whether on the train to work, sitting in the car (if you’re not driving!), or relaxing at home in front of the TV, you can consume their online, on-demand video streaming service.

They also have a huge library of content for consumers to choose from, ensuring that people keep coming back, as well as increasing their mass-market appeal.

They also produce high-quality, original content to differentiate themselves from their competitors.

Most people access Netflix either through their website or mobile/TV App . Another popular channel that you may have picked up on is their affiliate partners .

You’ve perhaps signed up for a mobile, TV, and internet package where the provider offers Netflix as an extra to sweeten the deal, so to speak.

That would be an example of an affiliate partnership between Netflix and mobile service providers.

I doubt many consumers have had direct contact with Netflix unless it’s to resolve a subscription issue or general query. It’s very much a self-automated service – you download the app, select the program you wish to watch, and hit play.

Very simple, very effective.

Again, this doesn’t need much embellishment. Netflix generates money from the different tiers and packages put together in their subscription services.

This varies depending on the region to account for local markets, but on the whole, it’s sold at a low price point.

Originally, Netflix’s Key Resources would have been their unrivaled DVD collection combined with a cost-effective mail-order system.

Nowadays it’s undoubtedly the rights to stream online video content. Netflix has brokered deals with some of the biggest production studios worldwide.

Combined with their huge library of in-house productions , it’s more than enough to encourage customers to renew their subscriptions.

To help sustain interest in their product, Netflix understands they need to serve-up relevant content for each sub-sector of their mass audience. Therefore their machine learning algorithm selects content for consumers based on streaming habits (what they watched, at what time, etc,.) to personalize the customer experience.

This explains why over 80% of all content streamed on Netflix was cherry-picked by this algorithm, making it a Key Resource for their business model.

Also, Netflix accounts for a whopping 12.6% of global bandwidth usage . The literal capacity to stream their services must be met meaning bandwidth must also be included here.

Content procurement is arguably their biggest Key Activity. They need to find people to produce and deliver their original content, including actors, studios, writers, etc. as well as secure the licensing and streaming rights from 3rd party producers such as Sony, Warner Bros, and Disney.

Finally, they need a fast, easy-to-use application to host their online streaming service. This needs to be available for both TV and mobile devices if they are to deliver their “on-demand” value proposition.

K ey Partners

Seeing as Netflix’s entire business model is largely based around streaming 3rd party content, key partnerships need to be built with production studios . No content, no Netflix!

Also, as we touched upon earlier Netflix is one of the largest consumers of bandwidth worldwide. If the speed and delivery of their streaming service are to be continued then deals will also need to be made with internet service providers (ISPs).

Netflix’s biggest expenditures come from both their in-house content procurement and 3rd party licensing agreements . The high-quality standard of video streamed on Netflix is only possible due to the speed and performance of its online platform and application , which has additional costs of staff, software, etc.

To show you just how flexible the business model canvas can be, I wanted to throw in a slightly leftfield example. Vintae is a Spanish wine producer who, after a detailed analysis of the business model canvas, was able to innovate and disrupt one of the world’s most competitive industries.

As some of you may know, the wine industry is extremely competitive. It’s also steeped in history and tradition , making it very challenging for newcomers to grab market share, let alone think about year-on-year growth and revenue.

However, CEO “Richi” Arambarri looked at the traditional “ bodega ” business model and saw a chink in its armor.

A “small” innovation in the business canvas model helped them to become one of the region’s most important winery groups, with over 10 installations and a presence across all regional denominations (Rioja, Priorat, Rias Baixas, etc.) with year on year growth of 30% – practically unheard of in such a competitive industry.

So how did Vintae analyze the business model canvas to find a niche in their market?

To answer that question, we must first look at the traditional winery business model .

Traditional Winery Business Model with its 9 developed points

As you can see, the wine industry has historically been patrimonial. Vineyards and estates are passed down through generations with the winery responsible for all phases of production, clarification, and distribution.

The traditional winery business canvas model suggests you must be the owner of the winery/vineyard where the wine is “manufactured”, meaning physical assets are a key resource of the business model.

So, if you wanted to start producing a Rioja, for example, you’d have to set up your vineyard in the region.

This is monumentally expensive as you need to:

  • Purchase the land
  • Plant a vineyard
  • Absorb set-up and installation costs
  • Deal with maintenance costs

It’s here where Vintae saw their opportunity.

What if we move vineyard ownership across the business model canvas from key resources to key partners ?

By leasing the equipment and space of large wineries (of which there was plenty), they could still produce their wine but reduce the cost and exposure associated with land purchase, crushing equipment, huge storage tanks, vineyard maintenance, and their bottling line.

This enabled them to focus on their sales, marketing, and distribution channels to create a better brand experience for their customers.

Also, it afforded them more flexibility when creating new wines as they were no longer confined to the limitations of grapes grown on their vineyard.

The lightness of this new business model eliminates maintenance overheads, channels energy into personalizing the customer experience, and allows for unprecedented levels of growth in one of the world’s most competitive industries.

Vinate business model

Business Model Canvas Software

Although I did mention starting with a large whiteboard, sticky notes, and a pack of colorful sharpies there are several options in which you can digitize the business canvas model production process.

While I still believe the aforementioned process is extremely valuable (it gets your entire team’s input in a single hour-long session) you may decide it more viable for each member of management to pool their ideas digitally before sharing with the rest of the group.

If that’s the case, then take a look at some of the following software tools for creating your business model canvas.

Strategyzer

Created by the founders of the business model canvas Alex Osterwalder and Yves Pigneur , Strategyzer offers a range of business model canvas templates for you to get started with.

If you opt for the paid model (there is a 30-day free trial period) they offer a series of various classes that teach you how to build and test different value propositions and business models.

A real-time built-in cost estimator analyzes the financial viability of some of your business ideas, identifying alternative areas you may wish to explore with your model.

All-in-all, it’s a great resource to play around with and test some of your business ideas, with the option to dive into further detail if you see fit.

Canvanizer is a free, easy-to-use web tool that allows you to share links between team members who are brainstorming ideas for a business model canvas, but working remotely.

Like Strategyzer, there are several business model canvas templates provided to help you get started with your analysis. The strength of this platform is its accessibility. Much like a Google Doc., several people can brainstorm on the same canvas simultaneously with changes being synchronized automatically.

Business Model Canvas Tool

A ThePowerMBA alumni, impressed by the simplicity and effectiveness of the tool, went ahead and created the free application Business Model Canvas Tool .

It’s an incredibly intuitive, and easy-to-use tool that allows you to create templates simply by clicking the + button in each building block.

Each business model canvas created can be downloaded and shared as a pdf. with the rest of the team.

Would You Like to Learn More about Business Models?

If, after going through our 9-step guide on how to use the Business Model Canvas you’d like to learn more about different business model analysis tools , take a look at our alternative MBA business program .

As you’ll see, the course gives students a 360-degree view of business and management practices – such as engines of growth, segmentation and targeting, and value propositions.

I highly recommend you go check it out.

Regardless, I’d love to hear what you thought about this guide. Was it helpful? Would you like to see additional business cases analyzed from your industry?

Let us know in the comments below.

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the first component of a business model

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16 Comments

Ayeah Goodlove

Perfect thought

kourosh abdollahzadeh

I am a DBA student. I have used your site a lot. Thank you for the information

KJ Hwang

Well defined steps, Thanks for good contents.

Reza Ebadi

Dear Sir many thanks for you guideline. it was very effective for me. Thanks a Million

Debashis Rout

Well explained with practical business case

Allen

Wow, this article was incredibly helpful! I’ve heard about the Business Model Canvas before, but I wasn’t sure exactly how it worked or how to use it for my own business.

NIMAKO JAMES

I need a sample of business model canvas for a beauty palour

Opoku Samuel

you’ve done a great job. keep it up

Claudia Roca

This is a very insightful content with a step-by-step practical approach of how to write a BMC and what exactly it should contain.

My team and I literally used your guide to write a BMC for a project we were working on, and in just about an hour we were done.

Thank you so much for this content, it was really helpful.

Franco

Thank you very much Collins and we are glad you are using this tool.

Jude

Insightful! Gave me the clarity I needed for my upcoming business. Thank you so much.

Praveen

Thank you very much for the business model example of ZARA. It was very very informative

Efi

This is a great explanation, the best i’ve seen. Thanks

Thank you very much for reading and sharing your comments

Tatyasaheb Phadtare

Really great tool for business and whom want to enter,. Thanks

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the first component of a business model

8 Key Elements Of A Business Model that You Should Understand

the first component of a business model

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

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

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

1. Value Proposition

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

2. Revenue Model

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

3. Market Opportunity

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

4.  Competitive Environment

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

5. Competitive Advantage

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

6. Market Strategy

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

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

7. Organization Development

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

8. Management Team

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

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

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the first component of a business model

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

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What is a business model? (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 to 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 .

Business model large

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 first component of a business model

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?

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

Business model in Aha!

  • 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.

Lean canvas example in Aha!

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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Business Model Canvas: Explained with Examples

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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.

Business Model Canvas Explained

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.  

Business Model Canvas Template

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.

Customer Persona Template for Business Model Canvas Explained

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.

Customer Journey Map

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).

Value Proposition Canvas

What to Avoid When Creating a Business Model Canvas

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

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

What Are Your Thoughts on the Business Model Canvas?

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

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

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

FAQs About the Business Model Canvas

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

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

 FourWeekMBA

The Leading Source of Insights On Business Model Strategy & Tech Business Models

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What Are The Key Components Of Any Business Model?

The key components of any business model are: 

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

Table of Contents

A glance at the business model tools available

With FourWeekMBA I’ve been researching into over a hundred  business models at the time of this writing. From tech to luxury, from innovative to more traditional.

I’ve been in search of a framework, recipe or something that could help me dissect any company. As I came from a financial background the most logical thing for me was to look at these companies by analyzing their numbers.

However, I soon realized that approach was too reductive. So I started to look at other frameworks that could be used to find the simplest parts of a business model and its key components.

In this article, I’ll show you a few approaches and how they come down to similar vital components.

A recap of key components according to several business model tools and frameworks

A business model is a representation of a company in the real world (this is a definition that works for practitioners, not necessarily for academics).

Business modeling for entrepreneurs might be a useful tool to gain insights about competitors, better understand your organization or design toolbox to grow your business.

From that standpoint, over the years a few tools came handy . Some of them have been discussed at great length on this blog:

  • business model canvas
  • lean startup canvas
  • blitzscaling canvas
  • sales navigator framework 
  • and many others

Each of those frameworks assumes a business model has several key components. For instance, the business model canvas tells you that a business model has nine key components:

  • Key partners
  • Key activities
  • Value proposition
  • Customer relationship
  • Customer segment
  • Key resource
  • Distribution channel
  • Cost structure
  • Revenue stream

While a lean startup canvas tells you there are still nine key elements, but it substitutes key partners, key activities, key resources, and customer relationships, with a problem, solution, key metrics, and unfair advantage. Therefore, the lean startup canvas will look like that :

  • key metrics
  • value proposition
  • unfair advantage
  • customer segments
  • cost structure
  • revenue streams

The lean startup canvas as an adaptation from the business model canvas might be better suited for startup organizations, which need to scale quickly while gathering feedback from customers.

The blitzscaling business model innovation canvas instead, looks at a business model as primarily skewed toward massive growth .

In that instance, what identifies a business model is its ability to leverage on growth , or to limit its growth .

Thus it is comprised of four growth levers and two growth limiters:

  • Market size
  • Distribution
  • High gross margins
  • Network effects
  • Lack of product/market fit
  • Operational scalability

Another framework from BMI Lab put together in the sales navigator assumes that a business model key components are three:

  • value chain
  • revenue model

Those elements come together when a business owner answers to a few key questions, such as, “what do you offer to the customer?” or “how is the value proposition created?” or yet “why is it profitable?”

Another tool called four box business model framework by Innosight  breaks down the business model in four key components:

  • customer value proposition
  • key resources and processes
  • and the profit formula

Each of those elements feeds into each other to create a feedback loop of business model innovation. Those tools are quite useful, and it tackles how you can assess your business at each stage.

The FourWeekMBA business model framework

After looking at the key components of a business model based on a few toolboxes; based on the analyses performed over the years, for the business model boils down to three key elements, those are tied up by another ingredient.

This framework by FourWeekMBA has three aims:

  • noise reduction
  • and profitability

In short, I believe that a great business model toolbox has to have a super simple set up. It has to be based on very few elements. And it needs to focus on its long term financial sustainability.

However, what the toolboxes I’ve been looking at mostly miss is the branding of each business model success .

In short, for me there are two dimensions of a business:

  • The people dimension
  • The financial dimension

These two dimensions walk hand in hand. Yet the people side is what also makes the business thick from the economic standpoint.

The people side comprises the following elements:

This people dimension will help you build a solid brand. A solid brand builds up a tribe, a group of people that can follow you anywhere. Once you have a solid brand, you can focus on the second dimension: the financial dimension.

The three elements of the financial dimensions are:

Key takeaway

To recap an effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand.

The financial dimension will help you build proper distribution channels by identifying the people that are willing to pay for your product or service.

Other resources for your business:

  • Successful Types of Business Models You Need to Know
  • Blitzscaling
  • What Is a Value Proposition?
  • How to Write a One-Page Business Plan
  • How to Build a Great Business Plan According to Peter Thiel
  • What Is The Most Profitable Business Model?
  • The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
  • How To Create A Business Model
  • What Is Business Model Innovation And Why It Matters
  • What Is Blitzscaling And Why It Matters
  • Marketing vs. Sales: How to Use Sales Processes to Grow Your Business

Handpicked business models:

  • How Does PayPal Make Money? The PayPal Mafia Business Model Explained
  • How Does WhatsApp Make Money? WhatsApp Business Model Explained
  • How Does Google Make Money? It’s Not Just Advertising! 
  • How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
  • The Google of China: Baidu Business Model In A Nutshell
  • How Does Twitter Make Money? Twitter Business Model In A Nutshell
  • How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
  • How Amazon Makes Money: Amazon Business Model in a Nutshell
  • How Does Netflix Make Money? Netflix Business Model Explained

Key Highlights of Components of a Business Model:

  • Compelling Value Proposition: This is how you want your audience to perceive your brand. It’s the unique value or benefit your product or service offers to your customers.
  • Unique Brand Positioning: This involves identifying what sets your brand apart from competitors. It’s about defining the aspects that make customers want more from your brand.
  • 10x Goal Setting: This principle suggests aiming to offer a product or service that is significantly better (10 times better) than existing solutions. This drives innovation and differentiation.
  • Customer Segments: Identifying who your paying customers are, which segments of the population are interested in and willing to pay for your product or service.
  • Distribution Channels: Determining how you will deliver your product or service to your customers. This could include online platforms, retail stores, partnerships, etc.
  • Profit Formula: Ensuring the financial sustainability of your business. This involves analyzing costs, revenue streams, and ensuring that your business model is economically viable.

Business Model Tools and Frameworks Highlights:

  • Business Model Canvas: This tool breaks down a business model into nine key components, including customer segments, value proposition , distribution channels , cost structure, and revenue streams.
  • Lean Startup Canvas: Adapted from the Business Model Canvas, this framework focuses on problem-solution fit, key metrics, and unfair advantage, among other elements.
  • Blitzscaling Canvas: Geared towards rapid growth , this framework emphasizes key growth factors like market size, distribution , and network effects , along with growth limiters such as lack of product/market fit.
  • Sales Navigator Framework: Simplifies the business model into three elements: value proposition , value chain, and revenue model. It emphasizes creating value and understanding profitability.
  • Four Box Business Model Framework: This framework highlights customer value proposition , key resources and processes, and the profit formula as key components that interact to drive business model innovation.
  • FourWeekMBA Framework: This framework focuses on simplicity, noise reduction, branding, and profitability. It divides the business model into the people dimension (value proposition, brand positioning, 10x goal) and the financial dimension (customer segments, distribution channels , profit formula).

People Dimension and Financial Dimension Highlights:

  • People Dimension: This aspect focuses on building a compelling value proposition that resonates with customers, creating a unique brand positioning to attract a loyal following, and setting ambitious 10x goals to drive innovation.
  • Financial Dimension: In this dimension, identifying customer segments willing to pay for your product or service becomes crucial. Additionally, determining effective distribution channels and ensuring a sustainable profit formula are vital for business success.

Key Takeaway:

An effective business model incorporates both the people dimension (value proposition, brand, goals) and the financial dimension (customer segments, distribution , profitability). Balancing these dimensions helps create a strong brand, innovative product or service, and a viable economic structure for long-term success.

FourWeekMBA Business Toolbox

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Market Expansion Theory

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Business model types and components

Small business owners look over a business plan

By Michael Feder

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

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

At a glance

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

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

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

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

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

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

Understanding business models

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

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

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

Learn more about online business degree programs!

The importance of business models

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

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

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

Types of business models

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

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

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

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

9 components of a business model

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

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

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

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

the first component of a business model

ABOUT THE AUTHOR

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

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Business Model Management pp 207–216 Cite as

Implementation of Business Models

  • Bernd W. Wirtz 2  
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Part of the Springer Texts in Business and Economics book series (STBE)

In the context of business model management, the implementation of business models follows the business model design process. The result of the design process is an integrated business model that contains all nine partial models and serves as a construction plan for implementation. Practical implementation takes place on the partial model level and ends with the complete implementation of the business model.

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See also for the following chapter Wirtz ( 2010a , 2018a , 2019a ).

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Wirtz, B. W. (2010a). Business model management: Design – Instrumente – Erfolgsfaktoren von Geschäftsmodellen (1st ed.). Wiesbaden: Gabler.

Wirtz, B. W. (2011). Business model management: Design – instruments – success factors . Wiesbaden: Gabler.

Wirtz, B. W. (2018a). Business model management: Design – Instrumente – Erfolgsfaktoren von Geschäftsmodellen (4th ed.). Wiesbaden: Springer Gabler.

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10 Components Of A Business Model

Building a solid business model requires a keen understanding of its fundamental components. Uncover the key Components of a Business Model that drives revenue, improves customer loyalty, and helps in achieving new heights.

What Is A Business Model? – Definition

A business model serves as a fundamental structure that outlines the essential elements of how a company generates, delivers, and captures value . It provides a clear understanding of how an organization creates revenue, maintains profitability, and operates within its specific market.

Importance of Business Model Components

Business Model Components help entrepreneurs figure out how a company or startup will generate revenue and stay profitable – which will be a roadmap to success!

By defining your business model components, you can identify the key ingredients that will set you apart from the competition. It helps to identify the best way to communicate with the customer – channels.

Efficient resource allocation is achieved when key activities, partnerships, and channels are aligned with the value proposition.

Identifying and understanding customer segments allows businesses to tailor their products, services, and marketing efforts.

Components of A Business Model

Let’s discover the essential building blocks of the Business Model that define how it creates value for both the business and its customers.

Also Read Aggregator Business Model Guide

Value Proposition

A value proposition is the heart of your business model, the compelling reason that convinces customers to choose you over the competitors.

Defining a compelling value proposition requires a deep understanding of the customer. It should meet the demands of your customers through the valuable product or service that you offer.

Especially if you bring innovative ideas to your offering , it would be a great advantage to opt for your brand over others.

This distinction sets you apart from the competition and establishes a competitive advantage for a long time.

Revenue Generation

This section will let you state a method of generating money – literally, tell how will you make money from the business.

Some of the ideal prospects for making money are

  • Product Sales
  • Subscription Models
  • Freemium Model
  • Licensing and Royalties
  • Advertising
  • Service Fees
  • Marketplace Fees
  • Consulting and Professional Services
  • E-commerce Marketplaces
  • Membership Models

The revenue model lays out the strategies and methods, similar to a cost structure, pricing and channels that are used to create a steady flow of financial income.

Irrespective of any method you choose, it is crucial to remind yourself to be adaptive to market dynamics. Only then you will be able to serve your customers and solidify your position in the competitive landscape.

Also Read Benefits Of Franchise Business Model

Customer Segment

Defining the customer segments is the base for your business model. From market research to targeting to creating an offer , everything revolves around them.

Usually, the market is diverse in nature, therefore you need to specify who your potential customers are. They are determined by several criteria such as

  • Buying habits

These factors may look like different groups of customers, yet they share common needs, preferences, and behaviours.

By critically analysing, identifying, and understanding your customer segments and their common needs, it would be more reliable for you to allocate resources effectively with personalized marketing efforts.

This will ultimately enhance customer satisfaction.

Key Resources

Key resources encompass the combination of tangible and intangible assets in a company.

These resources are essential components of the business ensuring long-term sustainability in its operations.

By leveraging these resources, businesses create products or services that address the customer needs or pain points . Thus it directly contributes to value creation .

For instance, a manufacturing company totally relies upon its equipment and machinery with advanced technology to create high-quality products.

Some of the common key resources for any business are

  • Capital investment
  • Intellectual property
  • Data of Customers and Market Insights

Cost Structure

Cost structure involves the distribution and optimisation of expenses throughout the processes from end to end in creating a product or service.

The importance of cost structure cannot be overstated as it is a critical component that you cannot leave aside while devising your business model.

The reason is because it acts as a financial backbone impacting your financial decisions, profitability, future investments and the overall endurance of a company.

Distribution Channels

Distribution channels are the pathways that link your offering and the target customers.

There are various channels available. It can be either directly or indirectly, or even via an online channel , you could reach them. But, You’ll need to put a strategy in the right place to determine where your potential buyers are.

Nowadays, everything goes online right. You can directly sell digital products to the customers. Even physical products could be channelised by e-commerce platforms, marketplaces and social media .

Finally, the choice of distribution channels should not be a vague mix, instead, it must be cost-effective and convenient for people who buy your product.

Key Partnership

You cannot single-handedly operate or manage several business functions. So, while creating a business model it is important to determine the key partners who accompany your business journey.

It is the role of a founder or business owner to nurture the partnership and maintain a smooth relationship to elevate the level of growth trajectory.

Types of key partnerships are

  • Distribution
  • Co-creation and
  • Strategic alliances

Customer Relationship

Understanding a customer relationship within a business drives sustainable success.

Customer relationships are beyond transactions as they cultivate an emotional connection with a business that involves interactions, connections, and experiences.

Moreover, nurturing your relationship with customers leaves a good remark in their minds. This will help you gain brand loyalty with repeat customers coming in where you can upsell or cross-sell your product.

Key Activities And Operations

Key activities and operations are the core actionable part of a business as it is the driving force behind value creation and happy customers.

No business can run without the base activities like production, marketing and sales, distribution, and customer support.

Unless these activities are properly resourced and allocated it would be hard to attain operational efficiency. Developing a strong business strategy will help you achieve the desired results.

Customer Acquisition Strategies

How to make people buy your product? – is the next big question after identifying your customer segments.

Though it is not easy at all. It is necessary to create tactical methods to attract, engage and convert your potential customers into valuable buyers, which is another way called Customer acquisition strategy .

To penetrate the target market, your brand should reach a wide audience where you should be implementing content marketing, social media advertising, influencer partnerships and referral programs.

This will boost your brand visibility and furthermore helps in acquiring customers with a high conversion rate.

Building a Solid Business Model for Long-term Growth

Customer-Centric Approach: Prioritize understanding and meeting customer needs to enhance their experience and loyalty.

Innovative Differentiation: Stand out from competitors by offering unique value propositions, innovative products, or exceptional service.

Diversified Revenue Streams: Rely on multiple income sources to buffer against market fluctuations and ensure steady growth.

Efficient Cost Management: Streamline operations, control expenses, and allocate resources judiciously to optimize profitability.

Adaptability to Change: Embrace a flexible mindset to swiftly adapt to evolving market trends, technological advancements, and customer preferences.

Data-Driven Decision Making: Leverage data insights to inform strategic choices, improving efficiency and customer engagement.

Sustainable Scalability: Build a model that accommodates growth without sacrificing quality, ensuring stability and seamless expansion.

Frequently Asked Questions

1. What are business model components?

Business model components are the essential elements that define how a business creates, delivers, and captures value. They include the value proposition, customer segments, channels, customer relationships, revenue streams, key activities, key resources, key partnerships, cost structure etc.

2. Why are business model components Important?

Business model components are important because they provide a framework for understanding how a business operates and generates revenue. They help businesses differentiate themselves, optimize resource allocation, focus on customer needs, drive profitability, and adapt to changing market conditions.

3. How do business model components contribute to success?

Business model components contribute to success by helping businesses identify their unique value proposition, target the right customers, establish effective channels for reaching customers, generate revenue through diverse streams, allocate resources efficiently, and build strategic partnerships for growth.

4. Can business model components change over time?

Yes, business model components can change over time. As businesses evolve and adapt to market dynamics, customer preferences, and technological advancements, they may need to modify their value proposition, customer segments, channels, or other components to stay competitive and meet changing demands.

5. How can businesses optimize their business model components?

Businesses can optimize their business model components by conducting market research, analyzing customer feedback, experimenting with different strategies, embracing innovation, and continuously evaluating and refining their value proposition, customer segments, channels, and other components to align with market needs and drive sustainable growth.

Bottom Line

Incorporating a strong business model is essential for sustained success. By understanding and integrating key components such as value proposition, target market, revenue streams, cost structure, etc. your business can pave the way for strategic growth, heightened efficiency, and a solid foundation for gaining high return on investment .

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A business model is a plan for how a company is going to make money. This can be simple or very complicated. The components of a business model include details on all operations, as well as short- and long-term visions for the business' growth. Without a business model, investors and owners will not have a clear idea of how to best grow the business, and it will be much harder to create a stable and sustainable concern.

Value Proposition and Market Segment

These parts of the business model describe how the product or service addresses the customer's needs and the value of the product from the customer's perspective. The value proposition describes the mix of product, service, customer relations and brand image unique to the company, explains QuickMBA.com .

The value proposition helps the company to differentiate itself from competitors and to focus on providing core value for customers. The market segment is a related component and describes what type of customers or what segment of the market the business will target.

Value Chain Structure

The value chain describes the chain of activities for a given business. This includes all the activities that a product or service goes through as it is being created and sold. As it passes through each part of the chain, the product or service gains more value. A business model will include descriptions of activities in the value chain and a discussion of how the company will use the chain to increase the value of the product or service being created.

Revenue Generation Strategies

This portion of the business model notes how revenue will be generated by the company. Revenue may be generated in different ways, including sale of a product or service, subscriptions and paid advertising on the company's website by other companies. The overall cost structures and estimated profit margins should be included in this section of the business plan.

Position in the Market

This component is also called the position in value network. In this section of the business model, identify competitors and how your product or service will differ from theirs, for example, by having a lower price, more features or better service.

You can also identify complementary products or services that may help you sell your product or service. For example, PayPal helps sites such as eBay and Amazon.com do business, so it is complementary to those businesses.

Long-Term Strategy

Outline how you will develop and maintain a competitive position in the market: for example, whether you will use a low-cost strategy, a value-added strategy, a pioneer strategy or a growth strategy. Most businesses eventually develop a complex strategy or series of strategies, but in the initial business model, you may want to provide only the strategy for the initial positioning of your product or service on the market.

  • QuickMBA: Business Model
  • Saylor: Components of a Business Model

Related Articles

Business model strategy, what is a normative business model, the chief elements of business models, the relationship between the business model and strategy, what are net worth & total assets, the advantages of the service-profit chain model, the difference between a business model & a value chain model, the differences between a business plan & business model, how to develop business models, most popular.

  • 1 Business Model Strategy
  • 2 What Is a Normative Business Model?
  • 3 The Chief Elements of Business Models
  • 4 The Relationship Between the Business Model and Strategy

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Component Business Model (CBM)

Component Business Model (CBM) is a technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify redundant or overlapping business capabilities, analyze sourcing options for the different components (buy or build), prioritize transformation options, and can be used to create a unified roadmap after mergers or acquisitions. The model is organized as business components along columns and "operational levels" along rows. The Business components are defined partly as large business areas with characteristic skills, IT capabilities, and processes. The three operational levels are "Direct", "Control" and "Execute" - they separate strategic decisions (Direct), management checks (Control), and business actions (Execute) on business competencies. [1]

Component Business Model

A Business Component is a logical view of part of an enterprise. It has discrete boundaries, defined by the business services that it offers and the business services it uses. It includes the resources, people, technology, and know-how necessary to deliver some value and is a ‘black box’ in the sense that the users don’t need to see the business activities that are inside. The Business Component can have attributes, such as cost, revenue, and importance to the business. Business services are goods or services that a business component offers to other business components and possibly to external parties.

CBM is not simply a way to imagine the future of the organization. It can also be used to put theory into action and drive the evolution toward a specialized enterprise, both internally and externally. This process involves three dimensions: one, developing a component view of the existing organization based on analysis of the business and the market environment; two, evolving toward specialization based on a reinvention plan within the context of changing industry dynamics; and three, advancing the organizational and operational infrastructure toward component-based enterprise optimization.

The key concepts of CBM are business components and accountability level:

  • Business components are the essential and unique non-overlapping building blocks that make up the business and mission of an enterprise. They have the potential to operate independently, in the extreme as a separate unit, shared service, contractor-managed, or outsourced component.
  • Directing is about strategy, overall direction, and policy.
  • Controlling is about monitoring, managing exceptions, and tactical decision-making.
  • Executing is about doing the work. [2]

IT Strategy (Information Technology Strategy) Enterprise Architecture Information Framework (IFW) Business Model

  • ↑ Defining Component business model [1]
  • ↑ Cocepts of Component Business Model [2]

IMAGES

  1. What Is a Business Model? Best Practices and Examples

    the first component of a business model

  2. 9 components of business model canvas

    the first component of a business model

  3. The 10 Main Components of a Business Model

    the first component of a business model

  4. Key Components of Business Model

    the first component of a business model

  5. Business Model Components Business Diagram Illustration Stock

    the first component of a business model

  6. A complete Guide on Business Model vs Business Plan

    the first component of a business model

COMMENTS

  1. The 10 Key Components of a Business Model

    A high-level vision. The first component of your business model is a basic description of your strategy. Your vision can be as short as a few sentences long and can ultimately be part of your company's mission statement. When creating a vision, be sure to clearly state the industry your business is in and use positive language.

  2. What Are the 11 Key Components of a Business Model?

    1. High-level vision. The first component of a business model is a summary of the company's strategy or overall goals for creating the model. This quickly tells readers what details the business model may include and allows you to refer to the purpose of your model as a guide when creating it. Your vision can be short, typically one to two ...

  3. What Is a Business Model?

    In The New, New Thing, Michael Lewis refers to the phrase business model as "a term of art.". And like art itself, it's one of those things many people feel they can recognize when they see ...

  4. What is a Business Model with Types and Examples

    Business Model: A business model is a company's plan for how it will generate revenues and make a profit . It explains what products or services the business plans to manufacture and market, and ...

  5. The 10 Main Components of a Business Model

    1. High-level vision: A basic description of your business model — two or three sentences that are your true north. 2. Key objectives: The top goals and how you plan to measure them. 3. Customer targets and challenges: The types of customers who will purchase your solution, along with their exact pain points. 4.

  6. Business Model Canvas: A 9-Step Guide to Analzye Any Business

    Created by Swiss entrepreneur and Strategyzer co-founder, Alexander Osterwalder, the Business Model Canvas is a visual representation of the 9 key building blocks that form the foundations of every successful business. It's a blueprint to help entrepreneurs invent, design, and build models with a more systematic approach.

  7. 8 Key Elements Of A Business Model that You Should Understand

    The value proposition should be personalized and customized to include the reduction of product search, discovery costs on price, and how you'll manage product delivery. 2. Revenue Model. This portion relates to how you plan to make money from your business through revenue and producing a good return on capital invested.

  8. What Is a Business Model? Best Practices and Examples

    Fee-for-service business model examples: McKinsey & Company, MedExpress, Walmart. Franchise. Builds on existing successful business and receives a percentage of earnings from franchises who invest in, operate, and promote new locations. Franchise business model examples: Ace Hardware Stores, McDonald's, The UPS Store.

  9. Business Model Canvas: Explained with Examples

    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.

  10. Business Model Canvas Explained: Definition and Components

    Business Model Canvas Explained: Definition and Components. The simple, visual template of the Business Model Canvas has made it a favorite among entrepreneurs and business strategists. With its one-page, nine-points design, a Business Model Canvas allows stakeholders to quickly understand the key needs and goals of any business. The simple ...

  11. What Are the Main Components of a Business Model?

    The main components of a business model are the products and services you sell, how much you spend to create them and how you organize your work flow. ... Devra Gartenstein founded her first food ...

  12. Business Models

    A business model is a company's fundamental identity while engaging with customers and other stakeholders. It works like a charter on which a business thrives and provides its goods and services to the end consumers. Examples of business models include retailers, manufacturers, e-commerce platforms, brokers, franchises, etc.

  13. What Are The Key Components Of Any Business Model?

    A tech business model is made of four main components: value model (value propositions, mission , vision ), technological model (R&D management), distribution model (sales and marketing organizational structure ), and financial model (revenue modeling, cost structure, profitability and cash generation/management).

  14. Business model types and components

    Some business models primarily outline costs and anticipated sales; others include processes, formulas, workflows and other details that contribute toward corporate success. Here are a couple of the most common components of a business model: Advertising — The use of advertising channels like social media, email and TV commercials to reach a ...

  15. Business Model Canvas Explained

    The Business Model Canvas is an excellent tool to create a business model and present your ideas. It gives a clear picture of how you will make money and sustain your business. The Business Model Canvas will challenge you by making you answer tough questions about your business which would help you to be more prepared to start a business.

  16. Components of a Company Business Model

    A business model is made up of parts that contribute to the successful operation of a company in order to make money. Find out what these components look like. In the simplest terms, a business model is a company's plan for turning a profit. But the model itself is made up of various components that all lead to impacting the bottom line.

  17. Component business models

    Component business models | IBM. Specialization - a laser-like focus on the few activities that confer real advantage and profit - will enable firms to deliver full value to their key stakeholder groups of customers, employees and share-holders.

  18. Component business model

    Component business model ( CBM) is a technique to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify redundant or ...

  19. Implementation of Business Models

    The goal of business model implementation is to design or combine these components in such a way that the business model and the pursued business model strategy are put into practice in the best possible way (Afuah 2004 ). With this in mind, an overview of the basics of business model implementation is given first.

  20. 10 Components Of A Business Model

    Business model components are the essential elements that define how a business creates, delivers, and captures value. They include the value proposition, customer segments, channels, customer relationships, revenue streams, key activities, key resources, key partnerships, cost structure etc. 2.

  21. Components of a Business Model

    Components of a Business Model. A business model is a plan for how a company is going to make money. This can be simple or very complicated. The components of a business model include details on ...

  22. Four steps to implement Component Business Modeling

    Four steps to implement Component Business Modeling | IBM. All too often, financial institutions manage risk and compliance by business or functional unit without looking at the company-wide costs. But with Component Business Modeling (CBM), it's possible to analyze these costs in a different way.

  23. Component Business Model (CBM)

    Component Business Model (CBM) is a technique developed by IBM to model and analyze an enterprise. It is a logical representation or map of business components or "building blocks" and can be depicted on a single page. It can be used to analyze the alignment of enterprise strategy with the organization's capabilities and investments, identify ...