4/23/25, 1:00 PM 13 Business Models: Definition and Examples

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BUSINESS COMPANY PROFILES

13 Business Models: Definition and

Examples
Learn to understand a company's profit-making plan

By CAROL M. KOPP Updated November 01, 2024

Reviewed by DAVID KINDNESS
Fact checked by YARILET PEREZ

Part of the Series

How Companies Make Money

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DEFINITION:
A company’s business model is its plan for making a profit.

What Is a Business Model?

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4/23/25, 1:00 PM 13 Business Models: Definition and Examples

The term business model refers to a company's plan for making a profit. It
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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 companies attract investment,
recruit talent, and motivate management and staff.

Businesses should regularly update their business model or they'll fail to

anticipate trends and challenges ahead. Business models also help investors to
evaluate companies that interest them and employees to 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.
The two levers of a business model are pricing and costs.
A business model should be periodically revised to make sure it still
reflects the business environment and customer demands.
Analysts and investors often look at a company's gross profit to
evaluate the success of a business model.

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4/23/25, 1:00 PM 13 Business Models: Definition and Examples

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Investopedia / Laura Porter

Understanding Business Models

A business model is a high-level plan for profitably operating a business in a
specific marketplace. This plan helps the company to identify the best way to
go about doing its business while also serving to attract investors and talent.

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; it should ideally be stated in a way that
differentiates the product or service from its competitors.

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A new enterprise's business model should also cover projected startup costs
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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. And they are subject to
change. Many businesses revise their business models periodically to reflect
changing business environments and market demand.

Types of Business Models

There isn't one type of business model. Not all companies are the same and
each has different ways of making money. Business models can vary
considerably. An aerospace company such as Boeing, for example, may operate
similarly to a peer such as Airbus but won't share much in common in terms of
how it makes money with, say, a shoe store or bar.

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

Retailer
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

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4/23/25, 1:00 PM 13 Business Models: Definition and Examples

A manufacturer is responsible for sourcing raw materials and producing

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finished products by leveraging internal labor, machinery, and equipment. A
manufacturer may make custom goods or highly replicated, mass-produced
products and can sell what it makes 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 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
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 becoming an upgraded member.

Example: LinkedIn/LinkedIn Premium

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4/23/25, 1:00 PM 13 Business Models: Definition and Examples

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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.

Bundling
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 receive compensation for hosting a platform for business to be
conducted. Although transactions could occur without a marketplace, this
business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate
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
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a disposable component needed to use that product. Also referred to as the

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"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)

FAST FACT
"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. [1]

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)

Franchise
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

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Instead of charging a fixed fee, some companies may implement a pay-as-you-

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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

Brokerage
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 and freight.

Example: Re/Max

Evaluating Successful Business Models

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 up 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, which 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.

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Many analysts consider gross profit to be more important in evaluating a

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business plan. A good gross profit suggests a sound business plan. In that case,
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.

IMPORTANT
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.

Investors and Business Models

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. Fortunately, it's not hard to find. Most companies outline their
business model on their website and in their annual reports.

Admittedly, the business model may not tell you everything about a company's
prospects. Investors need to fill in the blanks, look beyond the sales pitch, and
recognize that sensitive information or any flouting of rules of ethics to gain an
advantage won't be mentioned. The investor who understands the business
model, even on a basic level, can make better sense of the financial data.

How to Create a Business Model

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 someone can take to
create a plan:

1. 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 reflect who you are trying to target so you can
craft your product, messaging, and approach to connecting with that
audience.

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4/23/25, 1:00 PM 13 Business Models: Definition and Examples

2. Define the problem: In addition to understanding your audience, you must

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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 that creates demand for your services or products, your
business may struggle to find its footing.
3. 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.
4. 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.
5. 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.
6. Set monetization solutions: A business model isn't complete until it
identifies how the company will make money and turn a profit. This
includes selecting the strategy or strategies laid out in the business model
types section above.
7. 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.

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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.

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Criticism of Business Models

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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. [2]

Complicated business models can put off investors and hinder a company's
growth. People are less eager to invest in a company they don't understand.
Moreover, some business models can be less profitable and at risk of being
compromised. What works one year, isn't guaranteed to continue doing so in
the future.

Take the airline industry. 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. [3] 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:

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Productivity and business processes: Microsoft offers subscriptions to Office

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products and LinkedIn. These subscriptions may be based on product usage
(i.e. the amount of data being uploaded to SharePoint).
Intelligent cloud: Microsoft offers server products and cloud services for a
subscription.
Personal computing: Microsoft sells the Windows operating system as well
as physically manufactured products such as Surface, PC components, and
Xbox hardware. Residual Xbox sales include content, services, subscriptions,
royalties, and advertising revenue. [4]

What Is a Business Model?

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 Are the Main Types of Business Models?

There are various types of business models. Examples include subscription
models, bundling, and franchising. Business models can sometimes also be
loosely defined by industry. For example, manufacturers produce their own
goods and may or may not sell them directly to the public, whereas retailers
buy goods to later resell to the public.

What Is the Most Common Business Model?

Retailer is probably the most common business model in the U.S. today. This
model is also one of the most competitive.

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, in physical stores and/or online. Retailers interface
with their clients and sell goods, though retailers may or may not make the
actual goods they sell.

What Is the Best Business Model?

What's best relies on numerous factors, including what you are selling, where,
and, most important, what the competitive environment is. A company built on
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a good business model of almost any type can create virtuous cycles that result
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in a competitive advantage. [5]
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,
evaluate your plan and adjust your target audience, product line, or pricing as
needed.

The Bottom Line

A company isn't just an entity that sells goods. It's an ecosystem that must have
a 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 make a
profit. After building a business model, a company should have a stronger
direction on how it wants to operate and what its financial future appears to be.
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