Business Models: 8 Types of Business Models (Plus Examples) (2023)

The business model you choose will determine how much you have to invest to generate revenue. Learn about a few of the most popular models.

As you start to think about building a new business, you inevitably work on what the product will be, whom you’ll hire, and what the target market looks like. You need to spend as much time or more determining what your business model will be.

Overview: What is a business model?

The shortest definition of a business model is something like “how the business makes money.” I don’t think that goes far enough. Really, a business model is how you make money combined with the capital implications.

If you’re looking tostart a business, you shouldn’t look at the revenue model alone but the revenue model combined with the cost of capital and amount of capital required. The business model is more about how and what return on investment the business can achieve.

8 types of business models

Let’s take a look at eight common business models (with some subsets sprinkled in).

1. Subscription

A subscription business model is any model that generates recurring revenue. The classic example is newspapers. Newspaper companies used to be able to depend on secure revenue streams each month to pay employees and produce their products.

In the online era, the following subscription models have become more common.

  • Freemium:The freemium business model provides much of the product for free, usually with an upsell to the premium product. Think about a free email newsletter that advertises an online course.
  • Razor Blade:The razor blade model isn’t a perfect subscription because the opt-out is too easy. Razorblade companies offer the razor handle and the first few blades super cheap and then rake in the cash when you go back every month to buy expensive new blades.
  • Reverse Razor Blade:Reverse razor blade is where you provide the expensive product first, such as a video game. Then you charge for incremental improvements to the product that the customer must have. Reverse razor blade is often combined with freemium for games. The game is free to download, but almost any upgrade or cool skin comes with a cost.
  • SaaS: Software as a Serviceis a subscription model where there is no or little initial cost for the software. Instead, users pay a recurring fee to license the software and access customer service.

When we do business model analysis, we need to consider the two types of costs: fixed (e.g., capital investment) and variable. Fixed costs are the bare minimum necessary to set up the business and keep it running (rent, product development, equipment, etc.). Variable costs are the costs to deliver each incremental product (customer service, inventory, etc.).

(Video) The 9 Most Successful Business Models Of Today

Freemium and SaaS models are similar where they shell out a ton of moolah on fixed costs to build a product and acquire customers. After that, the variable cost of each new customer is basically nil. This is because most freemium and SaaS businesses are online-based.

You’ve reached the high point in a SaaS or freemiumlife cyclewhen it becomes a money machine. At that point, customer acquisition costs become more variable, and you can just pull the lever up on advertising and see a good revenue return from each marginal dollar spent.

Many razor blade businesses do need to worry about variable costs because they have to manufacture the blades and keep costs down to make sure no one opts out.

2. Lowest price

The lowest price model focuses on being the cheapest. The business must constantly be worried aboutpricing structure. Put rows of shelves or airline seats closer together. Find the cheapest raw materials. Forsake customer service.

The keys to a lowest price model are constant vigilance and volume. Keep fixed and variable costs down as low as possible and churn through as many sales as you can. The margin will be low, so you’ll have to make it up in volume.

3. Retail

Retail businesses either purchase or manufacture a product and sell it to the public. Many retailers struggle to meet fixed costs until they reach big box store status and start to benefit from economies of scale.

Online retailers are better off when it comes to fixed costs, especially if they have a product that can be drop-shipped from the manufacturer. Niche retailers have an advantage in that they can charge a premium price. It’s better to be the only Vietnamese/Mexican fusion restaurant in a given area than to be one of 76 different pizza restaurants.

4. Advertising

Advertising is the classic way to get a product to customers for “free.” Here are a few common advertising models.

(Video) 10 Business Models for Every Entrepreneur

  • Banner ads:Most websites you visit will have banner ads somewhere. Many websites have started to try to diversify away from banners ads because it’s so easy to use an ad blocker.
  • Sponsored articles:Similar to a freemium model, many blogs will provide quality free content and then also post articles written by sponsors. This evades the ad blocker and usually has a higher conversion rate for the customer buying the ad.
  • Affiliate links:If you Google long enough, you’ll find something like 14,000 different courses for starting an affiliate marketing business. The basic formula is to use lead magnets (free premium content) to build subscribers to an email newsletter (more free premium content), and then recommend affiliate products to email subscribers. Websites can also use the affiliate model. The one you’re on right now does. Generate high-quality content to build an audience, and then review quality products and recommend them to readers. Affiliate marketing is one of the simplest ways towork for yourself.
  • Commercials:Most TV channels and video websites use commercials. Cut into the premium programming with 15 seconds to three minutes of advertiser video. You also see this model in the podcast world.

Most businesses that are reliant on ads are constantly trying to find new ways to make money. Doing things like selling company swag, adding premium courses, or even holding conferences diversifies the revenue stream away from fickle advertising dollars.

5. Franchise

Converting to a franchise model should be thegoalof most restaurant businesses and many other retail businesses. The classic franchise model is to build a highly successful retail brand and then license the brand to third parties.

Almost every nationwide fast-food restaurant operates under this model. They will have some company-owned stores, but for the most part, the restaurants are owned by franchisees who pay a franchise fee back to the franchisor.

This model is ideal because it takes little to no fixed costs to keep going. Good franchisors will work on creating new products and advertisements, but they don’t need to go through the headache of buying real estate, hiring and paying employees, or serving customers.

6. Middleman

Middlemen are one of the most important features of an evolved economy. Doing accounting in Utah, it would be close to impossible for me to contact and buy corn from a farmer in Illinois. The middleman is the one who creates the relationship with the farmer to buy the corn and then sells it to a retail store close to me.

The capital outlay for a middleman business is usually whatever it costs to purchase the inventory. The middleman is effectively a speculator, buying the inventory in the hope that they can resell it with a markup.

It’s even better if you can get a middleman business going where you don’t have to front the cost of the inventory. Think about an online marketplace. The company gets a fee for listing the product and joining the buyer and seller, but it never has to take possession of the product. All costs are fixed, and the return on investment is sky-high.

7. Service

Service businesses are hard. They inevitably have high fixed and variable costs. For example, an HVAC contractor has to buy or rent an office/warehouse and buy vans and other equipment. Then, for each new transaction, the contractor needs an office person to take calls, gas for the van, and wages for the tech who goes out and does the job.

(Video) The Explainer: What is a Business Model?

As you can probably guess, most service businesses live and die based on service. An HVAC contractor is probably paying about the same amount for materials and employees as every other HVAC contractor. The competitive advantage comes from people wanting to do business with you.

8. Leasing

The leasing model has the biggest variance between fixed and variable costs. Fixed costs can be enormous, while variable costs are close to nonexistent.

If you own a self-storage site, you start with massive fixed costs to purchase or build the property. Every year, you pay for taxes and utilities on the site. From there, variable costs would be a few employees to rekey units and assist renters and almost nothing else.

Leasing is the perfectpassive business.

Business model examples to help you create your own

Here are a few examples of popular businesses with their models. I don’t have any special knowledge about any of these companies, so I’ll be guessing at the model based on what I’ve read and experienced.

1. The Motley Fool

Let’s start with our favorite financial newsletter company. The Motley Fool’s core business model is a freemium subscription model. It provides tons of free, high-quality content with articles andpodcastsabout the stock market and points readers to subscribe to various premium newsletters and services.

There are a few banner ads on the site here and there, but you won’t see many. I would guess this is a result of simple cost/benefit analysis. If someone clicks on a banner ad on the website, the company earns what could be as little as a few cents. If they stay on the website, they may eventually purchase a service that costs thousands of dollars per year.

The company also has diversified into other revenue sources, such as books and conferences. This is a way to upsell to existing subscribers who love the company and potentially bring in new subscribers who wouldn’t have joined through the website.

(Video) What Is A Business Model

2. McDonald’s

McDonald‘s has had an interesting business model evolution. It started out with a run-of-the-mill retail model with a restaurant. Later on, as it grew in popularity, it started to sell franchises but with a hybrid franchise/leasing model.

Successful franchises are awash with cash. Once they hit their fixed costs, almost every dollar flows directly to the bottom line. The problem then becomes what you can do with the money. There are only so many different types of burgers you can come up with. Once you start selling a double cheeseburger, it doesn’t take much R&D to come up with the triple cheeseburger.

McDonald’s decided to start purchasing the real estate its locations are on and then lease the sites back to the franchisees. It’s the perfect model. McDonald’s builds a diversified portfolio of in-demand and high-return real estate with its hoard of cash. If the franchise fails, McDonald’s doesn’t have to worry about vacancy. It just sends a new operator to the site until it can sell it to someone new.

3. Netflix

Netflix has evolved as well. You could say it’s always had a subscription model. In the beginning, it had recurring revenue with huge fixed costs to buy DVDs, but now it has recurring revenue with huge fixed costs to license and create content.

The difference is in the variable costs. In its original iteration, Netflix constantly had to buy new DVDs to replace damaged ones and to have all the newest movies.

Modern Netflix has negligible marginal costs for new subscribers. It has to pay billions to re-license and create new content every few years, but it’s working toward a future where the majority of its content will be Netflix-created. Selling subscriptions for content that was created and paid for years ago is the ideal model.

Choose your model

As you increase yourbusiness acumenand develop your business, you’ll naturally lean toward business models that are low on capital costs and high on profits. Learning about the models ahead of time will go a long way toward increasing your profit in the future.


Business Models: 8 Types of Business Models (Plus Examples)? ›

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.

What is an example of business model example? ›

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.

What are the 8 key components of an effective business model? ›

What are 8 common parts of a good business plan? Some of the most common components of a business plan are an executive summary, a company description, a marketing analysis, a competitive analysis, an organization description, a summary of growth strategies, a financial plan, and an appendix.

What are the 9 elements of a business model example? ›

The Business Model Canvas consists of nine essential parts: Customer Segments, Value Proposition, Revenue Streams, Channels, Customer Relationships, Key Activities, Key Resources, Key Partners, and Cost Structure.

What are the eight different component parts of business models? ›

8 Key Elements Of A Business Model that You Should Understand
  • Value Proposition.
  • Revenue Model.
  • Market Opportunity.
  • Competitive Environment.
  • Competitive Advantage.
  • Market Strategy.
  • Organization Development.
  • Management Team.

What is a good example of business model innovation? ›

Netflix's transition from a DVD rental service to a subscription-based streaming platform, Airbnb's disruption of the hotel industry with a peer-to-peer home-sharing model, and Tesla's direct-to-consumer sales model for electric vehicles are examples of successful business model innovations.

What is an example of business to customer business model? ›

What is an example of B2C? An ecommerce store selling products directly to a consumer at home. For example, a T-shirt brand selling t-shirts online.

What does 8 the Business Model Canvas explain an organization? ›

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.

What are the characteristics of 8 business functions? ›

There are eight business functions – administration, finances, general management, human resources, marketing, production, public relations and purchasing. Administration in a business involves recording and organising information so that the business can run successfully.

What are the eight core of business? ›

The growth rate of eight infrastructure sectors -- coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity -- stood at 7.6 per cent in FY23, down from 10.4 per cent recorded in 2021-22.

What are the 8 key elements of e commerce business model? ›

These elements are value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team.

How to create a business model? ›

Define the problem you're going to solve, then define the customers for which the problem will be solved. Next, identify the customer and the problem. After that, define a set of possible solutions. After, define a set of possible monetization strategies for that solution, test, and choose your business model.

What are the 7 C's business model? ›

These seven dimensions (7C's) are: customers, competitors, capabilities, capital, channels, communication, and coordination.

What are elements of business model? ›

Other experts define a business model by specifying the main characteristics of a good one. For example, Harvard Business School's Clay Christensen suggests that a business model should consist of four elements: a customer value proposition, a profit formula, key resources, and key processes.

What are the eight key components of an effective business model quizlet? ›

  • Value Proposition. Define how a company's product or service fufils the need of customers. ...
  • Revenue Model. ...
  • Market Opportunity. ...
  • Competitive Environment. ...
  • Competitive Advantage. ...
  • Market Strategy. ...
  • Organizational Development. ...
  • Management Team.

What are the 4 components of a business model example? ›

A business concept has four major components: Core Strategy, Strategic Resources, Customer Interface and Value Network”...

What are the 4 types of innovation with examples? ›

The four types of innovation
  • Sustaining, or incremental innovation. “Sustaining innovation” initially seems like an oxymoron. ...
  • Breakthrough innovation. We've spoken about how the current smartphone market is an example of sustained innovation. ...
  • Disruptive innovation. ...
  • Basic research.
Nov 7, 2022

What is an example of key innovation? ›

A key innovation may allow a species to invade a new region or niche and thus be freed from competition, allowing subsequent speciation and radiation. A classic example of this is the fourth cusp of mammalian molars, the hypocone, which allowed early mammalian ancestors to effectively digest their generalised diet.

What is an example of a profit model? ›

Common examples of profit model innovations include premium prices, where companies figure out how to charge more for their offering than competitors do, or auctions, where the market sets the price for goods. The ideal profit model will vary widely by context and industry.

What business model is Amazon example of? ›

Amazon's business model is an Ecommerce model, but over the years it has made acquisitions and created a portfolio of business models and revenue streams. However, the biggest proportion of sales which is fifty per cent came from their online marketplace.

What is the purpose of the business model? ›

In its simplest form, a business model provides information about an organization's target market, that market's need, and the role that the business's products or services will play in meeting those needs. Business model innovation, then, describes the process in which an organization adjusts its business model.

What is an example of a key partner? ›

Key partners are the companies or people your business works with to create a strategic relationship. A few examples of key partners are suppliers or distribution partners in the supply chain.

How are the 8 business functions interrelated? ›

Business functions are interrelated to achieve company success. They cannot work alone. Synergy and close communication between them are needed to achieve company targets. Indeed, each function has its own goals and targets, but it must support the company's goals as a whole.

What are the eight main functional areas within most businesses? ›

Common functional areas in businesses include sales, marketing, finance and accounting, customer service, human resources, research and development, production, and distribution.

Which of the followings are examples of business functions? ›

In general, the key functional areas of a business are the following:
  • Management.
  • Operations.
  • Marketing/Sales.
  • Finance.
  • Research and Development.

What are the 8 core products? ›

Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity. The Eight Core Industries comprise 40.27 percent of the weight of items included in the Index of Industrial Production (IIP).

What are examples of business cores? ›

Examples of core competencies in business
  • Consistently high quality.
  • Incomparable value.
  • Ceaseless innovation.
  • Clever, successful marketing.
  • Great customer service.
  • Formidable size and buying power.
Feb 21, 2023

What are core business processes and examples? ›

Operational processes (core business processes) are those that bring direct value to customers and the company itself. They are the processes that directly create revenue. Examples include: product manufacturing, order to cash process, and delivering products to customers.

What are the eight 8 unique features of e-commerce technology? ›

E-commerce has created a market place with significant advantages through eight unique features afforded to e-commerce transactions. These features include ubiquity, global reach, universal standards, richness, interactivity, information density, personalization-customization, and social technology.

What are the 8 unique features of e-commerce? ›

  • Ubiquity. internet/web tech is available everywhere. ...
  • Global reach. tech reaches across national boundaries which makes marketspace potentially billions.
  • Universal Standards. ...
  • Richness. ...
  • Interactivity. ...
  • Information density. ...
  • Personalization/Customization. ...
  • Social Technology.

What are the 4 eCommerce business models? ›

Some consider business-to-consumer (B2C), business-to-business (B2B), consumer-to-consumer (C2C), and consumer-to-business (C2B) the “four traditional” types of ecommerce.

What is the easiest business model to start? ›

What are the easiest home businesses to start?
  • Dog Walking.
  • Selling on eBay.
  • House Cleaning.
  • Freelance Writing.
  • Home Tutoring.
  • Social Media Service.
  • House Painting.
  • Yoga Classes.

What is the simplest business model? ›

In its simplest form, a business model can be broken down into three parts: Everything it takes to make something: design, raw materials, manufacturing, labor, and so on. Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale.

What are the 4 A's of marketing mix? ›

That's why one of the most effective marketing strategies is using the 4 A model: Acceptability, Affordability, Accessibility, and Awareness.

What are the 7 P's of marketing? ›

Since then, the theory has been expanded into the 7 P's of marketing. Which are: Product, Price, Promotion, Place, People, Packaging, and Process.

What are the 7 types of marketing mix? ›

The 7Ps of marketing are – product, pricing, place, promotion, physical evidence, people, and processes. The 7 Ps make up the necessary marketing mix that a business must have to advertise a product or service.

What are the two 2 most important parts of a business model? ›

Tip. 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.

What makes a successful business? ›

Successful businesses meet the needs and wants of customers. They identify a pain point or a gap in the market, they conduct deep research on what people are looking for, and they offer a solution to suit.

What is business model design? ›

Business model design generally refers to the activity of designing a company's business model. It is part of the business development and business strategy process and involves design methods.

What are the 7 common parts of a good business plan explain each part in two to three sentences? ›

The 7 Elements of a Successful Business Plan (Template Available!)
  • Executive Summary. The executive summary describes the overall mission of your business. ...
  • Business History, Background and Objectives. ...
  • Products and Services. ...
  • Marketing Planning. ...
  • Competition. ...
  • Operational Plan. ...
  • Financial Planning.
Jan 20, 2020

What are the 5 keys of business success? ›

5 Keys to Driving Business Success
  • Recognise your overall employee strengths and weaknesses. ...
  • What are your goals to achieve business success? ...
  • Establish a link between what you have and what you want. ...
  • Find and fill gaps. ...
  • Analyse and refine.

What are eight characteristics that arise out of the definition of business? ›

Characteristics of Business

Some of these characteristics include economic activity, buying and selling, continuous process, profit motive, risk and uncertainties, creative and dynamic, customer satisfaction, social activity, and government control.

What are the 3 types of business models? ›

Business models come in a variety of forms. Direct sales, franchise, freemium, and subscription models are among the common kinds.

What are the most important parts of business model? ›

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.

What kind of business model is Netflix an example of? ›

Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows.

Is Apple a business model? ›

Apple's business model is based on innovation and consumer-centric devices. They are able to keep their base due to easy-to-use designs and data migration to new product lines.

What is Netflix with example? ›

Netflix is a subscription-based streaming service that allows our members to watch TV shows and movies on an internet-connected device. Depending on your plan, you can also download TV shows and movies to your iOS, Android, or Windows 10 device and watch without an internet connection.

How can I improve my Netflix business model? ›

4 Strategies Netflix Can Implement to Boost Revenue Amid Slowing Subscriber Growth
  1. Lower-priced ad-supported version. ...
  2. Limited account access. ...
  3. Launching series weekly instead of all at once. ...
  4. Release blockbusters on the big screen first.
May 1, 2022

What are the 5 C's business model? ›

What is the 5C Analysis? 5C Analysis is a marketing framework to analyze the environment in which a company operates. It can provide insight into the key drivers of success, as well as the risk exposure to various environmental factors. The 5Cs are Company, Collaborators, Customers, Competitors, and Context.

What are the 4 areas of business model? ›

Broken into four parts, each business model includes an offering, customers, infrastructure, and financial viability.

What is Samsung's business model? ›

Samsung follows a simple business philosophy: to devote its talent and technology to creating superior products and services that contribute to a better global society. To achieve this, Samsung sets a high value on its people and technologies.

What business model is Instagram? ›

The Instagram business model is primarily based on advertising. The platform has many advertising formats, such as photo and video ads, carousel ads, story ads, and sponsored content. With over 2 billion active monthly users, the popularity of this social media platform is growing exponentially.

What is the type of business model? ›

Types of business models and examples
  • Retailer model. A retailer is the last link in the supply chain. ...
  • Manufacturer model. A manufacturer converts raw materials into products. ...
  • Fee-for-service model. ...
  • Subscription model. ...
  • Bundling model. ...
  • Product-as-a-service model. ...
  • Leasing model. ...
  • Franchise model.
Jul 14, 2022


1. Subscription Business Models - 6 Types You Should Know
2. Anu Hariharan - Nine Business Models and the Metrics Investors Want
(Y Combinator)
3. The Best Examples of Subscription Business Models
(Bernard Marr)
4. Master the Business Model Canvas
(Between Keyboard and Chair)
5. Designing Business Models
6. The 10 Best Platform Business Model Examples
(Bernard Marr)


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