WHAT IS A BUSINESS MODEL?

This refers to a company's plan for making a profit. It identifies the products or services the
business plans to sell, its identified target Business models help you develop strategies for
customer acquisition, talent recruitment, key partnership alliances, and business development
market, and any anticipated expenses.
BUSINESS MODEL VS. BUSINESS PLAN
BUSINESS MODEL BUSINESS PLAN
a) A business model describes how an a.) A business plan is a document that
organization creates, delivers and details the organization’s strategy and
captures value in economic, social, expected financial performance for
cultural or other contexts. years to come.
b) If the business plan is a road map that b.) the business model is the vehicle that
describes how much profit the gets you there.
business intends to make in a given
period of time,
The business model and the business plan are both key elements to an organization’s
development, growth and succession planning and decision making.
BUSINESS MODEL
For businesses on take-off, exploring potential business models can help you determine if your
business idea is viable, attract investors and guide your overall management strategy. For
established businesses, it serves as the basis for developing financial forecasts, setting
milestones, and setting a baseline for reviewing your business plan.
For established businesses, it serves as the basis for developing financial forecasts, setting
milestones, and setting a baseline for reviewing your business plan.
Most people define a business model as the company’s way of making money. But there’s much
more to the business model than meets the eye. Let’s first understand the differences before we
dive deeper into what investors look for when evaluating a startup.
A business model is how the company creates, delivers, and captures value.
Founders engaging for the first time with an investor need to have a well-designed and efficient
business model as there will be many questions at the first meet. And if your 5 min elevator
pitch is a success, you’ll get invited for a meeting. If your startup lacks any of the essential
elements of a business and revenue model, you will struggle to capture any investor’s attention.
An investor evaluating a prospective investment has to reduce investment risk by looking at a
couple of vectors. Without a revenue model, the business model will not work. When you first
start, make sure you get these right, and you are sure to increase your chances of success both
with getting funding and happy returning customers.
When we create more value than we capture and capture more value than it costs to deliver, we
have a sustainable business model. Keeping this equation in mind, let’s dissect the business
model further.
What is a business model?
Nine individual components describe and assess a business model. It involves identifying
customer segments, customer relationships, value propositions, delivery channels, key
resources, key activities, key partners, cost structure, and revenue model.
An intelligent founder can design a superior business model by using the following magic
triangle and slotting these nine activities into four individual components of a business
model: Figure 1 — Triangle of Business Model Development (own illustration based
on Business Model Navigator.)

1. WHO are the target customers? (Customer segments and relationships)

2. WHAT is offered to the customers? (Value propositions)
3. HOW is the value proposition created and delivered to the customer? (Key activities,
partners, and resources)
4. WHY is the business profitable? (Cost structure & revenue model)
TWO SIDES OF A BUSINESS MODEL (BUSINESS MODEL CANVAS)

This Business Model definition was created by the Swiss Consultant Alexander Osterwalder as
a result of his PhD thesis, entitled The Business Model Ontology, in which he researched
different business model definitions to create a single one. It was this document that later gave
birth to the popular Business Model Canvas tool.
The BMC is a typical tool used for helping entrepreneurs develop different ways of structuring a
company that solves a problem, adds value to its customers, and delivers a profit. Osterwalder
talks about the “front stage” and “backstage” sides of the business model canvas. The front
stage has everything to do with the customer-facing elements of the business, and backstage
handles all the aspects of the business process.
In other words, the front stage is customers, relationships, channels, and revenue (the right half
of the canvas). Backstage includes partners, key activities, key resources, and cost (the left half
of the canvas). And the essential “value” part is in the centre of it all. Founders need to ensure
that both sides of this model, the customer aspects and the business aspects are in alignment
for an efficient model.
The 9 blocks of construction are:
1. Customer Segments
2. Value Proposition
 3. Distribution Channels
4. Customer Relationship
5. Revenue Streams
6. Key-Resources
7. Key-Activities
8. Key-Partners
9. Cost Structure
KEY COMPONENT OF A BUSINESS MODEL
In its simplest form, a business model can be broken down into three parts:
1. CREATING VALUE - everything it takes to make something
• Design
• Raw materials
• Manufacturing
• Labor
2. DELIVERING VALUE - everything it takes to sell that thing
• Marketing
• Distribution
• Delivering a service
• Processing the sale
3. CAPTURING VALUE - how and what the customer pays
• Pricing strategy
• Payment methods
• Payment timing

Why do we need a business model?

To better understand how the Business Model Canvas works, I have an exercise for you. Take
some time out of your day, grab a cup of coffee, sit down in a quiet place, and apply the
Business Model Canvas to your business. Using this tool will make it easier for you to apply the
logic to your own business. It’s a valuable exercise to do at the beginning or at a time of
misalignment in your business since it can help pinpoint a troublesome area that needs
innovating.
When one component of the business model changes, it often leads to a change in other parts.
A change or innovation in the revenue model often can affect change across the company’s
entire business model. So, if you have been struggling to gain traction or received feedback that
your business and revenue model are misaligned, take comfort that it’s happened to the best.
For example, PayPal, Apple, and YouTube were flexible enough to change their strategies,
proving to be a significant asset. PayPal, founded in 1998, was initially meant to be a
cryptography company and then later a mechanism of transmitting money via PDAs. Yet after
several years of trial and error, PayPal discovered a working business model as an online
payment system that allowed them to go public in 2002.
Apple was also failing to consistently generate a profit from about 1993 to 1997. After several
internal issues, Steve Jobs left but later returned in 1997 and led the company through a drastic
change in Apple’s business model and, the rest is history.
DIFFERENT TYPES OF BUSINESS MODELS
1. Freemium Business Model
Freemium is a combination of the words free and premium. Companies following the
freemium business model offer the most basic version of their product or service for free
to entice consumers to purchase the more advanced features, capabilities, or add-ons of
the product or service in the future. The freemium business model works for new
companies by cultivating strong relationships with customers. It also works best for
internet-based service companies.
Examples are: Spotify, YouTube, LinkedIn, and Dropbox
2. Subscription-Based Model
The subscription-based model allows companies to charge consumers monthly or yearly
subscription fees to access their product or service. This model depends on these
consumers continuing to love and utilize the service. To keep consumers satisfied and
paying monthly subscription fees, companies need to continually improve their products
or services to keep up with changing trends or competitors
Examples are: Netflix, Disney+, and Cable Television
3. Peer-to-peer Business Model
In a peer-to-peer business model, a company acts as the go between businesses and
the customers interested in purchasing their products or services. The companies using
this model provide the platforms, navigate the regulations, and set pricing for the
products or services. A well-known example of this business model would be ride-
sharing services such as Uber. These platforms allow people to receive rides to and
from requested destinations by thoses who apply to be drivers for the service.
Examples are: Uber, Shopee, and Airbnb
4. Franchise Model
It provides a sense of working for oneself with the added security of having a company’s
backing with familiar trademarks and products. There is a legal and commercial
relationship between the franchisor, the parent company owner (usually a corporation),
and the franchisee. The franchisee (or business owner) is allowed to sell the franchisor’s
products or services in exchange for paying a royalty fee.
Examples are: Mcdo, 7-eleven, and more
5. Direct Sales Business Model
In the direct sales model, a company’s employees will be the ones who demonstrate and
sell the products or services being offered directly to the intended consumers. This
effectively eliminates steps within the distribution process, such as wholesalers and the
regional distribution centers. This model is when a person is compensated for sales
made by salespersons recruited by them and under their authority.
Examples are: AVON
6. Affiliate Marketing Business Model
People using the affiliate marketing business model promote and sell products from
other companies online to get paid a percentage of the sales they make. This business
model is common with “influencers” on Instagram or other leading social media apps.
They will post about a company’s product to entice their followers to buy it through them.
Many of their followers will buy the product through the supplied link. It is a win-win
situation for both the influencer marketing the product and the company selling it.
7. E-Commerce Business Model
Electronic commerce, or “e-commerce,” is a business model in which companies and
individuals buy and sell products and services online. Because the business is entirely
online, the products and services offered are nearly limitless. An e commerce business
offers companies the extra convenience of not needing a physical store. This increases
the selection of products available to consumers.
8. Drop-Shipping Business Model
Companies using the drop-shipping business model sell various products on their
websites, but supplying and shipping these products is done by a third-party wholesaler.
The significant upside to this business model is that you do not need to pay for or
maintain inventory for any of the products you sell. It can be costly to store, package,
and mail out orders. In this model a third party will handle the logistics of shipping and
making sure the customers receive the products they ordered. The individual who
marketed the products gets a percentage of the sales.

9. Vertically Integrated Business Model

The vertically integrated supply chain business model is when the company controls
both supply and distribution. The company controls all costs of production, inventory
stocked, marketing, and pricing. Because the company has complete control of the
product from start to finish, it can decrease transportation costs and improve sales and
profitability.
10. Consulting Business Model
There are two parts to the consulting business model. First, hiring experts or developing
a list of freelancing consultants, and second, charging a fee to provide access to these
experts by your clients. Typically, your experts will provide a service that speaks to the
consumer’s needs. Hopefully, the customer will return to you as further needs arise.
Common examples of this could be online tutoring, mentoring, and freelance work in
several different fields.
11. Ad-Supported Business Model
Advertising is a significant component in why some companies are incredibly profitable
and why some will financially fail. Failure to advertise a product or service can lead to
people not even knowing a company exists. The ad-supported business model
emphasizes the importance of advertising and the sales generated from it. Popular
 platforms to advertise products or services include print media, online media, and
television.
12. Enterprise Business Model
In the enterprise business model, specific aspects of a business are modeled, such as
infrastructures and asset groups. The company leaders will see what needs to be altered
within the business to maximize profits. The enterprise model is more about evaluating
how the business is functioning than it is about the overall structure of the business.
13. Lock-In Business Model or Lock-In Strategy
The lock-in business model takes customer loyalty and kicks it up a notch. This is done
by essentially locking customers into a company’s product or service by making it difficult
to abandon the company without dealing with negative consequences. Some of these
consequences include increased costs or making it difficult to switch.
14. Multi-Brand Business Model
With the multi-brand business model, a parent company will offer similar products with
different brand names to increase their market share. By doing this, the company
effectively reduces any potential competition. A company with many similar products at
different price points will appeal to a significant number of customers.
15. Razor and Blade Model
The razor and blade model works by selling products or services to consumers at a
lower price. Then later selling a related product or service to the consumer for increased
profits. The name razor and blade comes from King Gillette. Gillette effectively worked to
overtake the men’s razor market by offering a sturdy and reliable razor that required the
use of blades only sold by Gillette. As a result, the company cornered the market on
razors for a time and is still dominate today.
16. Distribution Based Business Model
The distribution-based business model facilitates the distribution of products or services
offered from the manufacturers to the consumers. With this model, the business ensures
that the mode of distribution chosen to get the product or service to the consumer is the
most direct, and more importantly, the most cost-efficient manner possible.
17. Direct-to-Consumers Business Model
With the direct-to-consumer business model, consumers buy products or services
directly from a company’s website, eliminating the middle-man. The model not only
saves the company money but can be convenient for the customer as well. Consumers
would have to physically visit a store to purchase the product they desire but know they
can order the product directly from the company or manufacturer.
18. Low-Touch Business Model
Some customers want the least amount of interaction with the company possible.
Businesses that want to meet that need should adopt a low-touch business model.
Products sold using this model can be consumed or used with little interference from
salespersons or customer service. Due to the pandemic of 2020, many businesses
learned to adapt to the threat. These businesses adopted low-touch strategies to help
keep their doors open.
19. Fractionalization Business Model
In this model, companies will sell partial usage of their product or service to consumers,
such as offering a timeshare deal for a condominium in a desirable location. Consumers
will receive full benefits of the timeshare when they are there, but they can only be there
for a pre-determined time each year.
 20. Pay-As-You-Go Model
As the name suggests, consumers will pay for the service or product as they use it.
Meaning there is no recurring bill or subscription necessary. This model should entice
those who do not like to be tied down. If the product or service is of high quality and
worth the price paid, they will continue using it.
21. User-Generated Content Business Model
User-generated content business is a type of content distribution platform where the
users create the content. This model eliminates the need to create content as a primary
way to engage visitors. This is another type of business model that is often combined
with the advertising model.
TIME VALUE OF MONEY
TVM is the fundamental financial concept that revolves around the changing value of money
over time. It states how the present value of money is greater than its future value. The value
that money holds currently and in the future is assessed based on its potential earning capacity.
The three main reasons that make TVM an important concept are – inflation, risk or uncertainty,
and liquidity.
• INFLATION - is the loss of purchasing power caused by the deteriorating future value of
money
• RISK OR UNCERTAINTY - is the difference between what is received as an outcome and
expected when the investment or expenditure was made
• LIQUIDITY- makes it easy for owners to sell their assets for cash as illiquid assets are difficult
to sell
REVENUE GENERATIONS
Revenue generation refers to the process of creating sales of products and services, with the
goal of creating income
PRICE STRUCTURE
A pricing structure is an approach in products and services pricing which defines various prices,
discounts, offers consistent with the organization goals and strategy. Price structure can affect
how company grows and is perceived by the customers.
Types of Pricing Structure
1. Market Penetration Pricing
the products lowest compared to other competitors to gain a penetration and anchoring
in the market. This attracts a large section of the market specifically the cost conscious
segment and helps the company to make large profits.
2. Price Skimming
Introducing a product or service with the highest possible price and slowly reducing the
prices over time. This targets almost every segment over a period of time.
3. Economy Pricing
 These products are priced at an affordable rate compared to other competitor products.
The target for these products is the lower economic segment. The quality may or may
not be compromised in case of these products.
4. Psychology Pricing
▪ Marking a Php1000 product as Php999.00 is psychology pricing. The feel of the price is
lower with a lower starting number is the technique used.
▪ Another variation of the same technique is to run discount pricing. To offer seasonal
discounts on limited products for a limited period of time.
5. Premium Pricing
▪ The price tag for the product is highest amongst all the competitors. The elite pricing is
owing to the superior and unique quality of the product.
▪ Premium pricing generates assured profits and generally the first one to create a
demand in the market since either they have unique products or are first in the market.
PRICE ELASTICITY
A measure of how consumers react to the prices of products and services. Normally, demand
declines when prices rise, but depending on the product/service and the market, how
consumers react to a price change can vary.
Two Types of Price Elasticity
1. Price elasticity of demand - is a measure in economics to show how demand responds
to a change in the price of a product or service.
2. Price elasticity of supply - is a measure that shows how the quantity of supply is affected
by a change in the price of a good or service.

CHANNELS OF DISTRIBUTION
A distribution channel represents a chain of businesses or intermediaries through which the final
buyer purchases a good or service. Distribution channels include wholesalers, retailers,
distributors, and the Internet. In a direct distribution channel, the manufacturer sells directly to
the consumer.
Types of Distribution Channels
1. Direct Channel - when the producer sells goods directly to their customer.
2. Indirect Channel - when the producer produces goods on a large scale, it is difficult to
make direct selling of the goods to the customers. In this way, middlemen come into the
 picture to ensure the availability of the goods to its customers. It may include
wholesalers and retailers.
▪ One Level Channel Producer → Wholesaler/Retailer → Consumer
▪ Two Level Channel Producer → Wholesaler → Retailer → Consumer
▪ Three Level Channel Producer → Merchantile Agent → Wholesaler → Retailer → Consumer
3. Hybrid Channels - when the manufacturer uses more than one channel to reach the final
consumer. This attracts more consumers and facilitates more sales.
STRATEGIC PARTNERS
A strategic partner is another business entity with which you form an agreement to share
resources with the mission of growth and mutual success.
Different Types of Strategic Partnerships:
1. Horizontal Partnership: Businesses within the same field join alliances to improve their market
position. Example: Facebook and Instagram.
2. Vertical Partnership: Businesses team up with companies within the same supply chain
(suppliers, distributors and retailers), often to stabilize supply chains and increase sales. The
close bond between an auto manufacturer and its suppliers is an example.
3. Equity Partnership: An investor acquires a percentage interest in a business, providing
needed capital and sharing in profits and losses.
4. Joint Venture: Two or more businesses form an entirely new legal entity in which the profits
and risks are shared, and the original companies continue to exist on their own.
5. Merger: Two companies agree to go forward as a single new company and the original
companies no longer exist.
6. Acquisition: One company takes over another company and establishes itself as the new
owner.

Types of Business Models

There are various types of business models, each tailored to the specific needs and goals of
different industries and companies.
1. Ad-Supported or Advertising
Advertising is a significant component in why some companies are incredibly profitable and why
some will financially fail. Failure to advertise a product or service can lead to people not even
knowing a company exists. The ad-supported business model emphasizes the importance of
advertising and the sales generated from it. It relies on generating revenue by displaying
advertisements to users. Popular platforms to advertise products or services include print
media, online media, and television.
e.g. Youtube, magazine ads, Truck Advertising
2. Affiliate Marketing
An advertising model in which a company compensates third-party publishers to generate traffic
or leads to the company’s products and services. When a customer makes a purchase through
the affiliate’s link, the affiliate earns a commission. People using the affiliate marketing business
model promote and sell products from other companies online to get paid a percentage of the
sales they make. This business model is common with “influencers” on Instagram or other
leading social media apps. They will post about a company’s product to entice their followers to
buy it through them. Many of their followers will buy the product through the supplied link. It is a
win-win situation for both the influencer marketing the product and the company selling it.
https://www.investopedia.com/terms/a/affiliate-marketing.asp
e.g. Tiktok affiliate
3. Bundling
Product bundling is a technique in which several products are grouped together and sold as a
single unit for one price. This strategy is used to encourage customers to buy more products.
Companies seling two or more products together as a single unit, often for a lower price than
they would charge seling the products separately. McDonald’s Happy Meals are an example of
product bundles. Instead of selling a burger, soda, and french fries separately, they are sold as
a combination, which leads to more sales than offering them separately.
https://www.zoho.com/inventory/academy/order-fulfillment/what-is-product-bundling.html
e.g. AT&T, Fast food combo meals
4. Fee-for-Service
Instead of seling products, fee-for-service business models are centered around labor and
providing services(intelectual or physical). A fee-for-service business model may charge by an
hourly rate or a fixed cost for a specific agreement. Fee-for-service is one of the most commonly
used social enterprise models among nonprofits. Membership organizations and trade
associations, schools, museums, hospitals, and clinics are typical examples of fee-for-service
social enterprises.
its mission centers on rendering social services in the sector it works in, such as health or
education. The social enterprise achieves financial self-sufficiency through fees charged for
services. This income is used as a cost-recovery mechanism for the organization to pay the
expenses to deliver the service and business expenses such as marketing associated with
commercializing the social service. Surpluses (net revenue) may be used to subsidize social
programs that do not have a built-in cost-recovery component.
e.g. Hairstylist, professors, doctors, lawyers
https://www.4lenses.org/setypology/ffs/
5. Franchise
Builds on existing successful business and receives a percentage of earnings from franchises
who invest in, operate, and promote new locations.
It provides a sense of working for oneself with the added security of having a company’s
backing with familiar trademarks and products. There is a legal and commercial relationship
between the franchisor, the parent company owner (usually a corporation), and the franchisee.
The franchisee (or business owner) is allowed to sell the franchisor’s products or services in
exchange for paying a royalty fee.
e.g. Mcdo, 7-eleven, and more
6. Freemium
Freemium is a combination of the words free and premium. It provides a limited free product
with a more advanced option that users can pay to access. Companies following the freemium
business model offer the most basic version of their product or service for free to entice
consumers to purchase the more advanced features, capabilities, or add-ons of the product or
service in the future. The freemium business model works for new companies by cultivating
strong relationships with customers. It also works best for internet-based service companies.
Examples are: Spotify (This model is common in the software-as-a-service space — Spotify, for
instance, has a free ad-supported tier, but subscribers get to listen ad-free.), YouTube, LinkedIn,
and Dropbox
7. Manufacturer
Sources raw materials to produce finished goods that are sold to retailers or directly to
customers. This type of business model might also involve the assembly of prefabricated
components to make a new product, such as automobile manufacturing. A manufacturing
business can sell the products created directly to customers, which is known as the business-to-
consumer model. Another option involves outsourcing the sales aspect of the process to
another company, which is known as the business-to-business or B2B model. Wholesaling
manufacturers typically sell products to retailers, which then sell directly to consumers. An
example of this type of company might be a clothing manufacturer that sells merchandise to a
retailer, which then sells to consumers.
Here are some ways that manufacturers can sell their products:
Business-to-consumer (B2C): The manufacturer sells the products directly to consumers.
Business-to-business (B2B): The manufacturer outsources the sales to another company.
Wholesaling: The manufacturer sells the products to retailers, who then sell them to consumers.
https://online.maryville.edu/business-degrees/traditional-types-business-models/#:~:text=The
%20manufacturer%20business%20model%20utilizes,which%20then%20sells%20to
%20consumers.
https://www.softwaresuggest.com/blog/manufacturers-business-model/
e.g. Apple, IKEA, Taytay Tiangge, Mercedes-Benz, Samsung
8. Pay-as-you-go
Charges customers based on actual usage of a product. As the name suggests, consumers will
pay for the service or product as they use it. Meaning there is no recurring bill or subscription
necessary. This model should entice those who do not like to be tied down. If the product or
service is of high quality and worth the price paid, they will continue using it.
The pay-as-you-go (PAYG) pricing model means that users pay based on how much they
consume. For example, a cloud storage service provider could charge based on the amount of
storage used, while many phone carriers bill based on minutes used.
You’ll also hear pay-as-you-go referred to as a usage-based or consumption-based model.
e.g. a cloud storage service provider, utility services, streaming services
9. Retailer
Procures and sells products manufactured by others — the last step of a supply chain. A
retailing business purchases products directly from a wholesale or distributing company, then
sells the inventory directly to the public. Retailers often utilize a brick-and-mortar location for
points of sale. Examples of retailers include grocery stores, clothing stores, and department
stores. Retailers might be nationwide chains, or they could be independent shops operated by a
single entity. A physical location for a retailer is common but not mandatory. Retailers may
choose to offer sales as an online retailer. Online retailing can be done alone or in combination
with selling from a physical location. Retailers experience the ongoing challenge of competing
against other retailers that offer similar products.
e.g.Walmart, Aldi, SM superma ls
https://online.maryville.edu/business-degrees/traditional-types-business-models/#:~:text=of
%20the%20market.-,Retailer,clothing%20stores%2C%20and%20department%20stores.
10. Subscription
Provides consumers with certain services for a fixed monthly, quaterly, or annual fee. The
subscription-based model allows companies to charge consumers monthly or yearly
subscription fees to access their product or service. This model depends on these consumers
continuing to love and utilize the service. To keep consumers satisfied and paying monthly
subscription fees, companies need to continually improve their products or services to keep up
with changing trends or competitors
Examples are: Netflix, Disney+, and Cable Television
11. Marketplace
Hosts a platform for other companies to do business in exchange for compensation
e.g. Apple, Ebay, Etsy, Facebook Marketplace