What is a Business Model?
A business model describes how a company creates, delivers, and captures value — in short, how it makes money. Choosing the right business model shapes pricing, customer relationships, and long-term profitability. Companies often combine or evolve models as they scale.
A business model is the plan a company follows to generate revenue and profit, defining its target customers, value proposition, revenue streams, and cost structure.
- •Recurring revenue (weekly/monthly/annual)
- •Predictable, stable cash flow
- •Focus on retention and churn reduction
- •Examples: Netflix, Spotify, gyms
- •Connects buyers and sellers, takes a commission
- •Revenue scales with transaction volume
- •Focus on network effects (more users = more value)
- •Examples: Airbnb, Etsy, Uber
Step-by-step worked examples
A company charges users $9.99 every month for streaming access. Which business model is this?
Recurring, fixed payments at regular intervals define the subscription model. Revenue is predictable and tied to retaining paying members over time. This is the model used by Netflix, Spotify, and similar services.
A platform lets independent sellers list handmade goods and takes a 5% cut of every sale. Which model is this?
The platform doesn't own the inventory — it connects buyers and sellers. It earns a commission per transaction, which is the marketplace model. Growth depends on network effects: more sellers attract more buyers, and vice versa.
An app is free to download but charges for premium features like ad removal. What model is this?
Offering a free basic version while charging for extras is the freemium model.
Revenue comes from a small percentage of users who upgrade ('conversion rate').
This model relies on a large free user base to make premium sales viable.Flashcards
Quick quiz
Q1.Which business model earns revenue through recurring periodic payments?
Q2.A marketplace business primarily earns money by…
Q3.In the freemium model, revenue mainly comes from…
Q4.Why might a company choose a subscription model over one-time sales?
The full card deck, worked steps and AI-tutor support for “What is a Business Model?” are in Notek — study by hand before your exam.
Common mistakes
A business model is the same as a business plan. — Correct: A business model explains how value is created and captured; a business plan is a broader document covering strategy, operations, and finances.
All marketplaces own the products they sell. — Correct: Marketplaces typically don't own inventory — they connect independent buyers and sellers and earn a commission.
Freemium means the entire product is always free. — Correct: Freemium offers a free basic tier, with premium features requiring payment.
A company can only ever use one business model. — Correct: Many companies blend models, e.g., a subscription service that also sells one-time add-ons.
FAQ
What is a business model?
A business model explains how a company creates value for customers and captures revenue from that value, such as through subscriptions, sales, or commissions.
What are common types of business models?
Common types include subscription, marketplace, freemium, franchise, and direct sales (e-commerce) models.
What is the difference between a subscription and a marketplace model?
Subscription models earn recurring fees for access to a product; marketplace models earn commissions by connecting buyers and sellers.
How do you choose the right business model for a company?
Consider your customer's buying behavior, cost structure, and value proposition — recurring needs favor subscriptions, while two-sided demand favors marketplaces.