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A business model spells out how a business will generate revenue. If you want to start a business, take the time to determine what type of model will support your goals, and incorporate its design into your business plan and market research.
Here are details about different business models, examples of each, and how to identify the right one for you.
What is a business model?
A business model is an outline for how your company plans to make money. In general, a business model explains four things:
- What product or service a company will sell.
- How it intends to market that product or service.
- What kind of expenses the company will face.
- How the company expects to turn a profit.
Types of business models and examples
Because there are many different businesses, the list of business model types is constantly changing. Here are 12 common business model options, all of which can be customized for a specific company or industry.
A “disruptive business model” innovates on these basic structures. And lots of businesses earn money from multiple revenue streams, meaning their business models include several of these types.
1. Retailer model
A retailer is the last link in the supply chain. These businesses purchase goods from manufacturers or distributors and then sell them to customers for a price that will both cover expenses and turn a profit. Retailers may specialize in a particular niche or carry a range of products.
Examples: Many of the businesses you patronize day to day are probably retailers, from grocery stores to pharmacies to florists.
» MORE: How to start a retail business
2. Manufacturer model
A manufacturer converts raw materials into products. Then, they sell those products to distributors, retailers or directly to consumers.
Example: Manufacturing businesses build everything from furniture to pharmaceuticals. They can be companies of any size and in almost any industry.
3. Fee-for-service model
A fee-for-service is just what it sounds like: A business charges a set fee for a specific service. A business set up on this model can increase its earnings by doing work for additional clients or by raising its rates.
Depending on what type of work the business does, it might charge an hourly rate, monthly retainer or commission. It may also create a fee schedule with a set rate for different types of services.
Example: Hairstylists, accountants and real estate agents all charge fees for their specialized services. They may work independently or be affiliated with a salon, office or brokerage that provides resources in exchange for a percentage of their earnings.
4. Subscription model
A subscription business model can be applied to both traditional brick-and-mortar stores and e-commerce businesses alike. Essentially, the customer makes a recurring payment for ongoing access to a service or product. A company may directly ship its product in the mail, or you may pay a fee to use its services.
Example: Many local farms offer farm shares or community-supported agriculture subscriptions, where clients get access to fresh produce on an ongoing basis while crops are in season.
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5. Bundling model
The bundling business model involves companies selling two or more products together as a single unit, often for a lower price than they would charge selling the products separately.
This type of business model allows companies to generate a greater volume of sales and perhaps market products or services that are more difficult to sell. However, profit margins often shrink since businesses sell the products for less.
Example: Many class-based fitness centers and gyms use a type of bundling model, where clients pay fees for a certain number of classes per month. The more classes a client buys, the cheaper each individual class becomes, even though their total spend increases.
6. Product-as-a-service model
Product-as-a-service businesses charge customers to use physical products. They may charge a subscription fee, a per-use or per-mile fee, or a combination of both.
Example: Bike rental companies offer products as a service. Customers might pay an annual membership fee plus a per-mile fee each time they ride, or they might have the option to rent a bike for the day.
7. Leasing model
Under a leasing business model, a company buys a product from a seller. That company then allows another company to use the product they purchased for a recurring fee. Leasing agreements are usually most efficient with big-ticket items like manufacturing and medical equipment, but some companies lease smaller items too.
Leasing is similar to the product-as-a-service business model, but leases usually have longer terms — days or weeks compared to minutes or hours. Leasing companies are unlikely to charge a subscription or membership fee for access to their products.
Example: A business that rents machinery like backhoes, augers and dozers to individuals for their home construction projects is using a leasing business model.
8. Franchise model
A franchise is an established business blueprint that a franchisee purchases and reproduces. The franchiser, or original owner, works with the franchisee to help them with financing, marketing and other business operations to ensure the business functions as it should. In return, the franchisee pays the franchiser a percentage of the profits.
Example: Domino’s, Anytime Fitness and Ace Hardware are all examples of the franchise model.
9. Distribution model
A company operating as a distributor is responsible for taking manufactured goods to the market. To make a profit, distributors buy the product in bulk and sell it to retailers at a higher price.
Example: A chain of beauty salons that buys supplies in bulk and sells some of them to other salons is using a distribution business model, though they may have other revenue streams too.
10. Freemium model
In a freemium model, customers can use parts of a product or service for free but must pay for access to more advanced features. 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.
Example: Some news and internet publishing companies use a freemium model, where some or all content is free but premium content or special features are paywalled.
11. Advertising or affiliate marketing model
The advertising and affiliate marketing business models leverage a business’s audience as an asset.
With advertising, a business sell its audience’s attention. Advertisers pay for space — whether it’s in the pages of a magazine or on the side of a vehicle — with rates usually determined by the size of the business's audience.
With affiliate marketing, a business earns a commission when a member of its audience buys a product or service it recommends. If you’ve ever heard a podcaster encourage you to use a specific offer code when you buy a product they’re promoting, affiliate marketing is probably part of the podcaster's business model.
Example: A fashion blogger who sells ads on their podcast or website is using an advertising model. If they post outfit-of-the-day photos with links that viewers can click to “get the look,” they might also earn an affiliate marketing commission on those purchases.
12. Razor blades model
To understand the razor blades model, you can simply look to your local drugstore. You’ll notice that replacement razor blades may cost more than razors themselves.
Companies offer a cheaper razor with the understanding that you’ll continue to purchase more expensive accessories — in this case, razor blades — in the future.
In addition to the traditional razor blades model, you'll also see companies use the reverse razor blades model, in which they offer customers a high-margin product and then promote the sales of lower-margin products that accompany that initial product.
Examples: This business model is most common among companies that sell physical products. Printers that require a specific type of ink or water pitchers that require a specific type of filter are examples of the razor blades model.
How to design a business model
There is no one-size-fits-all business model. Many businesses include elements of several models — the yoga studio that bundles classes may also sell retail products in its lobby, for instance.
To design your own business model, start by answering the following questions:
- How will you make money? Outline one or several revenue streams, which are the different ways your company plans to generate earnings.
- What are your key metrics? Having a profitable business is great, but it usually doesn’t happen right away. You’ll want to identify other ways your company will measure its success, like how much it costs to acquire a customer or how many repeat customers you'll have.
- Who’s your target customer? Your product or service should solve a specific problem for a specific group of consumers. Your business model should consider how big your potential customer base is.
- How will your product or service benefit those customers? Your business model should have a clear value proposition, which is what makes it uniquely attractive to customers. Ideally, your value proposition should be specialized enough that competitors can’t easily copy it.
- What expenses will you have? Make a list of the fixed and variable expenses your business requires to function, and then figure out what prices you need to charge so your revenue will exceed those costs. Keep in mind the costs associated with the physical, financial, and intellectual assets of your company.
From the outset, you may not have a clear idea of what each of these components will look like for your business. Writing a business plan can help them become more evident.
It may also be helpful to research other businesses that are similar to yours and see how they've structured their operations. This market research may reveal things you want to imitate, as well as gaps in the market that your business can fill.
Your business model will inform your operations and vice versa. As your business grows, you'll be able to change and adapt your strategy based on your learnings.
» NerdWallet’s picks for setting up your business finances:
A version of this article originally appeared on JustBusiness, a subsidiary of NerdWallet.
