What is a business model – simply explained

A business model describes how a company creates, delivers, and captures value. Put simply: it explains how a company makes money. Every company has its own individual business model that defines which products or services are offered, how customers are acquired and retained, and which revenue streams are used. A successful business model is based on a clear strategy and a well-thought-out structure.

For example, a traditional retailer sells goods directly to customers, while a subscription service receives regular payments for ongoing services. The business model is therefore the foundation of economic success and helps founders set a clear direction for their company.

1. What elements does a business model have? The building blocks of a business model

A business model consists of several core elements that together form a functioning company. These can be divided into three central areas: value proposition, business structure, and revenue model.

1.1. Value proposition

The value proposition describes the value a company offers its customers. It answers the question: Why should customers use this product or service in particular?

• Solving a problem: A successful business model identifies a specific problem of the target group and offers a targeted solution. For example, car-sharing services like ShareNow make flexible mobility in big cities easier by offering an alternative to owning a car.
• Innovation lead: Some companies stand out through unique innovations that did not exist before. With its electric vehicles, Tesla has created a completely new category and challenged traditional automakers.
• Cost advantages: A company can also stand out from the competition through lower prices. Discounter models such as Aldi and Lidl offer reasonably high-quality products at lower prices, appealing to price-sensitive customers.
• Personalization: Individually customizable products and services are becoming increasingly important. Companies like Nike allow their customers to create their own shoe designs to stand out from the crowd.

1.2. Business structure (architecture of value creation)

The business structure describes how the company implements its value proposition. This includes all processes, resources and partnerships needed to satisfy customers.

1.2.1. Value creation processes

A company needs certain resources to be successful. These can be physical resources such as raw materials and machinery, but also intangible resources such as patents and databases. For example, technology companies are heavily dependent on their intellectual property, while manufacturing companies primarily need logistical and material resources.

The main activities of a company determine how the product or service is delivered. For a software company, the focus is on developing new features, while a logistics company relies above all on an efficient supply chain.

Partnerships are also crucial for value creation. Companies often work with suppliers, distribution partners or other firms to optimize their offering. For example, car manufacturers cooperate with suppliers to integrate innovative components into their vehicles.

1.2.2. Internal organization

Every company needs a clear structure in order to work efficiently. Start-ups often rely on flat hierarchies to enable quick decisions, while large corporations use more complex organizational structures.

Corporate culture and values influence how a company is perceived. Companies like Patagonia rely on sustainability as a core value and have built a loyal customer base as a result.

Last but not least, the people in the company are crucial to success. Managers, developers, marketing experts and other talents all contribute to ensuring that the business model works and continues to evolve.

1.3. Revenue model (how the company makes money)

The revenue model shows how income is generated. There are various ways a company can earn money, depending on the business model it follows.

1.3.1. Revenue streams

A company can use various ways to generate revenue. Direct sales is the classic model, where customers pay once for a product or service. This applies, for example, to retail or car sales.

Subscription models, on the other hand, rely on regular payments from customers, ensuring a steady stream of income. Services like Netflix or Spotify are based on this model and have successfully established it in the digital world.

Another model is licensing fees. Companies that own patents or brand rights can license their technologies for use against a fee. For example, Microsoft earns substantial sums from licenses for its software.

Finally, there are business models that are based on advertising revenues. Platforms like Google and Facebook offer free services but finance themselves through targeted advertising shown to their users.

1.3.2. Cost structure

In addition to revenue streams, the cost structure also plays a central role. Companies have fixed costs that are incurred regardless of production or revenue, such as rent or salaries. At the same time, there are variable costs related to producing or selling a product, such as raw material costs or marketing budgets.

A company must manage its costs efficiently in order to remain profitable in the long term. Strategies such as economies of scale, automation or outsourcing can help reduce costs and increase profitability.

2. What business models are there?

There are numerous business models that companies can pursue. The most important models are:

• Product-oriented business models: Companies sell physical products, e.g. electronics or clothing.
• Service models: The focus is on providing services, e.g. consulting firms or hairdressers.
• Platform models: Companies connect providers and customers, e.g. Airbnb or Uber.
• Subscription models: Customers pay regularly for a service, e.g. Netflix or magazines.
• Freemium models: Basic services are free, additional features are paid, e.g. Spotify or LinkedIn.

Every model has advantages and disadvantages that must be considered when starting a business.

3. Business Model Canvas with an example

The Business Model Canvas is a method for systematically visualizing business models. It consists of nine building blocks:

1. Customer segments – Who are the target customers?
2. Value proposition – What benefit does the company offer?
3. Channels – Through which channels does the company reach its customers?
4. Customer relationships – How does the company interact with its customers?
5. Revenue streams – How does the company make money?
6. Key resources – Which resources are necessary?
7. Key activities – Which core processes are required?
8. Key partnerships – With whom does the company collaborate?
9. Cost structure – What costs are incurred?

An example of the Business Model Canvas is Airbnb. The company connects travelers with private hosts and provides a platform for bookings. Revenue is generated through brokerage fees. Key resources include the digital platform, branding and partner network. Without these components, the business model would not be successful.