What is a business model? Definition, types and examples

Published Friday 15 May 2026

Table of contents

• Business model definition
• Why business models matter
• Components of a business model
• Common types of business models
• Examples of successful business models
• Business model vs business plan vs revenue model
• The Business Model Canvas
• How to create a business model
• Evaluating and improving your business model
• Manage your business model finances with Xero
• FAQs on business models
• Disclaimer

Key takeaways

• A business model is the framework that explains how your business creates value, delivers it to customers and generates revenue in return. Defining yours helps you make clearer decisions about pricing, marketing and growth.
• Common business model types include service-based, retail, ecommerce, subscription, franchise, freemium and marketplace. The right choice depends on what you sell, who your customers are and how you deliver value.
• Test your assumptions with a small group of customers through trials or pilot program before fully launching. Gathering early feedback helps you refine your approach and avoid costly mistakes.
• Review your business model regularly, at least once a year, to respond to changing customer needs, market conditions and new opportunities.

Business model definition

A business model is a framework that explains how your business creates value, delivers it to customers and generates revenue. It answers 3 core questions: why customers choose you, what they receive from you and how you make money from that exchange.

Your business model sits at the centre of every major decision you make, from pricing and marketing to hiring and expansion. Getting it right gives you a clear path to profitability and long-term growth.

Why business models matter

A clear business model gives your small business direction. Without one, you risk spending time and money on activities that don't contribute to profitability or growth.

Your business model helps you identify your most valuable customers, understand how to reach them and determine the best way to charge for your product or service. It also makes it easier to communicate your strategy to partners, investors or lenders.

When you understand how your business makes money, you can spot problems early. Declining margins, rising costs or shifting customer preferences become visible when you have a framework to measure against. This helps you take action before small issues become serious.

A defined business model also makes managing cash flow more predictable. Knowing your revenue streams, cost structure and payment cycles lets you plan ahead with greater confidence.

Components of a business model

Business model components are the building blocks that define how your business operates and earns money. Many founders use the Business Model Canvas framework to map these elements on a single page. Understanding each component helps you clarify your strategy and set a path to success.

Key components to address:

• Value proposition: the unique benefit your business offers that sets you apart from competitors and gives customers a reason to choose you
• Revenue streams: the ways you generate income, such as product sales, service fees, subscriptions, advertising or licensing
• Cost structure: the expenses required to run your business, including production costs and overheads like rent, insurance, utilities and marketing
• Target market: the specific group of customers you aim to reach, defined by their needs, preferences and buying behaviours
• Customer acquisition: the methods you use to attract and retain customers, such as advertising, social media or word-of-mouth referrals
• Channels: the ways you deliver products or services to customers, whether through a physical store, ecommerce website or mobile app
• Key resources: the assets your business needs to operate, including physical resources like equipment, intellectual property like patents and skilled personnel
• Key activities: the essential tasks your business performs to deliver value, such as product development, marketing or customer service
• Key partnerships: the relationships you establish with suppliers, distributors or other businesses to support your operations

Common types of business models

Business model types describe the different ways companies structure their operations and generate revenue. The right model depends on what you sell, who your customers are and how you deliver value.

Service-based business model

A service-based business model involves selling your skills and expertise to clients for a fee.

This model is popular with freelancers and small businesses because it's relatively easy to set up with low operating costs. Services like consulting, writing, design and ride-sourcing all fall into this category.

One consideration is that your earning potential can be tied to the hours you work. Some service businesses address this by charging flat fees instead of hourly rates. As you become more efficient, you complete work faster and earn more per hour. Productising your services or packaging them into program can also help you scale beyond time-for-money constraints.

Retail business model

A retail business model involves selling products directly to customers at an agreed price, typically receiving payment before releasing goods.

This works for physical stores, online shops or a combination of both. Hospitality businesses also commonly use this model. Benefits include potential for high sales volumes, direct customer relationships and the ability to create personalised shopping experiences.

Considerations include high rent and operating costs for physical spaces, careful inventory management and intense competition from larger retailers. Seasonal demand and changing preferences also require adaptability. Effective small business marketing can help you stand out in a crowded market.

Ecommerce business model

An ecommerce business model involves selling physical or digital products through an online store or platform.

Customers purchase directly from your website without needing a physical location. This makes your products available to customers worldwide and can provide a steady income stream. In Australia, a business must register for GST if its annual turnover is $75,000 or more.

Online competition is high, so you'll need a strong marketing strategy to attract customers and increase sales.

Manufacturing business model

A manufacturing business model involves creating and producing your own products to sell.

You control the entire production process, from sourcing materials to delivering the final product. Benefits include higher profit margins when selling directly, full control over product quality and customisation, and the ability to scale production as your business grows.

Challenges include upfront investment in equipment and machinery, efficient supply chain management requirements and inventory and product development risks.

Subscription-based business model

A subscription-based business model involves customers paying a recurring fee to access your product or service on a regular basis.

Examples include meal-kit delivery services, streaming platforms and software-as-a-service (SaaS) businesses. This model provides predictable, recurring revenue that makes forecasting easier. Learn more in the business forecasting guide.

Success depends on continuously acquiring and retaining subscribers, plus managing recurring payments and ongoing customer service.

Franchise business model

A franchise business model involves licensing your brand, systems and processes to independent operators who pay fees to use them.

The franchisor provides the brand and systems, while franchisees run their own locations following established guidelines. This allows rapid expansion without the capital required to open company-owned locations. Franchisors earn revenue through initial franchise fees and ongoing royalties.

The trade-off is less direct control over customer experience and brand consistency. Success depends on strong systems, thorough franchisee selection and ongoing support.

Freemium business model

A freemium business model offers a basic version of your product for free while charging for premium features, additional capacity or enhanced functionality.

This model is common in software, apps and digital services. The free tier attracts a large user base, and a percentage of those users convert to paying customers over time.

Success depends on finding the right balance. The free version needs enough value to attract users, while the paid version must offer compelling upgrades worth paying for.

Marketplace business model

A marketplace business model connects buyers and sellers on a single platform, earning revenue through commissions, listing fees or transaction charges.

Examples include platforms for handmade goods, freelance services and real estate listings. The marketplace itself doesn't hold inventory, which keeps operating costs lower than traditional retail.

The main challenge is building enough supply and demand on both sides of the platform to create value. Early growth often requires significant investment in attracting either buyers or sellers first.

Bundling business model

A bundling business model packages multiple products or services together and sells them as a single offering at a combined price.

This approach increases the perceived value for customers while raising your average transaction size. Telecommunications, software and hospitality businesses frequently use bundling to encourage customers to purchase more than they might individually.

The risk is that bundling can reduce the perceived value of individual items. You need to ensure the bundle price still covers your costs and that each component adds genuine value for the customer.

Advertising-based business model

An advertising-based business model generates revenue by selling ad space or placements to other businesses, while offering content or services to users for free.

Media outlets, social networks and search engines commonly use this model. The business earns money from advertisers based on metrics like impressions, clicks or conversions.

Success requires building a large, engaged audience. Without significant traffic or user numbers, advertising revenue may not cover operating costs. Balancing user experience with ad placement is also essential to retain your audience.

Razor and blades business model

A razor and blades business model sells a core product at a low price (or even a loss), then generates ongoing revenue from consumable refills or accessories.

The name comes from the classic example of selling razors cheaply and profiting from replacement blades. Printers and ink cartridges, coffee machines and pods, and gaming consoles and games all follow this pattern.

This model builds customer loyalty and creates recurring revenue, but it requires customers to continue purchasing your proprietary consumables rather than switching to competitors.

Direct sales business model

A direct sales business model sells products directly to consumers, bypassing traditional retail channels.

Sales happen through personal relationships, demonstrations, online platforms or home-based events. This model is common in health, beauty and wellness industries. It gives you full control over the customer experience and eliminates retailer margins.

The challenge is that growth depends heavily on building and maintaining personal networks. Scaling can be slower than other models, and you need strong systems for order fulfilment and customer follow-up.

Examples of successful business models

Seeing how established businesses structure their models helps you understand how these concepts work in practice.

• Netflix (subscription model): customers pay a monthly fee for unlimited access to streaming content, providing predictable recurring revenue
• Dropbox (freemium model): users access basic storage free, with the option to upgrade to paid plans for more space and features
• McDonald's (franchise model): franchisees pay fees to operate under the McDonald's brand, following standardised systems while the parent company earns royalties
• Canva (freemium and SaaS model): the Australian-founded design platform offers a generous free tier, then converts users to paid plans with premium templates, brand kits and team collaboration features
• Woolworths (retail model): Australia's largest supermarket chain earns revenue through high-volume direct sales, combining physical stores with a growing online delivery operation
• Atlassian (subscription and SaaS model): the Australian software company sells team collaboration tools like Jira and Confluence on a subscription basis, using a self-service sales model that keeps customer acquisition costs low

Business model vs business plan vs revenue model

Understanding the differences between these 3 concepts helps you plan your business more effectively.

• Business model: a high-level framework showing how your business delivers value to customers and generates profit
• Business plan: a detailed blueprint covering goals, marketing strategies, financial projections and day-to-day operations. Learn more in the guide on how to write a business plan
• Revenue model: a specific focus on how you earn income, including payment methods like sales, subscriptions or advertising, and your pricing structure

The Business Model Canvas

The Business Model Canvas is a strategic tool developed by Alexander Osterwalder that lets you map your entire business model on a single page. It's widely used by startups and established businesses alike to visualise, test and refine how they create and deliver value.

The canvas is made up of 9 building blocks:

• Customer segments: the groups of people or organisations you serve
• Value propositions: the bundle of products and services that create value for each customer segment
• Channels: how you reach and communicate with your customer segments
• Customer relationships: the type of relationship you establish with each segment
• Revenue streams: the income your business generates from each customer segment
• Key resources: the most important assets required to make your model work
• Key activities: the most important things your business must do to operate successfully
• Key partnerships: the network of suppliers and partners that support your model
• Cost structure: all the costs involved in operating your business model

To use the canvas, fill in each block based on your current understanding of your business. Start with the customer segments and value propositions, then work through the remaining blocks. Revisit and update it as you learn more about your customers and market.

The canvas works well alongside traditional planning tools. Use it to sketch out your model quickly, then develop a full business plan with detailed financials and strategies.

How to create a business model

Creating a business model involves defining the key elements that explain how your business will operate and make money. Follow these steps to build yours:

1. Define your value proposition: identify the specific problem you solve or benefit you provide that makes customers choose you over alternatives
2. Identify your target customers: describe who your ideal customers are, including their needs, preferences and buying behaviours
3. Determine your revenue streams: decide how you'll charge customers, whether through one-time sales, subscriptions, licensing or other methods
4. Map out your cost structure: list your major expenses, including production costs, overheads and any variable costs that change with sales volume
5. Choose your distribution channels: decide how you'll deliver your product or service, whether online, in-store or through partners
6. Identify key resources and partnerships: determine what assets, skills and relationships you need to operate successfully
7. Test and refine: validate your assumptions with real customers and adjust your approach based on their feedback

Evaluating and improving your business model

Your business model should evolve as your business grows and market conditions change. Treat it as a living document rather than something you complete once and set aside.

Start by matching your model to your offering. A service-based model suits freelancers and consultants, while ecommerce works better for standardised products. If you're still exploring options, browsing business ideas can help you identify which model fits your strengths.

Evaluate performance by tracking revenue, profit margins, customer acquisition costs and retention rates. Customer feedback is equally valuable; ask what's working, what isn't and what they'd pay more for. Reviewing these metrics at least annually helps you spot trends before they become problems.

When the numbers or feedback suggest your current approach isn't working, consider pivoting. A pivot might mean changing your pricing structure, targeting a different customer segment or shifting from one-time sales to subscriptions. Many successful businesses have pivoted their models multiple times before finding the right fit.

Test your business model

Testing your business model means checking your assumptions about customers before fully committing.

Offer a free trial, beta test or pilot program to a small group of customers. This helps you identify issues, gather feedback and adjust your approach before a full launch. Even a simple test can reveal whether customers value your offering enough to pay for it.

Track the results carefully. Look at conversion rates, customer satisfaction and willingness to pay. Use what you learn to refine your value proposition, pricing or delivery method before scaling up.

Manage your business model finances with Xero

Whatever business model you choose, clear visibility into your finances helps you know whether it's working. Tracking revenue streams, monitoring costs and understanding profitability lets you refine your model with confidence.

Xero accounting software helps small businesses manage their finances with automated bank reconciliation, invoicing and customisable reports. Get one month free to see how straightforward financial management can be.

FAQs on business models

Here are frequently asked questions about business models.

Can a business use multiple business models at once?

Yes, many businesses combine elements from different models. A software company might use both subscription pricing for ongoing access and one-time fees for premium add-ons. A retailer might add an ecommerce channel alongside physical stores.

Do I need a business model if I'm a solopreneur or freelancer?

Yes. Even solo businesses benefit from defining how they create value, reach customers and generate income. A clear business model helps you make better decisions about pricing, marketing and growth.

What's the simplest business model for a new business?

Service-based and retail models are often the simplest to start because they involve straightforward exchanges of services or products for payment. They typically require less upfront investment than manufacturing or subscription models.

What is the Business Model Canvas?

The Business Model Canvas is a strategic planning tool that maps your entire business model across 9 building blocks on a single page. Developed by Alexander Osterwalder, it covers customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure.

What is the difference between a business model and a strategy?

A business model describes how your business creates and delivers value to generate revenue. A strategy describes how you position yourself against competitors to achieve long-term goals. Your business model is the "what and how" of making money, while your strategy is the "why and where" of competing in your market.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.