Business model: definition, types and how to build one

Published Monday 30 March 2026

Table of contents

• Business model definition
• The difference between a business model, a business plan, and a revenue model
• Components of a business model
• Common types of business model
• Choosing the right model for your business
• How to create a business model
• Writing a business model isn't a 'one and done' exercise
• Use Xero to bring your business model to life
• FAQs on business models

Key takeaways

• Define your business model by addressing three core questions: what unique value you offer customers, how you deliver that value, and how you generate revenue from the exchange.
• Test your business model with a small group of customers through free trials or beta testing before fully committing resources to reduce risk and improve your chances of success.
• Treat your business model as an ongoing process that evolves with market changes, customer needs, and business growth rather than a one-time exercise.
• Consider combining multiple business models to diversify revenue streams, such as pairing subscription services with one-time purchases or adding retail elements to a service-based business.

Business model definition

A business model explains how your business creates value, delivers it to customers, and generates revenue in return. This process is governed by global accounting standards like IFRS 15 Revenue from Contracts with Customers. It answers three core questions: why customers choose you, what they get from you, and how you make money from that exchange.

The difference between a business model, a business plan, and a revenue model

Understanding the distinction between these three concepts helps you plan and run your business more effectively.

• Business model: Provides an overall understanding of how your business delivers value to customers and generates profit
• Business plan: Serves as a detailed blueprint for starting and running your business, covering goals, marketing strategies, financial projections, and day-to-day management
• Revenue model: Focuses specifically on how you earn income, explaining payment methods like sales, subscriptions, or advertising, and your pricing approach

Components of a business model

Business model components are the building blocks that define how your business operates and earns revenue. Understanding each component helps you clarify your strategy and set a path to success.

Here are the key components to address when creating your business model:

• Value proposition: Defines the unique value your business offers to customers, setting you apart from competitors and giving customers a reason to choose you
• Revenue streams: Identify the different ways you generate income, such as product sales, subscriptions, licensing, or advertising
• Cost structure: Outlines the costs of running your business, including production costs and expenses like rent, insurance, utilities, and marketing
• Target market: Specifies the customer groups your business aims to reach, including their needs and preferences
• Customer acquisition: Describes the methods you use to attract and retain customers, such as advertising, social media, or word-of-mouth referrals
• Channels: Determines how your business delivers products or services, whether through a physical store, ecommerce website, or mobile app
• Key resources: Identifies what your business needs to operate, including physical resources like equipment and facilities, or intellectual property like patents and trademarks
• Key activities: Covers the essential tasks your business performs, such as product development, marketing, or customer service
• Key partnerships: Outlines the relationships your business establishes with suppliers, distributors, or other businesses to operate successfully

Common types of business model

The most common types of business model include service-based, retail, ecommerce, and subscription-based models. Each has distinct advantages and challenges, and the right choice depends on your business nature and customer needs. You'll customise any model with details about your target customers, products, and costs to make it unique to your business.

Service-based business model

A service-based business model involves offering your skills and expertise to clients in exchange for a fee. This includes services like writing, graphic design, consulting, or any other specialty. It's a popular choice for freelancers and small service businesses because it's relatively easy to set up with low operating costs.

Your earning potential may be limited by available hours. Some service businesses address this by charging a flat fee instead of an hourly rate. With flat fees, you agree on a set amount regardless of time spent, so as you become more efficient, you earn more per hour worked.

Retail business model

A retail business model involves selling products directly to customers at an agreed price, typically receiving payment before releasing goods. It works for physical stores, online shops, or a combination of both. Hospitality businesses also use this model.

The retail model offers several benefits:

• High sales volume: Potential for significant transaction numbers
• Brand presence: Opportunity to establish market visibility
• Customer relationships: Ability to create personalised shopping experiences

There are also some considerations to keep in mind:

• Operating costs: Physical space often requires high rent and overhead
• Inventory management: Stock control and storage add complexity
• Competition: Larger retailers may have pricing advantages
• Seasonal factors: Demand fluctuations require adaptability

Ecommerce business model

An ecommerce business model involves creating an online store or platform where customers purchase your products directly. It works well for businesses selling physical or digital products.

Your products become available to customers worldwide, creating potential for a steady income stream.

Competition in online marketplaces is high, so you'll need a strong marketing strategy to stand out and attract customers.

Manufacturing business model

A manufacturing business model involves creating and producing your own products to sell to customers. You control the entire production process, from sourcing materials to making the final product, which lets you ensure quality and customise offerings to meet customer demands.

This model offers several benefits:

• Higher profit margins: Especially when selling directly to customers
• Scalability: Production can grow alongside your business
• Quality control: Full oversight of the production process

There are also challenges to consider:

• Upfront investment: Equipment and machinery require significant capital. In some modern processes like additive manufacturing, material costs can be a major factor, with reports showing metal powder can cost 1 times more and plastic filament 50 to 100 times more than materials for conventional methods.
• Supply chain management: Efficient sourcing and logistics are essential
• Inventory risk: Stock management and product development carry financial exposure

Subscription-based business model

A subscription-based business model involves customers paying a recurring fee to access a product or service regularly. Examples include meal-kit delivery services, streaming platforms, and software-as-a-service (SaaS) businesses.

Recurring revenue provides predictable income, making it easier to forecast and plan. The COVID-19 pandemic highlighted the resilience of this model, with a report finding a quarter of subscription firms saw accelerated subscriber acquisition.

You'll need to focus on customer acquisition and retention, and manage challenges around recurring payments and ongoing customer service.

Choosing the right model for your business

Choosing the right business model means matching your approach to your specific situation. Here's how to decide:

• Assess your business type: A service-based model suits freelancers, while ecommerce works for products that don't require heavy customisation. Some businesses combine models, like a service business adding subscriptions.
• Understand your customers: Evaluate who they are and what they want. This helps you identify the model that best serves their needs and clarifies your unique selling proposition (USP).
• Analyse your competitors: Study what's working for similar businesses in your industry. Their successes and failures can guide your decision.

Once you've narrowed down your options, validation is essential.

Test your business model

Testing your business model helps you identify issues before fully committing resources. Offer a free trial or beta test to a small group of customers, gather their feedback, and make adjustments based on what you learn. This validation step reduces risk and improves your chances of success at launch.

How to create a business model

Creating a business model gives you a clear framework for how your business will operate and generate revenue. Follow these steps to build yours:

1. Define your value proposition: Identify the unique value you offer customers and why they should choose you over competitors.
2. Identify your target market: Determine who your ideal customers are, including their needs, preferences, and pain points.
3. Map your revenue streams: Decide how you'll generate income, whether through product sales, subscriptions, services, or a combination.
4. Outline your cost structure: List the costs required to deliver your value proposition, including production, operations, and marketing expenses.
5. Choose your channels: Determine how you'll reach customers and deliver your product or service, such as through a physical location, website, or app.
6. Test and refine: Validate your model with a small group of customers, gather feedback, and adjust before scaling.

Tools like the Business Model Canvas can help you visualise these elements on a single page and spot gaps in your thinking. The framework has been applied and tested in major organisations like IBM and Ericsson to help describe business models and create new strategies.

Writing a business model isn't a 'one and done' exercise

Creating a business model is an ongoing process, not a one-time task. Your model should evolve as your business grows, reflecting market changes, shifting customer needs, and your own goals. The COVID-19 pandemic starkly demonstrated this, with one study showing 43% of businesses temporarily closed, highlighting the need for business model resilience. Keeping it up to date helps you adapt to new challenges and seize opportunities for long-term success.

Use Xero to bring your business model to life

A well-designed business model is only the start. Turning it into reality means tracking your revenue streams, managing costs, and monitoring performance as you grow.

Accounting software from Xero helps you put your business model into action. Track income across different revenue streams, manage expenses against your cost structure, and get real-time insights into how your business is performing. With automated bookkeeping and clear financial reports, you can focus on running your business instead of managing spreadsheets.

Ready to see your business model in action? Get one month free.

FAQs on business models

Here are answers to common questions about business models.

What are the four types of business model?

The four types usually refer to a classification based on who you sell to: B2B (business-to-business), B2C (business-to-consumer), C2C (consumer-to-consumer), and C2B (consumer-to-business). This is different from business model types like retail or subscription, which describe how you operate.

Can I use multiple business models at once?

Yes. Many businesses combine models to diversify revenue. For example, a software company might use both a subscription model for ongoing access and a one-time purchase model for premium features.

How do I know if I've chosen the wrong business model?

Signs include consistently missing revenue targets, high customer churn, unsustainable costs, or feedback suggesting customers want something different. If your model isn't working, test alternatives on a small scale before making major changes.

What's the difference between a business model and a revenue stream?

A business model describes your overall approach to creating and capturing value. A revenue stream is one component of that model, specifically how you earn income. A single business model can have multiple revenue streams.

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

Yes. Even simple businesses benefit from clarity on what you offer, who you serve, and how you get paid. A basic business model helps you make better decisions and communicate your value to potential clients.