What is a business model? Definition, types and examples

Published Tuesday 6 October 2026

Table of contents

• Business model definition
• Why your business needs a model
• Components of a business model
• How the Business Model Canvas works
• 9 common types of business model
• Business model examples for small businesses
• How to create a business model in 6 steps
• 4 business model mistakes and how to fix them
• Business model vs business plan vs revenue model
• Track your business model performance with Xero
• FAQs on business models

Key takeaways

• A business model explains how your business creates value for customers and turns that value into revenue, so it shapes nearly every decision you make.
• The Business Model Canvas splits your model into nine building blocks on one page, which makes gaps easy to spot before you spend money.
• Choose a model type that suits what you sell and how your customers buy, then test it with a small group first.
• Review your model regularly so it keeps pace with changes in your market and your customers’ needs.

Business model definition

What is a business model? It’s the plan for how your business creates value, delivers it to customers and earns money from that exchange. Put simply, it shows why customers choose you and how that choice turns into income.

Picture a home bakery in Jakarta that sells custom celebration cakes through Instagram and WhatsApp. Its value is made-to-order cakes delivered on the day, it earns money per order, and its main costs are ingredients and delivery. Those few lines are the bakery’s business model.

Why your business needs a model

A clear business model gives you a foundation for confident decisions and steady growth. Here’s what it gives you:

• Financial clarity: a view of how money moves through your business, so you can plan your cash flow and budget with confidence
• Competitive positioning: a clear picture of what sets you apart and how to explain that difference to customers
• Resource efficiency: guidance on where your time and money will have the greatest impact
• Growth planning: a roadmap for scaling as new opportunities come up
• Credibility: a stronger case when you approach partners, lenders or investors

Components of a business model

Business model components are the building blocks that define how your business operates and makes money. Of all of them, value proposition gets the most attention. A 2017 review in SAGE Open found it’s the most often mentioned element of a business model. It appears in one-third of publications on the topic.

Cover each of these elements when you build your model:

• Customer value: your value proposition, meaning the unique benefit you offer and the reason customers pick you over competitors
• Target market: the specific group of people or businesses you want to serve
• Revenue streams: how you earn money, such as product sales, subscriptions, licensing or advertising
• Cost structure: what it costs to run the business, including production, rent, insurance, utilities and marketing
• Channels and customer acquisition: how you reach and win customers, whether through a physical shop, social media, referrals or an ecommerce site
• Key resources and activities: the equipment, skills and daily work, such as product development and customer service, that make your offer possible
• Key partnerships: the suppliers, distributors and other businesses you rely on

These parts work together. Your value proposition sets what customers will pay, your revenue streams capture that payment, and your cost structure decides how much you keep as profit.

How the Business Model Canvas works

The Business Model Canvas, developed by Alexander Osterwalder, puts your whole model on a single page. It splits the model into nine blocks, so you can see how each part affects the others.

To see it in action, imagine a small coffee shop in Bandung near a university campus. Here’s how its owner might fill in each block:

• Customer segments: students and remote workers who want somewhere comfortable to study or work
• Value propositions: locally roasted coffee and quiet tables with fast wifi at student-friendly prices
• Channels: the shop itself plus Instagram and food delivery apps
• Customer relationships: a loyalty card and quick replies to messages on WhatsApp
• Revenue streams: drinks, pastries, bags of coffee beans and small bookings for study groups
• Key resources: the espresso machine and trained baristas
• Key activities: sourcing beans, making drinks, cleaning the space and posting on social media
• Key partnerships: a local roastery and a bakery that supplies pastries
• Cost structure: rent, staff wages, ingredients, equipment upkeep and delivery app commissions

Once every block is filled in, check that they line up. For example, if most customers are students, your prices and opening hours should suit their budgets and timetables.

9 common types of business model

Most small businesses follow one of a handful of proven models, or combine two of them. Each type below has its own benefits and points to plan for.

Service-based

You sell your skills or time for a fee, as graphic designers and consultants do. Costs to get started are usually low, but your earnings are tied to the hours you can work.

Flat-fee pricing or productised services, such as a fixed-price logo package, help you earn beyond an hourly rate.

Retail

You sell products directly to customers through a physical shop, online, or both. Hospitality businesses such as cafés and restaurants often follow a similar pattern.

Retail can bring high sales volumes and a visible brand presence. Plan carefully for rent, inventory, staffing and seasonal changes in demand.

Ecommerce

You sell through your own online store or through marketplaces and social channels. Running an online business gives you reach well beyond your city and room for repeat income.

Competition is intense, so budget for delivery costs and platform fees from day one.

Manufacturing

You make your own products, either to sell directly or to supply other businesses. Owning production can bring higher profit margins and tighter quality control.

It also needs upfront investment in equipment, plus careful management of your supply chain and inventory.

Subscription

Customers pay a recurring fee for ongoing access to a product or service, such as meal kits or software. Recurring payments make your revenue more predictable, which helps with planning.

Your success depends on keeping customers happy and running a reliable system for recurring billing.

Freemium

You offer a basic version for free and charge for premium features. It’s popular with apps and software because a free tier attracts users quickly.

The model works when enough free users upgrade to cover the cost of serving everyone.

Marketplace

You connect buyers and sellers and earn a commission or listing fee on each transaction. A marketplace can grow without holding stock.

It becomes useful only once both sides are active, so plan how you’ll attract buyers and sellers at the same time.

Franchise

A franchisee pays a franchisor for the right to run a business under its brand and system. As a franchisee, you get a tested format and ongoing support in exchange for upfront fees and royalties.

As a franchisor, you can expand with your franchisees’ capital, but you’ll need clear systems to keep quality consistent across outlets.

Advertising

You offer content or a service for free and earn money by selling advertising space to businesses that want to reach your audience. Blogs and podcasts often use this model.

Income grows with audience size and engagement, so expect it to take time to build.

Business model examples for small businesses

These illustrative examples show how the model types look for small businesses in Indonesia. Each one is hypothetical, but the patterns are common:

• Freelance designer in Yogyakarta: sells fixed-price branding packages to local cafés, turning a service-based model into repeatable products
• Online batik shop: uses marketplaces to find new buyers and WhatsApp chats to handle repeat orders and custom requests
• Healthy catering business in Jakarta: delivers weekly lunch plans to office workers who pay upfront each month
• Laundry franchisee in Surabaya: runs an outlet under an established brand and pays fees for the brand format and marketing support
• Tutoring app: offers free practice questions and charges for live sessions with qualified tutors

Models can also be mixed. The designer could add a monthly retainer for social media content, adding a subscription stream to a service business.

How to create a business model in 6 steps

Creating a business model means answering the core questions in order, then checking your answers with real customers. Work through these six steps and write down your answers as you go.

1. Understand your customers

Start with the people you want to serve and the problem you solve for them. Talk to potential customers directly and ask how they solve that problem today and what they pay for it.

The more specific your customer picture, the easier every later step becomes.

2. Define your value proposition

Assess what you offer and decide what makes it different, such as price, speed, quality or local convenience. This is your unique selling proposition (USP), and it should be simple enough to explain in one sentence.

3. Analyse your competitors

Look at businesses in your industry and note how they price and deliver. Their approach shows you what customers already accept and where there’s room for you to stand out.

4. Choose how you’ll earn revenue

Pick the model type and revenue streams that fit your offer and the way your customers like to buy. Your pricing strategy should cover your costs and match what customers are willing to pay.

5. Map your costs and resources

List everything you need to deliver your offer, including equipment, staff, suppliers and software. Estimate your startup costs and ongoing expenses, then check your prices leave enough margin for profit.

6. Test your business model

Before you fully commit, try your model with a small group of customers through a free trial or beta test. Gather their feedback, then adjust your offer or pricing based on what you learn.

Few businesses take this step. In a 2003 Harvard Business Review study of 157 companies, only 21% tested the cause-and-effect relationships in their business models, and those that consistently did so earned 5.14% higher returns on equity on average.

Keep testing as you grow. The same approach works each time you’re launching a new product or entering a new market.

4 business model mistakes and how to fix them

Even a well-researched model can have weak spots. Here are four common ones and the fix for each:

• Broad customer segments: focus on the group most likely to buy, then expand once that group is profitable
• Copying competitors: borrow what works, then build your model around what makes you different
• Underestimated costs: list every expense, including platform fees and your own time, before you set prices
• A fixed model: review your model at least once a year and after big changes, such as a new product or a shift in demand

Treat your model as a living document. Regular reviews help you spot new opportunities and adapt as customer needs change.

Business model vs business plan vs revenue model

These terms are often used interchangeably, but each covers a different level of detail. Here’s how they compare:

• Business model: the overall view of how your business delivers value and makes a profit
• Business plan: a detailed blueprint covering your goals, marketing, financial projections and operations
• Revenue model: the specific way you earn income, including pricing and payment methods

Your model usually comes first and shapes the rest. Once it’s clear, learn how to write a business plan that turns it into goals and budgets.

Track your business model performance with Xero

Your business model will change as your market and customers shift, so the numbers behind it deserve regular attention. Understanding your model is the first step; tracking how it performs is the next.

With Xero’s cloud accounting software, you can monitor revenue streams and costs, and get real-time insights into your financial health. Get started today and get one month free to see how Xero simplifies your business finances.

FAQs on business models

Here are quick answers to common questions about business models.

Can I change my business model after I start?

Yes, and many businesses do. Make changes gradually where you can, and tell existing customers early if prices or services will change.

How long does it take to create a business model?

You can outline a first version in a few hours. Refining it is ongoing, because customer feedback and real sales data will keep sharpening your assumptions.

Do I need a different business model for each product?

Not always, as products that share customers and channels can sit under one model. If a product serves a new customer group or earns money differently, map it separately and judge it on its own numbers.

What are the 7 types of business models?

There’s no single official list, so the seven types you see will vary by source. Most lists draw on models such as subscription, freemium, marketplace, franchise, advertising, retail and manufacturing, and many businesses combine two or more.

How does a business model make money?

A business model makes money when each sale brings in more than it costs to win and serve that customer. Check this per customer as well as in total, because strong overall sales can hide products or channels that lose money.

What is a good example of a business model?

A classic example is selling a base product cheaply and earning ongoing profit from refills, such as printers and ink cartridges. It works because the first sale creates repeat purchases that are easier to predict.