What is a business model? Definition, types and steps

Published Thursday 12 March 2026

Table of contents

• Business model definition
• Components of a business model
• The difference between a business model, a business plan, and a revenue model
• Common types of business model
• Choosing the right model for your business
• How to build a business model
• Your business model will evolve
• Managing your business model with confidence
• FAQs on business models

Key takeaways

• Define your business model by documenting nine core components: value proposition, revenue streams, cost structure, target market, customer acquisition, channels, key resources, key activities, and key partnerships to create a clear roadmap for how your business operates and generates profit.
• Choose the right business model type for your situation by evaluating industry norms, customer needs, your unique selling proposition, and competitor analysis, then test your chosen model with a small group of customers before fully committing to gather feedback and make adjustments.
• Build your business model systematically by first defining your value proposition, identifying target customers, mapping revenue streams, listing key resources and activities, calculating your cost structure, and documenting everything to share with stakeholders as a foundation for business decisions.
• Review and update your business model regularly as it's a living document that should evolve with market conditions, customer needs, and business growth to help you adapt to challenges and seize new opportunities for long-term success.

Business model definition

A business model explains why customers choose you, what they get from you, and how you make money from that exchange. It defines your value proposition, identifies your target market, and maps out your path to profitability by clarifying factors like pricing. For example, one business analysis found that discounts accounted for 9.4 per cent of total income.

Components of a business model

A complete business model includes nine core components that work together to define how your business operates. Understanding each element helps you clarify your strategy and set a path to success.

• Value proposition: Defines the unique value your business offers customers and why they choose you over competitors
• Revenue streams: Identifies how you generate income, whether through product sales, subscriptions, licensing, or advertising
• Cost structure: Outlines all costs associated with running your business, including production, rent, insurance, utilities, and marketing. For instance, a case study showed salary expense at 53.2% of sales, well above the industry benchmark of 20–25%, highlighting the need to monitor key costs.
• Target market: Specifies the customer groups you serve and their needs and preferences. For example, a business analysis might reveal a reliance on trade sales over retail, indicating a specific customer group accounts for the majority of revenue.
• Customer acquisition: Describes how you attract and retain customers through advertising, social media, or word-of-mouth referrals
• Channels: Maps the ways you deliver products or services, whether through physical stores, ecommerce websites, or mobile apps
• Key resources: Lists the physical assets, equipment, facilities, or intellectual property you need to operate
• Key activities: Covers essential tasks like product development, marketing, and customer service
• Key partnerships: Identifies relationships with suppliers, distributors, or other businesses that support your operations

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

• Business model: Provides an overall understanding of how your business delivers value and generates profit
• Business plan: Details your goals, marketing strategies, financial projections, and day-to-day management approach
• Revenue model: Specifies how you earn income, including payment methods and pricing structure

Common types of business model

Business model types describe the fundamental way your company creates and captures value. The most common types include service-based, retail, ecommerce, manufacturing, and subscription models. Each has distinct advantages, and the right choice depends on your business nature and customer needs.

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 specialised skill. The model is relatively easy to set up with low operating costs.

The hours you can work may limit your earning potential. Some service businesses address this by charging flat fees instead of hourly rates.

With a flat fee, customers pay a set amount regardless of how long the work takes. As you become more efficient, you complete tasks faster and earn more per hour.

Retail business model

A retail business model involves selling products directly to customers for an agreed price, typically receiving payment before releasing goods. This model suits physical stores, online shops, or hybrid approaches. Hospitality businesses also use the retail model.

Key advantages of retail include:

• high sales volume potential
• brand presence in the market
• personalised shopping experiences
• direct customer relationships

Key considerations include:

• managing physical space requirements with associated rent and operating costs
• managing inventory, including challenges like stock that shrinks, which in one case study represented 11.65% of the cost of goods sold
• competing with larger retailers
• managing seasonal demand fluctuations
• providing guarantees, returns, or after-sales support

Ecommerce business model

An ecommerce business model involves creating an online store or platform where customers purchase your physical or digital products directly. This model makes your products available to customers worldwide and can provide steady income.

The online marketplace offers many opportunities to differentiate your business. 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 allows you to ensure quality and customise offerings.

Key benefits include:

• higher profit margins when selling directly to customers
• ability to scale production as your business grows
• full control over product quality

Key challenges include:

• need to invest upfront in equipment and machinery
• need to manage your supply chain efficiently
• risks when managing inventory and developing products

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.

This model provides reliable recurring revenue and lets you forecast revenue more accurately. However, you need to focus on acquiring and retaining customers, and you'll need to manage recurring payments and customer service effectively.

Choosing the right model for your business

Choosing the right business model requires evaluating several factors that affect your business success.

Consider these decision factors:

• Industry norms: Identify which models are commonly used in your industry
• Customer needs: Evaluate who your customers are and what they want from you
• Your USP: Determine what sets you apart from competitors
• Competitor analysis: Research what's working for similar businesses and what isn't
• Flexibility: Consider whether a hybrid approach might work, such as combining service and subscription models

Test your business model

Testing your business model helps you identify issues before fully committing. Offer a free trial or beta test to a small group of customers to gather feedback.

Use their responses to make adjustments before launching or scaling your business.

How to build a business model

Building a business model involves documenting key decisions about how your business creates and captures value. Follow these steps to create yours.

1. Define your value proposition. Identify what makes your offering unique and why customers should choose you over competitors.
2. Identify your target customers. Clarify who you're serving, their needs, and their preferences.
3. Map your revenue streams. Determine how you'll charge for your product or service, whether through direct sales, subscriptions, or other methods.
4. List your key resources and activities. Outline what you need to deliver value, including equipment, skills, partnerships, and core tasks.
5. Calculate your cost structure. Estimate all expenses for operations and delivery, including production costs, rent, and marketing.
6. Document your model. Write it down and share it with key stakeholders, advisors, or your accountant.

Once documented, your business model becomes a reference point when you make decisions and a foundation for your detailed business plan.

Your business model will evolve

Your business model will evolve as your business grows. It's a living document, not a one-time task.

Review and update your model when market conditions change, customer needs shift, or your goals develop. Keeping it current helps you adapt to challenges and seize opportunities for long-term success.

Managing your business model with confidence

A clear business model gives you confidence in how you create value, serve customers, and generate profit. It's the foundation for every business decision you make.

Once you've defined your model, the next step is managing the financial side effectively. Tracking revenue streams, monitoring costs, and understanding cash flow all become easier with the right tools.

Support your business model with smart accounting tools. Get one month free.

FAQs on business models

These questions address common queries about business models for small businesses.

Can a business use multiple business models at once?

Yes, businesses can combine models. For example, a retailer might add a subscription service. Just ensure the models complement and streamline your operations.

What's the difference between B2B and B2C business models?

Business-to-business (B2B) and business-to-consumer (B2C) describe who your customers are. This influences your sales cycles, pricing strategies, and delivery channels.

How often should you review your business model?

Review your business model at least annually. Also review when your business experiences significant growth, market changes, or when you're considering expansion.

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

Yes. Even one-person businesses benefit from clarifying their model. It helps with pricing decisions, market positioning, planning for growth, and managing key obligations, such as when a sole trader completes her IR3 return for income tax.

Should I create my business model before or after my business plan?

Create your business model first. It forms the foundation that your detailed business plan builds upon.