Business model: definition, types and how to create one

Published Monday 30 March 2026

Table of contents

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

Key takeaways

• Define your value proposition first by identifying the unique benefit you offer that solves a customer problem, then build the rest of your business model around this foundation.
• Test your business model with real customers through free trials or beta tests before fully committing, as most startup failures result from missing market need rather than poor execution.
• Choose a business model that aligns with your strengths and customer preferences, whether service-based for expertise, subscription for recurring value, or retail for direct product sales.
• Treat your business model as a living document that evolves with your business growth and market changes, updating it regularly to reflect new customer needs and industry shifts.

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's the foundation that shapes every decision you make about your products, pricing, and growth.

Components of a business model

Business model components are the elements that define how your business operates and makes money. A complete business model addresses these key elements:

• Value proposition: the unique benefit your business offers that sets you apart from competitors
• Revenue streams: the ways you generate income, such as product sales, subscriptions, licensing, or advertising
• Cost structure: the expenses required to run your business, including production costs, rent, insurance, and marketing
• Target market: the specific customers you aim to reach and serve
• Customer acquisition: the methods you use to attract and retain customers, such as advertising, social media, or referrals
• Channels: the ways you deliver products or services, such as physical stores, websites, or mobile apps
• Key resources: the assets you need to operate, including equipment, facilities, and intellectual property
• Key activities: the core tasks required to run your business, such as product development, marketing, or customer service
• Key partnerships: the relationships you establish with suppliers, distributors, or other businesses to support your operations

How to create a business model

Creating a business model helps you map out how your business will deliver value and generate revenue. Follow these steps to build a model that works for your business.

1. Define your value proposition: Identify the unique benefit you offer that solves a customer problem.
2. Identify your target customer: Determine who will buy from you and what they need.
3. Determine your revenue streams: Decide how you'll make money, whether through sales, subscriptions, or other methods.
4. Map out your cost structure: List the expenses required to deliver your product or service.
5. Choose your channels: Select how you'll reach and deliver to customers.
6. Test and refine: Validate your model with real customers before fully committing.

Common types of business models

Business model types define how you structure your operations and generate revenue. The right model depends on your products, customers, and goals. Here are the most common types small businesses use.

Service-based business model

A service-based business model involves offering your skills and expertise to clients in exchange for a fee. This includes businesses like consulting, graphic design, writing, and professional services.

This model is often easy to set up with low operating costs. However, your earning potential may be limited by the hours you can work.

To increase profitability, consider charging flat fees instead of hourly rates. As you become more efficient, you complete work faster while earning the same amount. Learn more about how to measure profitability.

Retail business model

A retail business model involves selling products directly to customers for an agreed price. This works for physical stores, online shops, or a combination of both.

Advantages of the retail model include:

• potential for high sales volumes
• opportunity to build brand presence
• ability to create personalised shopping experiences

Considerations to keep in mind:

• physical space often requires high rent and operating costs
• inventory management can be challenging
• seasonal demand and changing preferences require adaptability

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 model lets you reach customers worldwide and can provide steady income. Research shows that many new business model definitions relate to e-business. However, online competition is high, so you'll need a strong marketing strategy to stand out.

Subscription-based business model

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

This model provides reliable recurring revenue and makes forecasting easier. For example, when Microsoft switched Office 365 to a subscription, it led to a year-on-year growth of 27%. However, you'll need to focus on customer acquisition and retention, and manage recurring payments effectively.

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.

This model offers higher profit margins when selling directly to customers and the ability to scale production as you grow.

Keep in mind the challenges: upfront investment in equipment, supply chain management, and inventory risks.

B2B, B2C, and C2C business models

Business models can also be categorised by who you sell to.

• Business-to-Business (B2B): selling products or services to other businesses, such as wholesale suppliers or software providers
• Business-to-Consumer (B2C): selling directly to individual customers, such as retail shops or online stores
• Consumer-to-Consumer (C2C): facilitating transactions between consumers, such as marketplace platforms where individuals buy and sell to each other

Most small businesses operate as B2B, B2C, or a combination of both. Some research suggests that over time, B2C platforms can become more "B2B oriented". Understanding your customer type helps you tailor your marketing, pricing, and delivery approach.

Choosing the right model for your business

Choosing the right business model requires matching your approach to your products, customers, and goals. Consider these factors:

• Align with your strengths: a service-based model suits freelancers, while subscription models work for recurring deliverables
• Understand your customers: evaluate what they want and how they prefer to buy
• Define your unique selling proposition: identify what sets you apart from competitors
• Research your industry: analyse what models work for similar businesses and learn from their successes

Test your business model

Testing your business model helps you identify issues before fully committing. This is crucial because analysis shows a majority of startup failures are due to a missing market need. Offer a free trial or beta test to a small group of customers, gather their feedback, and make adjustments based on what you learn.

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

• Business model: explains how your business delivers value to customers and generates profit
• Business plan: provides a detailed blueprint for starting and running your business, including goals, marketing strategies, and financial projections
• Revenue model: focuses specifically on how you earn income, including payment methods and pricing

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

Your business model should evolve as your business grows and market conditions change. It's a living document, not a one-time task. A recent study found that 93% of digital startups use the iterative lean startup approach to find product-market fit. Keep it updated to reflect customer needs, industry shifts, and your own goals. This helps you adapt to challenges and seize new opportunities.

Build your business model with confidence using Xero

A clear business model needs clear financials to support it. Understanding your revenue streams, cost structure, and cash flow helps you test assumptions and make informed decisions as your business grows.

Get real-time visibility into your finances, so you can track whether your business model is working and adjust when needed. With automated invoicing, expense tracking, and reporting, you can stay on top of the numbers that matter.

Ready to manage your finances with confidence? Get one month free.

FAQs on business models

Here are answers to common questions about business models.

What are the four main types of business models?

The four main types are product-based, service-based, subscription-based, and marketplace models. Each defines a different way of delivering value and generating revenue.

What are the seven types of business models?

Common business model types include service-based, retail, ecommerce, subscription, manufacturing, franchise, and marketplace models. The right choice depends on your products, customers, and goals.

How long does it take to create a business model?

A basic business model can be drafted in a few hours. Refining it based on customer feedback and market research typically takes several weeks.

Can I use multiple business models in one business?

Yes. Many businesses combine models, such as offering both one-time purchases and subscriptions, or selling directly to consumers while also supplying other businesses.

What's the difference between a business model and a business strategy?

A business model explains how you create value and make money. A business strategy outlines how you'll compete and grow within your market over time.