What is a business model? Definition, types and steps

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 model
• The difference between a business model, a business plan, and a revenue model
• Choosing the right model for your business
• Your business model evolves with your business
• FAQs on business models

Key takeaways

• Define your value proposition clearly by identifying the unique value your business offers to customers and explaining why they'll choose you over competitors, as this is the most critical component of any business model.
• Map out all nine key components of your business model including revenue streams, cost structure, target market, customer acquisition methods, delivery channels, key resources, activities, and partnerships to create a complete framework for success.
• Test your business model with a small group of customers through free trials or beta testing before full launch to identify issues and make necessary adjustments based on real feedback.
• Review and update your business model regularly, at least annually or when you notice significant market changes, as successful businesses adapt their models over time to stay competitive and capture new opportunities.

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 how you'll generate revenue, and sets a path towards profitability.

Components of a business model

Business model components are the building blocks that define how your business creates, delivers, and captures value. Understanding each component helps you clarify your strategy and set a path to success.

Here are the key components to address:

• defines the unique value your business offers to customers and explains why they'll choose you over competitors; it is considered the most often mentioned element of a business model in academic literature, appearing in one-third of analysed publications
• Revenue streams: identifies the different ways you'll 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: describes the group or groups of customers you're trying to reach, including their needs and preferences
• Customer acquisition: covers the methods you use to attract and retain customers, such as advertising, social media, or word-of-mouth referrals
• Channels: specifies how you deliver products or services, whether through a physical store, an ecommerce website, or a mobile app
• Key resources: lists the assets your business needs to operate, including physical resources like equipment and facilities, or intellectual property like patents and trademarks
• Key activities: identifies the tasks required to run your business successfully, such as product development, marketing, or customer service
• Key partnerships: outlines the relationships you need to establish with suppliers, distributors, or other businesses in your industry

How to create a business model

Creating a business model gives you a structured way to define how your business will succeed. Follow these steps to build a model that works for you.

1. Research your market and customers: identify who your target customers are, what problems they face, and how they currently solve them
2. Define your value proposition: clarify what unique value you offer and why customers should choose you over competitors
3. Identify your revenue streams: determine how you'll make money, whether through product sales, subscriptions, services, or other methods
4. Map your cost structure: list all costs involved in running your business, including production, operations, and marketing
5. Outline your key resources and activities: identify what assets and tasks are essential to deliver your value proposition
6. Establish key partnerships: determine which suppliers, distributors, or other businesses you need to work with
7. Test your model: offer a free trial or beta test to a small group of customers to identify issues and make adjustments before full launch

Common types of business model

Business model types are frameworks that describe how different businesses create and capture value. Common types include service-based, retail, ecommerce, manufacturing, and subscription-based models.

Each type has distinct advantages and challenges. The right choice depends on your business nature and customer needs. Below, you'll find details on each model to help you identify which fits best.

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 specialisation.

Freelancers and small businesses favour this model because it's relatively easy to set up and has low operating costs.

However, the number of 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, so as you become more efficient, you earn more.

Retail business model

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

Retail offers the potential for high sales volumes and strong brand presence. For example, by curating its product selection, Trader Joe's sells only about 4,000 stock keeping units (SKUs), compared to 50,000 in a typical grocery store, allowing it to create a unique shopping experience and build strong customer relationships.

Consider these challenges before choosing retail:

• Physical space costs: can be significant due to rent and operating expenses
• Inventory management: requires ongoing attention to track stock
• Competition: you may face pricing disadvantages against larger retailers
• Customer expectations: may require offering guarantees, returns, or after-sales support
• Market fluctuations: require adaptability due to seasonal demand and changing preferences

Ecommerce business model

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

Ecommerce makes your products available to customers worldwide and can provide a steady income stream. However, many businesses compete online, so you'll need a strong marketing strategy and operational advantages to stand out. For example, some large retailers use autonomous robot systems to fulfil online orders in as little as 12 minutes, greatly increasing operational efficiency.

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.

This model suits businesses with unique product ideas. It allows you to ensure quality, customise offerings, and potentially earn higher profit margins by selling directly to customers. You can also scale production as your business grows.

Consider these challenges:

• Upfront investment: requires significant capital for equipment and machinery
• Supply chain management: requires efficient sourcing and logistics
• Inventory risks: requires careful planning for stock levels and product development

Subscription-based business model

A subscription-based business model involves customers paying a recurring fee to access a 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 reliable recurring income, making it easier to forecast accurately. Some companies find success by focusing on convenience; for example, one automotive subscription service made delivery within one week a key selling point.

However, you'll need to focus on acquiring and retaining customers. You'll also need to manage recurring payments and maintain strong customer service.

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

• Business model: helps you understand how your business delivers value to customers and generates profit
• Business plan: serves as a detailed blueprint for starting and running your business, including goals, marketing strategies, projected finances, and how to manage day-to-day operations. Learn more about how to write a business plan.
• Revenue model: focuses specifically on how you'll earn income, explaining your pricing and payment methods such as sales, subscriptions, or advertising

Choosing the right model for your business

Choosing the right business model requires matching your approach to your specific situation. Different models offer different advantages, and the best fit depends on several factors.

Consider these when choosing your model:

• Your skills and resources: consider that a service-based model suits freelancers, while manufacturing requires capital investment
• Your customers: evaluate who they are and what they want to determine which model best serves their needs
• Your industry: research which models are commonly used and why they work
• Your competitors: analyse what's working for them to inform your decision
• Your unique selling proposition: understand what sets you apart and choose a model that highlights those strengths

Some businesses combine models. For example, a service business might also offer subscriptions, or an ecommerce business might add custom options for certain products.

Your business model evolves with your business

Your business model evolves as your business grows. It's not a one-time task but a living document that should reflect market changes, customer needs, and your own goals.

Review your business model regularly, especially when you notice shifts in your industry or customer behaviour. By keeping it up to date, you can adapt to new challenges and seize opportunities for long-term success. In fact, research shows that over a 10-year period, business model innovators gained a 2.7% premium compared to the 1.7% gained by product and process innovators.

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FAQs on business models

Here are answers to some common questions about business models.

How do you define a business model in simple terms?

A business model covers what you sell, who you sell to, and how you make money.

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

A business model describes how your business operates and makes money. A business strategy outlines how you'll compete and achieve your goals within that model.

Can a business have multiple business models?

Yes, many businesses combine models. For example, a software company might offer both one-time purchases and subscriptions, or a retailer might sell in-store and online.

How often should I review or update my business model?

Review your business model at least annually, or whenever you notice significant changes in your market, customer behaviour, or business performance.

What's the most common business model for small businesses?

Service-based and retail models are most common among small businesses. However, subscription and ecommerce models are growing rapidly due to lower startup costs and broader reach.