Understanding Business Models
A business model describes how a company creates, delivers, and captures value. Explore the most common and successful business models used by organizations worldwide.
Subscription Model
Customers pay a recurring fee (monthly/yearly) for continuous access to a product or service.
Key Characteristics:
- Predictable recurring revenue
- Long-term customer relationships
- Focus on retention and churn reduction
Examples:
Netflix, Spotify, Adobe Creative Cloud, Microsoft 365
Freemium Model
Basic services are free, while premium features require payment.
Key Characteristics:
- Large user base with free tier
- Conversion of free users to paid
- Viral growth potential
Examples:
Dropbox, LinkedIn, Slack, Canva
Marketplace Model
Platform connects buyers and sellers, taking a commission on transactions.
Key Characteristics:
- Network effects (value increases with users)
- Transaction-based revenue
- Two-sided platform dynamics
Examples:
Airbnb, Uber, eBay, Etsy
E-commerce Model
Selling products directly to consumers online, owning inventory.
Key Characteristics:
- Direct-to-consumer sales
- Inventory management
- Logistics and fulfillment
Examples:
Amazon, Warby Parker, Casper, Allbirds
Advertising Model
Free services funded by displaying advertisements to users.
Key Characteristics:
- User attention is the product
- Scale is critical
- Data-driven targeting
Examples:
Google Search, Facebook, YouTube, Twitter
SaaS (Software as a Service)
Cloud-based software accessed via subscription, typically for businesses.
Key Characteristics:
- Centrally hosted and maintained
- Subscription-based pricing
- Scalable infrastructure
Examples:
Salesforce, Shopify, HubSpot, Zoom
Razor and Blades Model
Sell the base product cheaply, profit from recurring consumables.
Key Characteristics:
- Low-margin or subsidized base product
- High-margin consumables
- Customer lock-in
Examples:
Gillette razors, Nespresso, printers and ink cartridges
Franchise Model
License brand and business system to independent operators for fees and royalties.
Key Characteristics:
- Rapid geographic expansion
- Franchisee investment
- Standardized operations
Examples:
McDonald's, Subway, 7-Eleven, Anytime Fitness
Test Your Knowledge
Answer these questions to assess your understanding of business models.
Question 1
Which business model is characterized by offering basic services for free while charging for premium features?
Question 2
Airbnb and Uber are examples of which business model?
Question 3
What is the primary revenue source for the advertising business model?
Question 4
Which business model involves selling a base product cheaply and profiting from consumables?
Question 5
Netflix and Spotify primarily use which business model?
Question 6
What is a key characteristic of the SaaS business model?
Question 7
Which model benefits most from network effects?
Question 8
McDonald's expansion strategy primarily uses which business model?
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