A business model describes how a company will create value for customers and operate in a way that generates profit. It is the structure for how the company runs and will guide business decisions, markets, expansion and production. There are dozens of business model examples in our modern economy, with more being developed each year.
While every entrepreneur starts with an idea, they need to quickly develop a strong business model to make their idea viable.
Some types of business models, like the subscription model, grow rapidly over a few years and generate hundreds of startups. Other popular business models have been around for centuries and continue to thrive today.
Below is a guide to 20 business model examples so you can explore how they work and how companies turn a profit.
20 common business model examples
This list of models can help you consider how to develop your business and the model(s) you want to build it around.
- Software platforms
- Single purchase model
- Affiliate promotion
- Online marketplace
- Network marketing
- Hidden revenue
- Multi-sided model
- Premium branding
- Nickel-and-dime branding
Ready to get started? Dive in and see which business model example is the right fit for your new venture.
The most common business model is a retail business. This refers to the process of selling products or services directly to customers. Retailers range from multinational conglomerates like Wal-Mart and IKEA to small businesses in one-room shops down the street. In the modern era, retail stores can take multiple forms:
- Brick-and-mortar stores refer to traditional buildings where you browse for products and make purchases.
- e-Commerce brands like eBay and Alibaba sell their wares online, creating a digital retail environment.
- Bricks-and-clicks models refer to brands that have an e-commerce presence but also have physical locations.
For example, JCPenney offers a bricks-and-clicks model because customers can use their online store to order items or their physical location to browse for products. Sometimes customers use both when they buy items online and then pick them up in-store.
When you operate through a franchise model, you buy the rights to a brand and use the parent company guidelines to run your business. For example, every McDonald’s franchise has the same branding, food, policies, and employee training, even if the franchises are owned by different people across the world. The parent company provides some resources, but the franchisee foots the bill for rent, furniture, food, and other costs.
A manufacturing business model often works to supply materials to other businesses. A manufacturer can create furniture that will then be sold on the retail showroom floor or they can manufacture seats that will then get installed in public buses.
Manufacturers often sell in bulk to various companies and distributors. They can create final products or materials that are used by other companies to develop their own products.
4. Software platforms
Most companies offer either a product (like shampoo) or a service (like a haircut) within their business model.
Software isn’t a physical product, but rather an online tool that assists people or companies.
A company might use analytics software to glean data insights, while a consumer uses health monitoring software to check their heart rate and the total calories they burned in a workout.
With a software-as-a-service (SaaS) business model, the main expenses companies face are development and customer service. These companies profit by selling subscriptions to users.
Companies that follow a subscription model ask customers to sign up for regular, repeated payments in exchange for a product or service. Amazon Prime is a perfect example. Customers pay a flat fee each year and gain access to discounts and expedited shipping.
The subscription model can also be used for physical products along with digital services. Subscription boxes send products to customers each month, while magazine subscriptions send monthly or quarterly publications to their reader-base.
The pay-as-you-go model is an alternative to a subscription. For example, fans might subscribe to season tickets for a sports team or at a theatre. This gives them access to multiple events, whether they go to them or not.
Conversely, pay-as-you-go plans allow customers to only buy tickets when they are needed. So, if you only attend one sporting event in a season, you only pay for one ticket.
Pay-as-you-go models are popular in data usage and phone companies. Instead of paying for a certain number of minutes or amount of data, customers pay when they need the minutes and ideally save money by avoiding overspending on unneeded products or services.
7. Single purchase model
The single purchase model is another alternative to subscription services, allowing customers to make one purchase from a business with no immediate plan to make another in the future. While customers pay for memberships at Costco to reap sales benefits, shoppers can visit Aldi once without needing to pay or return because of a subscription. This model can limit brand loyalty as customers aren’t locked into using only one product or service.
8. Affiliate promotion
Affiliate marketing uses brand power to drive sales to other businesses. Through this business model, a company promotes products or services that drive traffic to another business. Affiliates are typically paid commission based on the traffic they drive.
For example, a cooking blogger or foodie social media influencer might link to a specific mixer and get a portion of the sales for each mixer bought from users clicking on that link. Brands like Rakuten (formally Ebates) use affiliate marketing to profit as a traffic-driver to online businesses.
9. Online marketplace
An online marketplace differs from an affiliate program in that users can actually buy products on the marketplace website. Customers who visit Amazon and eBay can buy products through the website, while most affiliate sites don’t have an e-commerce option.
Through an online marketplace, customers place orders which are then sent to the original retailer. This gives the retailer more exposure so it can grow its sales, while the marketplace benefits by taking a small fee for the listing. For a small-scale example, consider how a local candle maker can ship their products all across the country by listing their products on Etsy.
10. Network marketing
Network marketing relies on distributors to sell your products. A company will create products and sell them in large orders to people who want to sell them. These salespeople will then develop a network of people to buy the items and make a commission on the sales.
Many network marketing brands are also multilevel-marketing companies, which means distributors get a commission when they recruit other people to sell the products under them.
11. Hidden revenue
A hidden revenue business model offers a service to users for free, making the source of profits less obvious.
For example, Google as a service is free for users. However, the majority of its profits come from ad sales. Facebook and Pandora have similar hidden revenue models, where the company benefits from its large user base.
If these brands didn’t have a large market share of free users, then they wouldn’t profit as much from ad sales. (For example, consider the difference in ad profits between Google and Bing.) The hidden revenue model embodies the phrase, “if you’re not the customer, then you’re the product.”
The freemium model was made popular by smartphone apps and other digital services. Through this model, customers have access to certain aspects of the company’s products or services; however, if they want complete access, they need to pay. For example, you can listen to Pandora for free but need to pay extra to eliminate ads and get unlimited skip options.
To successfully run a freemium model, you need to be able to support a large user base — even if most customers won’t pay. You also need to create a service that encourages people to sign up beyond the free offering.
13. Multi-sided model
With a multi-sided business model, a company profits from both the customers directly and from hidden forms of revenue. LinkedIn and Spotify both use multi-sided models. Customers pay for premium access using the freemium model.
LinkedIn users can boost their exposure by paying for premium access, and Spotify users don’t have to listen to ads. Additionally, these companies profit from paid promotions from brands and ads.
The multi-sided model is ideal for companies that want to diversify and create multiple revenue streams.
Instead of a company providing a product or service, the peer-to-peer model lets customers make money off their existing resources. A taxi company provides cars for its drivers. However, Uber and Lyft drivers use their own cars. Instead of staying in a hotel built by Hilton, more people are opting to stay in homes provided by Airbnb.
This business model tends to have lower start-up costs because the company doesn’t need to invest in actual inventory. Instead, the main expenses come from developing easy-to-use software and a larger user base of peers offering their services (and peers wanting to buy them).
The agency-based business model provides services to individuals or companies on a large scale. Agencies tend to specialize in specific services and bring together multiple professionals from similar backgrounds.
An advertising agency will work with dozens of companies to create promotions for them. For companies, this is more affordable than hiring marketing teams in-house and employing them full-time.
While most agencies operate on B2B models, some work directly with consumers. For example, there might be a hub of real estate agents working together to grow their leads within an area.
A consultant or consulting firm is hired by companies or individuals to evaluate a situation and offer their expertise. For example, a consulting firm might examine a company’s operations to determine why it isn’t profitable. A financial consultant might work with a couple to see if they are ready for retirement.
Consultants often don’t actually do the work that they recommend to their customers, but they will create a path for success and list several actionable recommendations. Some consultants work for agencies and make recommendations based on what services the agency offers when applicable.
The one-to-one business model was popularized by the social good company Tom’s shoes. This was based on the idea that for every pair of shoes a customer buys, another pair is donated to someone who can’t afford them.
Tom’s shoes became exceedingly popular not just because of the comfort and style of their shoes, but also because people felt like they were helping others by buying them. Companies that want to help others (or at least market themselves as a company that helps others) can use this option to turn a profit while benefiting their communities.
18. Premium branding
Companies often build their marketing around the value they provide to customers. Their products can save money or time for those who buy them. With the premium model, the target audience and tone changes.
A Gucci purse holds your wallet and phone just as well as a $10 purse from Walmart, but it sends a message about status, luxury, and wealth. When customers are willing to pay more for that, it can be incredibly profitable for certain brands.
19. Nickel-and-dime branding
On the opposite end of the premium model is nickel-and-diming. This is the model of offering low prices and then charging extra for basic features as upsells. RyanAir is known for nickel-and-diming customers. They offer lower airfares than their competitors but will charge customers to pick their seats, board early, check their bags and enjoy other benefits that are standard on most airlines.
Every few years there are even rumors of the airline considering charging to use the bathroom. Still, many customers prefer to pay the lower fees even if it means giving up a few luxuries.
Crowdsourcing has become an important buzzword within the past decade. This is the process of asking hundreds of people to pool their resources to create one result. Wikipedia crowdsources the knowledge of thousands of people to create comprehensive resources for users. Websites like Kickstarter allow businesses to secure funding by crowdfunding, where dozens of people contribute a small amount to raise thousands of dollars.
With a crowdsourcing model, brands need to focus on creating useful software that is easy to use, because they aren’t providing the product or service on their own.
If the website isn’t intuitive, customers aren’t going to want to use it.
Summing it up
As you can see from the above business model examples, there are multiple types of business models to help you develop your business.
Depending on your product or service, you might not need a physical location, and you might opt to invest in certain types of marketing over others.
Consider these options as you develop your startup to determine what kinds of profit you plan to turn and how you can run your business successfully.
Settled on a great business model? Make sure you have a great business name to match. Search for your domain now.