What Is a Business Model? And How To Create One (With Examples)

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There are many moving parts in a functioning business, but one of the most important parts is the one new entrepreneurs trivialize or rarely talk about. And this is basically how your business is going to make money and keep the lights on. That underlying system is called your business model. Even if you’re building something you love, you still need to understand the mechanics of how it generates revenue. Yet if you ask ten entrepreneurs what a business model is, you’ll probably get eleven different answers. So, we’re going to break it down in this article.

What is a business model?

A business model is a company’s plan for generating profits. It is your business’ game plan for making money while actually delivering something valuable to people (your product).

No matter how good your idea is, your business model will determine whether people are willing to pay for it. It’s also what investors look at first as they want to know how your business plans to make money and become profitable for everyone involved.

A proper business model will answer these important questions about your business:

• What are you giving people that improves their lives in some way?
• How will you get it to them?
• How do you get paid for it?

In short, a business model gives your finances structure and ensures you make more than you spend. While it’s essential, a business model is not set in stone. You should update it regularly to keep up with changes in your product, your market and the economy.

The key components of a business model

To have a good, viable business model, you must consider everything from your product to your customers and even your resources.

Every business model, whether it’s a local coffee shop or a global tech company, is built on the same (or very similar) fundamental building blocks. These blocks were popularized by Alexander Osterwalder in the Business Model Canvas (BMC). You need all of them, but how you mix them is what makes your business unique.

Customer segments

This is who you’re serving as a business owner. Your customer segments are the specific groups of people who have the problem you’re solving and are willing to pay for your solution. The more specific you can be in defining this, the better. Because when you know exactly who you’re talking to, you can create something they actually want to take part in and are willing to pay for, instead of something you think they should want.

Value proposition

Your value proposition is what makes someone choose you over doing nothing or choosing a competitor. It’s the specific value you’re creating, the problem you’re solving, or the benefit you’re delivering that matters to your customer segment. It is important to define this because it is the most important element in this whole mix. It is what your customers are paying for.

Revenue streams

This is how money actually flows into your business. Are customers paying a one-time purchase price? A monthly subscription? Are you charging per use or per transaction? Maybe you’re making money from advertising, or commissions or licensing fees.

Your revenue stream needs to match how your customers want to buy. You can have the best product in the world, but if your pricing model doesn’t align with how people actually want to pay, you’re going to struggle.

Cost structure

These are the expenses it takes to keep your business running. Some costs are fixed like rent, salaries, software subscriptions. These hit you every month whether you make a sale or not. Other costs are variable, in the sense that they go up as you sell more. Costs like manufacturing costs, shipping, transaction fees.

Understanding your cost structure is critical because it tells you how much you need to sell just to break even, and how much profit you actually make per sale. A lot of new entrepreneurs focus so much on revenue that they forget to account for costs. Then they’re shocked when they’re making sales but somehow losing money.

Distribution channels

These are the pathways your product or service takes to reach customers. Are you selling directly through your own website? Through retailers? Via a mobile app? Through sales reps? In physical stores? On a marketplace like Amazon or Etsy? Is it a software that needs account creation? You need to define this. Your distribution channels need to match where your customers actually are and how they prefer to buy.

Key activities

These are the most important things your business has to do to make everything work. If you’re a software company, your key activities might be product development and customer support. If you’re manufacturing physical products, it’s production and quality control. If you’re a consulting business, it is delivering services and acquiring clients. These are the activities that, if you stopped doing them, your business would cease to function. Everything else is secondary.

Key resources

These are the critical assets you need to deliver your value proposition. This could be physical resources like equipment, inventory, vehicles or intellectual property like patents, trademarks, proprietary technology or human resources like skilled team members or financial resources like cash, lines of credit and more.

Knowing what resources you truly need helps you prioritize your investments and avoid wasting money on things that feel important but aren’t actually critical to your business model. Remember, the goal of defining your business model is to keep you as profitable as possible.

Key partnerships

These are the relationships with other businesses or organizations that help your business model work. Maybe you need suppliers to provide materials. Or strategic partners to help you reach customers. Or technology partners to handle parts of your service. Perhaps you’re working with distributors, affiliates or complementary businesses. Smart partnerships can help you access resources, capabilities or markets that would be too expensive or time-consuming to build yourself.

Customer relationships

This is how you interact with your customers throughout their journey with you. Your customer relationship strategy affects everything from your costs to your retention rates.

These nine components work together as a system. Change one, and you’ll probably need to adjust others. That’s why your business model isn’t something you set once and forget. It’s a living framework that evolves as you learn what works and what doesn’t.

Types of business models

Now that you understand the building blocks, let’s look at the different ways you can actually structure your business. These are proven patterns that have worked for countless companies. As an entrepreneur, you don’t have to reinvent the wheel here, you just need to find the model (or combination of models) that fits your business idea.

1. Direct-to-consumer (DTC)

Using this model, you make your product or service and you sell it directly to customers. No middlemen, no retailers, no distributors. Just you and your customer. This model exploded during the pandemic and it’s still going strong. Companies like Warby Parker, Glossier and Allbirds built entire brands this way. The beauty of DTC is that you control your brand message, customer experience and margins. But the downside is that you’re responsible for everything including marketing, fulfillment, customer service, the whole package. DTC works well when you have a strong brand story and can build direct relationships with customers. It’s particularly powerful if you’re selling products that traditional retail hasn’t served well.

2. Subscription model

Customers pay a recurring fee (usually monthly or annually but can even be weekly) for ongoing access to your product or service. Businesses like Netflix, Spotify, or your favorite software tools use this model. The subscription model is beautiful because it creates predictable, recurring revenue. You know roughly what’s coming in each month, which makes planning and scaling much easier. The challenge is that you need to continuously deliver value or people will cancel. You’re never done earning their business.

3. Marketplace model

Using the marketplace model, you build a platform that connects buyers and sellers and you take a cut of each transaction. A good example of businesses that use this model are Airbnb and Uber. Airbnb doesn’t own hotels. Uber doesn’t own cars. They connect people who have something with people who want it and they take a percentage for making that connection happen. The marketplace model is incredibly scalable once you hit critical mass, but getting there is the hard part. You need enough sellers to attract buyers, and enough buyers to attract sellers. It’s a chicken-and-egg problem that requires serious hustle to solve.

4. Freemium model

Here you offer a basic version of your product for free, then charge for premium features or advanced functionality. Dropbox pioneered this beautifully. You get free storage to start, but once you need more space or business features, you pay. The free tier is your marketing engine. When people try it and love it, eventually some percentage converts to paid. The freemium model works when your free tier provides real value but leaves room for customers to want more. The key is finding that balance where free users aren’t too costly to support, but the product is good enough that they’ll eventually upgrade.

5. E-commerce / online retail

Using this model, you sell physical products through an online store. You might manufacture them yourself or source them from wholesalers. This is one of the most straightforward models, but that doesn’t mean it’s easy. On the downside, you’re competing on a global stage, dealing with inventory, managing shipping and returns and constantly figuring out how to stand out in a crowded market.

6. Franchise model

The franchise model is interesting. You’ve built a successful business and now you’re licensing your brand and operational model to other entrepreneurs who run their own locations. McDonald’s, Subway, The UPS Store all use franchising to scale rapidly without having to fund every new location themselves. Franchisees pay an upfront fee plus ongoing royalties, and in return, they get a proven business model and brand recognition. Franchising works when you’ve got a replicable system and a strong brand. But it requires significant support infrastructure. You need to train franchisees, maintain quality control and provide ongoing support.

7. Licensing model

Here you create intellectual property (something like a brand, technology, content or design) and let others use it for a fee. Disney licenses its characters to toy manufacturers. Software companies license their code to other businesses. Musicians license their songs for commercials. Essentially, you’ve created something valuable and now you’re renting it out while maintaining ownership. This model can be incredibly profitable because your costs don’t increase much as you add more licensees. But you need to have an IP that others actually want to pay for, and you need to protect it legally.

8. Advertising model

You offer free content or services to users and make money by selling advertising space to other businesses that want to reach your audience. Google and Facebook perfected this model. As long as you can attract a large, engaged audience, advertisers will pay to reach them. The challenge is building that audience first, which often requires significant investment before you see any revenue. You also need to balance user experience with advertising because too many ads and people leave, too few and you can’t pay your bills.

9. Affiliate marketing model

With the affiliate marketing model, you promote other people’s products and earn a commission on sales you drive. Lots of bloggers, YouTubers and niche website owners use affiliate marketing as their primary revenue stream. You don’t need to create products, handle inventory or deal with customer service, you just focus on driving traffic and conversions. The catch is that you don’t control the product or the customer relationship. If the company changes its commission structure or its product quality drops, you’re affected. But as a low-risk entry point into entrepreneurship, it’s hard to beat.

10. On-demand / gig economy model

Here, you connect service providers with people who need services right now, facilitated through a digital platform. Uber, TaskRabbit, Upwork and DoorDash all operate on this model. Customers get instant access to services when they need them, service providers get flexible work and the platform takes a cut. This model requires sophisticated technology to match supply and demand in real-time, and you’re dealing with complex regulations around worker classification in many markets.

11. Razor-and-blades model

Using this model, you sell the main product cheaply (or even at a loss) and make your profit on the consumables or add-ons. Gillette literally invented this model. They sell cheap razors and then make money on expensive blade refills. The same goes for HP with printers and ink cartridges. And gaming consoles and games too. Also, coffee machines and pods. The list is endless. This works when customers are locked into your ecosystem and need to keep buying the consumables. The initial product acts as a loss leader that generates recurring revenue through the add-ons.

12. SaaS (Software-as-a-Service) model

Using the SaaS model, you provide software that customers access online, typically through a subscription, rather than buying and installing software. SaaS has become one of the dominant business models of the past decade. Companies like Edventures and Salesforce are all SaaS businesses. The beauty of SaaS is recurring revenue and relatively low customer acquisition costs once you’re established. And with SaaS, you can continuously improve your product without much hassle. The challenge, however, is that you’re never done. Customers expect constant updates and improvements.

13. Hybrid / multi-model approach

Sometimes, you don’t have to pick just one model. Some of the most successful businesses combine multiple models. Businesses like Amazon started as e-commerce, added a marketplace, built a subscription service (Prime) and now make massive revenue from cloud services (AWS). Apple sells hardware (DTC), runs a marketplace (App Store) and offers subscriptions like Apple Music and iCloud. The key is making sure your models complement each other rather than compete for resources or confuse customers.

How to choose the right business model for your idea

So you’ve got your business idea and you’ve just read about thirteen different business models. Now you’re probably thinking: “Cool, but which one is actually right for me?” Here’s how to figure it out.

Start with your customer

This might sound generic like most business advice, but actually it’s the only way this works. Your business model needs to match how your customers actually want to buy. To ensure the successful application of your business model, always match it with the needs and preferences of your customers.

Look at your resources

Be honest about what you have and what you don’t. There’s no point choosing a model that requires resources you don’t have and can’t get. For example, a franchise model is great, but if you don’t have a proven, replicable business yet, you’re not ready for it.

Consider your strengths

As a founder, what are you actually good at? Or what is your team good at? If you’re amazing at building relationships and selling, a direct sales or consulting model might work well. If you’re a great marketer but hate operations, maybe affiliate marketing or a platform model makes sense. If you’re technical and love building things, SaaS could be your path. Your business model should leverage your strengths, not require you to become someone you’re not.

Think about scalability

How big do you want this to get? Some models scale easily like digital products, platforms, licensing. Others are harder to scale, like service businesses, brick-and-mortar retail, anything requiring your personal time. Neither is better nor worse, but you need to be clear about your goals. If you want to build something that could become huge, you probably need a model with better scalability.

Analyze the competition

Take a look at your competition. What models are working in your space? We’re not saying copy them, but there’s wisdom in looking at what’s already successful. If every successful company in your industry uses a subscription model, there’s probably a reason. If no one’s tried a marketplace model, maybe it’s a blue ocean opportunity or maybe there’s a reason it won’t work. Study your competition, but also look at adjacent industries. Sometimes the best innovation comes from applying a business model from one industry to another.

Test your assumptions

When it comes to business, there is always a high chance that your assumptions are wrong. Don’t pick a business model based purely on theory. Get out there and test whether people will actually engage with your business the way you’re planning to structure it.

Be willing to pivot

Your first choice doesn’t have to be your final choice. Instagram started as a location-based check-in app. Slack began as an internal tool for a gaming company. Pick the model that seems most promising based on what you know now, but stay flexible. As you learn more about your customers and your market, you might discover a different model makes more sense. The goal isn’t to pick the “perfect” business model from day one. The goal is to pick a viable one that you can test, learn from and iterate on.

How to validate your business model before launching

No one wants to spend six months building something, launch it with great fanfare and then discover that no one is actually willing to pay what you need to charge or how you charge. This happens all the time. And it’s completely avoidable. The smart move is to validate your business model before you fully commit. We’ll give you a few ways to do that.

Talk to real potential customers

Talk to actual people who would be your customers if you launched tomorrow. Find at least 20-30 people in your target market and have real conversations with them. During the conversation, listen more than you talk. You’re looking for patterns in their problems and their willingness to pay for the solution. You’re also noting how they are willing to pay. If you can’t find 20 to 30 people willing to even talk to you about the problem you’re solving or pay the way you want them to, that’s a bad sign.

Create a minimum viable offer

You don’t need the full product to start testing. Deliver a simplified version manually before you automate it. You can even pre-sell the product before you manufacture it. The goal is to test whether people will actually engage with your business model with the smallest possible investment of time and money.

Test your pricing

This is what a lot of entrepreneurs get wrong, but it’s crucial. Try to get people to commit money, not just express interest. “That sounds great!” is very different from “Here’s my credit card.” You can do this with pre-orders, early bird pricing, deposits or even just asking “If this existed today at $X price point, would you buy it?” If people aren’t willing to pay enough to make your unit economics work, you don’t have a viable business model yet. Don’t be afraid to test different price points with different customer segments. You might be surprised by what people are actually willing to pay.

Run small experiments

Launch tiny versions of your business model to see what happens. If you’re considering a subscription model, can you test it with 10 beta customers for three months? If you’re thinking about a marketplace, can you manually match buyers and sellers on a small scale first?

These experiments teach you what works and what doesn’t before you’re all-in. You’ll discover operational challenges you didn’t anticipate and probably some opportunities you hadn’t thought of.

Track the right metrics

Pay attention to the numbers that actually matter for your business model. For a subscription business, What percentage of people actually subscribe after trying? How long do they stay subscribed? What’s your churn rate? For e-commerce, What’s your conversion rate? What’s your average order value? What are your actual costs per sale, including all the hidden expenses? For a marketplace: How many transactions are happening? What’s your take rate? How expensive is it to acquire both buyers and sellers? These metrics tell you whether your business model actually works in practice, not just in theory.

Identify your deal-breakers early

Every business model has potential breaking points. Maybe you need to reach a certain scale before the economics work. Maybe you’re dependent on a key partnership. Maybe your costs are higher than you thought and your margins don’t actually work at your price point.

The validation phase is about discovering these deal-breakers before you’re too invested to pivot. If your business model requires 10,000 customers to break even and you can’t figure out how to get there, it’s better to know that now than later.

Business model vs Business plan vs Business Model Canvas (BMC)

These terms tend to confuse many as they are quite related but different. So let’s clear it up.

Business model

The topic of this blog post. It’s the fundamental logic of how your business creates, delivers and captures value. It’s your operating system, aka, how the whole thing works.

Business plan

Your business plan is the detailed roadmap and pitch document. A business plan typically includes your business model, but then goes way deeper into execution. It includes market analysis, competitive landscape, detailed financial projections, marketing strategy, operational plans, team structure and probably a bunch of charts and graphs. If your business model is the “what” and “how,” your business plan is the detailed “when,” “where,” “who,” and “how much.”

Read: How to Create a Business Plan in 2026 (Without Wasting Time)

Business Model Canvas (BMC)

This is a visual tool, specifically, a one-page framework that helps you map out your business model. The Business Model Canvas was developed by Alexander Osterwalder and it breaks your business model into nine building blocks on a single page: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure. Sound familiar? It should. These are the components we covered earlier. The Canvas is incredibly useful because it forces you to think through all the elements of your business model and see how they connect. It’s also easy to iterate on as you can sketch it on a whiteboard, tear it up and start over without feeling like you’re throwing away a 30-page document.

Examples of real-world business models

Seeing how real companies structure themselves can give you ideas for your own business model.

Spotify: freemium + subscription

Spotify lets anyone stream music for free but with ads or pay for a premium subscription to skip the ads and unlock extra features like offline listening. Their customers are basically everyone who listens to music, split between free and premium users. This works for Spotify because the free tier acts as a massive marketing funnel. People get hooked on the service, get annoyed by ads and eventually convert to premium. Meanwhile, even free users generate some ad revenue.

Uber: on-demand marketplace

Uber connects riders with drivers through a mobile app and takes a cut of every ride. Riders get fast, affordable rides and drivers get flexible income opportunities. Uber doesn’t own cars or employ most drivers, which means they can scale quickly without the huge costs a traditional taxi company would have. The magic here is in the marketplace model, connecting supply and demand while making money on every transaction.

Dollar Shave Club: DTC subscription

Dollar Shave Club delivers razors and grooming products straight to customers’ doors. Customers pay monthly or quarterly, and the subscription ensures predictable revenue for the company. They also cut out middlemen, building a direct relationship with their customers.

Airbnb: marketplace

Airbnb connects property owners with travellers and takes a service fee from both sides. Hosts get extra income from unused space, guests get unique, often more affordable accommodations. Airbnb doesn’t own any real estate but has more inventory than most hotel chains. Their business model works because it creates value for both sides while keeping costs low, the classic win-win marketplace setup.

Salesforce: SaaS + freemium

Salesforce provides customer relationship management (CRM) software to businesses of all sizes, charging monthly subscription fees. Their customers get flexible, cloud-based tools without the huge upfront costs of traditional enterprise software. The subscription model creates predictable recurring revenue. And by offering affordable entry-level plans, Salesforce can capture small businesses that eventually scale into enterprise customers.

How Edventures can help you build and improve your business model

There isn’t a single “perfect” business model as what works in one market might flop in another. That’s why it’s so important to think carefully about pricing, positioning, your ideal customer, how your brand is perceived, all the moving parts.

That’s where Edventures comes in to help. Our AI-powered coaching platform, guided by Anna, helps you tackle your business model step by step. Together, you can:

• Explore different business models and figure out which fits your idea and your market.
• Decide on the right pricing strategy, one that balances your costs, your competition and the value you’re delivering.
• Define your positioning and ideal customer.
• Adjust your model over time as your market, resources or brand evolve.

Edventures gives you a personalised mentor who walks you through the mechanics of your business model, helping you make decisions that aren’t guesses but are backed by strategy and real-world insight. With Edventures, you don’t have to figure it all out alone, you can build a model that actually works for you and your business. Get step-by-step guidance with Edventures at edventures.ai.