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LEGAL DICTIONARY

Business Model

A business model is a company’s strategy to make a profit. It defines core aspects of a business, including its target customers, organizational strategies, and the products and services it will sell.

Business models also make clear what problems the business intends to solve, how it will create customer value, and what costs will be incurred.

Creating a business model is essential for both new and existing companies. They are helpful for new companies to gather investment, recruit new talent, and guide their employees. On the other hand, established businesses must also update their business plans to ensure that they can adapt effectively to future challenges and trends.

Find out about the different types of business models and the main components of this important concept.

Main Components of a Business Model

Business models vary significantly from company to company. However, there are certain sections that should always be included. These are often visualized through the use of a business model canvas, which allows a company to easily assess and change its business model over time.

The key components of any business model are as follows:

  • A clear value proposition describing what the business offers its customers
  • The brand and market positioning of the company and how it differentiates from competitors
  • The main customer segments which will be targeted
  • How revenue will be generated
  • The distribution channels that will be used to reach customers
  • How the value proposition will be promoted and advertised
  • What internal resources and capabilities will be used to drive the value proposition
  • The long-term strategy that will be used to develop and preserve a competitive position in the market

Types of Business Models

There are many types of business models, and they can all be customized depending on the specific industry or company in question. It’s even possible for certain companies to include multiple coexisting business models when creating their business plan.

Some of the most common types of business models are listed below:

  • Subscription: The customer pays a recurring fee on a weekly, monthly, or yearly basis in order to access a product or service.
  • Freemium: A limited version of an app or software is offered for free, and users must pay a fee or subscription to access additional key features.
  • Bundling: A company sells two or more products as a single unit, typically charging a lower price than they would if selling each product individually.
  • Product-as-a-service (PaaS): The PaaS business model permits customers to purchase a service for a set number of times instead of the products that provide that service.
  • Leasing: Leasing involves allowing a company or individual to use a product for a periodic fee.
  • Software-as-a-service(SaaS): SaaS is a business model in which a centrally hosted software is licensed to customers through a subscription plan.
  • Crowdsourcing: Under a crowdsourcing business model, organizations gather information or knowledge from a large open audience to help deliver a product or service.
  • Advertisement: Advertising business models involve selling ad space on different marketing channels to companies or individuals that want to reach a specific target audience.