A business model is a framework for how a company will create value. Ultimately, it distills the potential of a business down to its essence. It answers fundamental questions about the problem you are going to solve, how you will solve it, and the growth opportunity within a given market.
Creating a business model is essential, whether you are starting a new venture, expanding into a new market, or changing your go-to-market strategy. You can use a business model to capture fundamental assumptions and decisions about the opportunity in one place, setting the direction for success.
There are many types of business models. Each one varies considerably based on the type of organization and offering. For example, a manufacturing company will have a very different model than an advertising agency. Even within a specific industry, business models vary. Here are a few common business models used by technology companies:
- Retail sales
Most businesses end up using a combination of business models to reach their customers and grow over time.
Why is a business model important?
You need a clear path to build something meaningful. The process of building a business model establishes a plan for how you will realize your vision. It lays out the strategy behind a new undertaking or investment and provides a framework for tracking progress.
Creating a business model requires deep thought and analysis. Company and product builders must think from the outside in, focusing on market needs and what matters most to customers. Once built, sharing your business model across the organization encourages alignment. This keeps everyone accountable for what they are working on and why, as well as guiding investments of time and resources.
How do companies use business models?
Companies across every industry and at all stages of maturity use business models. Some rely on lengthy processes and build complicated models, while others move quickly to articulate the basics. Having the discipline to work through this planning tool forces internal alignment.
For established enterprises, a business model is often a living framework that is reviewed and adapted every year based on changes with customers, employees, and the market. For companies launching new products or entering new markets, a business model can help get them off to the right start and ensure that early product and marketing decisions are tied back to the strategy.
What are the components of a business model?
A business model should answer important questions about your business and set out a strong vision for the business. The key components of a business model should include relating to your target customers, the market, organization strengths and challenges, essential elements of the product, and how it will be sold. Establishing this foundation guides the next planning tool — your product roadmap.
Here is a list of essential components included in a business model:
| --- | --- | | Component | Definition | | Vision | High-level introduction to the company and business model | | Key objectives | Definition of the top-level goals and how they will be measured | | Customer targets and challenges | Description of the different types of customers to be targeted and their pain points | | Solution | How the product will solve those pain points | | Value | The key characteristics that differentiate the product offering | | Pricing | A view into what the solution will cost and how it will be sold | | Messaging | Explanation of why the offering will serve a customer’s pain points | | Go-to-market | Channels that will be used to reach and sell to customers | | Investment required | Costs required to make the solution successful | | Growth opportunity | Identified ways the business will grow |
What are some examples of business models?
Many people associate business models with lengthy documents that describe a company’s problem, opportunity, and solution in the context of a two-to-five-year forecast for costs, growth, and revenue.
But business models do not need to be a long document. A concise, visual document is an effective way to distill the key elements of your strategy and ensure everyone understands the high-level approach.
Below are two examples of succinct business model layouts you can use to objectively assess what is possible and what challenges could arise for your business:
Aha! business model builder
Articulate the foundation of your product or service in a flexible canvas-style format. The business model developed by Aha! is the most complete template available. It is based on the Aha! team's 20+ years of experience building breakthrough products and software companies. The focus is on capturing key elements like why the solution is worth buying (messaging), pain points of the buyers (customer challenges), and ways you will grow the business (growth opportunities). You can drag and drop each component into a custom layout.
Similar to the business model canvas, this model takes a problem-focused approach to create an actionable plan. First created by Ash Mauraya, it is most commonly used by startups and entrepreneurs to document their business assumptions. The focus is on creating a fast, concise, and effective single-page business model. It documents nine elements, including customer segments, channels used to reach customers, and the ways you plan to make money. All of the elements can be found here in our free, downloadable template.
What are some business model tools?
A wide variety of tools are available to help you quickly build and share your business model. The Aha! business model builder includes the most popular templates, including the two examples above. Aha! also lets you create your own custom business model, using the simple drag-and-drop interface. Access the business model builder for free during a 30-day trial. Or you can download these free Excel and PowerPoint business model templates.
Crafting a business model is part of establishing a meaningful business strategy. It requires deep thought about the core assumptions surrounding how a company or product is going to generate value and how the team will work towards achieving its goals.