Business model

The term business model is relatively recent. Though it appeared for the first time in the 1950s it rose to prominence and reached the mainstream only in the 1990s. Today the term is commonly used, but there is still no single dominant definition. Based on an extensive literature review Osterwalder, Pigneur and Tucci (2005) define a business model as:

a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.

The growing body of literature using the term business model shows that there is a continuum between authors using the term to simply refer to the way a company does business (e.g. Galper 2001; Gebauer and Ginsburg 2003) and authors that emphasize the model aspect (e.g. Gordijn 2002). These two viewpoints differ because the former generically refers to the way a company does business, whereas the latter refers to a conceptualization of the way a company does business. Proponents of the latter viewpoint propose reference models that consist of elements and relationships that allow describing the business model of a company.

Efforts to link the business model concept to design and innovation are undertaken by a community that is writing a wiki-book on Business Model Design and Innovation.

The business model concept

Many different conceptualizations of business models exist (Chesbrough and Rosenbloom 2000; Hamel 2000; Linder and Cantrell 2000; Petrovic, Kittl et al.; Weill and Vitale 2001; Gordijn 2002; Afuah and Tucci 2003; Osterwalder 2004). They all have various degrees of resemblance or difference. The model proposed by Osterwalder (2004) synthesises the different conceptualizations into a single reference model based on the similarities of a large range of models. The author's conceptualization describes a business model as consisting of nine related business model building blocks. Thus, a business model describes a company's:

value propositions: The company's offers which bundle products and services into value for the customer. A value proposition creates utility for the customer.
target customer segments: The customer segments a company wants to offer value to. This describes the groups of people with common characteristics for which the company creates value. The process of defining customer segments is referred to as market segmentation.
distribution channels: The various means of the company to get in touch with its customers. This describes how a company goes to market. It refers to the company's marketing and distribution strategy.
customer relationships: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.
value configurations: The configuration of activities and resources.
core capabilities: The capabilities and competencies necessary to execute the company's business model.
partner network: The network of cooperative agreements with other companies necessary to efficiently offer and commercialize value. This describes the company's range of business alliances.
cost structure: The monetary consequences of the means employed in the business model.
revenue model: The way a company makes money through a variety of revenue flows.

The process of business model design is part of business strategy. The implementation of a company's business model into organizational structures (e.g. organigrams, workflows, human resources) and systems (e.g. Information Technology architecture, production lines) is part of a company's business operations. It is important to understand that business modeling commonly refers to business process design at the operational level, whereas business models and business model design refer to defining the business logic of a company at the strategic level.

Types of business models

Generally, the business models of service firms are more complex than those of manufacturers and resellers. The oldest and most basic business model is the shop keeper model. This involves setting up a store in a location where potential customers are likely to be and displaying a product or service.

A business model is a description of how an organization functions, a general template that describes its major activities. It identifies the firm’s customers and the products and services it offers. A model also provides information about how a firm is organized and how it generates revenues and profits. Business models combine with strategy to guide major decisions at a firm. The model also describes products and services, customer markets and business process.

Currently, most of the business models depend on technology. Entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging excessive amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor writer.

In the 1950s new business models came from McDonald's Restaurants and Toyota. In the 1960s the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks. Poorly thought out business models were a problem with many dot-coms.

Each of these business model innovations can give the firm a sustainable competitive advantage. But times are changing and companies must continuously rethink their business design. Companies must change their business models as value migrates from industry to industry. Ultimately the success or failure of a company depends first on how well its business design matches their customers' priorities.

There have been a few attempts to develop a systematic taxonomy of business models. Among the earliest are by Timmers and Rappa.

Articles on business models

The subscription business model
The razor and blades business model (bait and hook)
The pyramid scheme business model
The multi-level marketing business model
The network effects business model
The monopolistic business model
The cutting out the middleman model
The auction business model
The online auction business model
The bricks and clicks business model
The Loyalty business models
The Collective business models
The industrialization of services business model
The servitization of products business model
The low-cost carrier business model
The online content business model

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The business model concept

Types of business models

Articles on business models

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