What is a Business Model?

Business Model vs. Business Plan

These business tools serve different purposes:

A business model defines how your business creates and captures value. It’s the core structure of how you make money—what you sell, who buys it, and how the money flows. You can explain most business models in a few sentences.

A business plan is a detailed document that covers your marketing strategy, competitor analysis, team structure, funding needs, and financial projections—along with your business model.

The Business Model Canvas is a popular tool that helps you visualize your business model on a single page. Created by Alexander Osterwalder, this template has nine blocks: Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partners, and Cost Structure. It’s a practical way to sketch out your business model quickly and see how all the pieces fit together.

Think of your business model as the engine of your car, while the business plan is the complete manual that also covers the exterior design, navigation system, and maintenance schedule. You need a working engine (business model) before the rest matters. The Business Model Canvas is like the blueprint for that engine—a visual tool that helps you design it effectively.

Types of Business Models

Every business has a model for making money. Here are several common approaches that startups and small businesses use:

Subscription Model Customers pay regularly (monthly or yearly) for ongoing access to your product or service. Consider a local lawn care company that offers monthly maintenance packages. Instead of customers calling whenever their grass gets too long, they pay a fixed monthly fee for regular scheduled service.

Marketplace Model: You create a platform connecting buyers and sellers, taking a percentage of each transaction. Think of a community craft mall where independent artisans rent small spaces to display their goods. The mall owner provides the location, handles all transactions, and takes a percentage of each sale, creating a win-win situation where sellers access customers without needing their own storefront.

Freemium Model: You offer basic services for free but charge for premium features. Independent financial advisors often use this model. They might offer free budget templates and basic financial workshops to community members, then charge for personalized financial planning services. This approach helps them build trust and demonstrate expertise before asking clients to pay for premium services.

Direct Sales Model: You sell products directly to customers without middlemen. Local food producers, such as small-batch hot sauce makers, might use this model to sell their products at farmers’ markets, through their own website, and directly to customers who visit their production facility. By avoiding distributors and retailers, they keep their full margin and build direct relationships with their customers.

Retail Model: You buy products from suppliers and sell them to consumers at a markup. The neighborhood pet store operates this way, purchasing food, toys, and accessories from various manufacturers and distributors, then selling them with a markup. They create value through careful product selection, knowledgeable staff who can make recommendations, and convenient location for local pet owners.

Service-Based Model You sell your skills, expertise, or labor. A small accounting firm sells their expertise, helping business owners with tax preparation, bookkeeping, and financial planning. They might charge hourly rates for consultations, flat fees for tax returns, or monthly retainers for ongoing services. Their value comes from specialized knowledge that clients don’t have themselves.

Advertising Model You provide free content or services and make money by selling advertising. A local events website might list activities, concerts, and restaurant specials at no cost to readers, while generating revenue by selling advertising space to the very businesses they feature. Their value comes from building an audience that local advertisers want to reach.

Each model has its advantages and challenges. Many successful small businesses combine elements from different models to create their own unique approach. The right model for you depends on what you’re selling, who your customers are, and what resources you have available.

Building Your Business Model

Creating your business model doesn’t need to be complicated. Follow these steps:

Figure out who will pay you. Talk to potential customers about their needs. A pet sitting service would talk to pet owners about their challenges when traveling.

Decide what they’re willing to pay for. The pet sitting service might learn that people worry most about their pets being lonely or not getting exercise.

Set your prices. Decide how you’ll charge and how much. The pet sitting service might charge $25 per visit or $60 per day for overnight care.

List your costs. Write down everything you’ll spend money on. The pet sitting service needs transportation, insurance, advertising, and possibly staff.

Test it out. Start small with a few customers to see if your model works. The pet sitting service might start with friends and neighbors before expanding.

Our StartUp Story about Oakwell Beer Spa demonstrates a clear business model in action. After discovering beer spas in Europe, the founders identified two overlapping customer segments in Denver: craft beer enthusiasts and wellness-focused consumers. Their revenue model combines several streams: they charge for spa services (primary revenue), sell craft beer during treatments (secondary revenue), and offer retail products (tertiary revenue). Their cost structure includes spa facility expenses, beer purchasing, staff, and marketing. By building their business at the intersection of two popular local interests, they created a unique value proposition that customers were willing to pay premium prices for.

Next Steps

Once you’ve mapped out the basic framework of your business model, you’re not quite ready to open your doors yet. The next important phase is evaluating and refining your model before investing significant time and money. Many people skip this testing phase and rush straight to launch—only to discover fundamental flaws in their business model later. The following steps will help you validate your business model and make necessary adjustments while you’re still in the planning stage.

Research similar businesses. Look at companies offering similar products or services. How do they make money? What pricing models do they use? Don’t just copy them—learn from their approaches and consider how you might do things differently.

Test your assumptions with potential customers. Before investing money, have conversations with people in your target market. Show them your offering and proposed pricing. Ask directly: “Would you pay $X for this?” Their honest feedback can help you refine your model.

Calculate your numbers. Create a simple spreadsheet showing expected revenue, costs, and profit margins. Test different scenarios: What if you charged 20% more? What if acquiring customers costs twice what you expect? This helps you understand the financial viability of your model.

Identify the riskiest parts. Every business model has assumptions that could prove wrong. Maybe you’re assuming customers will pay a premium price, or that your costs will stay low. Identify these risks and plan small experiments to test them before fully launching.

Create a simple one-page summary. Write down your business model on a single page—who pays you, what they pay for, how you deliver value, and what it costs. This clarity helps you explain your business to others and keeps you focused as you move forward.

Your business model will likely evolve as you learn more about your market and customers. The goal at this stage isn’t perfection—it’s creating a reasonable framework that you can test and refine. By thinking through these elements before launching, you increase your chances of building a business that can sustain itself and grow.