Understanding How Companies Create, Deliver, and Capture Value
A business model is a conceptual framework that describes how a company operates. It explains the company's core mission, how it creates value for its customers, how it generates revenue and profit, and what gives it a competitive advantage. For an analyst, understanding the business model is the first step to evaluating a company's strategy, risks, and financial profile.
A complete business model answers several fundamental questions about the company's operations.
This identifies the target customers, including their geography and market segment (e.g., B2B or B2C).
This defines the specific products or services the company provides and how they are differentiated from competitors.
This outlines how the company sells and delivers its offerings, such as through direct sales, intermediaries, or digital platforms.
This details the company's pricing strategy (e.g., premium or discount) and revenue model (e.g., one-time sales, subscriptions).
This describes the firm's organizational structure, key supplier relationships, and its value chain—the system of processes that create value for the customer.
This is the synthesis of the components above. It is the overall promise of value to be delivered to the customer, combining the product, service, sales process, and price.
Modern business models employ a variety of sophisticated pricing strategies and non-traditional ownership structures.
Charging different prices to different customers (e.g., tiered pricing, dynamic pricing).
Offering multiple products together for a single price.
Selling a core product at a low price and its consumables at a high margin (e.g., printers and ink).
Setting a low initial price to quickly gain market share.
Offering a basic service for free with premium features available for a fee.
Subscription-based services providing continuous value.
Selling assets or access to them in smaller units (e.g., timeshares).
Granting use of an asset for a specified period in exchange for payment.
Granting rights to use intellectual property or a business model in exchange for royalties or fees.
Digital technology has enabled the evolution of many innovative business models beyond the traditional linear model of producing and selling goods.
The value of the service increases as more users join the network. These are often two-sided or multi-sided networks that connect distinct groups of users, like buyers and sellers or riders and drivers.
Their reliance on network effects distinguishes them from linear businesses.
Involve users directly contributing to the product or service, often through user communities.
Combine elements of traditional linear business models with platform models (e.g., Amazon, which sells its own products and operates a marketplace for third-party sellers).
Modern technology continues to drive business model innovation, creating new ways for companies to create, deliver, and capture value. Understanding these models is crucial for financial analysis and investment decisions.