Objective
An important pre-requisite to developing a start-up venture is to figure out the underlying structure of the business, including how to make money, how to build revenue streams, who your customers are, how to serve your customers, and how to monetize your work. There are several alternatives one can consider for this purpose. As one simple example, one may create a product and sell to generate a revenue stream. As another example, one may decide to give away a service for free and make money from advertising revenue. As a third example, one may design a market where buyers and sellers meet and take a small cut of every transaction. It is important to learn these options and structure your business well.
Purpose
This page serves as a resource for student teams who want to explore alternative business models. This is not a matter of reading through and memorizing different business models but rather, figuring out which model(s) may best fit your start-up venture. The answer is rarely a perfect one. Instead, it will require you to weigh different possibilities, consider how you may translate the model to your specific situation, and how to talk with mentors so that you can develop a viable business model for your venture.
Terminology
In the start-up ecosystem, you will hear different terms and descriptions. We want to make sure that we understand these clearly, differentiate across these, and use these as appropriate. For the purpose of this discussion, let's clarify these three terms:
- Business Model: Appropriate for you to identify how you will serve different market needs, capital requirements, and customer engagement strategies. Often communicated with a label that describes your revenue and monetization strategy, and should be specified succinctly and precisely within 2 pages (a general estimate).
- Business Model Canvas: Appropriate for explaining, graphically and concisely, how your company creates, delivers, and captures value. It follows a template that allows a team to view all elements together, and sets the stage for discussion and brainstorming. Often limited to 1 page (following the template).
- Business Plan: Appropriate for you to articulate your vision, attract stakeholders, and guide your decisions. It allows you to clarify internal strategy, attract investors, communicate with partners and investors, and aligns your team. A well-specified business plan will often run between 20 to 40 pages (a broad estimate).
Navigating Business Model Alternatives
Choosing a business model is an important decision for a student team pursuing a start-up venture. A student team rarely thinks of this because they are not privy to these conversations among founders. They only get to see the final outcome. But - this is one of those key decisions that sets up everything, the business model canvas, your value proposition, the operations, the monetization strategy, customer segments and much more.
Consider the lemonade stand. A conventional lemonade stand would follow a Product-Based Business Model. But - a team may draw inspiration from other possibilities, and draw elements from other models depending on the approach and objectives. Consider these:
Core Business Model
- Product-Based Model
- Selling a physical product (fresh lemonade) directly to customers and generate revenue from individual sales.
- Example: A simple stand where a customer pays $1 for a cup of lemonade.
Potential Variations
- Subscription-Based Model:
- Offer customers a weekly or monthly "Lemonade Pass" for unlimited or discounted refills.
- Example: Customers pay $10/month for a daily cup of lemonade.
- Freemium Model:
- Give away free samples to attract customers and upsell premium lemonade flavors or sizes.
- Example: Customers pay for premium lemonade (flavored or organic lemonade).
- Advertising-Based Model:
- Sell ad space on the lemonade stand
- Example: A local store places a sign at the back of the lemonade stand. Customers get lemonade free.
A student team will have several business models to choose from. One may think of these in different groups or clusters (based on common characteristics, objectives, and operational strategies). These clusters can help entrepreneurs conceptualize and refine their approach to delivering value, generating revenue, and scaling their ventures. Here are some commonly recognized clusters of business models:
Business Model | Description | Examples |
| Product-based Models | Creating and selling digital products | Direct-to-Consumer (DTC) (e.g., Warby Parker), Manufacturing and Distribution (e.g., traditional retail or wholesale), Customization or Made-to-Order (e.g., Nike By You) |
| Service-based Models | Providing a service rather than a tangible product | Consulting or Freelance Services (e.g., McKinsey & Co., Fiverr), Subscription Services (e.g., Peloton, beauty box services), On-Demand Services (e.g., Uber, TaskRabbit) |
| Subscription-Based Models | Charging customers regularly (e.g. monthly or annually) | Software as a Service (e.g., Slack, Adobe Creative Cloud), Streaming Platforms (e.g., Netflix, Spotify), Membership Models (e.g., gym memberships, Costco) |
| Platform-based Models | Creating a platform to connect two or more groups | Marketplaces (e.g., Amazon, Airbnb), Content Platforms (e.g., YouTube, Medium), Ecosystem Enablers (e.g., Shopify, App Store) |
| Marketplace Models | Facilitating transactions without holding inventory | B2C (e.g., Etsy, eBay), B2B (e.g., Alibaba), P2P (e.g., Craigslist, Turo) |
| Freemium Models | Offering a free product/service while monetizing premium features or tiers | Software (e.g., Zoom, Grammarly), Content Platforms (e.g., Spotify with ads, YouTube Premium) |
| Franchise Models | Allowing others to operate under your brand and business model | Fast Food Chains (e.g., McDonald’s, Subway), Service Franchises (e.g., Anytime Fitness) |
| Advertising-Based Models | Generating revenue through ads shown to users | Social Media Platforms (e.g., Facebook, Instagram), Search Engines (e.g., Google), Media Outlets (e.g., Buzzfeed, free newspapers) |
| Licensing Models | Monetizing intellectual property or technology by granting usage rights | Entertainment (e.g., Disney licensing characters), Technology Patents (e.g., Qualcomm’s 5G technology) |
| Aggregator Models | Building a network of service providers or content producers under a brand | Online Travel Aggregators (e.g., Expedia), Food Delivery Apps (e.g., DoorDash, Zomato) |
| Social Enterprise Models | Blending profit goals with social impact | Buy One, Give One (e.g., TOMS Shoes), Impact Funds (e.g., Acumen Fund), Nonprofit Generating Revenue Streams (e.g., Goodwill) |
| Hybrid Models | Combining multiple business models to create a unique value proposition | Amazon (Marketplace + Prime Subscription + Direct to consumer via AmazonBasics), Tesla (Sales + Licensing + Energy-as-a-Service) |
Other business models may include:
- Dropship Model: Retailer sells products that are shipped to consumers directly from a third party (e.g. Amazon third party sellers).
- Affiliate Marketing: Earn commissions by promoting other companies’ products (e.g. Amazon Affiliate).
- Peer-to-Peer (P2P) Model: Enables direct exchange of services or goods between individuals (e.g. AirBnB).
- Value-Added Reseller (VAR) Model: Products (e.g. software) are bundled with additional services (e.g. implementation) before resale.
- Pay-Per-Use Model: Customers pay based on the usage (e.g. an hour of use) of a service or product (e.g. excavator for mining).
- Asset-Sharing Model: Customers share an asset such as data storage or office business (e.g. WeWork)
- Data Monetization Model: Businesses that collect large datasets offer insights for marketing and health.
Selected Resources
- Investopedia: https://www.investopedia.com/terms/b/businessmodel.asp
- Business Model Navigator at BMI Lab: https://businessmodelnavigator.com/explore
- Ovans, A. 2015. What is a Business Model. Harvard Business Review. https://hbr.org/2015/01/what-is-a-business-model
- Strategyzer. 2024. The toolkit to design a disruptive company. https://www.strategyzer.com/business-models-the-toolkit-to-design-a-disruptive-company (See also Business Model Canvas)