The term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, including its purpose, offerings, strategies, infrastructure, organizational structures, trading practices and operational processes and policies. Although the term can be traced to the 1950s, it achieved mainstream usage only in the 1990s. Many informal definitions of the term can be found in popular business literature, such as the following:

More recently, researchers build definitions based on economic and organizational theories and show that the definitions are econometrically sound. For example, Malone, et al. (2006) at MIT propose an operational definition of business model, based on theories such as those from transaction cost economics. Zott and Amit (2002) from INSEAD and Wharton based their definition on boundary-spanning transactions. Mapúa Institute of Technology (MIT, MapúaTech or simply Mapúa) is a private, non-sectarian, Filipino tertiary institute located in Intramuros, Manila. ... In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. ... INSEAD is a graduate business school and research institution with campuses in Fontainebleau (near Paris), France and in Singapore. ... Wharton most often refers to the Wharton School of the University of Pennsylvania. ...

Simply put: What problem does this business solve, and how does it do so profitably?

Basing concept

A business model is a representation of a selected view on reality. This chosen view is a specialization compared to copying the real system or the modeled business process with the following restrictions:

• Model is no copy of reality
• Model requires validation
• Other models are possible and may have validity
• Model serves testing of hypotheses at low risk and low cost
• Model serves ease of intelligibility
• View specializes to certain purpose
• Other views are not represented as well

Components of a business model

Many different conceptualizations of business models exist (Chesbrough and Rosenbloom 2000; Hamell 2000; Linder and Cantrell 2000; Petrovic, Kittl et al.; Weill and Vitale 2001; Gordijn 2002; Afuah and Tucci 2003; Osterwalder 2004; Fetscherin & Knolmayer 2005). 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 business:

Infrastructure Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ...

• core capabilities: The capabilities and competencies necessary to execute a company's business model.
• partner network: The business alliances which complement other aspects of the business model.
• value configuration: The rationale which makes a business mutually beneficial for a business and its customers.

Offering A business alliance is an agreement between businesses, usually motivated by cost reduction and improved service for the customer. ...

• value proposition: The products and services a business offers.

Customers A value proposition in business and marketing, is a statement summarizing the customer segment, competitor targets and the core differentiation of ones product from the offerings of competitors. ...

• target customer: The target audience for a business' products and services.
• distribution channel: The means by which a company delivers products and services to customers. This includes the company's marketing and distribution strategy.
• customer relationship: 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.

Finances Next big thing redirects here. ... Wikibooks [[wikibooks:|]] has more about this subject: Marketing Distribution is one of the 4 aspects of marketing. ... Customer relationship management (CRM) is a broad term that covers concepts used by companies to manage their relationships with customers, including the capture, storage and analysis of customer, vendor, partner, and internal process information. ...

• cost structure: The monetary consequences of the means employed in the business model. A company's DOC.
• revenue: The way a company makes money through a variety of revenue flows. A company's income.

These 9 business model building blocks constitute a business model design template which allows companies to describe their business model.

Evolution

A brief history of the development of business models might run as follows. 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.

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 compensatory recurring 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. The razor and blades business model (also called the bait and hook model or the tied products model) works by selling a master product at a subsidised price, and making the profit on high margin consumables that are essential to the use of the master product. ... (19th century - 20th century - 21st century - more centuries) Decades: 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s As a means of recording the passage of time, the 20th century was that century which lasted from 1901–2000 in the sense of the Gregorian calendar (1900–1999 in the...

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. The 1950s decade refers to the years 1950 to 1959 inclusive. ... McDonalds Corporation (NYSE: MCD) is the worlds largest chain of fast-food restaurants, primarily selling hamburgers, chicken, french fries, milkshakes and soft drinks. ... This article is about the automaker. ... The 1960s decade refers to the years from the beginning of 1960 to the end of 1969. ... Wal-Mart Stores, Inc. ... In commerce, a hypermarket (from the French hypermarché) is a store which combines a supermarket and a department store. ... The 1970s decade refers to the years from 1970 to 1979, also called The Seventies. ... Federal Express redirects here. ... Toys Я Us NYSE: TOY is a toy store chain based in the United States. ... The 1980s refers to the years from 1980 to 1989. ... Blockbuster Inc. ... The Home Depot (NYSE: HD) is an American retailer of home improvement and construction products and services. ... Intel Corporation (NASDAQ: INTC, SEHK: 4335), founded in 1968 as Integrated Electronics Corporation, is an American multinational corporation that is best known for designing and manufacturing microprocessors and specialized integrated circuits. ... Dell, Inc. ... For the band, see 1990s (band). ... This article is about the American airline. ... Netflix (NASDAQ: NFLX), is the largest online DVD rental service, offering flat rate rental-by-mail to customers in the United States. ... This article is about the online auction center. ... Amazon. ... For other uses of Starbuck, see Starbuck. ... Dot-com redirects here. ...

Today, the type of business models might depend on how technology is used. For example, 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.

Example business models over the years

• 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
• The freemium business model
• The premium business model
• The direct sales model
• The professional open-source model
• Various distribution business models

The subscription business model is a business model that was pioneered by magazines and newspapers, but is now used by a myriad of businesses and websites. ... The razor and blades business model (also called the bait and hook model or the tied products model) works by selling a master product at a subsidised price, and making the profit on high margin consumables that are essential to the use of the master product. ... The unsustainable geometric progression of a classic pyramid scheme A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. ... Multi-level marketing (MLM, now sometimes called network marketing) is a business model that combines direct marketing with franchising. ... The network effect causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service. ... This article is about the economic term. ... Cutting out the middleman is a business model that involves reducing costs by removing layers from a distribution network. ... An auctioneer and her assistants scan the crowd for bidders An auction is a process of buying and selling goods by offering them up for bid, taking bids, and then selling the item to the winning bidder. ... The online auction business model is one in which participants bid for products and services over the Internet. ... Bricks and clicks is a business strategy or business model in e-commerce by which a company attempts to integrate both online and physical presences. ... The loyalty business model is a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. ... This article needs to be wikified. ... The industrialization of services business model is a business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures. ... Service economy can refer to one or both of two recent economic developments. ... A Ryanair Boeing 737-800 A low-cost carrier or low-cost airline (also known as a no-frills or discount carrier / airline) is an airline that offers generally low fares in exchange for eliminating many traditional passenger services. ... Online means being connected to the Internet or another similar electronic network, like a bulletin board system. ... The freemium business model works by offering basic services for free, while charging a premium for advanced or special features. ... The premium business model is the business concept of offering high end product and services. ... Direct selling is the marketing of products or services to consumers through sales tactics including presentations, demonstrations, and phone calls. ... Professional open-source is a business model that many open-source software venders are attempting to follow. ... Wikibooks [[wikibooks:|]] has more about this subject: Marketing Distribution is one of the 4 aspects of marketing. ...

Do Business Models Matter?

Malone et al. (2006) at MIT find that some business models, as defined by them, indeed performed better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through 2002, while they did not prove whether or not the existence of a business model mattered or not.

Related Concepts

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. Strategic management is the process of specifying an organizations objectives, developing policies and plans to achieve these objectives, and allocating resources so as to implement the plans. ... Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. ... It has been suggested that this article or section be merged with Process Modeling. ... A business process or business method is a collection of interrelated tasks, which solve a particular issue. ... Business model design refers to the activity of designing a companys business model. ...

See also

• Business model design
• Business process modeling
• Business plan
• Growth Platforms
• Market forms
• Marketing
• Marketing plan
• Monopoly
• Strategic management
• Strategic planning
• Value migration
• Business rule