Types of business models

What are the conventional business models?

Conventional business models are common and long established. Alone or in combination, they make up most business models in practice. Each industry tends to have its own version, such as an “athletic apparel manufacturer”. The table describes eight, using the questions from the first lesson.

Model	Customers	Earns money from	Key inputs
natural resource producer	refiners, distributors	spot or forward prices in contracts	resource rights, technical expertise
manufacturer	distributors, end users	price per product (sometimes subscription)	materials, brands, technical and creative skills
distributor	retailers	spread between purchase and sale price; delivery fees	logistics assets, product range
retailer	end users	markup; membership fees	product selection, physical or digital store
broker	buyers and sellers	commissions; listing fees	many buyers and sellers, platform
bank	borrowers (and depositors)	spread between lending rate and funding cost	deposits and other funding, borrower relationships
service producer	businesses or consumers	service fees, markups	relationships, expertise
software	businesses or consumers	subscription, license and maintenance fees	technical expertise, channel partners, digital infrastructure

Conventional business modelscommon, long established; most firms are one or a mix

• Natural resource producer Memorize sells resources to refiners and distributors at spot or forward prices
• Manufacturer Memorize sells finished goods to distributors or end users
• Distributor Memorize buys and resells to retailers; earns the spread
• Retailer Memorize sells to end users; earns a markup
• Broker Memorize connects buyers and sellers; earns commissions
• Bank Memorize lends to borrowers; earns the spread over funding cost
• Service producer Memorize sells services to businesses; earns fees
• Software Memorize sells software to businesses; earns subscription, license and maintenance fees

Two pairs are easy to confuse. A distributor buys goods from manufacturers and resells them to retailers, earning the spread. A retailer buys and resells to end users and earns a markup. A broker owns nothing: it connects buyers and sellers, so it needs many on both sides and earns commissions or listing fees.

Exam tip Ask three things: who pays, for what, and what must the firm own to deliver it.

How does a bank earn its money?

A bank lends to borrowers and funds the loans with deposits and other borrowing. Its main income is the spread, the lending rate minus what it pays for funding, applied to the loans it holds. The analyst should look at the spread, not the interest earned alone.

$$I = L\,(r - f)$$

Here $L$ is the loans outstanding, $r$ the average lending rate and $f$ the average funding cost.

What are the common variations?

Most other models are combinations of the conventional ones or industry-specific variations.

Business model variationscombinations or industry-specific versions of the eight

• Contract (private label) manufacturers Memorize make goods that others brand and sell
• Value added resellers Memorize distribute and also install, customize and support
• Licensing arrangements Memorize produce under someone else's brand for a royalty
• Franchising Memorize operate under the franchisor's brand and processes; franchisor earns royalties

Contract manufacturers (also called private label manufacturers) produce goods that others market. This is common for offshore production. The brand owner can then specialize in research and development, design, sales and marketing, and manage a web of specialist factories.

Value added resellers not only distribute a product but also handle more complex installation, customization, service or support. They are typical for complex, service-intensive products such as construction machinery, IT hardware and enterprise software.

In licensing arrangements , a company produces something using someone else’s brand name in return for a royalty. A cookware maker might pay a celebrity chef to put the chef’s name on its pans; a phone maker might pay a royalty to use another firm’s patented technology.

In franchising , franchisees have a tightly defined, exclusive relationship with a franchisor to operate under its brand, with its proprietary products and processes. Restaurants, retailers and auto dealerships are typical. The franchisor earns a royalty on franchisee sales, is responsible for product development and advertising, and often collects an extra fee from franchisees for that advertising.

$$R = N \times S \times \rho$$

Here $N$ is the number of franchisees, $S$ the sales of each and $\rho$ the royalty rate.

How do new business models arise?

Business model innovation introduces or adapts a model in an existing market. It is often combined with technology and pioneered by new entrants, but it does not need to be. The common pattern is that a newcomer changes one or more of the five answers (who, what, where, how much, how) and, over time, innovation becomes convention.

Industry	Innovation	What changed
Airlines	low-cost and ultra-low-cost carriers	leisure customers; point-to-point flights; low prices; no frills; direct digital sales
Software	software as a service	monthly fees instead of an upfront license; a broader customer base because of the pricing
Retailing	discount retailing, e-commerce, digital marketplaces	prices, product selection, channel
Securities brokerage	discount brokers	individual customers; low or free commissions; no extra services; direct digital sales

Digital technology has been especially important because it sharply lowered the cost of communicating, exchanging information and paying. This has four direct implications:

• location matters less, because customers can buy from firms with no local presence;
• outsourcing is easier;
• digital marketing reaches very specific groups of customers, wherever they are, and engages them more deeply than traditional advertising;
• network effects, covered in the next lesson, are more powerful and available to more firms.

Go deeper How capital intensity differs across the models

A natural resource producer needs large physical assets, and a bank needs a large balance sheet to lend from. A broker, software firm or franchisor needs little capital per additional customer. Firms whose profits swing with commodity prices often keep debt low so that fixed financing costs stay small. The model shapes how a firm is financed, a link picked up in the capital structure module.

Go deeper Other evolutions: a lodging example

The hotel industry shows how a model evolves. Large chains and brands spread across locations; specialist lodging (resorts, vacation packages) served particular segments; and franchising let brands expand without owning properties. Through functional separation , branding and marketing, property ownership and management became different companies, so the largest hotel brands often own few or none of their hotels. Fractional ownership , in the form of time-shares, created a category between the hotel and the vacation home. Loyalty programs rewarded high-value frequent travelers.

Go deeper Disintermediation

When an online booking platform automates what travel agents used to do (research, price comparison, booking), it can displace traditional agents, a process called disintermediation. The platform shifts bargaining power between agencies and their hotel customers, and the remaining traditional agents have to specialize. Hotels responded by investing in their own websites and direct booking.