Divine Word College of San Jose
San Jose, Occidental Mindoro
Bachelor of Science in Accountancy
Module 2
1. Title: Business Logic
2. Scope: Business Model
3. Overview:
In this module established businesses should regularly update their business
model or they'll fail to anticipate trends and challenges ahead. Business models also help
investors evaluate companies that interest them and employees understand the future of
a company they may aspire to join.
4. Objectives:
After completing this module, you should be able to do the following:
Define what business model is and understand its components
Learn the different basic types of business models
Become familiar with the successful business organizations using these models.
5. Discussion of the topics
What Is A Business Model?
A business model is a conceptual structure that supports the viability of the business and
explains who the business serves to, what it offers, how it offers it, and how it achieves its
goals. All the business processes and policies that a company adopts and follows are part of the
business model. According to management guru Peter Drucker: A business model is supposed to
answer who your customer is, what value you can create/add for the customer and how you can
do that at reasonable costs. Thus, a business model is a description of how a company creates,
delivers, and captures value for the customer as well as itself.
What Are The Components of A Business Model?
A n ideal business model usually conveys four key aspects of the business which is presented
using a specialized tool called business model canvas. These key components are
customers, value proposition, operating model, and revenue model. Precisely, a business model
answers the following key questions-
1. Who is the customer?
2. What value does the business deliver to the customers?
3. How does the business operate? 4. How does the business make money?
Key Partners Key Activities Value Proposition Customer Customer
Relationship Segments
Who are your What are the What is the value
key activities you you delivery to your What For whom
partners/suppl perform every customer? relationship are you
iers? day to create Which of your does each creating
& deliver your customer’s problems customer value?
What are the value are you helping to segment expect
motivators for proposition? solve? you to establish What are the
3 What is the and maintain?
the customer
customer need that 8
partnerships? segments
your value that other
Which key Key Resources proposition pay, receive
Channels
activities are addresses? or decide on
your partners What are the What is your How does your your value
resources you promise to your value proposition
perform? reach your proposition?
need to create customers?
customer?
and deliver What are the
Where can your
your value products and customer buy or
proposition? services you create use your
7 for your customers? products or 1
5 services?
2 6
Cost Structures Revenue Streams
What are important cost you make to create & How do customer reward you for the value
delivery your value proposition? your provide to them?
What are different venue models?
9 4
Figure 2.1: Business Model Canvas
Who Is The Customer?
T he customer forms the heart of a business model. It answers who the company plans to sell
its offerings to. A business usually groups the customers into different segments with certain
homogeneous needs, characteristics, or behavior. It then defines one or more customer segment
that it serves or wants to serve, followed by an answer to why it plans to serve this segment.
What Value Does The Business Deliver To The Customers?
This is the most important component of a business model that answers several key
customers and business’s value related questions. It is often usually presented using a value
proposition canvas.
What are the jobs the customer wants to be done?
What are their pains in doing the job?
What do they gain by doing the job?
Once these questions are answered, the business answers another set of questions that
relates business to the customers:
How does business get the job done?
How does the business relieve the customer’s pain?
How can the business help the customer get the gains?
How Does The Business Operate?
It’s the operating model of the business that elaborates:
Key Activities: What all offerings does the business sell to the customers?
Key Partners: Who all help the business in delivering value to the customers?
Key Resources: What all resources does the business use to develop and deliver its offerings?
Key Channels: What channels does the business use to deliver its offerings to the customers.
Customer Relationships: What type of relationships does the business maintain with its
customers?
How Does The Business Make Money?
M aking money is important for the business to sustain. This component of the business
model focuses on elaborating on the financials and how the business makes money.
It’s called the revenue model of the business and has two components:
The cost structure includes all the expenses that the business incurs in creating and
delivering value to the customers.
The revenue streams include all the primary and non-primary revenue streams that the
business utilizes.
Why Is It Important To Develop A Business Model?
The business model acts as the blueprint of the business and a roadmap for its success (or
failure). This tool helps the founders decide how their business will work and make money.
It is the only documentation that makes clear –
The business concept – the market opportunity the business capitalizes on.
The target market the business caters to.
The problems the business intends to solve.
The solution the business offers and how it creates customer value.
How the business gets its customers.
The operating model the business follows.
How the business makes money and what are the costs incurred to get the same.
Moreover, the business model gives a reason for the customers to choose the offering over others
in the market. People chose Facebook because it helped them connect and chat with other people
around the world (operating model) and it didn’t even charge for it (revenue model). Netflix’s
business model was preferred over others as it provided value in the form of consistent on-
demand content instead of the usual TV streaming business model.
Types of Business Models
There are different types of business models meant for different businesses. Some of the basic
types of business models are:
1. Manufacturer
A manufacturer makes finished products from raw materials. It may sell directly to the
customers or sell it to a middleman i.e another business that sells it finally to the customer.
Examples – Ford, 3M, General Electric.
2. Distributor
A distributor buys products from manufacturers and resells them to the retailers or the
public. Examples – Auto Dealerships.
3. Retailer
A retailer sells directly to the public after purchasing the products from a distributor or
wholesaler. Examples – Amazon, Tesco.
4. Franchise
A franchise can be a manufacturer, distributor or retailer. Instead of creating a new
product, the franchisee uses the parent business’s model and brand while paying royalties to
it. Examples – McDonald’s, Pizza Hut, Jollibee
5. Brick-and-Mortar
Brick-and-mortar is a traditional business model where the retailers, wholesalers, and
manufacturers deal with the customers face-to-face in an office, a shop, or a store that the
business owns or rents.
6. Ecommerce
E-Commerce business model is an upgradation of the traditional brick-and-mortar business
model. It focuses on selling products by creating a web-store on the internet.
7. Bricks-and-Clicks
A company that has both an online and offline presence allows customers to pick up
products from the physical stores while they can place the order online. This model gives
flexibility to the business since it is present online for customers who live in areas where they do
not have brick-and-mortar stores. Examples – Almost all apparel companies nowadays.
8. Nickel-and-Dime
In this model, the basic product provided to the customers is very cost-sensitive and
hence priced as low as possible. For every other service that comes with it, a certain amount
is charged. Examples – All low-cost air carriers.
9. Freemium
This is one of the most common business models on the Internet. Companies offer basic
services to the customers for free while charging a certain premium for extra add-ons. So
there will be multiple plans with various benefits for different customers. Generally, the basic
service comes with certain restrictions or limitations, such as in-app advertisements, storage
restrictions etc., which the premium plans shall not have. For example, the basic version of
Dropbox comes with 2 GB storage. If you want to increase that limit, you can move to the
Pro plan and pay a premium of $9.99 a month for it. Other examples are : Zoom, Dropbox,
MailChimp, Evernote etc.
10. Subscription
If customer acquisition costs are high, this business model might be the most suitable
option. The subscription business model lets you keep customers over a long-term contract
and get recurring revenues from them through repeat purchases. Examples – Netflix,
LinkedIn, Amazon Prime, Dollar Shave Club,
11. Aggregator
Aggregator business model is a recently developed model where the company various
service providers of a niche and sell their services under its own brand. Also called On-
Demand Delivery model . Aggregator Business Model is a network model where the
aggregator firm collects the information about a particular offering providers, sign contracts
with such providers, and sell their services under its own brand.
Since the aggregator is a brand, it provides the offering which has uniform quality and
price, even though it is offered by different partner providers. The offering providers never
become aggregator’s employees and continue to be the owners of the product or service
provided. Aggregator just helps them in marketing in a unique win-win manner.
The money is earned as commissions. Examples – Uber, Airbnb, Oyo. Zillow
12. Online Marketplace
Online marketplaces aggregate different sellers into one platform who then compete with
each other to provide the same product/service at competitive prices. The marketplace builds
its brand over different factors like trust, free and/or on-time home delivery, quality sellers,
etc. and earns commission on every sale carried on its platform. Examples – Amazon,
Alibaba.
13. Advertisement
Advertisement business models are evolving even more with the rise of the demand for
free products and services on the internet. Just like the earlier times, these business models
are popular with media publishers like Youtube, Forbes, etc. where the information is
provided for free but are accompanied with advertisements which are paid for by identified
sponsors.
14. Data Licensing / Data Selling
With the advent of the internet, there has been an increase in the amount of data
generated upon the users’ activities over the internet. This has led to the advent of a new
business model – the data licensing business model. Many companies like Twitter and
Onesignal sell or license the data of its users to third parties who then use the same for
analysis, advertising, and other purposes.
15. Affiliate Marketing
Affiliate marketing business model is a commission-based model where the affiliate
builds its business around promoting a partner’s product and directs all its efforts to convince
its followers and users to buy the same. In return, the affiliate gets a commission for every
sale referred. Affiliate marketing is the process of promoting other people’s (or company’s)
products/services and earn a commission every time you refer a paid customer to an affiliate
offer using your unique affiliate link. It’s a type of performance-based marketing which
means no sale, no commissions. Examples are Clickbank, JVzoo, CJ affiliate, WarriorPlus,
Amazon Affiliate program,
16. Dropshipping
Dropshipping is a type of e-commerce business model where the business owns no
product or inventory but just a store. The actual product is sold by partner sellers who receive
the order as soon as the store receives an order from the ultimate customer. These partner
sellers then deliver the products directly to the customer. Examples are China brand,
Dropify ,Oberlo ,OJMD Dropshipping
17. Network Marketing
Network marketing or multi-level marketing involves a pyramid structured network of
people who sell a company’s products. The model runs on a commission basis where the
participants are remunerated when –
They make a sale of the company’s product.
Their recruits make a sale of the product.
Network marketing business model works on direct marketing and direct selling
philosophy where there are no retail shops but the offerings are marketed to the target market
directly by the participants. The market is tapped by making more and more people part of
the pyramid structure where they make money by selling more goods and getting more
people on board. Examples Amway, Avon, Herbalife
18. Crowdsourcing
Crowdsourcing business model involves the users to contribute to the value
provided. This business model is often combined with other business and revenue models
to create an ultimate solution for the user and to earn money. Examples of businesses
using the crowdsourcing business model are Wikipedia, reCAPTCHA, Duolingo,
Youtube
19. Blockchain
The Blockchain is an immutable, decentralized, digital ledger. It is a digital
database that no one owns but anyone can contribute to. Many businesses are taking this
decentralized route to develop their business models. Models based on blockchain are not
owned or monitored by a single entity. Rather, they work on peer-to-peer interactions and
record everything on a digital decentralized ledger. . Blockchain-based businesses make a
profit using tokens and offer Blockchain as a service
Many crypto-currencies like Bitcoin, Ethereum, and Litecoin use Blockchain
technologybased business model
20. High Touch
The High Touch model is one which requires lots of human interaction. The
relationship between the salesperson and the customer has a huge impact on the overall
revenues of the company. The companies with this business model operate on trust and
credibility. Examples – Hair salons, consulting firms.
21. Low Touch
The opposite of the High Touch model, the low touch model requires minimal human
assistance or intervention in selling a product or service. Since as a company, you do not
have to maintain a huge sales force, your costs decrease, though such companies also
focus on improving technology to further reduce human intervention while making the
customer experience better at the same time. Examples – Ikea, SurveyMonkey , use of
digital platforms in banking transactions., Zendesk
22. Auction-Based
Mostly used for unique items that are not frequently traded and that don’t have a
well-established market value, like collectables, antiques, real estate, and even
businesses.
This business model involves the listing of an offering by the seller and the buyers
making repeated bids to buy that offering while fully aware of other bids by other buyers.
The offering is sold to the highest buyer with the auction broker charging a listing fee
and/or commission based on the transaction value. eBay is one such auction platform.
23. Reverse-Auction-Based
A reverse auction is an auction where the roles of a buyer and seller are exchanged,
i.e. sellers bid prices instead of buyers.
The reverse-auction-based business model is often used when there are several sellers
selling a similar offering to a single buyer. These sellers lower their price with every bid
and generally the bidder with the lowest bid wins the auction. However, there are cases
when the bidder with a price higher than the lowest bid wins the auction as the buyer
likes his offer (offering with add-ons)
A platform which lets sellers bid for government contracts is an example of a reverse
auction based business model.
24. Razor And Blades
Razor and blade model is used by companies which deal in complementary or
companion products like razors and blades. It involves selling the high-margin root
product at a low price to increase the volume sales of the complementary or related low-
margin product.
The razor-razorblade model is a pricing strategy in which one good is sold at a
discount or loss and a companion consumable good at a premium to generate profits. By
using this model, businesses create a stream of recurring income over the life of the root
product.
Companies dealing in razors, mosquito vaporizers, and other refillable products
employ this business model. The game industry also makes use of this model by
providing the gaming console at a very economical price and making good profits with
the sale of games.
Example: Xbox or PlayStation Video Games, HP Printers, Nespresso coffee
machines, AT&T Mobile phones with 2-year contract.
[Link] Razor and Blades
A business employing a reverse razor and blades model offers the low margin
item at a very less price or below the cost to encourage the sale of the high margin
product.
The sellers here offer the dependent product at a premium price and consumable
at a lower and convenient price
Amazon employs this business model to sell its Kindle e-reader. It provides
Kindle ebooks at a price lower than their actual cost so to make people consider Kindle as
a one-time investment to enjoy low-cost books throughout its life.
Example: Apple employs this business model perfectly. Apple’s App Store and
iTunes sell apps, movies, songs, etc. at reasonable rates but charges premium prices on its
devices like iPhone, iPad, and Mac
26. User Community
Driven by the network effect, this business model involves granting access to a
community or a network in return for a membership fee.
Glassdoor is a good example of such a user community, Hubspot. Shopify.
27. Multi-sided platform model
Any company that offers services to both sides of business carries out a multi-sided
business model. The perfect example is LinkedIn, which provides subscription services to
people to find job opportunities as well as to HR managers to find candidates for their
vacancies.
Example: LinkedIn, [Link]
28. Hidden revenue business model
This model refers to a revenue generation system in which users don’t have to pay
for the services offered, but the company still earns revenue streams from other sources.
Like, Google earns from advertising money spent by businesses to bid on keywords while
users don’t pay for the search engine. Examples: Google, Facebook, Instagram, Twitter
29. Bundling Business Model
Bundling is a business strategy that combines products or services to offer a
package gathered as a single combined unit to sell at a comparatively low price. It is the
form of convenient purchasing for several products and services from a single business
unit.
Example: Microsoft Office 365 (PowerPoint, Excel, Word, OneNote, Outlook)
Value meal at Burger King or McDonald’s, Printer and ink
30. Fractionalization business model Fractionalization model is selling a product or service
for partial usage or separate parts. It’s a strategy which divides products and services into
further subcategories to introduce variety in the products, charging for each category
separately.
Example: You can sell a pizza by the box or individual slices of different varieties
( cheese/ pepperoni).
6. Self-Check Test and Evaluation of Activities
Review Questions:
IDENTIFICATION
1. It is a conceptual structure that supports the viability of the business and explains who the
business serves to, what it offers, how it offers it, and how it achieves its goals.
2. This business model is involved in the listing of an offering by the seller and the buyers
making repeated bids to buy that offering while fully aware of other bids by other buyers.
3. A commission-based model where the affiliate builds its business around promoting a
partner’s product and directs all its efforts to convince its followers and users to buy the same. In
return, the affiliate gets a commission for every sale referred.
4. A recently developed model where the company various service providers of a niche and sell
their services under its own brand. Also called On-Demand Delivery model.
5. This is one of the most common business models on the Internet. Companies offer basic
services to the customers for free while charging a certain premium for extra add-ons.
6. It is an up gradation of the traditional brick-and-mortar business model. It focuses on selling
products by creating a web-store on the internet.
7. A business that makes finished products from raw materials.
8. It is a business strategy that combines products or services to offer a package gathered as a
single combined unit to sell at a comparatively low price. It is the form of convenient purchasing
for several products and services from a single business unit.
9. This business model involves the listing of an offering by the seller and the buyers making
repeated bids to buy that offering while fully aware of other bids by other buyers
10. This business model is one which requires lots of human interaction. The relationship
between the salesperson and the customer has a huge impact on the overall revenues of the
company
7. Sources and References:
1. [Link] /
2. [Link]
3. [Link]
business-model/
Prepared by:
LORENA P. FLORITA
College Instructor
Noted:
MRS. ELVIE D. ARAGONES, PhD (cand.)
Program Chairperson
Approved by:
DR. LUIS I. GANTE, JR
Dean of College