Business model

A business model is a framework that describes how an organization creates, delivers, and captures value. It serves as a specific plan for how a company conducts itself, spends its resources, and earns money to generate profit. Beyond simple finances, a business model can encompass a company's purpose, its target customers, and its organizational structures. It also includes operational processes, sourcing, and even the internal culture of the firm.

By using these models, managers can explore possibilities for future development and use them as "recipes" for creative growth.

Researchers often view the creation of a business model through the lens of design logic. This perspective sees the model as the result of creating or changing organizational structures to pursue a specific opportunity. Authors Gerry George and Adam Bock have studied how managers use these designs to succeed. They found that successful entrepreneurs often create a coherent narrative, or a consistent story, to move a business from one opportunity to another. If the components of this story are misaligned or incoherent, the business is more likely to fail.

One classic example of a specific business model is the "bait and hook" method. This is also called the tied products or razor and blades model. In this system, a company offers a basic product at a very low cost, often at a loss. This low-cost item acts as the "bait." The company then earns money by charging recurring amounts for necessary refills or associated services, which acts as the "hook."

For instance, a company might sell a printer cheaply but charge high prices for ink cartridges. Adobe used a variation of this by providing a document reader for free while charging hundreds of dollars for its document writer.

Business models have evolved significantly since the term was first used in 1832. The history of innovation shows a steady increase in sophistication across different decades. In the 1950s, McDonald's and Toyota introduced new ways of operating. The 1960s saw innovation from Wal-Mart and Hypermarkets, followed by FedEx and Toys R Us in the 1970s. The 1980s brought companies like Intel and Dell, while the 1990s featured Amazon, Netflix, and eBay. Today, many models depend on emergent technology, allowing businesses to reach massive customer bases with minimal costs through globalization and outsourcing.

Modern commerce is currently seeing a shift from "pipes" to "platforms." A pipe is a linear business model where a firm creates goods and pushes them downstream to customers. In this model, value flows in one direction, much like water through a physical pipe. In contrast, a platform is a networked model that facilitates exchanges between interdependent groups, such as producers and consumers.

This digital transformation is now the predominant way of doing business in the 21st century.

A successful platform requires three specific elements to function effectively. First, it needs a "toolbox" to provide the infrastructure that allows participants to plug in and connect. Second, it needs a "magnet" to create a pull that attracts a critical mass of both producers and consumers. Finally, it needs a "matchmaker" to foster the actual flow of value between the groups.

Data sits at the heart of this matchmaking process, helping the platform connect the right people at the right time.

Platforms have also changed how companies monetize their services. One common method is the subscription model, where users pay a small monthly fee. To attract users who prefer free content, many companies use a "freemium" model instead. Another method is through advertising, which has moved toward highly personalized and targeted strategies. Finally, some platforms monetize the data and metadata generated by their users. This shift in how value is captured continues to disrupt entire industries globally.