What Is a Business Model and How Do You Develop One That Works?

Building a successful business goes beyond having a great product or service—it requires a solid framework to generate revenue, deliver value, and sustain growth. This framework is your business model.

Whether you're an entrepreneur with big dreams, or someone refining their operational strategy, understanding business models is a non-negotiable skill. But what exactly makes a business model successful, and how can you conceptualise one tailored to your vision? In this guide, we’ll break down the essential steps, explore proven frameworks like the Business Model Canvas, and share actionable tips to help you craft a business model that drives results. Let’s dive in and start building your path to sustainable success!

What Is a Business Model?

At its core, a business model is the blueprint for how a business operates and sustains itself. It defines the methods by which a company transforms ideas into a system that generates profit. A well-crafted business model answers three fundamental questions:

• How does your product or service create value for customers?
  What problem does it solve, or what need does it fulfil? This is the foundation of value creation.
• How is this value delivered effectively to customers?
  What processes, tools, or systems ensure the customer can access and benefit from the value you’ve created? This is the domain of value delivery.
• How does your company capture value as revenue?
  What mechanisms are in place to monetise the value you’ve provided, ensuring financial sustainability? This is the principle of value capture.

Within every business model, there are three components that should be present to have a complete business model. Without them,  it's likely your model is unsustainable. These components explain how value is:

1. Created
   Value creation focuses on the product or service itself. It’s about identifying customer problems and providing solutions that meet their needs effectively. This process often begins with customer discovery—understanding what customers value most and testing whether your offering resonates with them.
2. Delivered
   Even the best products won’t succeed without effective distribution. Value delivery is the process of ensuring your solution reaches the customer in a way that is seamless, efficient, and accessible. Distribution channels—whether physical, digital, or hybrid—are central to this process. For instance, an e-commerce company might rely on a blend of online platforms and logistics partners, while a subscription-based service like Netflix uses digital delivery exclusively.
3. Captured
   This is the revenue-generating component of your business model. Value capture involves pricing strategies, payment structures, and monetisation methods that allow you to sustain and grow your business. Whether through direct sales, subscription fees, or advertising revenue, the goal is to ensure your business reaps sufficient financial rewards for the value it delivers.

A business model can shape the success of your company just as much as your product or service. Take Dollar Shave Club, for instance. This company didn’t invent a new need—men have always needed to shave. Instead, it innovated with its business model: a subscription service delivering fresh blades directly to customers on a schedule they chose.

This model wasn’t born out of asking if men needed to shave. Instead, Dollar Shave Club focused on business-model-oriented customer discovery: are people open to a subscription for razors? The answer was a resounding yes, attracting millions of subscribers and leading to its $1 billion acquisition.

This example illustrates an important point: your business model often determines the type of customer discovery you need. Some entrepreneurs begin by identifying a need and then create the perfect business model around it. Others start with a business model hypothesis and explore whether customer needs align with it.

In either case, success requires two things:

• Viability prototyping: Testing if the business model works.
• Desirability prototyping: Ensuring the need is real

How to Develop a Business Model

Building a business model is a systematic process that helps you align your vision with customer needs while ensuring long-term sustainability. Here’s a step-by-step list to creating a successful business model:

1. Customer Segments: Who are you serving? Identify and define the specific groups of people or organisations your business aims to serve. Understanding your target audience's demographics, behaviors, pain points and needs is fundamental to tailoring your offerings effectively.
2. Value Propositions: What problem are you solving, and what value are you offering? Determine the unique value your product or service provides to each customer segment. This involves articulating how your solution addresses customer problems or fulfills their needs better than existing alternatives.
3. Channels: How will you deliver your product or service to customers? Establish the pathways through which your value propositions reach your customers. This includes selecting appropriate distribution, communication, and sales channels that align with your customers' preferences and behaviors.
4. Customer Relationships: How will you interact with your customers? Define the type of relationship you want to establish with each customer segment. This could range from personalised services to automated interactions, depending on what best suits your business model and customer expectations.
5. Revenue Streams: How will you earn money? Identify how your business will earn money from each customer segment. This may involve various pricing mechanisms such as direct sales, subscription fees, leasing, licensing, or advertising.
6. Key Resources: What assets are required to deliver value? List the critical assets required to deliver your value propositions, reach your markets, maintain customer relationships, and generate revenue. These resources can be physical, intellectual, human, or financial.
7. Key Activities: What core tasks must you perform? Outline the essential actions your company must perform to operate successfully. This includes activities related to production, problem-solving, platform management, and more.
8. Key Partnerships: Who will help you achieve your goals? Identify external organisations or individuals that can help your business achieve its objectives. Forming strategic alliances, joint ventures, or supplier relationships can optimise operations and reduce risks.
9. Cost Structure: What are your significant expenses? Analyse the costs associated with operating your business model. Understanding your cost structure helps in pricing your offerings appropriately and ensuring profitability.

When crafting or refining a business model, it's also important to consider frameworks as these can help you organise your ideas, identify opportunities, and evaluate potential strategies. Two standout tools for this purpose are the Business Model Canvas and the Business Model Navigator.

Business Model Canvas

Developed by Alexander Osterwalder, the Business Model Canvas is a visual tool that maps out the nine steps outlined above. It is particularly effective for visualising existing business models or restructuring established ones. By seeing how all parts of a business fit together, teams can identify areas for improvement and ensure alignment across different functions.

However, the Business Model Canvas can feel rigid for startups in the ideation or prototyping phase. While it excels as a diagnostic tool, it’s less effective for iterative experimentation when your model is still evolving based on market feedback.

Business Model Navigator

The Business Model Navigator, developed by Oliver Gassmann and his team at the University of St. Gallen, takes a different approach. This tool focuses on inspiration and experimentation, offering a catalog of 55 proven business models from various industries.

Unlike the Canvas, which helps define existing structures, the Navigator encourages entrepreneurs to experiment by borrowing concepts from successful businesses and adapting them to their unique context. Examples include:

• Freemium Model: Offering basic services for free while charging for premium features.
• Subscription Model: Charging customers a recurring fee for continued access to a product or service.
• Two-Sided Marketplace: Connecting two groups of users, such as buyers and sellers, and monetising their interactions.

How to Use the Business Model Navigator

1. Review the 55 Models

Start by familiarising yourself with the diverse models outlined in the navigator. These include popular approaches like the subscription model. As previously noted, companies such as Dollar Shave Club transformed a routine product into a billion-dollar enterprise by offering the convenience of direct-to-consumer razor subscriptions. This approach not only simplified purchasing but also fostered customer loyalty.

Another example includes the freemium model, as leveraged by Dropbox. This model attracts a large user base by offering basic features for free while monetising through premium upgrades.

As you review the various business models, you’ll gain insights into their core principles and applications, helping you understand how other companies have successfully redefined customer relationships, revenue generation, and market positioning.

2. Brainstorm Applicability to Your Business

Once you’ve reviewed the models, start brainstorming how they might apply to your own product or service. For our example models, this could centre around the following questions:

• Could a subscription service simplify customer access or improve retention?
• Would a freemium model attract a broader audience and encourage upgrades?
• Does another model over more value to your customers? For example, bundling your offerings under a product-to-service model?

By imagining how each model could influence your business, you’ll uncover opportunities to innovate your value proposition or tap into unmet customer needs.

3. Experiment with Variations

Select 20–25 models that seem the most promising or intriguing for your business. For each one, map out a version of your business using that model. This involves:

• Reimagining Your Value Proposition: How does this model change what you offer to your customers? For instance, shifting from one-time purchases to subscriptions often increases convenience and customer lifetime value.
• Adjusting Revenue Streams: Explore how the model affects your pricing structure or income sources. A pay-per-use model, for example, might make your product accessible to a wider audience.
• Reassessing Customer Relationships: Consider how the model changes your interactions with customers. A crowdsourcing model, for example, creates deeper engagement by involving customers in the creation process.

4. Evaluate and Refine

After sketching out these variations, assess their feasibility, scalability, and alignment with your target market. Look for patterns or insights across the models to identify the most viable options.

5. Apply and Iterate

Finally, choose the best-performing model or combination of models and test them in the real world. Be prepared to iterate based on customer feedback and market response. The navigator is not a one-and-done tool—it’s a framework for continuous innovation as your business evolves.

Practical Tips for Developing Your Business Model

On top of experimenting with your business models, you will require a mix of customer insight and strategic execution. Below are practical tips we recommend that will guide you through the process of refining your business model.‍

1. Start with Customer Discovery

First and foremost, prioritise understanding your customers. We've stressed this before, but customer needs, challenges, and willingness to pay are the foundation of a sustainable business model. Unfortunately, this aspect is often overlooked and regarded as a one-time task. Lose this mentality if that's how you currently think, and instead, internalise that it is a continuous process crucial for keeping your business aligned with your audience's evolving needs. Therefore, consistently:

• Conduct Interviews and Surveys: Engage directly with potential customers to understand their challenges and how they currently solve them. By doing so, you gain qualitative insights into their behaviours and preferences.
• Observe Behaviours: Watch how your target audience interacts with existing solutions. This naturalistic research can uncover unspoken needs or frustrations.
• Test Assumptions Early: Validate your ideas before investing heavily in development. For example, use landing pages or simple prototypes to gauge interest.

2. Focus on Distribution

A well-designed business model succeeds only if your product or service effectively reaches the right audience. Distribution connects your offering to customers, turning potential into profit. It's about choosing channels that match your target customers' habits and preferences while ensuring a seamless experience from discovery to purchase and beyond.

One of the most effective ways to approach distribution is by leveraging a beachhead segment—a small, targeted group of early adopters who are most likely to engage with and champion your product. Focusing on a niche audience allows you to direct your resources more effectively, build momentum, and generate early proof of concept. For example:

• Younger audiences might respond best to ads or partnerships on platforms like Instagram, TikTok, or Snapchat, where engagement is high.
• B2B products might perform better when marketed through LinkedIn, industry webinars, or partnerships with professional associations.
• Local businesses can benefit from hyper-targeted campaigns, like using Google My Business or community sponsorships, to build a local customer base.

These early adopters are invaluable not only for generating initial sales but also for providing feedback that helps you refine your strategy and product.

Distribution strategies rarely succeed perfectly out of the gate, so iteration is essential. By listening to your beachhead segment, you can assess what’s working and what’s not, then adapt quickly. For example:

• If TikTok ads are underperforming, you might adjust your targeting or shift your focus to another channel like YouTube, which could convert better for your audience.
• Experimenting with alternative methods, like micro-influencer collaborations, email marketing, or in-person events, can uncover new opportunities to engage your audience effectively.
• Resource reallocation is key—putting more effort into high-performing channels ensures your budget and time are being used wisely.

Common Biases in Selecting a Distribution Channel

When selecting your distribution channel, there are a few pitfalls to watch out for:

Ease Bias

The first of which is ease bias. That is, choosing a channel because it’s easy to implement. For example, using social media ads simply because the setup is straightforward. While tempting, these channels often face intense competition. Instead, evaluate potential channels based on their effectiveness.

Familiarity Bias

Another common cognitive bias in decision-making is the familiarity bias, which involves sticking to the channels you are already familiar with, even if they aren’t necessarily the best fit for your current needs. This tendency can lead to missed opportunities and suboptimal outcomes. For example, a marketer might continue using an outdated social media platform for advertising simply because they are accustomed to it, missing out on newer platforms that could reach a broader audience more effectively.

Acceptability Bias

A frequent error in developing a business model is succumbing to acceptability bias. This occurs when you select a channel based on its acceptability to you, rather than considering its alignment with your target market's preferences. For example, unconventional or "less professional" platforms, like TikTok or Reddit, may appear informal, yet they can be highly effective for specific businesses, particularly startups aiming at niche audiences.

3. Use Metrics to Optimise Your Model

Data is your ally in refining your business model. Applying metrics like Pirate Metrics helps you evaluate your performance across the entire customer lifecycle and identify bottlenecks. Here are some metrics to consider:

• Acquisition: How do users find your product?  Evaluate marketing efforts such as search engine optimisation (SEO), social media ads, or word-of-mouth referrals. For instance, a fitness app might run Google Ads targeting specific demographics like health-conscious individuals. Measuring click-through rates and cost-per-acquisition allows the app to evaluate which campaigns are driving traffic effectively.
• Activation: Do users have a great first experience? Track engagement metrics like account sign-ups, time spent on your platform, or app downloads. Take an SaaS company, where enhancing activation could involve optimising the onboarding process, sending welcome emails, or providing guided tutorials with metrics like trial account completions and feature adoption rates to reveal areas that need improvement.
• Retention: Do users come back after their initial interaction? Focus on creating experiences that encourage repeat use, such as loyalty programmes or consistent value delivery.
• Revenue: Are users converting into paying customers? Optimise pricing strategies to balance accessibility with profitability.  For example, an e-commerce brand might A/B test different pricing tiers or discount offers to see which yields the highest revenue without compromising profitability.
• Referral: Are satisfied users recommending your product?Encourage this behavior through referral bonuses or incentives. For instance, consider a tech startup implementing a referral programme that offers discounts or credits for successful referrals while also monitoring the percentage of new customers acquired through such initiatives.

4. Prioritise Retention and Referrals

Acquiring new customers is essential, but retaining them and encouraging referrals often delivers higher returns over time. Loyal customers are your biggest advocates and a powerful source of organic growth.

• Build Strong Relationships: Engage with your customers through personalised communication and excellent support. Happy customers are more likely to stay and recommend your product.
• Design for Stickiness: Offer features or benefits that make it hard for customers to leave. For example, subscription services can add exclusive perks that incentivise long-term commitment.
• Foster Advocacy: Introduce referral programmes or social sharing incentives to encourage customers to spread the word. Consider gamifying the process with rewards for top advocates.

5. Stay Adaptable

Like life, the business world is ever-evolving. New customer demographics emerge, and what was once in demand can quickly become outdated. The primary challenge to any business model is the passage of time, which emphasises the need for adaptability. Every organisation must reflect this adaptability in their business model.

Relying on an outdated model will not deliver the desired outcomes. In today's world, customers expect to be heard and to participate in shaping businesses. Ignoring their needs and the changes within their environment will only harm your business. A successful business model requires a clear focus on customers and their perception of value. Organisations must acknowledge the reality of business model erosion and embrace innovation. This approach is vital not only for addressing existing model issues but also for capturing new value for the organisation.

Kodak – An Example of Business Model Erosion

A classic example of market adaptation failure comes from Kodak, the iconic photography company. Initially, Kodak's business model prioritised revenue from film sales over camera sales. They dominated the market, becoming synonymous with film and photography.

However, as technology evolved and consumer preferences shifted, digital cameras gained popularity, rendering film-based photography obsolete. Kodak, however, resisted this change and ignored the new market demands could care less for film. Consequently, companies like Sony eclipsed Kodak by embracing digital cameras. What we can gather from this is that ignoring market shifts is neither wise nor strategic. Instead, businesses should learn from these changes and adapt their strategies to align with new demands.

That's a Wrap!

Your business model is the blueprint for how your organisation creates value, reaches customers, and sustains growth. It serves as a guide, shaping your operations and influencing your product roadmap. By following the steps outlined in this article and leveraging tools like the Business Model Canvas or Business Model Navigator, you can design a model that aligns with your vision and meets the needs of your target audience.

Like what you've read and are ready to supercharge your startup journey? Explore our Founder Resources—the ultimate toolkit for founders, featuring expert-crafted templates, guides, and strategies to help you build, launch, and grow with confidence.

‍