Business models describe how a company selects customers, defines offerings, and captures profits. They can be described as "pipes" where the company controls materials and sells outputs, or "platforms" where members interact directly and the company takes commissions. Common business models include franchising, freemium, loyalty programs, low-cost/premium options, auctions, cooperatives, and networks that benefit from more users. Business models help communicate strategy and align actions to support the model.

1. Compiled from various sources by Prof S K Palekar in July 2014
for class room use in marketing / strategy subject
What is a “Business Model”?
Why study business models ?
When you ask a question “what business are you in?”; we get a wide variety of answers :
1) “We are in watch business”
(What products we make / sell)
2) “We supply surgical consumables to hospitals”
( What kind of customers we service)
3) “We are wholesalers of steel”
( What type of distribution channel we have)
4) “We take long term recruitment contracts”
( What type of customer engagement)
5) “We provide turnkey solutions for water purification”
( What solutions we create)
6) “We are specialized in small batch manufacturing of high precision mechanical parts”
(What Capabilities we possess)
7) “We are an association of all small and medium enterprises in UP”
(The Network we provide access to)
8) “We have the lowest cost call center”
(What is our cost structure)
9) “We provide loans for buying luxury cars to high net worth people”
(Where does our revenue come from)
All of these , individually, are valid ways of describing your business but none of them are
capable of describing your business properly. For example, if you are in “watch business”, so are
many other companies – and are all these companies comparable to you ? Most probably not.
Hence you are in “watch business” is obviously an incomplete description of your business.
In this article we create a brief, and yet complete, definition of what business are you in.
Because only when you understand your own business model well, will you be in position to
Know which companies to benchmark against
Understand whether you are buying assets which support your business model
Know if your activities and spends strengthen your business model
Definition of what is a business model
It is the totality of how a company selects its customers, defines and differentiates its
offerings, defines the tasks in its value chain, decides which ones of these will it perform
itself and which ones it will outsource, configures its resources, goes to market, creates
utility for customers and captures profits.
The Business models are effective tools used by senior leaders to create narratives / stories in
order to communicate business strategy, create alignment and create a common context for

2. Compiled from various sources by Prof S K Palekar in July 2014
for class room use in marketing / strategy subject
action for outsiders as well as insiders. There is no one single correct way of expressing a
business model. People use formal as well as informal language and include vision, mission,
purpose, process, target customers, offerings, strategies, infrastructure, organizational structures,
operational processes etc as appropriate.
Some famous business models have been
1950 : McDonald's, Toyota
1960 : Wal-Mart, Hypermarkets
1970 : FedEx, Toys R
1980 : Home Depot, Intel, Dell
1990 : Southwest Airlines, Netflix, eBay, Amazon, Starbucks
2 Broad Models : “Pipes” to “Platforms”
Pipes
“Pipes” are traditional linear business models where the company “buys” materials from the
vendors (who are upstream to the company) for converting them into products or services which
are “sold” to the customers (who are downstream to the company).
The company is the main actor
which is responsible for buying materials from the vendors
which arranges resources / competencies for converting these into output
and then earning money by finding and selling the output to the customers .
Platforms
“Platforms” do not have vendors and customers. Instead they have members and participants.
The company is not the main actor – it is merely an enabling mechanism (like a club)
The company creates the mechanism / rules for its members to meet and interact directly
So that each member can find another suitable member who can create value for him
The value creating transactions take place direct between two members
The company earns money by charging a commission or a fee
Example of platforms are
Clubs ( Metro is a “buying club” of cash and carry retailers )
Portals ( Members of “Shaadi.com” enables men to find wives and girls to find husbands)
Stock Exchanges ( Members can buy and sell shares using the infrastructure provided)
Retail Malls (Customers come and by directly from member retailers inside the mall)
Theatres ( Viewers and players come together to see / act a play)
Industrial Parks (Export processing zones : members share exporting facilities)
Software systems (Android hardware, software developers and customers come together)

3. Compiled from various sources by Prof S K Palekar in July 2014
for class room use in marketing / strategy subject
The platform models have come to the fore from 2000 onwards due to new technologies like
Web 2.0, collective intelligence, crowd-sourcing, network effects, user generated content, and
continuously self-improving systems.
Buyers and Sellers : Alibaba.com, eBay, Taobao, Rakuten, Exhibitions
Flyers and Air Lines : Airports
Dwelling Owners and Renters : Airbnb
Professional drivers and passengers : Uber Apps
Users, advertisers, content developers, third-party sites : Facebook
Application developers and users : Apple’s iOS
Handset makers, app developers and users : Google’s Android OS
Game developers and users : Sony’s PlayStation, Microsoft’s Xbox
Merchants and Customers : American Express, PayPal and Square
Retail stores and consumers : shopping malls
Cinemas and Viewers : Fandango
Event Venues and Consumers : Ticketmaster .
20 Examples of Business Models
1) Bricks and clicks business model : a company integrates both offline (bricks) and online
(clicks) presences. For example, when a chain of stores allows the user to order products
online, but lets them pick up their order at a local store.
2) Cutting out the middleman model : Instead of going through traditional distribution
channels - distributors, wholesalers, brokers, agents, retailers – the company deals with
every customer directly for example via the Internet.
3) Direct sales model : Involves selling to consumers directly - away from a fixed retail
location. Sales are typically made through party plan, one-to-one demonstrations, and other
personal contact arrangements. Direct personal presentation, demonstration, and sale of
products and services to consumers, usually in their homes or at their jobs.
4) Value-added reseller model : A business makes something which is resold by other
businesses but with modifications which add value to the original product or service. These
modifications or additions are mostly industry specific in nature and are essential for the
distribution.
5) Franchise Model : Franchising is the practice of using another firm's successful business
model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute
goods and avoid investment and liability over a chain. The franchisor's success is the success
of the franchisees. The franchisee is said to have a greater incentive than a direct employee
because he or she has a direct stake in the business.
6) Freemium business model : A common model on web sites, colloquially becoming known
as the freemium model, is to provide content for free, but restrict access to premium features

4. Compiled from various sources by Prof S K Palekar in July 2014
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(for example, archives) to paying subscribers. In this case, the subscriber-only content is said
to be “behind a paywall”.
7) Performance Servicing Model : Here what is sold is the performance and not the product.
For example, the painting of roads is the basis of the number of kilometers to be covered and
not the number of liters of paint used. This concept is also called “product-service systems",
"chemical servicing" or “performance servicing”.
8) Loyalty business models : Company resources are employed so as to increase the loyalty of
customers which leads to customer satisfaction, which in turn leads to customer loyalty,
which leads to low defection and more profitability due to low acquisition costs of new
customers.
9) Low cost business model (Also called “no-frills”, “discount”, “Budget” model). It occupies
lower position on “Value for Money” curve - lower prices but lower value too. Example :
Low cost airline model : the common practices are
Standardized fleet (lower training, maintenance costs; purchasing aircraft in bulk)
Remove non-essential features (non-reclining seats, no frequent flyer schemes)
Use of secondary airports (lower landing fees, marketing support)
Rapid turnaround (less time on the ground, more flights per day)
Online ticket sales (no call centres or agents)
Online check-in (fewer check-in desks)
Impose baggage charges (fewer bags mean faster loading) (revenue for checked bags)
Do not use jet-ways (avoiding extra airport charges)
Have staff do multiple jobs (cabin crew also check tickets at the gate, clean aircraft)
Hedge fuel costs (buying fuel in advance when it is cheaper)
Charge for on-board services, reserved seating, and extra baggage
Do not use reserved seating (which slows down the loading of the aircraft)
Charge for checked bags (which slows down loading of the aircraft)
Charge for last minute baggage check-in (which slows down loading of the aircraft)
Fly point to point (passenger transfers to other flights are not accommodated)
Keep aircraft on the ground for very short time (lower airport charges)
Carry very little extra fuel (reducing the weight of the aircraft)
Have the plane outfitted with cost-cutting modifications as winglets.
Route planning before aircraft arrives at airport (saving time on the ground)
Work closely with aircraft manufacturers
Work closely with airports to develop special “low cost terminals”
Pricing policy : usually very dynamic, with discounts and tickets in promotion.
10) Premium business model : This is the opposite to the previous one : offering high end
products and services appealing to discriminating consumers. “Brand image” and “Want” is
important in this model as quality is subjective. The model seeks a higher profit margin on a
lower sales volume : Rolls-Royce, BMW, Mercedes-Benz in the auto industry, Gucci bags
and Rolex watches in the luxury accessories industry, and elite personal services such as

5. Compiled from various sources by Prof S K Palekar in July 2014
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using a chauffeur.
11) Online auction business model (If conducted by an auction house it is a “platform”
business. If conducted by an individual buyer it is a “pipe” business) : There are different
forms like “Ascending English auction”, “Descending Dutch auction”, “First-price sealed-
bid” etc. These auctions are propelled by the Internet as they remove the physical limitations
of geography, presence, time, space, and a small target audience. In 2002, online auctions
were projected to account for 30% of all online e-commerce due to the rapid expansion of the
popularity of the form of electronic commerce.
12) Online or offline cooperative (Platform Business) : An autonomous association of similar
businesses who voluntarily join together on an online platform for their mutual and
individual benefit. For example restaurants within a part of a city can create a joint portal
where the customers can log in and choose what food they want and have it delivered to them
within an hour. Such a facility will be outside the funding abilities of an individual
restaurants. The platform aspect of the cooperative allows for the unique, individual
identification of each member in the cooperative.
13) Multi-level marketing business model : (Also called pyramid selling model, network
marketing, referral marketing) where the salespersons are compensated not only for the sales
they personally generate, but also for the sales of the other salespeople that they recruit, train
and sustain. But this model has come under fire because of
a) Price fixing of products
b) High initial entry costs (for marketing kit and first products)
c) Emphasis of recruitment of others over actual sales
d) Requiring members to purchase and use the company's products
e) Exploitation of personal relationships as both sales and recruiting targets
f) Complex and exaggerated compensation schemes
g) Company / distributors making money off training events and materials
h) Cult-like techniques to enhance their members' enthusiasm and devotion.
14) Collective business models ( Platform Model) : A large numbers of businesses who pool
resources, share information, provides other benefits for their members. For example : all
export oriented units find it convenient to have all resources available for export business like
banks to open LCs, library stocked with latest rules, satellite dish to connect to overseas
customers, on site presence of customs officers, quick access to port and airport facilities etc.
15) Network effects business model (Typically a “Platform” model ): The value of a product
or service is dependent on the number of others using it. Example : The more the people
own telephones the more is the value of a new connection to the new owner. A user may
purchase a telephone without intending to create value for other users, but he does. Social
networking sites like Twitter and Facebook become more useful as more users join.
16) Professional open-source model : In software business, open-source vendor generates
revenue from paid professional services, maintenance and support provided along with the
software. Businesses hesitated to adopt Linux because no single entity guaranteed its

6. Compiled from various sources by Prof S K Palekar in July 2014
for class room use in marketing / strategy subject
stability and support. As a consequence, larger businesses often chose commercially
distributed software over a product that was released under an open-source license. The
business model of these companies tries "to offer open-source software with a free license,
while using professional services, maintenance and support for these products to derive
revenue."
17) Free Lunch Model : In the early 1900s, you could get a “free" lunch with the purchase of at
least one drink in some US salons. The saloon-keeper relied on the expectation that most
customers would buy more than one drink, and that the practice would build patronage for
other times of day.
18) Razor and blades business model : Example of “Hook and Bait ” model “ “we are here to
somehow sell “the hook” once so that the person will keep on buying “the baits” for the rest
of the life”.
razor (bait) and blades (hook)
cell phones (bait) and air time (hook)
computer printers (bait) and ink cartridge refills (hook)
cameras (bait) and prints (hook)
Adobe Reader : document reader is free but writer is charged.
Gillette sold razors at an artificially low price to create the market for the blades. The
company still uses this approach, often sending disposable safety razors in the mail to
young men near their 18th birthday, packaging them as giveaways at public events that
Gillette has sponsored.
Standard Oil and its owner, John D. Rockefeller, looked to China to expand their
business and gave away 8 million kerosene lamps for free or at greatly reduced prices to
increase the demand for kerosene.
Comcast often gives away DVRs to its subscribing customers. However, the cost of
giving away each free DVR is offset by a $19.95 installation fee as well as a $13.95
monthly subscription fee to use the machine. Based on an average assumed cost of $250
per DVR box to Comcast, after 18 months the loss would balance out and begin to
generate a profit.
Computer printer manufacturers have gone through extensive efforts to make sure that
their printers are incompatible with lower cost after-market ink cartridges and refilled
cartridges. This is because the printers are often sold at or below cost to generate sales of
proprietary cartridges which will generate profits for the company over the life of the
equipment. In fact, in certain cases, the cost of replacing disposable ink or toner may
even approach the cost of buying new equipment with included cartridges, although
included cartridges are often 'starter' cartridges that are only partially filled.
Methods of vendor lock-in include designing the cartridges in a way that makes it
possible to patent certain parts or aspects to prohibit reverse engineering by third-party
ink manufacturers. Another method entails completely disabling the printer when a non-
proprietary ink cartridge is placed into the machine, instead of merely issuing an
ignorable message that a non-genuine (yet still fully functional) cartridge was installed.
19) Servicization of products model : Many products are being transformed into services. For
example, IBM treats its business as a service business. Although it still manufactures

7. Compiled from various sources by Prof S K Palekar in July 2014
for class room use in marketing / strategy subject
computers, it sees the physical goods as a small part of the "business solutions" industry.
They have found that the price elasticity of demand for "business solutions" is much less than
for hardware. There has been a corresponding shift to a subscription pricing model. Rather
than receiving a single payment for a piece of manufactured equipment, many manufacturers
are now receiving a steady stream of revenue for ongoing contracts.
20) Subscription business model : The subscription business model is a business model where a
customer must pay a subscription price to have access to the product/service and was
pioneered by magazines and newspapers but is now used by many businesses and websites.
Rather than selling products individually, a subscription sells periodic access to a product.
Opera companies sell tickets to the entire run of five to fifteen scheduled performances for an
entire season. Industries that use this model include mail order book sales clubs and music
sales clubs, cable television, satellite television providers with pay-TV channels, satellite
radio, telephone companies, cell phone companies, internet providers, software providers,
business solutions providers, financial services firms, fitness clubs, and pharmaceuticals, as
well as the traditional newspapers, magazines and academic journals. Renewal of a
subscription may be periodic and activated automatically, so that the cost of a new period is
automatically paid for by a pre-authorized charge to a credit card or a checking account.
Summary
There are many advantages of being able to define your business model briefly yet
comprehensively. Because, an explicitly defined model permits you
To know which companies to benchmark against
To know whether you are buying assets which support your business model
To know if your activities and spends strengthen your business model
To narrate your story to outsiders and insiders to create alignment
When creating your business model you may include any of the following as relevant to your main
purpose
Type of Products / Services / Solutions
Type of customers
Type of distribution channels
Type of customer engagement and relationships
Type of capabilities
Type of cost structures
Type of revenue streams