A business model is a company's plan for how it will generate revenues and make a profit. It explains what products or services the business plans to manufacture and market, and how it plans to do so, including what expenses it will incur.

A business model lays out a step-by-step plan of action for profitably operating the business in a specific marketplace. The business model for a restaurant is significantly different from the business model for an online business for instance.

To put together a good business model, you need to know the value proposition for the business. A value proposition is a straightforward statement of what a company offers in the form of goods or services that is of value to potential customers or clients, ideally in a way that differentiates the company from its competitors.

A business model should also include projected startup costs and sources of financing, the target customer base for the business, marketing strategy, competition, and projections of revenues and expenses. One of the most common mistakes leading to the failure of business startups is a failure to project the necessary expenses to fund the business to the point of profitability, i.e., the point in time when revenues exceed expenses.

If possible, a business model should include any possible plans for partnering with other existing businesses. An example of this would be an advertising business that aims to establish an arrangement for referrals to and from a printing company.

Types of Business Models

There are many different types of business models. Direct sales, franchising, advertising-based and brick-and-mortar are all traditional business models. Brought about by the internet, there is also a click-and-mortar business model, which combines a physical presence with an online presence.

Even if two businesses operate within the same industry, they likely have different competitive advantages and disadvantages and, therefore, need different business models.

Business model canvas

Business model is usually designed by using business plan or business model canvas (BMC).

A standard BMC include: Key partners, Key activities, Value proposition, Key resource, Audience relationship, Distribution channels, Audience segments, Cost structure and Revenue Stream.