How Businesses Make Money: An Introduction to Business Models

Two Questions Every Business Model Answers

At its core, a business model answers two questions: what value does this company create for someone, and how does it get paid for creating that value? A company can be doing genuinely useful work in the world and still fail if it can't answer the second question; value creation without a way to capture some of that value as revenue isn't a business, it's a hobby or a charity.

Two companies can create very similar value, say, connecting riders with drivers, and still have completely different business models depending on how they charge for it: a subscription, a per-use fee, a cut of each transaction, or something else entirely.

Common Revenue Models

A few patterns show up repeatedly across industries. In a transaction model, a company earns money each time a specific sale happens, like a retailer selling a product for more than it cost to acquire or produce. In a subscription model, customers pay a recurring fee, monthly or annually, for ongoing access to a product or service, which creates more predictable revenue than one-off sales. In a commission or marketplace model, a company connects two other parties and takes a percentage or fee for facilitating the transaction, without ever owning the underlying product itself. In an advertising model, a company offers a product free or cheap to users and instead earns revenue by selling access to that audience's attention to advertisers.

Worked Example: Comparing Two Coffee Businesses

Consider two coffee-related businesses. Business A is a coffee shop: it buys beans, milk, and cups, brews coffee, and sells each cup directly to a customer for more than the ingredients cost, a transaction model, where revenue is tied directly to the number of cups sold. Business B is a coffee subscription service: it charges customers $15 per month for a bag of beans delivered automatically, whether or not the customer drinks every last cup that month, a subscription model, where revenue arrives predictably regardless of exact daily consumption.

Both businesses sell coffee, but Business B has more predictable monthly revenue and can plan inventory and staffing further in advance, while Business A has no ongoing commitment from customers and must attract each sale individually, which can mean more flexibility but less predictability.

Revenue vs. Profit

A business model describes how money comes in, its revenue, but that's only half the picture. Profit is what's left after subtracting the cost of creating and delivering that value. A company can have an excellent business model in terms of revenue and still lose money if its costs are too high relative to what it charges. This is why business models are usually evaluated alongside unit economics: does the company make more from a typical customer than it costs to acquire and serve that customer?

Why Business Models Change

Business models aren't fixed forever; companies frequently shift models as technology, competition, or customer expectations change. Software was once sold primarily as a one-time purchase; today, much of it is sold as a subscription, since ongoing updates and support make recurring revenue a better match for the ongoing cost of running the product. Recognizing which model a business is really operating under helps explain its pricing, its incentives, and what kind of growth it's actually chasing.