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What is a business model

Definition

A business model explains how a business makes money: who pays, for what, and why delivering it costs less than the price the customer pays.

Why it matters

A business can sell a lot and still lose money if delivery costs more than the price, and the business model is where that shows.

Common mistakes

Building the model on an assumption about what customers will pay that nobody has tested.

Related terms

Worked exampleIllustration

One café order, taken apart

Illustrative numbers: one fictional café, prices excluding VAT, no real business.

  1. Who pays

    A local regular who comes in three times a week.

  2. Price

    One average order: a coffee and something to eat.

    ₪25

  3. Delivery cost

    Coffee, milk, food and cups ₪7, staff time ₪8, and a share of rent, equipment and software ₪7.

    ₪7 + ₪8 + ₪7 = ₪22

  4. Left per order

    What stays with the café after every order.

    ₪25 - ₪22 = ₪3

  5. The model

    A repeat local habit where the profit is in volume and regulars, so the café lives or dies on how many of its 200 daily orders it fills.

A business model is not the price list, it is why the ₪3 is still there after every order.

Illustration

Where one order's money goes

  1. A regular pays
  2. ₪25
  3. The café
  4. costs, then what is left

Each ₪25 order costs ₪22 to deliver and leaves ₪3. The café earns only by filling its 200 orders a day, again and again.

Move the price and the costs: what is left turns gold when the order earns, red when it loses.

Six everyday business models

  • A shop

    Customers pay for goods, and the business keeps the margin on each sale.

    A café, a grocery, an online store

    The café on this page

  • A service by the hour

    Clients pay for time and skill.

    A plumber, a lawyer, a physiotherapist

  • A subscription or membership

    Customers pay a fixed amount every month to keep access.

    A gym, a streaming service, booking software

  • A marketplace

    Sellers pay a commission on each sale made through the platform.

    A booking site, a second hand goods app

  • A franchise

    A branch owner pays the brand for its name, its method and its supplies.

    A branch of a pizza chain

  • Advertising

    Readers use it free, and advertisers pay for their attention.

    A free news site, a local magazine

Who pays, and for what. The café on this page is the first one.

Definition

A business model describes how an organisation creates value, delivers it and captures part of it as income, in the framing Alexander Osterwalder and Yves Pigneur use in Business Model Generation (2010). In practice it answers three questions: who pays, for what, and why delivery costs less than the price. A revenue model is only one part of it, the way the business charges. The business model also covers the costs, the partners and the way the product reaches the customer. How the business is financed belongs to the business plan, not to the model.

Why it matters

Joan Magretta wrote in Harvard Business Review in 2002 that a business model has to pass two tests: the story has to make sense, and the numbers have to add up. A model that is profitable on paper still needs enough cash to last until it proves itself.

Directly related: Business Model Canvas, Problem-Solution Fit, Product-Market Fit.

Improvement tips

  • Write the model in three lines: who pays, for what, and why delivery costs less than the price.
  • Take one order or one customer apart, price against every cost, before you plan volume.
  • Test the riskiest assumption first, usually whether customers will pay the price, with a small and cheap experiment.
  • Lay the model out on a Business Model Canvas when you need to see all its parts on one page.

Common mistakes

  • Confusing a revenue model, how the business charges, with the whole business model, which also covers costs, partners and delivery.
  • Keeping the model unchanged after costs, competitors or customer habits have moved.

Related terms

StartupsBeginner

Business Model Canvas

The Business Model Canvas is a one-page template of nine blocks that shows how a business creates value, delivers it and earns from it.

StartupsBeginner

Problem-Solution Fit

Problem-solution fit is the point where you have evidence that customers feel a problem and want your way of solving it, before you build the product.

StartupsIntermediate

Product-Market Fit

Product-market fit is when a product satisfies a real market so well that customers stay, come back and bring others without being pushed.

FinanceBeginner

Cash flow

Cash flow is the money coming into and going out of a business's account in a period. A profitable business can still run short of cash when customers pay late.

FinanceBeginner

Revenue

Revenue is everything a business sold in a period, before any costs and without the VAT on the invoice. It is the P&L's top line, not profit and not cash.

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Quick check

Which question does a business model answer that a revenue model does not?

Choose an answer

Frequently asked questions

What is a business model in simple words?
The explanation of how a business makes money: who pays it, for what, and why the product costs less to deliver than the customer pays.
What is the difference between a business model and a revenue model?
A revenue model is how you charge, for example per hour, per month or per item. The business model also includes what delivery costs, who your partners are and how the product reaches the customer.
What are common types of business model?
A shop that earns a margin on goods, a service paid by the hour, a subscription or membership, a marketplace that takes a commission, a franchise, and advertising, where the users are not the ones who pay.
What is an example of a business model?
A café: in the illustrative example a regular pays ₪25 an order, delivery costs ₪22 and ₪3 stays. The model is a repeat local habit where profit comes from volume.
How do I build a business model?
Answer the three questions in writing, take one sale apart into price and costs, and test the weakest assumption with real customers. The Business Model Canvas lays the parts out on one page.
Do I need a final business model before I start?
No. Start with a clear first version and treat it as a set of assumptions to test. It should be clear enough that you know which assumption to test first.
Should I copy an existing business model or invent a new one?
Most small businesses do well with a proven model and a better offer. A new model adds a second thing to prove at the same time as the product.
How does the business model affect funding options?
Investors look for models that can grow without costs growing at the same pace. A model with heavy upfront costs or work paid by the hour often fits a bank loan or the owner's own money better than venture capital.
Why does the business model matter if I am already selling?
Because sales and profit are different things. If each sale costs more to deliver than it brings in, more sales mean bigger losses.
How do I fix a business model that stopped being profitable?
Take one sale apart again and find the line that moved: a cost, the price or the customer mix. Then change one part at a time, the price, the delivery or the customer group, and measure the result.
How do I know a business model works?
Apply Joan Magretta's two tests: does the story make sense, and do the numbers add up. A model that fails either one does not work yet, however good the product is.
Do I need a business consultant to design my model?
Not to start. The three questions and one sale taken apart get you far. An outside view helps when the numbers do not add up and you cannot see which part to change.

Sources: Alexander Osterwalder and Yves Pigneur, Business Model Generation (2010), Joan Magretta, "Why Business Models Matter", Harvard Business Review, May 2002 (hbr.org)

Last reviewed: 2026-09-24

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After I finished a cosmetology course at a leading company, I was confused. I didn't know how to open a business, what to sell from home, or how to bring in clients. Since I reached out to Mobius, everything has changed. We built an organized plan with clear steps and no unnecessary risks. Today I see results, and I'm growing and developing every month.

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Mark

Massage therapist, Gan Yavne

When I finished a massage course, I imagined a different world. I found out it's a hard field, and financial stability isn't easy to find. When I came to Mobius, something changed. We started an organized process and built a business plan. Without Mobius? I probably would have given up. Today I believe in myself and in my own path.

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