Business Models
Who Pays + Why: mapping the future of your company.
Purpose
- Business models dictate the shape of your company over the long term, including relationships with employees, customers, and the direction of future products. Ultimately, the business model is the foundation of your company, and it’s expensive, time-consuming and sometimes impossible to rebuild a structure with a poorly constructed foundation. Your business model dictates how products make money, and it connects to both development costs and scaling potential. A business model philosophically and tactically defines how you think about customers and employees. For example, a business model will affect whether customers feel they are receiving value or value is being extracted from them. A business model will also decide how your company grows — with full time employees, part-time workers, off-shore contractors, and other human resources.
- An enduring company delivers value to customers without making them feel they are the product. This approach builds loyalty which converts to long term value for the company. While you can lock in customers with dark design patterns, eventually a competitor will lower switching costs enough that customers migrate to another platform.
- If you make customers feel their core problems are being solved at a reasonable cost, they get the support they need, and their needs continue to be met as the product evolves, you will reduce churn and keep customer acquisition costs low.
Method
- Background
Survey existing business models to determine whether an existing model works for your product, if you want to combine features of multiple models, or if you want to experiment with something new. There are many well known business models, and resources to help you learn about them.
See Tools for a ledger on models, ex. freemium, subscription, platform models, advertising-supported, razor-razor blade, e-commerce, software-as-a-service, data monetization. - Identify relevant factors
In order to choose a business model, write out relevant factors related to how you will make money. Many of these will be hypotheses, but documenting them now will give you more precision later as additional data comes in and hypotheses change. Consider:
- What value are you delivering to customers?
- Over what timeframe is this value delivered? How long do you anticipate customers will need your product?
- How much will it cost to build and maintain the product?
- What ongoing customer interaction will there be?
- What does the product roadmap look like and will that deepen connection with existing customers or create new customer segments?
- What company values do you want to bake into the company DNA? For example, if you care about data privacy or interoperability, that will influence business model choices.
- Name contingencies
Next, name the contingencies for your business model to work. Business model contingencies build profits based on a recognition of how societal and economic forces interact. These choices reflect company values. A strong foundational business model will be based on the characteristics of the product, the company, and the environment in which the product is delivered.
Another way to think about this is ‘what are the things that need to be true in the world for this business model to work?’. Examples of profitable companies built with business model contingencies:
- Creating a product that can only be delivered with a large contingent workforce, like Uber or Lyft
- Providing infrastructure with products themselves provided by others, like Ebay or Airbnb
- Creating a company that prioritizes full time employees with full benefits like Costco
- Deriving margins by having large numbers of part time employees who use public benefits for healthcare, like Walmart
- Weigh your options
Consider experimenting with new business models or combining more than one existing model. Software used to be sold in shrink-wrap and carry a one-time price tag; now we can’t imagine software and apps without monthly subscription fees. While we don’t yet know what new business models will emerge with AI, we can be confident there *will* be new models in the coming years. - Don’t get attached
Don’t get attached to a business model too early. Recognize that most startups pivot through different business models as they work towards PMF. The business model will help you target the best customer segments and figure out pricing. It can also direct any tactical growth strategies. - Gut check assumptions
If you find yourself pivoting extremely often on business models or having trouble finding one that lands, do more customer engagement to get a deeper understanding of what definition of value resonates with customers.
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Trap Doors
- Misalignment
Business models reflect both founder values and company values. For example, business models reflect how you think about your customers and delivering value to them. You have the opportunity to be in control and be intentional with those choices. The easy path is not always the one that amplifies the values that led you to create the company. - (Lack of) Tracking
As you grow your company and start to generate revenue, be ruthless about tracking your cost of doing business – this means the cost to acquire customers as well as product costs (compute time, manufacturing, shipping, etc.). Conduct quarterly lookbacks on revenue vs. costs to assess if your business model or pricing strategy needs to change. - (No) Ramp to Better Margins
There should be a clear path to reasonable margins as the company grows. For hardware, target 30%-50%, for software target 85-90%. - Overlooking
Don’t forget that your workforce is part of your business model; plan your financial projections accordingly.
Don’t leave values behind as you pivot through different business models.
Keep in mind that values can be reflected in how you implement a business model as well, making subscriptions easy to cancel, for example.
Cases
Amazon combines e-commerce, subscription (Prime), platform (marketplace), and advertising models, showing how digital companies create sophisticated, multi-layered approaches to value creation and capture.
Notion's business model centers on usage-based pricing tiers. It starts with a free personal tier that includes limited blocks and file uploads, and then scales to paid plans. Paid plans begin at a low monthly cost per user for teams, with premium enterprise options offering advanced administrative features.
Early growth was largely organic, driven by strong product-market fit in the knowledge management space and viral adoption through template sharing and public pages, which kept customer acquisition costs low. Their revenue model relied heavily on subscription income from paid workspaces, following a classic land-and-expand strategy where they started with small teams and gradually scaled to company-wide deployments.
The platform creates high switching costs once organizations build extensive databases and workflows, improving retention. The company also benefits from strong network effects through shared workspaces and templates.
Who to Enlist
Advisors, board members, and other founders can provide insight into how they have approached developing business models.
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Keep in mind their experiences will vary based on product category, target customers, and the timing of when they introduced their product.