Types of business models

Q: I’m working on a startup idea and it got me thinking—what are the types of business models out there? Are there any creative ways to design our business model?

When I saw your question, I went looking for a quick answer. I was sure there would be a bunch of blog posts or HBR articles that succinctly summarize all of the ways you can make money as a business. I was wrong. There was nothing out there. So I’ve gone ahead and taken a shot at coming up with an answer. Below, you’ll find:

The eight types of business models
A collection of business model innovations
Inspiration to innovate on your own business model

Let’s get in there.

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The 8 business models

1. Sell a thing

How it works: Sell someone your physical or digital product
Examples: iPhone, lemonade, land, stocks
Ideal for: Physical products you manufacture or acquire
Business strategy: Make or acquire a thing —> Sell it for more than it cost you
Optimize: Unit economics

2. Rent a thing

How it works: Allow someone to borrow a product that you continue to own
Examples: Apartments, rental cars, carpet cleaners, mortgage
Ideal for: Physical products you manufacture or acquire that people don’t want (or can’t afford to) to own
Business strategy: Make or acquire a thing —> Rent it out over and over
Optimize: Consumption

3. Take a cut

How it works: Charge a % for each transaction you facilitate
Examples: Stripe, Airbnb, real-estate agents, bookies
Ideal for: Platforms and marketplaces
Business strategy: Build a valuable platform or marketplace —> Charge a small fee for the convenience of using it each time
Optimize: GMV

4. Charge a subscription

How it works: Charge a monthly or yearly fee for access to your product or service
Examples: Figma, Netflix, AT&T, gyms
Ideal for: Products/services that people need regularly
Types of subscription models:
Flat fee (e.g. Superhuman)
Tiered plans (e.g. Notion)
Per seat (e.g. Figma)
Per host (e.g. Datadog, New Relic)
Annual contracts (e.g. Oracle, gyms)
Business strategy: Build a valuable product —> Get people to try it —> Convince them to subscribe
Optimize: Engagement

5. Charge based on usage

How it works: Charge a fee only when people use the product
Examples: Twilio, AWS, Metromile, hourly motels
Ideal for: Infrastructure products
Types of usage-based models:
One-off cost (e.g. Twilio)
Per second usage cost (e.g. AWS EC2, S3)
Per mile (e.g. Metromile)
Business strategy: Build a valuable product —> Get people to try it out at a small scale —> Get them hooked and scale with them
Optimize: Consumption

6. Sell a service

How it works: Provide a service leveraging your skills and experience
Examples: Plumbers, engineers, health providers, tour guides
Ideal for: Hands-on human help
Business strategy: Develop a skill —> Charge for leveraging that skill
Optimize: Skillset

7. Advertising

How it works: Charge for sharing something with your audience based on views, clicks, or actions
Examples: Facebook, TV, Billboards, podcasts
Ideal for: Products that draw a large and/or sought-after audience
Business strategy: Build an audience —> Charge for access to your audience
Optimize: Traffic

8. Percentage of assets

How it works: Charge a percentage of the assets you are managing or loaning
Examples: Wealth advisors, loans, credit card companies
Ideal for: Money managers
Business strategy: Convince people to let you manage their money —> Make them money, which makes you money
Optimize: AUM

How to innovate on your business model

Combine two business models

Examples:

Sell a thing + Subscription: Peloton, Mirror, iPhone + iCloud
Take rate + Subscription: Shopify, Amazon Prime, DoorDash DashPass
Take rate + Advertising: Instacart, Amazon
Advertising + Subscription: NY Times, Cable TV
Advertising + Sell a thing: Kindle

How might you…

If you’re currently selling a thing, could you add a subscription (e.g. Peleton, Robinhood Gold) or advertising (e.g. Kindle)?
If you’re currently take rate, could you add a subscription (e.g. Shopify, Amazon Prime) or advertising (e.g. Amazon, Instacart)?
If you’re currently usage-based, could you add a flat-fee subscription (e.g. Amazon EC2 reserved instances)?
If you’re currently advertising, could you add a take rate (e.g. affiliate program)?

Replace one business model with another

Examples:

Robinhood: Replaced “usage-based” (charging per trade) with “selling a thing” (selling data generated by users).
Dollar Shave Club: Replaced “sell a thing” (i.e. razors once in a while) with “subscription” (i.e. razors delivered monthly).
Uber: Replaced “rent a thing” or “buy a thing” (i.e. tax medallions) with “take rate,” allowing drivers to make money driving without any up-front cost.
Warby Parker: Optimized “sell a thing” unit economics by going straight to the consumer, cutting out high-margin middlemen, which allowed them to offer cheaper better quality glasses.
Rolls-Royce airplane engines: Replaced “sell a thing” with rented their engines to airlines, versus selling up upfront, enabling low-cost airlines like Southwest.
Alibaba: An e-commerce business (i.e. “Sell a thing”) that drop-ships products from the manufacturer straight to the buyer’s location, significantly improving their unit economics and allowing them to deliver lower costs.
Chime: Moved away from “usage-based” (charging fees on bank penalties) to “take-rate,” taking a portion of the transaction fees that Visa charges merchants when customers use Chime’s debit card.

How might you…

If you’re currently selling a thing, could you replace it with a take rate (e.g. Homeaway —> Airbnb), usage-based (e.g. Xerox), subscription (e.g. Sephora —> Birchbox, Dollar Shave Club, SaaS vs. on-prem enterprise software), or rent it (e.g. Rolls-Royce airplane engines, Hilti)?
If you’re currently selling a thing, could you significantly cut back one step of the value chain to make your product significantly less expensive (e.g. Warby Parker)?
If you’re currently renting a thing, could you replace it with a subscription (e.g. Blockbuster —> Netflix)?
If you’re currently doing a take rate or usage-based, could you replace it with selling a thing (e.g. TD Ameritrade —> Robinhood)?
If you’re currently renting a thing, could you replace it with a take rate (e.g. taxi —> Uber)?
If you’re currently flat-fee subscription, could you replace it with usage-based (e.g. Metromile)?

Bonus: The eight most popular creator economy business models

The list above describes the eight ways for businesses to make money, but just for fun, below are the eight most common ways creators (ake solo entrepreneurs) can make money: