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:

1. **The eight types of business models**
2. **A collection of business model innovations**
3. **Inspiration to innovate on your own business model**

Let’s get in there.

![Image from Types of business models](https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/0d658aa6-a5b7-45cd-a53e-cb893bef9927_2400x3064.png)

### 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:**

1. **Sell a thing + Subscription**: Peloton, Mirror, iPhone + iCloud
2. **Take rate + Subscription**: Shopify, Amazon Prime, DoorDash DashPass
3. **Take rate + Advertising**: Instacart, Amazon
4. **Advertising + Subscription:** NY Times, Cable TV
5. **Advertising + Sell a thing:** Kindle

**How might you…**

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

#### Replace one business model with another

**Examples:**

1. **Robinhood**: Replaced “usage-based” (charging per trade) with “selling a thing” (selling data generated by users).
2. **Dollar Shave Club**: Replaced “sell a thing” (i.e. razors once in a while) with “subscription” (i.e. razors delivered monthly).
3. **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.
4. **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.
5. **Rolls-Royce airplane engines**: Replaced “sell a thing” with rented their engines to airlines, versus selling up upfront, enabling low-cost airlines like Southwest.
6. **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.
7. **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…**

1. If you’re currently selling a thing, could you replace it with a take rate (e.g. Homeaway —> Airbnb), usage-based (e.g. [Xerox](https://www.petterileppanen.com/2020/03/11/5-business-model-innovations-you-should-know-about/)), subscription (e.g. Sephora —> Birchbox, Dollar Shave Club, SaaS vs. on-prem enterprise software), or rent it (e.g. [Rolls-Royce airplane engines](https://www.lead-innovation.com/english-blog/famous-business-model-innovations), [Hilti](https://www.strategyzer.com/blog/lessons-from-hilti-on-what-it-takes-to-shift-from-a-product-to-a-service-business-model))?
2. 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)?
3. If you’re currently renting a thing, could you replace it with a subscription (e.g. Blockbuster —> Netflix)?
4. If you’re currently doing a take rate or usage-based, could you replace it with selling a thing (e.g. TD Ameritrade —> Robinhood)?
5. If you’re currently renting a thing, could you replace it with a take rate (e.g. taxi —> Uber)?
6. 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:

1. **Subscriptions** (e.g. Patreon, Substack, OnlyFans)
2. **Tips** (e.g. Twitch, Clubhouse, Twitter Tip Jar, Buy Me a Coffee)
3. **Advertising** (e.g. YouTube/IG/TikTok, [Packy](https://www.notboring.co/))
4. **Revenue share (e.g.** affiliate deals, investing in startups**)**
5. **Selling goods** (e.g. NFTs, merch)
6. **Selling access** (e.g. VIP meetup, private DMs)
7. **Selling access to events or courses** (e.g. [Maven](https://maven.com/))
8. **Job board** (e.g. [my job board](https://lennysnewsletter.com/jobs))

If you’ve come across other examples of business model innovations, I’d love to hear them! Please leave a comment 👇

[Leave a comment](https://www.lennysnewsletter.com/p/types-of-business-models/comments)

### 📚 Further study

1. [Business Model Navigator](https://businessmodelnavigator.com/)
2. [Business Model Innovation – The What, Why, and How](https://www.viima.com/blog/business-model-innovation)
3. [YC Key Metrics](https://www.ycombinator.com/library/1y-key-metrics)

*Have a fulfilling and productive week 🙏*

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## **🧠 Inspiration for the week ahead**

1. **Watch:** [Graduations](https://vimeo.com/497879805) (via [The Viewer](https://theviewer.is/))

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