A business model is the operating system of a firm. Who you sell to, what you offer, how you charge, and why customers pick you over the alternative. CFA Level I tests whether you can decode that system from a paragraph of facts.
A business model describes how a firm creates and captures value. Candidates should be able to read a company description and tag each element.
Customer identification. Who buys? Retail vs. institutional. B2B vs. B2C vs. B2G (government). Mass market vs. niche. A firm selling jet engines to airlines is a different business from one selling sneakers to teenagers, even if reported margins look similar.
Firm offering. What is sold? A physical good, a service, a digital product, a license, access to a network, or a bundle of these. The offering shapes inventory needs, working capital intensity, and gross margin profile.
Channels. Where and how does the customer reach the product? Direct sales force, owned retail, e-commerce, third-party distributors, wholesalers, franchisees, or platforms.
Common mistakes
- Confusing business model with strategy. Business model is the value architecture (who, what, how). Strategy is competitive positioning (where to play, how to win). A firm can change strategy without changing model. Trap answer: "Porter's five forces describe the business model."
- Tagging franchise as licensing. Both involve royalties, but franchise transfers an entire operating system (brand, training, supply chain, playbook), while licensing transfers only IP rights. McDonald's franchises restaurants; Disney licenses Mickey Mouse to toy makers.
- Assuming subscription always equals predictable revenue. Revenue is predictable only while churn stays low. A subscription with 30% annual churn has volatility closer to transactional revenue.
Bottom line
- A business model answers WHO (customers), WHAT (offering), WHERE (channels), HOW (pricing and delivery), and WHY (value proposition).
- Revenue model couples a pricing approach (value-based, cost-plus, dynamic, auction) with a volume mechanism (subscription, transaction, usage); the profit model adds cost structure and asset intensity.
- Common archetypes include subscription, freemium, razor-and-blade, franchise, licensing, platform/aggregator, marketplace, pay-in-advance, auction, value-added reseller, and affiliate.
- B2B serves businesses (longer cycle, larger ticket, committee buyers, relationship-driven); B2C serves consumers (shorter cycle, smaller ticket, emotional and brand-driven).
Exam shortcut
Read the company description and tag each segment with a single archetype (franchise, licensing, subscription, freemium, razor-and-blade, platform, marketplace, auction, VAR, affiliate, or pay-in-advance); if you cannot pick one, the firm is blending models. Map the revenue model first (recurring vs. transactional vs. usage), then the cost structure (fixed vs. variable, asset-light vs. asset-heavy), because those two together determine operating leverage.
The full lesson (about 2,223 words, 15 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- business models
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