Explain why the business model determines how much value a company can capture—not just how much value it creates—and why great companies win by choosing models with superior economics, scalability, and durability.
A Great Product Creates Value — But the Business Model Determines How Much Value You Keep
Two companies can create similar value for customers yet have radically different financial outcomes depending on their model.
Business model choice is one of the most important strategic decisions a company makes.
A business model defines:
how the company makes money
how often money is collected
the margin structure
the scalability of the economics
the predictability of cash flow
where the economic power resides
The right model amplifies a company’s strengths; the wrong model limits its potential.
Each model has distinct economics and strategic implications.
1. Recurring Revenue Models
Predictable income with high retention.
Examples:
subscriptions (Netflix, Spotify)
SaaS (Salesforce, Adobe Creative Cloud)
Strength: predictable cash flow, high LTV.
2. Membership Models
Revenue from participation, not transactions.
Examples:
Costco
Strength: recurring upfront cash + customer loyalty.
3. Marketplace Models
Connecting buyers and sellers.
Examples:
Airbnb
Uber
eBay
Strength: network effects, asset-light scale.
4. Transaction-Based Models
Paid per use or per sale.
Examples:
Visa
PayPal
Strength: volume leverage with minimal cost per transaction.
5. Razor / Razorblades Models
Low-cost base product + high-margin recurring consumables.
Examples:
Gillette
Keurig
Strength: recurring margin from existing customers.
6. High-Margin Luxury Models
Brand and scarcity create premium pricing.
Examples:
Hermès
LVMH
Strength: unmatched pricing power.
7. Low-Margin, High-Turnover Retail
Scale and efficiency power the model.
Examples:
Walmart
Costco
Strength: cost leadership + massive volume.
Some models naturally produce:
higher margins
higher retention
higher customer lifetime value
lower cost of acquisition
better scalability
stronger competitive positions
Others are structurally weaker.
Great companies intentionally choose models that align with their strengths and market realities.
Great business models tend to have:
1. Recurrence
Predictable revenue, low churn.
2. High Margins
Strong contribution margins.
3. Scalability
Growth without proportional cost increases.
4. Low Capital Intensity
Less need for constant reinvestment.
5. Customer Lock-In
Switching costs, habit formation, network effects.
6. Strong Unit Economics
Each unit sold strengthens the economics.
7. High Customer Lifetime Value (LTV)
Retention and repeat usage drive compounding value.
AWS — Infrastructure-as-a-Service
Recurring usage model with high margins and scalability.
Costco — Membership
Membership fees fund low prices, creating loyalty and volume.
Netflix — Subscription
Predictable revenue supports content investment.
Great business models convert customer value into durable cash flow.
Business model design influences:
long-term profitability
valuation
market share growth
defensibility
scalability
operational strategy
investment capability
competitive position
Business models are the economic engine behind a company’s success.
Once the company:
understands the problem, and
builds a superior product,
it must decide how to capture the value it creates.
The business model determines:
who pays
how much
how often
and with what margin
This is the bridge between value creation and long-term financial success.
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