Definition
A business model is a broad outline designed and used by companies to know how they can make money. It tells four key things:1. Product or service that the company will sell2. How the product/service will be sold3. Expenses that the company will incur4. How will the company achieve profitability
Example
Suppose a company sells video games and makes a profit of $5 million. In doing so, it spends $3 million. Thus, the profit margin will be $2 million.With growing competition, the company had to tweak its business model to survive in the market. So, as it remodeled its business and reduced pricing, its expenses rose and profits reduced. In the long run, however, the company survived the competition and started earning higher profits. Basis the current and expected market scenario, the company must adapt its business model to remain profitable.
Why it matters
A company can be better placed to target its customers if it's equipped with a business model. It can also adopt marketing and financial strategies as per its business model and clientele.Investors and stakeholders review the company's business model to get a clear picture of the company’s direction and competitive edge. It also gives finer details on the company’s products/services, segment-wise strategies, pricing strategies, etc.