Business Models

A clearly described business model helps the analyst understand a business: its strategy, operations, target markets, key customers, suppliers, and ultimately prospects, risks, and financial profile. Many firms have conventional business models that are easily understood and have long existed, such as manufacturers and retailers. However, many business models are complex, novel, or a combination of models. Technological innovation, particularly digitalization, has enabled significant business model innovation over the past decades. Analysts need to develop their own understanding of an issuer’s business model to inform their outlook and risk assessment; analysts should not rely solely on management’s description of its business model.

• A business model addresses four key parts of a business: the customers (the “who”), the firm’s product and service offerings (the “what” and often the “why”), channels for reaching customers (the “where”), and pricing (the “how much”).
• A pricing model describes the amount customers are billed for units of products or services. A firm’s value proposition refers to the product attributes that lead customers to purchase the product rather than those of competitors. A firm’s value chain refers to how a firm structures its systems and processes to create value for its customers.
• Conventional business models are common and long established, while unconventional business models are based on innovations or industry-specific combinations and variations of conventional models.
• Digital technology has been particularly influential for business model innovation by generating new products, new channels, new ways to communicate and exchange information, and new methods for handling financial transactions.