A Simple Guide to 14 Economic Models

Explore 14 economic models for business value creation and profit generation. Uncover diverse strategies, from goods and services delivery to rental-based and platform-driven approaches, employed by successful companies.

A Simple Guide to 14 Economic Models
Image: Generated by Midjourney

As I conclude my four years in chemistry and scientific research, I'm gearing up for an MBA this Fall. To ready myself for this new venture, I'm dedicating the summer to learning the basics of business.

The first and most fundamental business concept I learned is:

to make money, businesses must create some form of value.

In the list below, I summarized 14 basic and most common forms of economic value and examples of prominent companies that primarily utilize each method.

Keep in mind that value extends beyond tangible products to encompass relationships, reputation, and community roles. Also, many businesses utilize multiple methods and do not fit neatly into just one category.

  1. Good & Services Delivery
  2. Rental and Usage Based
  3. Resale & Value Addition
  4. Platforms & Marketplaces
  5. Digital Goods & Services
  6. Licensing & Franchising
  7. Advertising & Promotion
  8. Freemium & User-Pay Models
  9. Investments & Financial Services
  10. Consultancy & Expert Services
  11. Cooperative & Shared Economy
  12. Donations & Social Value
  13. Membership & Community
  14. Gamification & User Engagement

1. Goods & Services Delivery:

This category includes businesses that create value primarily by offering products or services for direct purchase.

Product sales:

Businesses in this category sell physical products directly to consumers.

  • Example: Amazon. Amazon is one of the world's largest online retailers. They sell a vast array of products, from books to electronics to household goods, and much more. Amazon buys products from suppliers and sells them directly to consumers, making it a prime example of a product sales business.

Service sales:

Businesses in this category sell services rather than physical products.

  • Example: McKinsey & Company. McKinsey is a global management consulting firm. They sell professional services, specifically consulting services, to other businesses. Their product is the expert knowledge and advice they provide to help their clients solve business problems.

Wholesale:

Wholesalers sell goods in large quantities at lower prices to retailers, who then resell the goods to consumers at higher prices.

  • Example: Costco Wholesale. Costco is a membership-based warehouse club that sells products in bulk at lower prices than typical retail. They primarily sell to individual consumers, but many small businesses also use Costco to stock up on supplies, placing Costco in the wholesale category.

Dropshipping:

In dropshipping, the retailer doesn't keep goods in stock. Instead, when a retailer sells a product, it purchases the item from a third party and has it shipped directly to the customer.

  • Example: Oberlo. Oberlo is a platform that makes it easy for online retailers to find and sell drop-shipped products. The users of Oberlo, often small e-commerce businesses, sell products to consumers without ever physically handling the goods.
The dropship model. Image: Oberlo.

Bundling:

This strategy involves selling multiple products or services together as a package.

  • Example: McDonald's. McDonald's often sells their products (burgers, fries, drinks, etc.) as part of a "meal," which costs less than if the items were purchased individually.

E-commerce:

E-commerce businesses sell goods or services online.

  • Example: Etsy. Etsy is an online marketplace where independent sellers can offer goods (often handmade or vintage) directly to consumers. Etsy operates exclusively online, making it an e-commerce business.

Merchandising:

Merchandising involves promoting and selling products effectively. This can involve store layout, product display, packaging, pricing, and more.

  • Example: Disney. In addition to its entertainment products, Disney sells a huge array of merchandise related to its movies, TV shows, and theme parks. Disney's success in merchandising lies not just in the popularity of its characters and brands, but also in its effective marketing and selling of merchandise.

2. Rental and Usage Based:

This category includes businesses that provide temporary access to goods or services, often for a fee based on the amount or frequency of usage.

Lease/Rental:

In this model, businesses offer products or services for temporary use for a set period. This can range from minutes to years, depending on the nature of the good or service.

  • Example: Enterprise Rent-A-Car. Enterprise Rent-A-Car is a car rental company. They own a fleet of vehicles that they rent out to customers for short periods, often a few days or weeks. Customers pay based on the length of the rental and the type of car they choose.

Subscription services:

Businesses in this category charge customers a recurring fee, usually monthly or annually, to access a product or service. The key is that customers are paying for access, not ownership.

  • Example: Netflix. Netflix is a streaming service that charges customers a monthly fee to access their library of films and television shows. Customers don't own any of the content – they're paying for the right to view it.
Netflix is a leading streaming service that offers a wide range of movies, TV shows, and original content to its subscribers. Image: Netflix.

Pay per use:

Businesses that employ a pay-per-use model charge customers based on the amount they use a particular service. This can be measured in time, distance, data usage, etc.

  • Example: Uber. Uber is a ride-hailing service that charges customers based on the distance and time of each ride. The more a customer uses the service, the more they pay.

3. Resale & Value Addition:

This category includes businesses that create value by purchasing products and then either reselling them, often after adding some form of value or by transforming them into something new.

Resale:

Resale businesses buy products, often used, and sell them to others. The value these businesses add is often in the form of cleaning, repairing, certifying, or otherwise ensuring the quality of the items they sell.

  • Example: CarMax. CarMax is a used car retailer. They buy used cars from individuals and other sources, inspect and often repair or refurbish them, and then sell them to other consumers. The value CarMax adds is in the certification process that assures buyers of the quality and reliability of the cars they sell.

Upcycling:

Upcycling businesses take waste materials or useless products and turn them into new materials or products of better quality or for better environmental value.

  • Example: TerraCycle. TerraCycle is an innovative recycling company that has become a global leader in recycling hard-to-recycle waste. They "upcycle" or recycle various waste materials, transforming them into usable products like park benches, playgrounds, and a variety of consumer products.
How TerraCycle works. Image: Teton Valley News

Trade-In:

Trade-in programs allow customers to exchange old items for credit toward new ones. The old items are often refurbished and resold.

  • Example: Apple. Apple offers a trade-in program where customers can turn in their old devices in exchange for credit toward new Apple products. The old devices are then either refurbished and resold or recycled, depending on their condition. This model benefits Apple by driving sales of new products, and it benefits customers by providing a way to offset the cost of new devices.

4. Platforms & Marketplaces:

These are businesses that create a venue, often digital, for third parties to sell or exchange goods and services. These businesses typically make money by charging fees or commissions on transactions.

Marketplace:

Marketplace businesses provide a platform for sellers to reach and transact with buyers. The marketplace business typically charges a fee or commission on transactions.

  • Example: eBay. eBay provides a platform where individuals and businesses can sell goods to consumers. They make money by charging the sellers fees on listings and final value sales.

Peer-to-peer sharing:

This model, also known as the sharing economy, involves individuals sharing resources like housing, transport, or skills. The platform provider makes money by charging a fee or commission on transactions.

  • Example: Upwork. Upwork is a peer-to-peer sharing platform that connects freelancers with clients for project-based work. Upwork earns revenue by charging a fee or commission on completed projects facilitated through its platform
The platform covers a wide range of professional services, including graphic design, writing, web development, marketing, translation, and much more. Image: Upwork.

Networking:

Networking platforms enable professionals to connect, share knowledge, and find opportunities. The platform provider usually makes money by charging membership fees, offering premium services, or through advertising.

  • Example: LinkedIn. LinkedIn is a professional networking platform where individuals can connect with other professionals, share content, find jobs, and learn new skills. LinkedIn makes money through advertising, premium subscriptions, and talent solutions.

5. Digital Goods & Services:

This category includes businesses that create value by offering digital products, services, or access to digital platforms. Here are the subcategories:

Data:

Businesses in this subcategory generate value by collecting, analyzing, and selling data or using it to provide more personalized services to users.

  • Example: Google. Google offers a range of free services, such as search, email, and online storage, that millions of people use daily. While these services are free for users, Google collects data from these services to create detailed profiles of user behaviors and preferences, which it uses to sell targeted advertising.

In-app purchases:

These are transactions made within a mobile app, typically to unlock additional features, content, or services.

  • Example: Fortnite by Epic Games. Fortnite is a popular video game where players can make in-app purchases to buy "V-Bucks", the game's virtual currency. V-Bucks can be used to buy items like outfits, emotes, and the latest Battle Passes. These in-app purchases are a major source of revenue for Fortnite.

IaaS, PaaS:

Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) are categories of cloud computing services. IaaS offers online services that provide high-level APIs (Application Programming Interfaces) used to dereference various low-level details of underlying network infrastructure. PaaS provides a platform allowing customers to develop, run, and manage applications without the complexity of building and maintaining the infrastructure typically associated with developing and launching an app.

  • Example: Google Cloud Platform. Google Cloud Platform provides IaaS capabilities with offerings like Compute Engine for virtual machine instances and Cloud Storage for scalable object storage. It also offers PaaS services like App Engine, Cloud Functions, and Cloud SQL, allowing developers to build and deploy applications without worrying about infrastructure management.

SaaS:

Software as a Service (SaaS) businesses deliver applications over the Internet as a service. Instead of installing and maintaining software, users simply access it via the internet, freeing them from complex software and hardware management.

  • Example: Slack. Slack is a collaborative tool used by teams for communication. It is a cloud-based software provided as a service, where customers do not own or maintain the software but use it over the internet. As such, Slack is an excellent example of a SaaS business.
IaaS vs PaaS vs SaaS. Image: Plesk.

6. Licensing & Franchising:

This category includes businesses that create value by allowing others to use their intellectual property or business model.

Licensing:

Licensing businesses grant rights to their intellectual property to others, often in return for royalty payments. This can include patents, trademarks, copyrights, or any other type of intellectual property.

  • Example: Microsoft. Microsoft licenses its proprietary software, like the Windows operating system and the Office suite of productivity tools, to individuals, businesses, and other organizations. Users pay Microsoft a fee to use their software, typically through a combination of upfront costs and recurring licensing fees.

Franchising:

In a franchising business model, a business (the franchisor) allows another operator (the franchisee) to use its brand, products, and business model in return for a franchise fee and ongoing royalties.

  • Example: Subway. Subway is one of the largest franchising businesses in the world. Each Subway restaurant is owned by a franchisee who pays fees and royalties to Subway in exchange for the right to use the Subway brand, sell Subway products, and access Subway's systems and processes. The franchisee operates their own business but within the framework provided by the Subway franchising system.
Subway Restaurant Locations (2022). Image: Wikimedia Common.

7. Advertising & Promotion:

This category includes businesses that create value by offering advertising or promotional services.

Advertising:

Advertising businesses generate revenue by creating and selling advertising space. This can be on physical media, like billboards or newspapers, or digital media, like websites or social networks.

  • Example: Google AdSense. Google AdSense is where website publishers display targeted ads from Google on their sites to earn revenue based on clicks or impressions.

Sponsorship:

Sponsorship involves a business (the sponsor) providing funds or resources to an event, activity, person, or organization (the sponsee). In return, the sponsor receives some form of recognition or promotional benefits.

  • Example: YouTube influencers. Many YouTube influencers make money through sponsorships. Companies pay them to promote their products or services in their videos. The influencers typically disclose these sponsorships to their viewers, and they earn money for each promotion they do.

Affiliate marketing:

Affiliate marketing is a type of performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought by the affiliate's own marketing efforts.

  • Example: Booking.com Affiliate Partner Program. Affiliates earn commissions by promoting Booking.com accommodations through affiliate links. When users book through these links, affiliates receive commissions based on the booking value. Affiliates can customize promotions and track performance using provided tools. The program helps Booking.com expand its reach and reward affiliates.

8. Freemium & User-Pay Models:

This category includes businesses that create value by offering basic services for free and charge for advanced features or that allow users to determine the payment amount.

Freemium:

The freemium business model offers basic services for free, while more advanced features or services are locked behind a paywall. This model is prevalent in digital businesses, especially those offering software as a service (SaaS).

  • Example: Spotify. Spotify is a digital music service that offers access to millions of songs. While anyone can listen to music for free on Spotify, they offer a premium service that allows users to listen without ads, download music for offline listening, and more. The free tier attracts users, and the premium tier generates revenue.

Pay What You Want:

This model is quite unique and not widely adopted, but can be very successful in certain scenarios. Businesses that operate on this model allow customers to decide how much they are willing to pay for a product or service.

  • Example: Panera Bread's Panera Cares. In 2010, Panera Bread launched Panera Cares, a nonprofit initiative that opened community cafes where customers could pay what they wanted for meals. The aim was to address food insecurity and provide a dignified dining experience for all. Although not all cafes were sustainable, the initiative gained significant publicity and demonstrated innovative use of the pay-what-you-want model.
“By 2016, the Panera Cares experiment appeared to be winding down”. Image: Eater

9. Investments & Financial Services:

This category includes businesses that create value by investing in other companies or assets.

Investments:

These businesses make direct investments in securities such as stocks, bonds, commodities, and other financial instruments, aiming to profit from their price movements and/or the income they generate.

  • Example: BlackRock. BlackRock is a leading asset management firm that helps individuals and institutions achieve their financial goals through financial planning and investment management services. They use active and passive strategies to manage investments globally.
BlackRock is a major player in finance, influencing global markets and engaging with companies and policymakers on corporate governance, climate change, and sustainability. Image: The New York Times.

Venture Capital:

Venture Capital (VC) firms invest in early-stage companies (startups) in exchange for an equity stake. They aim to earn a return when these startups are sold or go public.

  • Example: Sequoia Capital. Sequoia Capital is a highly successful venture capital firm known for its strategic investments in innovative companies like Apple, Google, and WhatsApp. They guide and support these companies from early stages to success, earning substantial returns when they go public or are sold.

Private Equity:

Private Equity (PE) firms buy and restructure companies that aren't publicly traded. They aim to earn a return by improving these companies and eventually selling them or taking them public.

  • Example: Kohlberg Kravis Roberts. Kohlberg Kravis Roberts is a global private equity firm that specializes in acquiring and improving companies across various sectors. They partner with management teams to enhance operations and market presence, aiming to increase overall value.

Mergers and Acquisitions (M&A):

M&A services involve helping clients buy, sell, divide, and combine different companies. The objective is typically to grow rapidly, increase market share, or gain synergies.

  • Example: J.P. Morgan. J.P. Morgan's M&A advisory team provides end-to-end advice and execution on both buy-side and sell-side transactions across all industries globally. They aim to earn fees by advising clients on these transactions and facilitating the process.

10. Consultancy & Expert Services:

This category includes businesses that create value by offering expert advice or education.

Consulting:

Consulting businesses provide expert advice to other businesses or individuals in a specific field. They typically charge fees for their time, expertise, and the value of the advice they provide.

  • Example: Bain & Company. Bain & Company is a global consultancy that helps the world’s most ambitious change-makers define the future. They work alongside their clients as one team with a shared ambition to achieve extraordinary results, outperform the competition, and redefine industries.

Training and education:

Businesses in this subcategory create value by providing training and education services. These can range from online courses to in-person training sessions and entire degree programs.

  • Example: Udemy. Udemy is an online learning platform aimed at professional adults and students, developed in May 2010. Students take courses largely as a means of improving job-related skills and they provide tools that enable users to create a course, promote it, and earn money from student tuition charges.
Udemy provides a user-friendly interface that enables learners to browse and enroll in courses of their interest. Image: Udemy.

11. Cooperative & Shared Economy:

This category includes businesses that are owned by members or facilitate sharing of resources among users.

Cooperative model:

A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.

  • Example: The Greenbelt Cooperative. This is a cooperative grocery store owned and governed by its members. The members elect a board of directors to make business decisions, and profits are returned to members based on how much they use the cooperative's services.

Crowdfunding:

Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. Crowdfunding is a form of crowdsourcing and alternative finance.

  • Example: Kickstarter. Kickstarter is a major crowdfunding platform hosting diverse creative projects. Creators set a funding goal and deadline, and if the goal is reached through people's pledges, the project receives funding. It's an all-or-nothing model, funding successful projects ranging from films to technology products.

Bartering/Exchange:

This involves the direct exchange of goods or services without the use of money. Nowadays, some businesses facilitate this exchange digitally.

  • Example: Bartercard. Bartercard is a barter trading exchange founded in Australia in 1991. Members of the exchange use Bartercard's digital currency, Trade Dollars, to conduct transactions rather than using cash. This is a great example of a modern twist on the age-old practice of bartering.
Bartercard enables businesses to expand their customer base and trade without conventional currency, making it useful for filling excess capacity, moving surplus inventory, and attracting new customers. Image: Bdaily.

12. Donations & Social Value:

This category includes businesses that create value by generating income from donations or through partnerships with nonprofits.

Donations:

Non-profit organizations or charities are typically dependent on donations to carry out their social missions. Donations may come from individuals, corporations, or other charities.

  • Example: Red Cross. The American Red Cross prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors. It depends heavily on charitable donations and volunteer work.
The Red Cross relies on public donations, fundraising activities, and partnerships with governments and other organizations to fund its operations. Image: Red Cross.

Cause Marketing:

This refers to a type of corporate social responsibility, in which a company's promotional campaign has the dual purpose of increasing profitability while bettering society.

  • Example: Warby Parker. Warby Parker is an American online retailer of prescription glasses and sunglasses, based in New York City. For every pair of glasses sold, a pair is distributed to someone in need. This is an example of a company that combines profit-making with making a social impact, a practice known as cause marketing or social entrepreneurship.

13. Membership & Community:

This category includes businesses that create value by offering membership benefits or by co-creating products with customers.

Membership fees:

Some businesses operate on a membership model, where customers pay a recurring fee to have access to products, services, or other benefits.

  • Example: Costco. Costco is a multinational corporation that operates a chain of membership-only big-box retail stores. As of 2020, it was the fifth-largest retailer in the world. For a recurring fee, members can shop for discounted products and services ranging from groceries to electronics to insurance and vacation offers.

Co-creation:

This is a business strategy focusing on customer experience and interactive relationships. Co-creation allows and encourages a more active involvement from the customer to create a value-rich experience.

  • Example: LEGO Ideas. LEGO Ideas is an online community where fans can submit and vote for new LEGO set ideas. Selected ideas have the chance to be produced as official LEGO products, showcasing a strong example of co-creation with customers.
If a LEGO design on the platform receives 10,000 votes from the LEGO community, it enters a review process conducted by the LEGO Ideas team. Image: LEGO Ideas.

14. Gamification & User Engagement:

This category includes businesses that create value by using game design elements or exceptional user experiences to engage customers.

Gamification:

Gamification is the application of game-design elements and game principles in non-game contexts to improve user engagement, organizational productivity, flow, learning, crowdsourcing, employee recruitment, and evaluation, ease of use, the usefulness of systems, physical exercise, traffic violations, voter apathy, and more.

  • Example: Duolingo. Duolingo is a platform that gamifies language learning. Users earn points for correct answers, race against the clock, and level up. These short, bite-sized lessons feel more like a game than a traditional classroom curriculum, which helps keep users engaged and motivated.
Duolingo has gained popularity due to its user-friendly interface, engaging learning format, and accessibility. Image: Campaign UK.

Experience and branding:

Some businesses focus on delivering exceptional user experiences or building strong brands as a means of engaging customers and creating value.

  • Example: Apple. Apple Inc. prioritizes design and user experience in its products and retail stores, fostering simplicity, elegance, and user-friendliness. This focus has contributed to their strong brand, customer engagement, and loyalty.

Again, many businesses utilize multiple methods and do not fit neatly into just one category. This list represents a generalized view and provides examples of prominent companies that primarily utilize each method.