Business models: who pays, and for what
Subscription, marketplace, advertising, licensing, franchising, razor and blade, freemium, B2B and B2C, asset-light and asset-heavy, each with a real example and the metric that matters.
Firm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- A business model answers two questions: who pays, and for what. The same product can be sold in very different ways, and each way has its own numbers to watch.
- It sets the revenue equation.
- It shows the risk. Advertising revenue falls fast in a recession; subscriptions are steadier; franchisors are protected from store running costs but depend on franchisee health.
- It shows the lever. A franchisor grows by adding outlets, a marketplace by adding both buyers and sellers (network effects), a razor-and-blade business by growing its installed base.
Key idea
A business model answers two questions: who pays, and for what. The same product can be sold in very different ways, and each way has its own numbers to watch.
| Model | How it makes money | Real example | Key metric |
|---|---|---|---|
| Subscription | Customers pay a fixed amount every month or year to keep access | Netflix: streaming subscriptions, including a lower-priced plan with ads | Subscribers, ARPU, churn |
| Marketplace or platform | Connects buyers and sellers and keeps a fee on each transaction (the take rate) | Airbnb: service fees on stays booked through its platform | Gross booking value, take rate, repeat use |
| Advertising | Users get the product free; advertisers pay to reach them | Alphabet (Google): most of its revenue comes from advertising | Users, time spent, price per click or per thousand views |
| Licensing | Lets others use its intellectual property for a fee and royalties | Arm: licenses chip designs and earns royalties on chips shipped | Royalty per unit, number of licensees |
| Franchising | Local owners run outlets under the brand and pay fees, royalties and often rent | McDonald's: most of its restaurants are run by franchisees | Number of outlets, sales per outlet, royalty rate |
| Razor and blade | Sells a device at a low margin and earns on repeat consumables | HP: printers, plus ink and toner supplies | Installed base, supplies revenue per device |
| Freemium | A basic version is free; a paid version adds features | Spotify: a free tier with ads and paid Premium subscriptions | Free users, conversion to paid, ARPU |
| Asset-light | Owns few physical assets; earns fees for its brand, management or technology | Marriott: most hotels under its brands are franchised or managed, not owned | Fee revenue, rooms under the brand |
| Asset-heavy | Owns the assets that deliver the service | Power utilities and airlines that own their plants or fleets | Asset utilization, return on capital |
So-what
Name the model in the first minute of a case. It tells you which metric to ask for.
B2B, B2C, and who the customer really is
B2B (business to business) companies sell to other companies. They have fewer, larger customers, longer sales cycles, negotiated prices and written contracts. Salesforce, which sells software to companies, is an example. B2C (business to consumer) companies sell to individual people, so brand, marketing and convenience matter most. Many consumer brands are really B2B2C: a food company such as Unilever sells to retailers, who sell to shoppers, so it must win both. B2G (business to government) means selling to the public sector, usually through formal tenders.
Why the model matters in a case
- It sets the revenue equation. Subscription revenue is subscribers times price; marketplace revenue is bookings times take rate; advertising revenue is users, multiplied by time spent, multiplied by the ad price.
- It shows the risk. Advertising revenue falls fast in a recession; subscriptions are steadier; franchisors are protected from store running costs but depend on franchisee health.
- It shows the lever. A franchisor grows by adding outlets, a marketplace by adding both buyers and sellers (network effects), a razor-and-blade business by growing its installed base.
Worked case
A marketplace and a freemium app
The prompt
A fictional travel marketplace in Southeast Asia processes gross booking value (GBV, the total value of trips booked) of USD 2,000 million a year and keeps a take rate of 12 percent. It also runs a freemium trip-planning app with 10 million free users, of whom 4 percent pay USD 5 a month for the paid plan. What yearly revenue does each part earn, and what is one point of take rate or conversion worth?
The structure
- Revenue by model
- Marketplace = GBV x take rate
- Freemium = free users x conversion x price x 12
Working it through
1. Marketplace revenue
12 percent of USD 2,000 million.
Marketplace revenue (USD millions):2,000 × 0.12 = 2402. Paying users
4 percent of 10 million.
Paying users:10,000,000 × 0.04 = 400,0003. App revenue
400,000 users at USD 5 a month for 12 months.
App revenue per year (USD):400,000 × 5 × 12 = 24,000,0004. One point of take rate
1 percent of USD 2,000 million.
Value of 1 point of take rate (USD millions):2,000 × 0.01 = 205. One point of conversion
1 percent of 10 million users at USD 60 a year.
Value of 1 point of conversion (USD millions):10,000,000 × 0.01 × 60 ÷ 1,000,000 = 6
The recommendation
The company should focus on the marketplace, because it earns USD 240 million a year against USD 24 million from the app. First, one point of take rate is worth USD 20 million, while one point of app conversion is worth USD 6 million. Second, this means small gains on the USD 2,000 million of bookings move the total most. The risk is that raising the 12 percent take rate pushes buyers and sellers to rivals. As a next step, test a small take rate change in one market and track bookings.
A burger brand in the UAE has 120 franchised outlets. Each sells AED 5 million a year and pays the brand a 5 percent royalty. What royalty income does the brand earn a year, in AED millions?
A printer is sold at a USD 10 loss. Each printer then uses USD 100 of ink a year at a 60 percent gross margin, for 3 years. What is the lifetime gross profit per printer, in USD?
A company gives its app away free and earns money from advertisers. Revenue is falling. Which numbers should you check first?
What is a take rate?
Which of these is an asset-light model?
In a freemium model, which number usually matters most?
Sources for this lesson (9)
- Recognized public explanations of case-interview concepts and frameworks
- Netflix investor relations
- Airbnb investor relations
- Alphabet investor relations
- Arm investor relations
- McDonald's investor relations
- HP Inc. investor relations
- Spotify investor relations
- Marriott International investor relations
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