Before looking at numbers, ratios, or share prices, a long-term investor must answer one basic question:
How does this company actually make money?
This lesson focuses on understanding business models — the core engine that drives a company’s revenue, profits, and long-term survival.
What Is a Business Model?
A business model explains:
- What the company sells
- Who its customers are
- How it earns revenue
- What major costs it incurs
- Why customers choose it over competitors
📌 In simple terms: A business model is the company’s money-making blueprint.
Why Business Models Matter to Investors
Two companies can have similar profits today but very different futures.
A strong business model helps a company:
- Generate consistent revenue
- Maintain pricing power
- Survive competition and downturns
- Grow without excessive risk
📌 Investor insight:
Great companies fail when their business models break.
Common Types of Business Models (With Simple Examples)
1️⃣ Product-Based Model
Company makes and sells physical products.
Examples:
- FMCG companies (soaps, food, beverages)
- Automobile manufacturers
Key questions for investors:
- Is demand recurring?
- Are margins stable?
- How strong is the brand?
2️⃣ Service-Based Model
Company earns by providing services.
Examples:
- IT services
- Consulting firms
Key questions:
- How dependent is revenue on employees?
- Can the business scale easily?
3️⃣ Subscription Model
Customers pay regularly (monthly/annually).
Examples:
- Streaming platforms
- Software companies
Key questions:
- Customer retention rate
- Pricing power
- Switching costs
4️⃣ Platform / Marketplace Model
Company connects buyers and sellers.
Examples:
- E-commerce platforms
- Payment platforms
Key questions:
- Network effects
- User growth
- Monetization strength
Cost Structure: The Other Side of the Model
Understanding costs is as important as understanding revenue.
Look at:
- Fixed costs (rent, salaries)
- Variable costs (raw materials, logistics)
- Operating leverage
📌 Investor mindset:
A business that controls costs well survives tough times.
Scalability: Can the Business Grow Profitably?
Ask:
- Can revenue grow faster than costs?
- Does growth require heavy capital every time?
High-quality businesses often show:
- Rising margins over time
- Better efficiency as scale increases
Simple Red Flags in Business Models
Be cautious if a company:
- Depends on heavy discounts to sell
- Has unclear revenue sources
- Relies only on one customer or product
- Faces easy replacement by competitors
📌 Rule of thumb: If you cannot explain the business model in simple words, avoid investing.
Real-Life Thinking Exercise
Before investing in any company, ask:
- What problem does this company solve?
- Why do customers pay for it?
- How does the company earn repeatedly?
- What could disrupt this model in 5–10 years?
Key Takeaways
- Business models are the foundation of fundamental analysis
- Strong models create predictable, sustainable earnings
- Numbers matter only after understanding the business
- Simplicity and clarity beat complexity