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📖 Chapter 3: Understanding Companies – Business Model: How Companies Make Money
🔹 Introduction
Before you invest in any stock, you must understand how that company makes money.
A company’s business model is the backbone of its existence — it explains:
- What the company sells
- Who its customers are
- How it earns revenue
- And how it plans to grow in the future
📌 Without understanding the business model, investing is like buying a car without knowing if it runs on petrol or diesel.
🔹 What is a Business Model:?
Definition:
A business model is the plan or structure that a company uses to generate revenue and profit from its operations.
It answers 4 basic questions:
- What product or service does the company offer?
- Who is the target customer?
- How does it deliver the product/service?
- How does it make money?
🔹 Example: Simple Explanation
Let’s take Zomato:
- Product: Food delivery platform
- Customer: Anyone ordering food online
- Revenue: Charges commissions from restaurants + delivery fees
- Growth: Expanding into grocery & B2B supplies
✅ Zomato doesn’t cook food — it connects restaurants and customers. This is its business model.
🔹 Types of Business Models (With Examples)
There are many types of business models. Here are the most common ones investors should know 👇
1. Product-Based Model
- Companies manufacture and sell physical products.
- Example: Maruti Suzuki – sells cars; revenue from each car sold.
2. Service-Based Model
- Companies provide services for a fee.
- Example: Infosys / TCS – provide IT solutions and consulting services.
3. Subscription Model
- Customers pay a recurring fee monthly or yearly.
- Example: Netflix – earns revenue from monthly subscriptions.
4. Commission/Platform Model
- Company earns commission by connecting buyers and sellers.
- Example: Zomato, Swiggy, Amazon – commission per order.
5. Freemium Model
- Basic services are free, premium features are paid.
- Example: Spotify – free with ads, premium is paid.
6. Franchise Model
- Company allows others to use its brand for a fee.
- Example: Domino’s – earns from franchise fees and royalties.
7. Ad-Based Model
- Revenue comes from advertisements.
- Example: Meta (Facebook, Instagram) – free to users but earns from ads.
🔹 Why Business Model Matters for Investors:
- Revenue Predictability – Subscription models provide stable recurring revenue.
- Scalability – Platform models can grow quickly with minimal costs.
- Profit Margins – Product businesses have lower margins than SaaS or digital platforms.
- Risk Identification – Business model tells you potential threats and competition.
🔹 Real-Life Comparison:
| Company | Business Model | Revenue Source |
|---|---|---|
| Reliance | Diversified (Energy, Retail, Telecom) | Oil refining, Jio plans, Retail sales |
| HDFC Bank | Financial Services | Loans, credit cards, interest income |
| DMart | Retail (Product Sales) | Margin on groceries and FMCG products |
| Zomato | Platform/Commission | Restaurant commission, delivery fees |
🔹 Warning Signs in Business Models:
🔴 Unclear revenue source: If you don’t understand how they make money — avoid.
🔴 Over-reliance on one client: Risky if 70%+ revenue from one source.
🔴 Unsustainable pricing: Companies selling below cost just to grow are risky long-term.
🔹 Interesting / Lesser-Known Facts
- Many startups with no profit still get huge valuations — because their business model shows future potential.
- Amazon was unprofitable for years but investors trusted its scalable model.
- Companies often evolve — Netflix started as a DVD rental business and shifted to streaming + production.
🔹 Q&A Section
Q1: How can I understand a company’s business model as a beginner?
A: Start by reading the company’s website, annual report, and “About Us” section.
Q2: Can two companies in the same sector have different business models?
A: Yes. Example: DMart owns stores (asset-heavy), Nykaa runs an online platform (asset-light).
Q3: Does business model affect share price?
A: Absolutely. Scalable, high-margin models get higher valuations.
Q4: Should I invest if the business model is confusing?
A: No. Legendary investor Warren Buffett says: “Never invest in a business you don’t understand.”
🔹 Key Takeaways
- A business model shows how a company makes money and plans to grow.
- Understanding it helps you judge stability, profitability, and future potential.
- Different models = different risks, margins, and scalability.
- Always invest only when you clearly understand the company’s business model.