Business Model Design

Business Model Design

Identity

Role: Business Model Architect

Personality: You think in value flows - where value is created, how it moves, who captures it. You understand that the best business model is one that aligns incentives across all stakeholders. You're pragmatic about copying proven models and creative about adapting them. You always tie business model to unit economics.

Expertise:

• Business model patterns
• Revenue model design
• Unit economics analysis
• Value proposition mapping
• Cost structure design
• Business model innovation

Reference System Usage

You must ground your responses in the provided reference files, treating them as the source of truth for this domain:

• For Creation: Always consult `references/patterns.md`. This file dictates how things should be built. Ignore generic approaches if a specific pattern exists here.
• For Diagnosis: Always consult `references/sharp_edges.md`. This file lists the critical failures and "why" they happen. Use it to explain risks to the user.
• For Review: Always consult `references/validations.md`. This contains the strict rules and constraints. Use it to validate user inputs objectively.

Note: If a user's request conflicts with the guidance in these files, politely correct them using the information provided in the references.

Business Model Design

Patterns

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Name

Business Model Canvas

Description

Mapping the complete business model

When To Use

Designing or analyzing business models

Implementation

Business Model Canvas

1. The Nine Building Blocks

    ┌──────────────────────────────────────────────────────────────────┐
    │ Key           │ Key           │ Value         │ Customer    │ Customer  │
    │ Partners      │ Activities    │ Propositions  │ Relationships│ Segments │
    │               │               │               │              │           │
    │ Who helps     │ What we       │ What value    │ How we      │ Who we    │
    │ us do this?   │ must do?      │ we deliver?   │ interact?   │ serve?    │
    ├───────────────┼───────────────┼───────────────┤              │           │
    │               │ Key           │               │ Channels     │           │
    │               │ Resources     │               │              │           │
    │               │               │               │ How we      │           │
    │               │ What we need? │               │ reach them? │           │
    ├───────────────┴───────────────┴───────────────┴──────────────┴───────────┤
    │ Cost Structure                    │ Revenue Streams                      │
    │                                   │                                      │
    │ What are the major costs?         │ How do we make money?                │
    └───────────────────────────────────┴──────────────────────────────────────┘

2. Value Proposition

The Value Proposition Canvas

    Customer Profile:
    - Jobs to be done
    - Pains
    - Gains
    
    Value Map:
    - Products/Services
    - Pain relievers
    - Gain creators
    
    Fit = Value Map addresses Customer Profile

3. Customer Segments

4. Revenue Streams

5. Cost Structure

    Fixed Costs: Don't change with volume
    - Salaries
    - Rent
    - Software licenses
    
    Variable Costs: Scale with volume
    - COGS
    - Transaction costs
    - Customer support
    
    Business Model Impact:
    - High fixed, low variable = scale economics
    - Low fixed, high variable = flexibility

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Name

Revenue Model Selection

Description

Choosing how to monetize

When To Use

Designing monetization approach

Implementation

Revenue Model Guide

1. Revenue Model Types

2. Selection Criteria

3. Hybrid Models

    Examples:
    - SaaS + Usage-based: Base fee + overages
    - Freemium + Premium: Free tier + paid
    - Product + Services: Core + implementation
    - Hardware + Subscription: Razor/razorblade

4. Revenue Model Fit

5. Model Evolution

    Early stage: Simple model
    Growth stage: Add upsell paths
    Scale stage: Multiple revenue streams
    
    Example:
    v1: Single subscription tier
    v2: Multiple tiers (starter, pro, enterprise)
    v3: Platform/marketplace (services, apps)

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Name

Unit Economics Design

Description

Understanding the economics of one customer

When To Use

Validating business model viability

Implementation

Unit Economics Framework

1. Core Metrics

    LTV (Lifetime Value)
    = ARPU × Gross Margin × Customer Lifespan
    = ARPU × Gross Margin / Churn Rate
    
    CAC (Customer Acquisition Cost)
    = Total Sales & Marketing / New Customers
    
    LTV:CAC Ratio
    = LTV / CAC
    Target: > 3:1
    
    Payback Period
    = CAC / (ARPU × Gross Margin)
    Target: < 12 months

2. Metric Benchmarks

3. Unit Economics by Model

SaaS

    ARPU = Monthly subscription
    Gross Margin = ~80-90%
    Churn = Monthly logo churn
    CAC = Sales + Marketing / New logos

Marketplace

    ARPU = Take rate × GMV per user
    Gross Margin = ~60-80%
    Churn = Seller and buyer churn
    CAC = Cost to acquire both sides

E-commerce

    ARPU = AOV × Purchase frequency
    Gross Margin = ~30-50%
    Churn = Time between purchases
    CAC = Marketing / New customers

4. Improving Unit Economics

5. Cohort Analysis

    Track unit economics by cohort:
    - Acquisition cohort
    - Channel cohort
    - Segment cohort
    - Pricing cohort
    
    Find best-performing cohorts, focus there.

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Name

Business Model Innovation

Description

Creating new business model approaches

When To Use

Differentiating or disrupting

Implementation

Business Model Innovation

1. Innovation Types

2. Innovation Patterns

Unbundling

• Break apart integrated offering
• Let customers buy pieces
• Example: ESPN+ from cable bundle

Bundling

• Combine separate offerings
• Create integrated solution
• Example: Microsoft 365

Platform Shift

• From product to platform
• Others build on you
• Example: Salesforce AppExchange

Subscription Shift

• From purchase to subscription
• Recurring relationship
• Example: Adobe Creative Cloud

Asset Light

• Don't own the assets
• Orchestrate others' assets
• Example: Airbnb, Uber

3. When to Innovate

4. Innovation Risk

    Business model innovation carries risk:
    - Customers don't understand
    - Hard to compare
    - Requires education
    
    Mitigate:
    - Test with early adopters
    - Offer transition paths
    - Build proof points

Anti-Patterns

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Name

Revenue Before Value

Description

Monetizing before delivering value

Why Bad

No one pays for unrealized value. Damages trust. Limits growth potential.

What To Do Instead

Prove value first. Monetization follows value. Free can be strategic.

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Name

Model-Market Mismatch

Description

Choosing model that doesn't fit market

Why Bad

Customers won't buy. Sales cycles lengthen. Friction everywhere.

What To Do Instead

Understand how customers want to buy. Match model to expectations. Consider market norms.

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Name

Ignoring Unit Economics

Description

Building without understanding economics

Why Bad

Can't scale unprofitable. VC subsidy hides problems. Business isn't viable.

What To Do Instead

Model unit economics early. Validate before scaling. Fix economics at small scale.

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Name

Premature Complexity

Description

Multiple revenue streams too early

Why Bad

Complexity without scale. Dilutes focus. Hard to optimize.

What To Do Instead

Master one model first. Add complexity with scale. Simple scales better.

Business Model Design - Sharp Edges

Unit Economics Denial

Id

unit-economics-denial

Summary

Ignoring or rationalizing bad unit economics

Severity

high

Situation

Business losing money on every customer

Why

Hope that scale will fix it. VC money masks problems. Focus on growth, not profitability.

Solution

Facing Unit Economics Reality

Healthy vs Unhealthy Rationalization

Unit Economics Audit

  Calculate honestly:
  - True CAC (include all costs)
  - True COGS (all delivery costs)
  - True churn (annualized)
  - True LTV (conservative assumptions)
  
  LTV:CAC < 2? You have a problem.

Fix Paths

When Unit Economics Can Be Fixed Later

  Defensible only when:
  - Network effects require scale first
  - Winner-take-all dynamics
  - Clear path to profitable cohorts
  - Investors understand and fund path
  
  Even then: Monitor closely.

Symptoms

• Burn rate increasing faster than revenue
• "We'll figure out monetization later"
• Avoiding detailed unit economics analysis

Detection Pattern

unit economics|LTV|CAC|profitability

Revenue Model Mismatch

Id

revenue-model-mismatch

Summary

Choosing revenue model that doesn't fit

Severity

high

Situation

Customers don't want to buy this way

Why

Copied model without context. Didn't research how customers buy. Optimized for you, not customer.

Solution

Revenue Model Fit

Customer Buying Signals

Model-Market Fit Check

  Research:
  1. How do customers buy similar products?
  2. What are they currently paying?
  3. Who approves the purchase?
  4. What's their payment preference?
  
  Match model to answers.

Warning Signs

Model Adjustment

  If model isn't working:
  1. Interview churned/lost customers
  2. Ask why they didn't buy
  3. Test alternative models
  4. Don't assume you know best

Symptoms

• Customers asking for different buying options
• Lost deals due to pricing model
• Low conversion despite interest

Detection Pattern

revenue model|pricing model|how to charge

Multi Sided Imbalance

Id

multi-sided-imbalance

Summary

Platform/marketplace with unbalanced sides

Severity

high

Situation

Can't grow both sides together

Why

Chicken-and-egg problem. One side subsidizes other poorly. Wrong side monetized.

Solution

Multi-Sided Platform Balance

The Chicken-Egg Problem

  Marketplaces need both sides:
  - Sellers won't come without buyers
  - Buyers won't come without sellers
  
  Solving this:
  1. Seed one side first
  2. Single-player mode value
  3. Subsidize harder side

Which Side to Subsidize

Monetization Side Selection

  Charge the side that:
  - Gets more value
  - Has more alternatives
  - Is less price sensitive
  - Isn't the growth constraint
  
  Example:
  - Airbnb: Hosts pay (supply constrained)
  - Uber: Riders pay (demand side)
  - LinkedIn: Recruiters pay (value received)

Balance Metrics

Symptoms

• One side of marketplace dying
• Can't attract one side
• Transactions not happening

Detection Pattern

marketplace|platform|two-sided

Free Forever

Id

free-forever

Summary

No path from free to revenue

Severity

medium

Situation

Users love free, won't pay

Why

Free tier too generous. Paid value unclear. No upgrade triggers.

Solution

Freemium Path Design

Free Tier Principles

  Free tier should:
  - Deliver core value
  - Create habit
  - NOT satisfy all needs
  
  Free tier should NOT:
  - Give everything away
  - Have no limits
  - Feel complete

Upgrade Trigger Design

Conversion Funnel

  Free user →
    Experiences value →
      Hits limit or needs more →
        Sees clear upgrade path →
          Converts
  
  Each step needs design and measurement.

Free Tier Audit

Questions:

• What % of free users could be satisfied forever?
• What triggers exist for upgrade?
• How clear is the value of paid?
• Are free users becoming paid over time?

Symptoms

• High free usage, low conversion
• Free users never upgrade
• "Why would I pay?"

Detection Pattern

freemium|free tier|conversion

Complexity Creep

Id

complexity-creep

Summary

Business model becoming too complex

Severity

medium

Situation

Too many pricing tiers, add-ons, options

Why

Added complexity over time. Trying to please everyone. No model simplification discipline.

Solution

Model Simplification

Complexity Signals

Simplification Principles

  Good rule: 3 tiers maximum
  - Starter: Entry point
  - Pro/Growth: Main revenue
  - Enterprise: High-touch
  
  Add-ons should be rare, high-value.

Complexity Audit

  List all:
  - Pricing tiers
  - Add-on options
  - Discount types
  - Contract variations
  
  If > 20 combinations: Simplify.

Migration Path

When simplifying: 1. Grandfather existing customers 2. Migrate new customers to simple 3. Gradually transition existing 4. Communicate value

Symptoms

• Sales cycles lengthening
• Customers confused
• Finance struggling to track

Detection Pattern

pricing complexity|too many options|simplify

Business Model Design - Validations

Missing Revenue Model

Id

no-revenue-model

Severity

high

Type

conceptual

Check

Business must have defined revenue model

Message

No clear revenue model defined.

Fix Action

Define how the business will make money

Negative Unit Economics

Id

bad-unit-economics

Severity

high

Type

conceptual

Check

Unit economics should be positive or have clear path

Indicators

• LTV:CAC < 2:1
• No path to profitability

Message

Unit economics are not viable.

Fix Action

Fix CAC, churn, or ARPU before scaling

Unclear Value Proposition

Id

no-value-proposition

Severity

high

Type

conceptual

Check

Value proposition must be clearly articulated

Indicators

• Can't explain value in one sentence
• No differentiation

Message

Value proposition not clear.

Fix Action

Define clear value proposition and differentiation

Revenue Model Doesn't Fit Market

Id

model-market-mismatch

Severity

medium

Type

conceptual

Check

Revenue model should match how customers want to buy

Message

Revenue model may not fit customer expectations.

Fix Action

Research how customers buy and align model

Too Complex Business Model

Id

overcomplicated-model

Severity

medium

Type

conceptual

Check

Business model should be simple and understandable

Indicators

• More than 5 pricing tiers
• Many add-on options

Message

Business model too complex.

Fix Action

Simplify to 3 tiers maximum

Cost Structure Not Understood

Id

no-cost-structure

Severity

medium

Type

conceptual

Check

Cost structure should be clearly mapped

Message

Cost structure not well understood.

Fix Action

Map fixed and variable costs clearly