Business model

How a company creates value for a customer, delivers it, and keeps a share of it for itself.

The description that is useful to an analyst has four parts. Who pays, and for what. What it costs to serve them, split into what varies with volume and what does not. How much capital has to sit in the business for that to happen. And what stops somebody else doing the same thing.

Most of what passes for business model analysis stops at the first part, which is the least informative. Two companies selling the same product to the same customer can have entirely different economics if one owns its factories and the other contracts them out, or if one collects in advance and the other in ninety days. The money is in the second, third and fourth parts, and all three can be read out of published accounts with enough patience.

Describe the model in one paragraph before touching a multiple.

Four parts. Most analysis stops at the first.

The fourth part is where the money is and it is the one that requires the most evidence. A business earning good returns without protection will not keep earning them, because capital is abundant and competitors read the same filings. So the description has to name the specific thing that prevents entry, and then find its number: the switching cost measured as retention, the cost advantage measured in unit costs, the brand measured as a price premium. A business model description that ends with a claim about quality rather than a measurement is an opinion.