Updated for the 2026-2027 CFA® Level I curriculum.
A business model explains how a company makes money. It covers what the company sells, who buys it, and how the company turns that activity into profit. This concept matters because every later step in equity analysis, including forecasting and valuation, depends on first understanding how the business actually operates.
After this note, you should be able to identify a company's business model from its disclosures and distinguish it from unrelated analytical concepts like industry structure or valuation method.
Quick Answer
A company's business model is the combination of what it sells, how it delivers that offering, and how it captures value in the form of revenue and profit.
To determine a business model, analysts look at what the company produces or provides, how customers pay for it, and which relationships (suppliers, customers, channels) drive costs and revenue.
On the CFA Level I exam, expect questions that ask you to infer the business model from a short company description or set of financial facts.
Key Takeaways About Determining a Company’s Business Model
A business model describes how a company creates, delivers, and captures value.
Value creation means identifying what the company actually produces or provides to customers.
Value capture means identifying how the company turns that output into revenue and profit.
Revenue sources vary widely: one-time sales, recurring subscriptions, licensing fees, or transaction-based fees.
Key operating relationships, such as supplier dependence or customer concentration, shape the risk and stability of the model.
Analysts infer a business model using company filings, segment data, and management discussion, not assumptions.
A single company can operate more than one business model across different segments.
What You Need to Know for CFA Level I
Identify how a company creates and captures value from a short case fact pattern.
Recognize common revenue sources and economic drivers without confusing them with pricing power itself.
Explain how key operating relationships (suppliers, customers, distribution channels) support or threaten the business model.
Infer a company's business model using disclosed information rather than outside assumptions.
Distinguish business model analysis from industry analysis, forecasting, and valuation, which are separate stages.
How to Identify How a Company Creates and Captures Value
Start with two separate questions. First, what does the company create? Second, how does it get paid for creating it?
Value creation is the company's actual output. This can be a physical product, a service, access to a platform, or intellectual property. Value capture is the mechanism that converts that output into cash. Two companies can create similar value and capture it in very different ways.
A simple framework helps organize this analysis:
Framework Element | Question It Answers | Example |
|---|---|---|
Value creation | What does the company produce or provide? | Manufacturing equipment, software access, insurance coverage |
Value delivery | How does the offering reach the customer? | Direct sales force, retail stores, online platform |
Value capture | How does the company get paid? | One-time purchase, subscription fee, commission, licensing royalty |
Candidates often skip value delivery and jump straight from creation to capture. This step matters because the delivery channel affects cost structure, which affects profitability. A company that sells directly to consumers online has a different cost profile than one that sells through third-party retailers, even if the underlying product is identical.
Revenue Sources and Economic Drivers at a High Level
Once you know what a company creates and captures, look at where the revenue actually comes from. At Level I, you need to recognize broad categories rather than build a detailed revenue model.
Common revenue sources include:
Unit sales. Revenue rises and falls with volume sold, common in manufacturing and retail.
Recurring fees. Subscription or membership revenue tied to a contract period, common in software and media.
Transaction-based fees. Revenue earned per transaction processed, common in payment networks and exchanges.
Licensing or royalty income. Revenue earned by allowing another party to use intellectual property.
Each source has a different economic driver. Unit sales depend on volume and price. Recurring fees depend on the number of active subscribers and retention. Transaction fees depend on activity levels across the customer base. Recognizing the driver behind the revenue line is the first step toward understanding how sensitive that revenue is to economic conditions.
This note stops at identifying these categories. Detailed pricing power and driver analysis is covered in the next study note in this sequence.
Key Operating Relationships That Define the Model
A business model does not exist in isolation. It depends on relationships with suppliers, customers, and distribution partners. These relationships shape both the cost side and the revenue side of the model.
Three relationships matter most for Level I purposes:
Supplier relationships. A company dependent on a small number of suppliers faces cost and availability risk. A company with many interchangeable suppliers has more negotiating power.
Customer relationships. A company with a concentrated customer base faces revenue risk if a major customer leaves. A company with a broad, diversified customer base has more stable revenue.
Channel relationships. How a company reaches its customers, directly or through intermediaries, affects both cost structure and pricing control.
These relationships help explain why two companies in the same industry can have very different risk profiles even when their products look similar on the surface.
How to Infer a Business Model From Company Information
On the exam, you will rarely see the phrase "business model" stated outright. Instead, you infer it from disclosed facts. Useful sources include:
Segment reporting. Companies often break revenue into segments that reveal multiple business models operating under one parent.
Revenue recognition disclosures. These show whether revenue is recognized at a point in time (unit sale) or over time (subscription or long-term contract).
Management discussion and analysis. This section often explains how the company generates revenue and what drives costs.
Customer and supplier concentration disclosures. These reveal dependency risks tied to the model.
The skill being tested is inference, not memorization. A CFA exam question will give you facts, such as revenue recognized ratably over a contract term, and expect you to identify that this points to a subscription-based model rather than a one-time sale model.
Worked Example
Scenarioz: NorthPeak Outdoor Gear reports two segments in its annual filing.
Segment A sells hiking and camping equipment directly to retail stores. Revenue is recognized when goods ship, and the segment reports higher revenue in the second and third quarters each year. Segment A depends on three large sporting goods retailers for 60% of its sales.
Segment B operates a gear-rental subscription service. Customers pay a monthly fee for access to a rotating selection of equipment. Revenue is recognized evenly across the year and grows with subscriber count, not with unit sales.
Step-by-step analysis.
Identify value creation. Segment A creates value through physical products. Segment B creates value through access to equipment without ownership.
Identify value capture. Segment A captures value through one-time unit sales. Segment B captures value through recurring subscription fees.
Identify key operating relationships. Segment A carries customer concentration risk tied to three retailers. Segment B depends on subscriber retention rather than any single customer.
Identify the economic driver. Segment A revenue is seasonal and volume-driven. Segment B revenue is steadier and driven by active subscriber count.
NorthPeak operates two distinct business models under one company.
Segment A behaves like a traditional seasonal manufacturer with customer concentration risk.
Segment B behaves like a subscription service with smoother, more predictable revenue.
An analyst evaluating NorthPeak needs to assess each segment separately rather than treating the company as a single uniform business.
Common Exam Traps
Confusing business model with industry classification
Two companies in the same industry can run completely different business models. The exam may test whether you can tell the difference between industry structure and the company's specific value creation and capture method.
Memorizing a label without applying it to the facts
Knowing the term "subscription model" is not enough. You must connect specific facts in the question, such as revenue recognized over time, to that label.
Using a broad rule when the question asks for a specific distinction
Do not assume all recurring revenue is low risk. The question may test whether you notice customer concentration or contract length as a modifying factor.
Giving a directional conclusion without the reasoning
Stating that a company "has a strong business model" without explaining the value creation, delivery, and capture logic behind that claim will not satisfy an exam question that asks you to justify your answer.
Practice Question
Sable Analytics generates revenue by charging clients a fee for every data query processed through its platform. Query volume varies month to month based on client activity, and no client is responsible for more than 4% of total revenue.
Which of the following best describes Sable Analytics' business model?
A subscription model with revenue driven by fixed monthly fees
A transaction-based model with revenue driven by client activity levels
A licensing model with revenue driven by long-term royalty contracts
Correct Answer: B
Sable's revenue depends on the number of queries processed, which is a transaction-based revenue source. Revenue rises and falls with client activity rather than a fixed periodic fee or a licensing arrangement.
The diversified client base (no client above 4% of revenue) also supports the transaction-based model, since revenue does not depend heavily on any single customer relationship.
Option A: Incorrect. A subscription model charges a fixed recurring fee regardless of usage. Sable's fee varies with query volume, which rules out a pure subscription structure.
Option C: Incorrect. A licensing model involves granting rights to intellectual property in exchange for royalties, not per-transaction processing fees.
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FAQs About Determining a Company’s Business Model
Is a business model the same as an industry?
No. An industry describes the broader competitive environment a company operates in. A business model describes how that specific company creates and captures value within its industry. Two companies in the same industry can have different business models.
Can a company have more than one business model?
Yes. Many companies report multiple segments, each with its own value creation and capture approach, as shown in the NorthPeak example above.
Where do I find business model information in real company filings?
Look at segment reporting, revenue recognition policies, and management discussion and analysis sections in annual reports (10-K filings for U.S. companies).