CFA Level I · CFA Level I Exam

Business Models: formula sheet

Full chapter guide

Key formulas

Value creation and capture: Value created for customers → portion captured as revenue → profit = revenue − costs; A framework, not a calculation. Strong value creation does not guarantee profit.
Core business model elements: Customers + value proposition + channels + revenue streams + cost structure + key resources; Use this checklist to describe any firm's model.
Network effect: More users on one side → more value for other side → more users; Defines platform models. Can be positive feedback that builds scale.
Type by customer: B2B = sells to firms; B2C = sells to individuals; platform = connects groups; A firm can mix types, for example selling to consumers and businesses.
Core components of a business model: Customer segments + Value proposition + Channels + Revenue streams (with pricing) + Cost structure; This is a framework, not a calculation. Know each component and how they link.
Profit per unit: Profit per unit = Price − Variable cost per unit; Use contribution per unit (price minus variable cost) to see how much each sale helps cover fixed costs.
Operating profit: Operating profit = Revenue − Variable costs − Fixed costs; Links pricing and revenue (inflows) to cost structure (outflows).
Breakeven quantity: Breakeven units = Fixed costs ÷ (Price − Variable cost per unit); Higher fixed costs raise the breakeven point. Higher price or lower variable cost lowers it.
Maximum loss: sole proprietor or general partner: Loss exposure = business investment + personal assets (unlimited); Creditors can reach personal assets. In a general partnership liability is often joint and several.
Maximum loss: shareholder or limited partner: Maximum loss = amount invested (limited liability); Limited partners keep this protection only if they do not manage the business.
Agency relationship: Principal (shareholders) → hires → Agent (managers); Agency costs arise from monitoring and from divergent interests. Ownership and control separate most in large corporations.
Double taxation (typical corporation): Profit taxed at corporate level, then dividends taxed at shareholder level; Not universal. Many partnerships and sole proprietorships are taxed only at owner level (pass-through).

Quick revision

A business model explains how a firm creates, delivers and captures value.
Core features: customers, value proposition, revenue streams, cost structure and channels.
The value proposition is the benefit offered to the customer that makes them choose the firm.
Know how revenue is earned in each type: one-off sales, subscriptions, fees or commissions, advertising.
Platform and marketplace models connect two or more groups, so growth in one group can attract the other.
A sole proprietorship has one owner who is personally liable for the business debts.
Partnerships share ownership and, in general partnerships, liability among partners.
Corporations are separate legal entities with limited liability and easier access to outside capital.
Risks include competition, changing customer needs, technology change and regulation.
Innovation can renew a model, but it can also make the existing one obsolete.
Sustainability asks whether the model can keep earning returns while managing environmental, social and governance factors.
In three-option items, remove the extreme option first, then compare the last two against the stem.

Common mistakes

Treating a business model as the same as a strategy or a product list. Fix: Business model is how the firm creates and captures value. Strategy is how it competes. Answer with the value and revenue logic.
Classifying a firm as B2C because the end user is a consumer. Fix: Classify by the paying customer. A firm selling components to a phone maker is B2B.
Treating pricing and cost structure as the same thing. Fix: Pricing is what the customer pays. Cost structure is what the company spends. Inflow versus outflow.
Confusing the value proposition with the product description. Fix: Ask why the customer would choose it over alternatives. The answer is the value proposition.
Saying a limited partner always has limited liability. Fix: Remember limited partners are protected only if they do not take part in management. Every limited partnership needs at least one general partner with unlimited liability.
Assuming all corporations suffer double taxation. Fix: Treat it as typical, not universal. Tax rules vary by country and by entity type, so go by what the stem says.
Treating any large market share as a durable competitive advantage. Fix: Ask whether the share is protected by switching costs, network effects, cost advantage or IP. Share alone can be competed away.
Assuming innovation always raises value. Fix: Innovation costs cash and can fail. Value rises only if it renews the advantage or earns returns above the cost of capital.

Exam tips

Classify by the paying customer, not the end user.
Look for two user groups in the stem as the signal for a platform model.
Expect questions linking a model to risk, such as customer concentration in B2B or demand swings in B2C.
Choose the option that fits the stem's facts; check absolute wording carefully rather than assuming it is wrong.
With no penalty for wrong answers, never leave a question blank.
Match the stem's key phrase to one component label before reading the options.
Watch for items where the user does not pay, such as advertising-funded models.
Remember the three-option format: usually two options describe other components, so eliminate by label.