CFA Level I · CFA Level I Exam
Business Models for CFA Level I: Chapter Guide
A business model describes how a company creates, delivers and captures value: who its customers are, what it offers, how it earns revenue and what it costs to run. For the exam, you classify a model, link it to its risks and legal form, and judge whether it is sustainable. Each question has three options, so practise eliminating two.
What this chapter covers
This chapter explains how a company makes money and why it can keep doing so. You learn the main features of a business model, such as the customer segment, the value proposition, the revenue streams, the cost structure and the way the firm reaches customers. You then see common types, such as manufacturing, platform, subscription, and marketplace models. After that, you look at legal forms, from sole proprietors and partnerships to corporations, and at the risks, innovation and sustainability issues that can change a model over time.
The chapter is mostly conceptual. There is little calculation, so the marks come from precise vocabulary and from applying definitions to short case descriptions. Expect stems that describe a company in a few lines and ask you to name the model type, the revenue driver, the main risk or the legal form that fits.
It connects to the rest of the paper in three ways. In Corporate Finance, the legal form and the ownership structure affect how a firm raises capital and who bears risk. In Equities and Financial Statement Analysis, the business model explains the revenue pattern, margins and capital needs you see in the statements. In Ethical and Professional Standards, sustainability and governance themes show up in how you judge a firm's long-term prospects.
This chapter is a low-calculation, high-return area. The ideas are easy to learn in a few sessions, and a candidate who knows the terms well can answer these questions quickly, saving time for harder numerical items. The same ideas also help you in later topics, because understanding how a firm earns revenue and bears risk makes valuation, financial statement and capital structure questions easier to reason through. All questions carry equal weight and there is no penalty for wrong answers, so every item you secure here counts.
Business Models: topics in the order to study them
- 1Business Model Features and TypesStart here to learn the basic vocabulary and the main model types that the rest of the chapter builds on.
- 2Business Model Structure and Value PropositionOnce you know the types, learn how a model is built: customers, value proposition, revenue and costs.
- 3Business Models: Sole Proprietors to CorporationsNext, link the model to its legal form, because ownership, liability and capital access follow from it.
- 4Business Model Risks, Innovation and SustainabilityFinish with risks and change, as they test whether you can judge a model using everything learned earlier.
How to prepare Business Models
Treat this chapter as a vocabulary and application chapter. Aim to recognise a model from a short description and name its key features and risks.
- Read each topic once at a steady pace and write a one-line definition for every term in your own words.
- Build a comparison sheet of the model types, with how each earns revenue, its main cost drivers and a typical global example.
- Learn the legal forms side by side: ownership, liability, ability to raise capital, and how profits are taxed or shared in general terms.
- Practise by describing a well-known company, such as a streaming service or an online marketplace, using the features of a business model.
- Do short three-option questions after each topic. For every wrong answer, note which definition you confused.
- Practise elimination: remove the option that is too extreme or mismatched to the stem, then choose between the remaining two on the key feature.
- Revise your comparison sheet two days before the exam and again on the final day.
Common mistakes in Business Models
Confusing the value proposition with the revenue model
Fix: Remember that the value proposition is what the customer gets, and the revenue model is how the firm is paid for it.
Mixing up legal forms and their liability
Fix: Compare them side by side on owners, liability and capital access, and tie limited liability to the corporation.
Naming a model type from one detail in the stem
Fix: Read the whole description and identify how the firm earns revenue and who the customers are before you choose.
Treating innovation as always positive
Fix: Note that innovation can both strengthen a model and threaten it, and choose according to the context in the stem.
Skipping this chapter because it has no calculations
Fix: Allocate a fixed short block of time and practise questions, since the marks are equal and the terms are easy to secure.
Last-day revision: Business Models
- 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.
Business Models practice questions
- A company sells a subscription analytics platform to mid-sized retailers. Its management describes who the customers are, what problem the p…
- A company sells subscription software and relies on a single large customer for most of its revenue. Which risk to its business model is mos…
- A restaurant brand grants independent operators the right to use its name and operating system in return for an initial fee and ongoing roya…
- A business model describes how a firm identifies its customer segments. A software firm sells one product to large corporations and a free, …
- A company sells razors at a low price and earns most of its profit from recurring sales of proprietary replacement blades that fit only its …
- Company X sells printers at a small margin and earns most of its profit from proprietary ink cartridges bought repeatedly by printer owners.…
- A software firm gives its basic product free of charge and earns revenue only from a small share of users who upgrade to paid premium featur…
- An analyst assesses a mining company's business model. Management has signed long-term offtake contracts but faces rising carbon-pricing reg…
Business Models in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Business Models: frequently asked questions
Is Business Models a calculation-heavy chapter in CFA Level I?
No. It is mainly conceptual, so you rely on definitions and on applying them to short descriptions of companies. You do not need a calculator for it. Focus on clear terms and comparisons.
How long should I spend on the Business Models chapter?
Because it is concept-based, a few focused sessions are usually enough for a first pass. Add short practice sets afterwards. Spend more time on chapters where you score lower in mock tests.
How does this chapter help with other CFA Level I topics?
It gives you the reasoning behind revenue patterns, margins, capital needs and ownership structure. That helps in Financial Statement Analysis, Equities and Corporate Finance, where you must interpret how a firm earns and funds itself.
What is the best way to answer these questions in the exam?
Read the stem for how the firm earns revenue, who its customers are and what form it takes. Eliminate the option that does not match, then choose between the last two. Since there is no penalty for wrong answers, always answer.