CFA Level I Exam · Business Models

Business Model Features and Types for CFA Level I

Updated 7 October 2026 · Fact-checked

A business model describes how a company creates value for customers and captures part of it as profit. To answer exam questions, identify the customer, the value proposition, the revenue source, the cost structure and the channel, then match the pattern to a type such as B2B, B2C or platform.

Understand Business Model Features and Types

A business model is a company's plan for making money. It explains who the customers are, what the company offers them, how it delivers it, and how it earns revenue and keeps costs under control. Analysts study it because it drives cash flows, risk and how much a firm can grow.

Think of two steps. First, value creation: the firm solves a problem or meets a need, such as a product, a service or a convenience. Second, value capture: the firm turns that value into revenue and profit, for example through a sale price, a subscription, a fee or advertising. A firm can create value and still capture little of it if competition is strong.

Typical features to look for are the value proposition, customer segments, channels (direct, retail, online, distributors), revenue streams, cost structure, key resources and partners, and pricing strategy. Pricing may be a one-off sale, a subscription, usage-based, freemium, or a commission.

Main types by customer:
- B2B (business to business): sells to other firms. Few, large customers, long contracts, negotiated pricing, concentration risk.
- B2C (business to consumer): sells to individuals. Many small customers, brand and marketing matter, demand is sensitive to consumer sentiment.
- B2B2C and direct-to-consumer (DTC) variants: reach end users through a partner or without intermediaries.

A platform (marketplace) model connects two or more groups, such as buyers and sellers, and earns fees or advertising. Its strength comes from network effects: each extra user makes the platform more valuable to others. Platforms often have low marginal cost but may need heavy early spending to attract users. Other patterns include subscription, franchise, and asset-light versus asset-heavy models.

Key formulas to remember

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.

How to solve Business Model Features and Types questions

Use this sequence for any question that asks you to describe, classify or evaluate a business model.

1Identify who pays. Is the customer a firm, an individual, or several groups?
2State the value proposition: what problem the product solves.
3Find the revenue stream: sale, subscription, fee, commission, advertising or licence.
4Check the cost structure: fixed or variable, asset-heavy or asset-light.
5Look at the channel and scale drivers: direct or indirect sales, network effects, economies of scale.
6Classify the type: B2B, B2C, platform or a mix.
7Judge the consequences: customer concentration, demand cyclicality, pricing power, and where the main risks sit.
8Pick the option that matches the facts in the stem, not general beliefs.

Quickest way: Who pays, for what, and how

When to use it: Use it when you have about 90 seconds and the stem describes a company in a few sentences.

Underline the customer (firm, individual, or two sides).
Underline how revenue is earned (fee, subscription, sale).
If two groups interact on the firm's service, think platform and network effects.
If few large customers sign contracts, think B2B and concentration risk.
Eliminate the two options that contradict a stated fact, then choose between the remaining.

Common mistakes in Business Model Features and Types

Treating a business model as the same as a strategy or a product list.
The terms sound similar.
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.
Students focus on who uses the product, not who pays.
Fix: Classify by the paying customer. A firm selling components to a phone maker is B2B.
Calling every online business a platform.
Platform is used loosely in news.
Fix: A platform needs multiple user groups that benefit each other. A retailer selling its own stock online is not a platform.
Assuming network effects always protect profits.
Overstating a strength.
Fix: Network effects can build advantage, but competition, switching ease and regulation can limit them.
Ignoring value capture.
Students stop at the customer benefit.
Fix: Always ask how the firm earns revenue and whether costs leave a profit.

Worked examples

Example 1

A company supplies cloud accounting software to mid-sized firms on annual contracts, with a dedicated sales team. Which best describes its model? A. B2C one-off sale; B. B2B subscription; C. Two-sided platform.

Show the solution

Who pays? Mid-sized firms, so the customer is a business.
How is revenue earned? Annual contracts, so a recurring subscription.
Are there two interacting user groups? No, the company simply sells to one group.
Eliminate A (customers are not consumers, and revenue is not one-off) and C (no two-sided network).

Answer: B. It is a B2B subscription model.

Example 2

An online marketplace connects independent sellers with shoppers and charges sellers a commission on each sale. It holds no inventory. Which statement is most accurate? A. Revenue depends mainly on its own product margins; B. Its value rises as more buyers and sellers join; C. It is a B2C retailer with inventory risk.

Show the solution

Two groups, buyers and sellers, interact through the firm, so it is a platform.
Revenue is a commission, not product margin, so A is wrong.
No inventory means little inventory risk, so C is wrong.
More buyers attract more sellers and vice versa, which is a network effect.

Answer: B. Network effects make its value rise as participation grows.

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.

Practice questions from Business Models

Business Model Features and Types in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Business Model Features and Types: frequently asked questions

What is a business model in CFA Level I?

It is the way a company creates value for customers and captures part of it as profit. It covers customers, value proposition, channels, revenue streams and costs. Analysts use it to understand cash flows and risks.

What is the difference between B2B and B2C?

B2B firms sell to other businesses, usually with fewer customers, larger orders and negotiated contracts. B2C firms sell to individuals, with many small customers and more reliance on brand and marketing.

What makes a platform business model different?

A platform connects two or more groups, such as buyers and sellers, and earns fees, commissions or advertising. Its value grows through network effects as more users join.

How do I explain a company's business model in an exam answer?

State who the customers are, what value the firm offers, how it earns revenue and what its main costs are. Then name the type and one key risk or strength that follows.