One of the most critical, and often misunderstood, decisions a startup founder will make is choosing the right business model. Your idea might be innovative, your team talented, and your timing perfect, but without a clear and viable way to deliver value and capture revenue, even the best startups struggle to gain traction.
This is why founders so frequently search for how to write a business plan and which business model is best. These two topics are deeply connected. A business model defines how your company works, while a business plan explains why it will work and how it will be executed.
Institutions such as Harvard Business Review, the U.S. Small Business Administration (SBA), SCORE, and academic programs like Boston University’s Entrepreneurship Certificate consistently emphasize that founders should not default to a model they’ve seen before. Instead, they should make a deliberate choice based on customer behavior, value creation, cost structure, and long-term scalability.
This article might help you understand the most common startup business models, compare their pros and cons, and show how each model shapes the structure of your business plan.
Business Model vs. Business Plan: Clarifying the Difference
Before choosing a model, it’s important to distinguish between the two concepts.
A business model describes how your company:
- Creates value for customers
- Delivers that value
- Captures revenue and profit
A business plan, on the other hand, documents:
- The market opportunity
- The chosen business model
- The execution strategy
- Financial projections
- Risks and assumptions
Harvard Business Review and Lean Startup–inspired methodologies stress that founders should treat the business model as a testable hypothesis, not a fixed decision. Your business plan should evolve as your model is validated, or invalidated, by real market feedback.
Key Questions to Answer Before Choosing a Business Model
Across resources from Boston University’s innovation programs, the SBA, and SCORE mentoring frameworks, several core questions consistently appear:
- Who is the customer, and what problem are you solving?
- How often does the customer experience this problem?
- How do customers prefer to pay for solutions like yours?
- What are your primary costs to deliver value?
- How scalable is the model without proportional cost increases?
Your answers will naturally guide you toward certain business models while eliminating others.
Common Startup Business Models and How to Choose Among Them
1. Subscription Model
Overview
Customers pay a recurring fee, monthly or annually, for continued access to a product or service. This model is common in SaaS, media, and membership-based businesses.
Pros
- Predictable, recurring revenue
- Typically, higher customer lifetime value
- Easier forecasting and planning
Cons
- Requires strong customer retention
- Higher pressure to deliver ongoing value
- Slower early revenue growth without scale
Business Plan Considerations
A subscription-based business plan must emphasize:
- Customer acquisition cost (CAC)
- Churn rate and retention strategies
- Monthly recurring revenue (MRR) growth
- Product roadmap and continuous improvement
Lean Startup principles, frequently discussed in Harvard Business Review, recommend testing pricing tiers early and iterating based on customer behavior rather than assumptions.
2. Transactional (One-Time Purchase) Model
Overview
Customers pay once per transaction, product, or service. This model is common in e-commerce, consulting, and professional services.
Pros
- Simple to understand and implement
- Faster revenue recognition
- Lower dependency on long-term retention
Cons
- Inconsistent revenue
- Higher reliance on ongoing sales and marketing
- Limited lifetime value per customer
Business Plan Considerations
Your business plan should focus on:
- Sales funnel efficiency
- Average order value
- Customer acquisition channels
- Repeat purchase strategies
The SBA’s sample business plans often show transactional models paired with strong go-to-market execution to offset the lack of recurring revenue.
3. Freemium Model
Overview
Users access a basic version of the product for free, with premium features available for a fee. This model is common in software and digital platforms.
Pros
- Low barrier to entry for users
- Rapid user base growth
- Strong word-of-mouth potential
Cons
- Conversion rates can be low
- Infrastructure costs for free users
- Requires clear differentiation between free and paid tiers
Business Plan Considerations
A freemium-focused plan must clearly define:
- Conversion assumptions from free to paid
- Cost to serve non-paying users
- Feature gating strategy
- Monetization timing
Boston University’s innovation coursework emphasizes that freemium only works when founders deeply understand user behavior and have strong analytics in place.
4. Marketplace Model
Overview
The platform connects buyers and sellers and takes a percentage or fee for facilitating transactions. Examples include B2B platforms, services marketplaces, and e-commerce aggregators.
Pros
- Scales efficiently once liquidity is achieved
- Network effects create defensibility
- Multiple revenue streams possible
Cons
- Difficult early-stage traction
- Requires balancing two customer segments
- Trust and quality control challenges
Business Plan Considerations
Marketplace business plans must address:
- Supply and demand acquisition strategies
- Incentives for early users
- Trust, safety, and quality mechanisms
- Unit economics at scale
Harvard Business Review frequently notes that marketplaces fail not because of poor ideas, but because founders underestimate the operational complexity early on.
5. Usage-Based or Pay-As-You-Go Model
Overview
Customers pay based on usage rather than a flat fee. This model is increasingly common in APIs, infrastructure software, and utilities.
Pros
- Aligns cost with value delivered
- Lower entry barrier for customers
- Attractive to enterprise buyers
Cons
- Revenue predictability challenges
- More complex billing systems
- Requires careful pricing design
Business Plan Considerations
Your plan should include:
- Usage forecasting assumptions
- Margin analysis at different usage levels
- Infrastructure cost scaling
- Pricing transparency
This model aligns well with Lean Startup experimentation, allowing founders to learn quickly how customers actually use the product.
Matching the Business Model to the Business Plan
Regardless of which model you choose, your business plan should include the following sections, adapted to your model:
1. Executive Summary
Clearly state:
- The problem
- The customer
- The business model
- Why this model fits the market
2. Market Analysis
Include:
- Target segments
- Buying behavior
- Competitive models in the market
SBA and SCORE resources strongly encourage founders to validate assumptions with real customer interviews.
3. Product or Service Description
Explain:
- How value is delivered
- Why customers will pay
- How the model supports differentiation
4. Go-To-Market Strategy
This section varies significantly by model:
- Subscription: onboarding and retention
- Transactional: sales velocity and conversion
- Marketplace: early liquidity strategies
5. Financial Projections
Tailor projections to your model:
- Recurring revenue metrics for subscriptions
- Volume-based assumptions for transactional or usage-based models
6. Risks and Assumptions
Harvard Business Review emphasizes that strong plans explicitly state what must be true for the model to succeed.
Final Thoughts: Choose Deliberately, Then Validate Relentlessly
Choosing a business model is not about copying what worked for another startup or following trends. It is about aligning customer value, revenue mechanics, and operational reality. Make sure you get guidance from an experienced attorney, a trusted tax professional, or ideally…both!
As emphasized by Harvard Business Review and Lean Startup methodology, founders should treat their business model as a living system, one that evolves through real-world testing and customer feedback. Your business plan is the tool that documents that evolution, communicates your thinking, and keeps your team focused on what truly matters.
The right model will not only help your startup survive…it will give it the foundation to scale with confidence.