What It Is:

A business model is the methodology that a company follows to generate revenue from its product or service offering.

How It Works/Example:

Companies follow different business models depending on their products and services. Companies choose or invent the model that will generate the most profit.  The model determines the sales and marketing strategies of the company, including branding, pricing, sales channels and potential partners.
 
For instance, mobile phone carriers often choose to sell mobile phone sets at very low prices and to generate most of their revenues from plans which are based on services consumed, such as minutes spent on calls. This model is attractive to investors as it generates an ongoing revenue stream along with the potential to offer new services and features in the future, for additional revenues.

Why It Matters:

Innovative business models can be no less important than innovation in products or services.  Technological advances have resulted in new business models pioneered by leading companies such as Google, Apple and e-Bay.