A business model connects customers to cash

Learning goals

• Describe value creation, delivery and capture using unit economics.
• Compare recurring, transactional, platform and asset-heavy models without confusing scale with profit.

Draft · approximately 45 minutes, excluding further revision.

Ask who pays, why and when

A business model explains customers, their problem, the proposed value, delivery activities, revenue mechanism, cost structure and required resources. A product description alone is incomplete. Identify pricing power, retention, distribution, supplier dependence and the cash-conversion pattern. Revenue growth can coexist with losses, dilution or working-capital strain.

Subscription models depend on recurring price, churn and service cost. Transaction models depend on volume and margin per transaction. Platforms may connect groups and benefit from network effects, but can face multi-homing, subsidies and trust costs. An asset-heavy operator needs capacity, maintenance and financing; utilization can create operating leverage. Hybrid models require separating segments rather than applying one label to every activity.

Unit metrics need definitions and cash context

Contribution per unit is price less variable cost under a stated cost definition. Break-even units are fixed operating cost divided by positive unit contribution, but capital costs, tax and working capital remain outside that simple calculation. For a fictional commission-only platform, net commission revenue may be modeled as transaction value times take rate; gross transaction value is not automatically the issuer’s recognized revenue. Actual accounting depends on contractual roles and applicable standards.

Customer acquisition cost and lifetime contribution should use compatible cohorts, margins and horizons. An undiscounted, constant-churn approximation is monthly contribution divided by monthly churn; it assumes stable behavior and excludes many uncertainties. Growth can destroy value if acquisition, retention, financing and operating costs exceed durable contribution. Challenge rosy unit metrics against actual cohort cash flows.

Formula and assumptions

Unit contribution=price−variable cost; break-even units=fixed cost/contribution; toy undiscounted lifetime contribution=monthly contribution/churn

A subscription model before capital costs

1. 1,000 subscribers pay 20 per month; variable service cost is 8 each; fixed monthly operating cost is 9,000. Contribution=12,000 and operating result=3,000 before other excluded items.
2. Break-even subscribers=9,000/(20−8)=750 under constant pricing and cost assumptions.
3. Monthly churn 2% gives an illustrative undiscounted lifetime contribution 12/0.02=600. Acquisition cost 300 gives simple contribution payback 25 months. Neither result proves a profitable business after all costs or stable retention.

Calculation lab

Errors to catch

• Reporting transaction volume as recognized revenue without examining the contract.
• Comparing customer metrics with incompatible cohorts or ignoring capital needs.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov