"Business Model" Explained

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Investors would do well to develop a solid understanding of the "business model" concept as they evaluate potential investments.

A firm's business model is simply the method by which it makes its money. For example, part of Wal-Mart's (NYSE: WMT) business model was initially to establish profitable stores in small communities that other discount chains had dismissed. (It's now establishing itself even in large cities.) Coca-Cola's (NYSE: KO) business model involves using its secret formula to manufacture syrup that it supplies to bottlers. By distributing its beverages through stores, restaurants, vending machines, and more, it's attempting to make its drinks easily available to anyone.

Online marketplace eBay's (Nasdaq: EBAY) business model is to connect individual buyers and sellers through a website, and to profit by charging fees and by taking a percentage of each sale -- all this without carrying any inventory. Fellow online commerce enterprise Amazon.com (Nasdaq: AMZN) has a different model that requires it to keep many products in stock, so they can be quickly shipped out to customers. Barnes & Noble (NYSE: BKS), like Amazon, sells many books, but it does so largely through a long chain of bricks-and-mortar stores -- representing yet another business model, one with higher overhead costs.

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