Lesson 2 of 7 · 13 min
Determining the business model
The business model answers five questions (what, to whom, how, for how much, and what the company relies on) and is the first step of company analysis because it tells the analyst what drives the numbers.
In short
- Determining the business model summarises the drivers of results, shows what needs more research and sets initial expectations. It sits in the 'company description' part of a report.
- Five elements: products/services, customers, sales channels (acquisition and delivery), pricing and payment terms, and resources, suppliers and partners.
- Many companies have a conventional model (retailer, resource producer); analysts focus on how the company differs from that model and from competitors.
- Information sources: the issuer, public third parties, proprietary third parties and the analyst's own primary research.
- A platform that sells on behalf of others is an agent: it reports only its commission as revenue (net basis), which makes its gross margin look high.
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