Business Models as Systems

Designing your business model is about systems thinking

What is a business model

“All it really meant was how you planned to make money” — Michael Lewis

At the fundamental (level 1) a business model is about how you plan to make money. This post isn’t going to be a long overview of what a business model is, but instead want to focus on two levels of thinking about business models:

  • Level 1 — This is what you probably are most familiar in hearing. Someone may say they have a subscription business model or a freemium business model.
  • Level 2 — This is where you start to look at the system that is created by a company to generate money and the tradeoffs required

I’ll focus most of the post on Level 2 as this is where decision making is put to its test.

Business Model Level 1

The graphic below does a great job of what most people think of as a business model. This is a great place to start when thinking about your business model as it conveys the major revenue generating models.

Source: “What is a business model”

I used the above set of models to think through which revenue model would most fit the product we had. In fact this was a useful tool as we were starting our business model transformation from a subscription to transaction model. Subscription models have been all the rage given the recurring revenue stream, the downside with a subscription model is that it is very challenging to balance the value delivered to a customer (as seen in the image below).

Business Model — Level 2 Thinking

The above does a good job of starting to layout various business models to generate revenue around your product. The next level of thinking is to design the full system of your business model. I’ll highlight two tools for going deeper in your business model design.

Business Model Canvas

In business school I was introduced to the business model canvas. The work that Alex Osterwalder did to pull this together is quite great. Here is his definition on a business model which drives the design of this tool:

A business model describes the rationale of how an organization creates, delivers and captures value.

The Value Prop canvas on its own is a great tool to look at customer pain points and jobs to be solved. The value of the business model canvas is to think through all of the components that are required for a business to generate revenue.

The book does a great job laying out the various options for each segment. The key to making it useful is to think through a system view of the components. The design of the model is such that it forces you to think through specific situations, like how do you communicate your value prop through your desired channels to customers. A few example questions:

  • if you are targeting a specific customer segment which channels to market maximize the value?
  • if you want to build strong relationships with customers what does that mean in regards to your revenue model and channels?
  • how do you structure your costs to generate profits to deliver the value prop?

The Grid

Another similar model is called “The Grid” (linked here). This is a newer one to me that I saw last year. This one is similar to the Business Model Canvas, though I find does a better job of helping me think through the business model as a system. In addition, it has more focus on the customer — which let’s be real should be the core of any business model. The image below is an example the author had put together — which shows that it is really a business on a page.

This model is also great as a way to check the boxes and think through various elements. It brings together elements of Porter’s 5 Forces along with the 4 P’s of Marketing. There are ~27 elements, but this can helpful to evaluate all of the various components to ensure that you don’t move too quickly to change your business model.

I like this business on a page view to identify conflicts, but like the canvas it is helpful to structure and identify tradeoffs. Here are a few examples:

  • Do we have the cash required to pursue the initiative?
  • What is the impact if we focus on improved retention?
  • Should we invest more in additional channels to market or improve the customer value prop?

Business Model System Design Example

I came across this article and image below that is one of the best examples I have found on designing a system around a business model to highlight tradeoffs. This is more advanced than I have seen, but is something I strive for in thinking about the feedback loops that drive a business.

Source: 2nd Horizon

In Closing

There is more to a business model than the basic revenue model. It can be helpful to anchor on a specific revenue model to then go deeper on the full design of your business model. I find systems thinking extremely helpful when when you design your business model to evaluate the various tradeoffs for the system design.

I’ll close out with this quote from Jeff Bezos’s 2015 Shareholder letter that highlights why it is important to think through your business model decisions. While a business model can be changed, it is not an easy process and can result in higher customer churn initially.

Some decisions are consequential and irreversible or nearly irreversible — one-way doors — and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that — they are changeable, reversible — they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.