What is a business model and how do I pick one?

Daniels professor Andrew Schnackenberg defines the term business model and provides tips for picking the right framework for your business.

Whether you’re in the infancy of building your business or a decade in and looking for a change, finding the right business model for your firm is a crucial strategic decision.

Andrew Schnackenberg teaches strategic management at the Daniels College of Business and recognizes that business models can be challenging to define. In this article, he’ll share details on the types of business models, how to find the right one for your business and what you need to know before you choose a framework.

Andrew Schnackenberg

The Importance of Picking a Business Model

Selecting the right business plan is key to a successful business. Famous examples from business history such as Blockbuster and Netflix illustrate the importance of picking the right model for the business type.

Netflix’s Subscription-Based Model

Netflix saw an opportunity in the movie rental space and quickly entered with a subscription model in the late 1990s. It started by sending physical copies of DVDs to consumers’ homes and migrated to a streaming platform when technology advanced.

Now, it even produces its own movies and TV shows, a shining example of business model innovation.

While the company was doing all this, how did Blockbuster respond? Slowly, if at all.

Blockbuster’s lack of ability to change its brick-and-mortar business model, despite market pressures, led to its downfall.

Numerous other examples display the importance of picking the right plan out of the dozens of successful business models.

Types of Business Models

Common business models change as rapidly as the business landscape does. That being said, there are some standard models to consider when you’re forming or adjusting your business. The most popular include:

• Advertising-based business models
• Franchising or leasing business models
• Freemium business models
• Subscription business models

There are thousands more variations of business models including agency, wholesale and bundling.

Schnackenberg tries to simplify how companies should think about the varying types of business models.

“One way to think about it is a business model is a cognitive framework to explain, interpret and understand business activities,” he said.

Characteristics of an effective business model

When envisioning your company’s business model, it’s important to correctly identify the company’s strengths, weaknesses and priorities. Schnackenberg likes to compare it to a ladder with three rungs. The top rung is value, the middle is price and then the bottom rung is cost.

For managers, Schnackenberg recommends looking for ways to bridge the gap between each rung on the ladder. Between value and price is the value proposition. Between price and cost is a company’s margin.

And while it may seem like businesses can impact each of these rungs, Schnackenberg says the focus should be on value and cost. If value falls below price, customers won’t want to purchase your now overpriced product. If the cost to produce exceeds the price of sale, a business is losing money.

What to know before you choose

Like all strategic business decisions, the selection of the right business model is complex. You must gather insights from a variety of sources to make an informed conclusion on which model is right for you. Schnackenberg suggests a few places to start.

“It’s a strategic decision, like pretty much everything else in a business,” he said. “So, what are your capabilities? What do you do in the firm that’s valuable, rare, inimitable and non-substitutable?”

Maybe you’ve got access to some cheap goods that serve as a lead generator for higher ticket items; then you might consider the razor-blade model. If you have an efficient supply chain and your cost is a differentiator, the wholesale model might be the fit.

Once you’ve identified the capabilities, next comes putting them into action and looking at the long-term trajectory of your business. Schnackenberg rattled off a list of questions you should ask next.

• Where do you want to take this organization?
• Do you want to focus more on a certain niche?
• How broad or narrow do you want to focus your marketing strategy?
• Are you a producer? Are you a retailer, are you an intermediary?

“You’ll see the market opportunities, recognize what your capabilities are and then start doing an ongoing calculus on how to configure those things,” Schnackenberg said.

Once you decide on a business model, now what?

For newer businesses, the next step will be to secure funding. You’ll need to finalize your business model and begin to approach investors to infuse capital into your new business. By setting your business model, you’ll have a clearer understanding of how much money you’ll need and what it will be put toward.

For legacy businesses that are looking to change their business model, the next step will be to reconfigure internal processes and capital resources, Schnackenberg said. You’re looking at how to move things around to fit this new strategy you’ve laid out.

Can you change models on the fly?

Netfix is an example of a successful pivot, moving from mailed DVDs to streaming, and now to production. But the company is an outlier, Schnackenberg said.

“Most of the time, firms fail at changing business models and this is why they go out of business. Because they’re not paying attention,” he said. “And this is a very typical situation. In organizations, they can see the rising tide on the horizon. It’s not very hard to spot the vulnerabilities, yet they are unable to modify their business model in such a way that would enable them to adapt and evolve.”

He said examples of firms that are able to modify their business models are rare, but it’s almost imperative for the modern company. If you look at a list of all the organizations that have thrived over the last century, you’ll find that most of them don’t look anything like what they were founded to do. American Express was a delivery company, Marriott sold root beer and Wrigley started with soap before gum. Those were successes, but there are many multitudes more of failures.

“Thinking through all of that change is tremendously difficult and implementing it is even more difficult,” Schnackenberg said.

Learn the right model for you at Daniels

If you’re looking to learn more about business models and strategic decision-making, Daniels offers top-of-the-line coursework for undergraduate and graduate business professionals, as well as non-degree Executive Education.

Schnackenberg said Daniels stands out for its ability to keep its students informed on changes within the rapidly changing business world. This will prove crucial for developing a sustainable business model.

“Understanding what a business model actually is and understanding how to adapt in the face of tumultuous headwinds is going to be imperative for businesses to succeed over the next two to three decades,” he said. “If they’re not able to understand, incorporate and pivot to emerging technologies—in particular information technologies—they won’t succeed.”

Learn more about degree options at the Daniels College of Business, or reach out to our admissions team with any questions.