Episode 4 in the #ArtsManaged video series explores the concept and components of a “business model.” As I continue the search for the cleanest and clearest definition, I’m still drawn to Alexander Osterwalder, Yves Pigneur, et al’s version in Business Model Generation: “A business model describes the rationale of how an organization creates, delivers, and captures value.”
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If you work in the world of nonprofit arts organizations, someone is bound to come up to you and say that your business model is broken. This will probably be a funder or foundation program officer or a board member or an entrepreneurial friend.
So what do you say in return? What is a business model? And how might it be broken?
Hi, I’m Andrew Taylor. I’m on the faculty of Arts Management at American University in Washington, DC. And this is ArtsManaged a series of resources about arts management: what it is, how it works, how you might get better at it. In this video, we’re talking about a business model, what it is, and why you might care about it.
So let’s start with some basic definitions. A BUSINESS is a durable arrangement of people, money, and stuff, usually organized around a particular set of purposes or outcome goals, and usually intended to exist over a period of time.
A MODEL is an idealized or simplified representation of something, a system or process or entity. So a model is our way of understanding something complex, the way it works in itself, and the way it works in the world. So a BUSINESS MODEL is an idealized or simplified representation of a business, of that aggregate of people, money, and stuff and how it works in and with the world.
A business model is a bundle of assumptions about what the organization does, how it does it, how it reaches the world, who it reaches, and what they value about its work. It also carries assumptions about the technology, the superstructure, and the supporting systems that make that business work.
In the for-profit world, business models tend to focus primarily on financial aspects: How the enterprise might earn net profit over time or increase its net worth to its shareholders. Although this is also true in the nonprofit world. Nonprofits also have to meet their budgets, they have to make payroll, they have to continue operations in a world that needs money. As my colleague Clara Miller says: “There’s really only one business model, and that’s reliable revenue that meets or exceeds expense.”
But of course, in the nonprofit world, we’re talking about many other things beyond profit. As you heard in a previous video, nonprofits are part of the plural sector. And the plural sector has a social logic. They’re entities intended to generate social benefit and social good, drawing from social resources.
So a nonprofit business model has to include not only financial considerations, but also the social, the political, the contextual, and the other aspects of value that it’s trying to create into the world.
So I do like the definition from Business Model Generation that suggests a business model describes the rationale of how an organization creates, delivers, and captures value. So again, a business model describes the rationale, your understanding of, how an organization creates, delivers, and captures value.
Every business on this planet has a business model, whether or not the people within it can describe it out loud. We all carry assumptions about how the business works, about how it generates value, about how that value meets an audience, and about how it sustains itself operationally over time. So the trick is to make your business model explicit. You already have one that’s implicit. So talking with your colleagues about what it is you do in the world, and how you understand that work, is the essential work of building an explicit and intentional business model.
It’s important to note that a business model is not the business it is your shared and collective understanding of what the business is, how it works, and how it reaches out into the world. Just like a map is not the terrain, a business model is not the business. It is a representation, internally and among a group of people, about how the business works. And that representation and all those assumptions help you decide what to do and when to do it and how to do it. So the key point in business model development is to first understand “what is our current understanding of this business?” “How can we bring forward our implicit assumptions about what we do and how we do it, who we reach and what they value?” And some of the clues around those questions are in that definition from Business Model Generation. Remember, a business model describes the rationale of how an organization creates delivers and captures value.
So where and how does your organization create value? This is an internal conversation, certainly, among those who make the work or make the work available to the world. What is it that caused you to make that work? What are the standards of excellence or care that you hope to bring it into the world? What are the things that draw you and pull you to make the work available in its best possible form? But there’s also an external conversation. What is it that others experience: our audiences, our supporters, our communities, our neighbors? What is it about our work that brings value to their lives to their lived experience?
Surprisingly enough, it’s really useful to ask them.
Second is the question is how do we deliver that value? So where and how does that value come into contact with other people? This can be through live experience. So we do it through a theater and a live performance event. We do it through a gallery, through a shared open space during business hours. We do it online through online services or platforms, through social media. We do it around town at pop up shows or exhibits. Where and how does that value get delivered into the world? Capturing value is a question about where and how resources flow back to your organization and its operations, so that you can make more, different, and better work in the future. This can come in the form of earned income, as we said in previous videos: through ticket sales through gate fees through event fees through others forms of payment. Or it can be contributed income through gifts and grants from individuals, foundations, governments.
So the question then becomes: How do we imagine a coherent organization that creates, delivers, and captures value in ways that make us sustainable and, even more than that, vibrant in the world, able to take risk, to make risk, to absorb difficult choices, and to make better choices over time.
That’s what a business model is about. And describing it is a key aspect of your work together and making the organization all it can be.
Now, a business model overlaps, obviously, with the ten functions identified in a previous video. Go check it out if you haven’t already. And all of those ten functions are oriented toward the positive outcome of the model you have in your head. So you’re imagining you’re a theatre company, we’re a professional theatre company, our way of creating value is to gather extraordinary professionals, actors, directors, playwrights, stagecraft professionals in an outstanding physical space. That’s where we deliver the value. And we capture value back through earned income and ticket sales, through corporate sponsorships, through grants and gifts. So that might be your business model. And then your ten functions all have to align in ways that amplify that business model into the world and capture when that business model is drifting out of fit.
The other problem with business models is that they will invariably be wrong. As George Box says in one of my favorite quotes: “All models are wrong, some are useful.” That just means that models are necessarily idealized and simplified abstractions of a system. They are not the system, just like the map is not the terrain. They are our best effort to capture the most essential dynamics of a system so we can behave in ways that are positive and move us forward in that system.
So your business model is wrong. The question is whether that wrongness is material or important to the work you’re doing.
So how do you figure out whether and how your business model is wrong? Well, one of the key rules is you cannot develop and sustain a business model that only includes insiders. A business model is your internal assumption about how the business works. And therefore it’s always going to be flawed because you only have an internal view. You want to engage in constant conversation with people outside the enterprise: those who experience it, those who love it, those who hate it, those who support you, those who don’t support you. You want to get perspectives there about “What kind of value do we create in your lives? Where and how do you experience that value?” In other words, where is it delivered? “Where and how could we or do we capture value from that work and that value we bring into the world?”
These questions have to be asked across multiple audiences over time, over and over again, because the world is always changing.
Another way to reality check your business model is to look at actual evidence. Look at your past performance, your activities, your outcomes. Do those align with your assumptions about what you think you do in the world and how you think you do it? One of the easiest ways to do this I learned from Kate Barr at Propel Nonprofits. She suggests that you look at the top three revenue sources on your annual budget, and even the last three annual budgets. And you also look at the top three expense categories on those budgets. That will give you a lot of clarity around what it is you actually do in the world, where you spend your attention, at least as evidenced by where you spend your money, and also what audiences or values you’re providing based on the revenue sources that come back into your organization. So for example, if you have a business model in your head that you are an educational institution, but it’s not one of your top three expenses or revenue sources, it might be worth questioning whether or not your assumptions are right.
A business model is a simplified and idealized representation of a very complex thing. The model is not the business. But your model that you carry and your colleagues carry with you defines and derives and drives the business into the way it’s going to be. Your assumptions about how it works will lead you to make choices, will lead you to look for evidence and avoid other evidence. So the way you understand your business is a really important part of doing the work itself.
So if somebody does wander up to you and say, “Hey, nonprofit arts leader, your business model is broken.”” There’s two things you can say back to them. One is: “Tell me more about that. What do you imagine to be our current business model?” And second, “How do you imagine it is broken?”
That tends to be the pathway to a more productive conversation both about your own understanding of the model and the business and how it works in the world, but also other people’s understanding, and how you might think together about making the model a little more useful and a little less wrong.