Business Models Matter

And why your "perfect" product is not enough.

Here’s a hard truth for most founders:

You can build the right product and still build the wrong business.

It’s uncomfortable to think about because in your head it makes no sense. “If I have the right product then people will buy it.” Maybe that’s true and people buy or use it, but it doesn’t mean you will make money or have sustainable growth.

The Business Model

There is an important lesson that is hammered into us at business school:

Businesses don’t fail because of their product, they fail because of their business model.

So what exactly does this mean? Well, to start my professor wrote down 4 questions on the board.

1. Who is the customer?

2. What does the customer value?

3. How do you make money?

4. Why does the math work?

If you can’t answer these questions, do not build your product yet. You are just guessing.

A business model is not a spreadsheet.

It’s not a pricing page.

It’s definitely not “I’ll figure it out later.”

A business model is the true story of how your business creates and captures value.

Value creation = product

Value capture = business model

But many people often assume value creation automatically leads to value capture. This is 100% not true. Many failed companies built something people loved ….. but they couldn’t translate that love into a profitable system.

Let’s explore some of these cases so you don’t think I’m full of shit.

Value Creation, Without a Business

Clubhouse is a perfect example of this. Have you ever heard of it? If yes, there’s no way you still use it. If not, well that’s my point.

Clubhouse is an audio-only social media app where users could join live “rooms” for conversations on various topics. Covid was the perfect catalyst for the app, and it exploded with users, celebrities on stage, and social hype that felt unstoppable. I still remember listening to Elon talk with Vlad Tenev (CEO of Robinhood) on Clubhouse about the GameStop stock hype.

But the product required a defensible business model, one that was never built. The network effects were weak, and it didn’t take long for X (I still call it Twitter) Spaces and Discord to basically copy the experience overnight.

Users came for the novelty but left as soon as it worse off.

Value creation → Yes

Value capture → None

Whoop had a similar problem early on. Athletes loved the device. The tech worked, but the economics didn’t. They were losing money on every piece of hardware shipped, hoping scale would magically fix cost structure.

Eventually, Will Ahmed and Whoop realized their device wasn’t the business model, the health analytics subscription was. The hardware was the part of the journey, but not the destination.

Whoop nearly ran out of money before they figured out the key lesson:

Your product is not your business model. People may love the product but you need to convert that love into cash.

When Growth Makes Things Worse

Sometimes a company nails the value capture early, but their business model is structurally designed to collapse with scale.

An example of this is Blue Apron. This was a food/meal prep delivery service that provided you with weekly ingredients and the recipes to then cook meals. I remember it gained a lot of early traction (my family actually used it for a little) and demand continued to grow.

But every additional subscriber introduced massive operational costs: cold chain logistics, custom packaging, complex fulfillment. Their margins were never able to improve with scale.

In business school we call this negative scale economics.

Essentially, the more successful you are the faster you bleed money. (If you do not realize your business model is wrong, like Whoop did.)

Once again, value creation does NOT equal value capture.

Companies That Actually Got It Right

When we look at companies that did it right, one thing becomes very clear: their business model is their competitive advantage.

It is easy to copy products or services, but successful companies differentiate by building a business model that cannot be replicated. The business model can be looked at as a system of inputs and outputs.

Company X and Company Y might sell the same product and have much of the same inputs and outputs, but Company X designed their system to work efficiently from the beginning. They figured out how to make the math work and have margins and unit economics that actually improve with scale. This will give you an extreme advantage against competitors with the same product but are going to “figure out the business model as they scale.”

So let’s look at some companies that created a competitive advantage through their business models.

Costco did this to perfection. They barely make money on the things they sell, but their margins come from the membership. New memberships have consistently grown YoY and they have a 92% renewal rate every year in the US (89% globally). Actually insane numbers and there is a reason why the stock is valued where it is. Costco embedded psychology into their business model. Customers have already bought the membership, so it feels wasteful if they don’t shop at Costco. It has created an insane level of stickiness.

Another unbelievable business model: Liquid Death. Now remember, a business model is more than the financials, but it tells a story. Liquid Death completely turned the water industry upside down. They didn’t compete on price (a race to the bottom), they completely changed the narrative. Liquid Death competes on brand, identity, and distribution pull. They turned a commodity into a statement and created pricing power within an industry that never had that before. You can think what you want about paying $6 for a can of water, but it’s hard to argue with a $1.4 BILLION valuation.

Lastly, let’s look at Shopify. They rode the e-commerce wave by creating the infrastructure for entrepreneurs and thousands of small businesses to build their own online stores. The subscription model worked extremely well because the owners of these stores will continue to pay to use the tool. But that wasn’t it. Every single dollar that flows through these online businesses, Shopify takes a cut. From payment processing to shipping to financing to apps to themes, every single feature was carefully planned to create value for the customer but to allow Shopify to capture that value. And once a seller is established on Shopify, it is extremely hard for them to leave. Shopify created a product people wanted, but its business model created a sticky ecosystem that keeps customers around and grows with them.

So just remember, the right product is nothing without the right business model.

And that’s the uncomfortable truth for many.

Which brings us to the billion dollar question:

How Does Business School Actually Teach Us to Design a Winning Business Model?