A recent customer‐driven change of the understanding of service forces especially service firms to revise their strategies and following their business models as new market conditions require firm action. Our paper presents an analysis of how service firms innovate their business models in detail to cope with changing ecosystem conditions. We focus on theory building and approach this topic against the background of a qualitative, narrative research design. Our study contributes to business model innovation literature as it provides insights into the dynamics of business model innovation and presents an empirically grounded cycle model that details how service firms choose, invent, utilize, develop, and finally terminate a specific business model. In addition, we highlight cognitive and structural determinants affecting the positioning of a specific service firm business model in the identified lifecycle.