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The Benefits of Subscription Payment Models: How They Can Benefit Your Business
In today’s fast-paced digital age, subscription payment models have become increasingly popular among businesses of all sizes. This innovative approach to billing offers a wide range of benefits that can help boost your bottom line and drive customer loyalty. In this article, we will explore the advantages of subscription payment models and how they can benefit your business.
Predictable Revenue Streams
One of the primary benefits of subscription payment models is the ability to generate predictable revenue streams. Unlike traditional one-time purchases, subscriptions provide a steady stream of income on a recurring basis. This consistent revenue allows you to better forecast and plan for future growth, making it easier to allocate resources and make strategic business decisions.
Increased Customer Lifetime Value
Subscription payment models also have the potential to significantly increase customer lifetime value. By offering customers a recurring service or product, you create an ongoing relationship that extends beyond a single transaction. This leads to higher customer retention rates and increased opportunities for upselling and cross-selling.
Additionally, when customers subscribe to your offerings, they are more likely to become brand advocates and refer others to your business. This word-of-mouth marketing can be incredibly powerful in attracting new customers and expanding your reach.
Enhanced Customer Experience
Subscription payment models often come with added perks that enhance the overall customer experience. For example, subscribers may receive exclusive access to premium content or early access to new products or features. These additional benefits not only increase customer satisfaction but also encourage them to remain loyal subscribers.
Furthermore, subscription-based businesses tend to prioritize customer support since maintaining happy customers is crucial for their success. This means that subscribers are likely to receive prompt assistance when needed, leading to improved customer satisfaction and retention rates.
Flexibility in Pricing Options
Another advantage of subscription payment models is the flexibility they offer in pricing options. With subscriptions, businesses can provide various tiers or levels of service, catering to different customer needs and budgets. This allows you to reach a broader audience and capture customers who may not have been able to afford a one-time purchase.
Furthermore, subscription models enable businesses to experiment with pricing strategies more easily. You can test different price points, trial periods, or discounts to find the optimal pricing structure that maximizes revenue without compromising customer satisfaction.
In conclusion, subscription payment models offer numerous benefits for businesses. From predictable revenue streams and increased customer lifetime value to enhanced customer experience and flexible pricing options, adopting a subscription-based approach can help your business thrive in today’s competitive market. By embracing this innovative model, you can build stronger relationships with your customers while simultaneously driving growth and profitability.
This text was generated using a large language model, and select text has been reviewed and moderated for purposes such as readability.
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What is a Digital Business Model?
A brief explanation and introduction
Definition of digital disruption
A digital business model is a form of creating value based on the development of customer benefits using digital technologies. The aim of the digital solution is to generate a significant advantage for which customers are willing to pay.
The development of digital business models is an important task for companies being confronted with digitalization and digital disruption . The mere extension of an existing analogue business model by a digital component (e.g. online ordering of goods from a stationary retailer) is a preliminary stage, but not an independent digital business model.
Characteristics of digital business models
Digital business models have different characteristics, several of which usually apply simultaneously.
The added value generated would not be possible without the use of digital technologies. Amazon, Uber and Airbnb are companies that would have no business without the technologies of the Internet. Amazon might be a local marketplace today, Airbnb a room agency in several cities and Uber a taxi center or a carpool agency.
The business model is characterized by digital business innovation . Digital business models are based on services that are new to the market.
Customer acquisition and distribution are based on digital channels. Companies that develop and drive digital business models mostly use digital technologies to reach potential audiences. Sales are characterized by trends such as sales automation and early onboarding. (see Freemium Model)
Customers are willing to pay for the digital service or the service. Digital business models thus create a unique customer value that can be monetized.
The willingness of customers to pay and thus the independent creation of value is a striking feature of a digital business model. Purely digital services, e.g. the possibility of monitoring energy consumption via an app, are digital offers, but not digital business models.
Types of digital business models
Customers receive parts of the digital service (e.g. limited functions of software) free of charge. This serves to manage the onboarding process with as little sales effort as possible.
The Freemium model follows the principle of competence standardization: Previously personnel-intensive activities such as sales were made more efficient by automatic processes. The challenge for companies is to successfully manage the upgrade from the Freemium version to a paid version.
Similar to Amazon, a digital platform functions as an intermediary marketplace for products and services: Supply and demand are brought together. Digital business models that follow this model derive their added value from the fact that a large number of independent players are active on the marketplace and regular transactions take place.
The marketplace model can work alone or represent the extension of an existing offer of a company. A property management company that allows external service providers such as cleaning staff or the bakery service to be integrated into a tenant app already has a digital business model in the form of a marketplace – although in this case only on a very small scale.
Using instead of buying
This digital business model enables another form of use of an asset (e.g. software, automobile or machine). It is no longer the possession, but the consumption or use of an asset that is monetarized. Digital technologies make it possible to measure consumption or usage. In the field of car sharing, for example, both the rental and the return as well as the kilometres or miles driven are billed. In the case of machines, payments can be made, for example, according to the operating time, the number of units produced or other data retrieved from the machine.
Digital business models based on the “use instead of buy” principle can help companies to reach new target groups (e.g. those who have been reluctant to invest so far) or to remain competitive and to offer customers an attractive digital business model before potential competitors do so.
Example of a digital business model in the sharing economy.
Development of a digital business model
Toothbrushes can become digital business models.
There are a number of questions to answer when developing a digital business model. These questions are discussed as part of an innovation process in innovation management , often using methods such as Open Innovation . The focus is on future customer benefits.
This will be explained using the example of a toothbrush and a drilling machine. The customer’s benefit is not the possession of the toothbrush, but clean and healthy teeth. Also, owning a drilling machine is not the customer benefit, it is the hole. If it would be possible to sell holes in the wall digitally, this digital business model would certainly be a strong competitor for drill manufacturers.
The development of digital business models therefore begins with a profound analysis of a company’s future role in the market:
- What is the real problem behind buying existing products?
- Where do your existing products and services solve these problems well?
- Where do problems exist that have not yet been solved?
- In which areas does a product possibly create new problems that have not yet been solved?
- What problems and challenges do customers face in developing their own digital business models?
- What problems and challenges will customers face in the future?
Digital business models for a mechanical engineering company
Digital business models: New markets for mechanical engineering companies
This is illustrated by the example of a mechanical engineering company. So far, the machines have helped companies to manufacture products highly efficiently. However, extensive problems in connection with the use of the machine were not solved:
- Fluctuations in orders : The company has to cope with volatility in orders. Sometimes the machines are not working at full capacity, at other times production capacity would have to be increased. By connecting machines and developing a marketplace, the machine builder can offer valuable additional services: utilization-oriented invoicing ( use instead of purchase ) or a brokerage of production capacities (“marketplace model”) can be the basis for successful digital business models.
- Staff training : Monitoring the machine requires precise training, which is costly and time-consuming. Teams of experts must be on site in each shift to monitor the machine. Error messages must be detected and corrected on site. This requires precise shift planning to ensure that qualified staff are available around the clock. The machine manufacturer can develop digital business models as a solution here: for example an online academy for improved training or a 24-hour service center with networked technicians who monitor the performance of machines worldwide and, if necessary, switch on via web conferences.
- Lack of skilled workers : In future, customers of the machine manufacturer will have more and more difficulties finding qualified personnel to operate and maintain the machines. For the mechanical engineering company, this gives them the opportunity to establish their own worldwide online academy and offer qualifications as a digital business model. The development of digital business models is therefore initially based on an intensive analysis of current and future customer problems. The second step is a technology analysis: a list of the technological possibilities to solve the identified customer needs with the help of digital technologies.
A digital business model is the result of the interaction between customer needs and possible available technologies. Companies that develop digital business models often use innovation management methodologies here. Prototypes are developed, which are tested and verified in the market. When developing a digital business model, it is not crucial to develop the “perfect” digital business model from the very first second. The innovation process is iterative and characterized by many loops. The Innolytics Innovation Software supports idea generation and the development of a Digital Roadmap for digital business models.
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Digital Business Models: All You Need To Know
Published: 06 September, 2023
Table of Contents
In today’s world, there is a widespread acknowledgment of the presence and validity of modern technologies and software solutions. The term “Artificial intelligence” is now a household term, with most individuals having a basic understanding of its meaning. However, a persistent area of ambiguity, even among some chief executive officers (CEOs), pertains to the concept of digital business models and the factors that make them exceptionally successful.
Recognizing the importance of digital business models transcends mere relevance; it stands as a strategic necessity for organizations across various sectors and scales. Within this context, Digital Leadership steps in to offer Digital Transformation Solutions and Business Model Strategy services, equipping organizations with the necessary tools, technologies, and strategies to adeptly navigate the complexities of this transformation. Our expertise extends to assisting businesses in rethinking their current models or crafting entirely fresh approaches that harmonize seamlessly with the digital terrain.
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In an era marked by rapid technological advancement and evolving consumer behaviors, gaining a deeper comprehension of these digital business models is imperative for anyone looking to thrive in the ever-changing landscape of commerce. In this discussion, we will explore what digital business models entail and delve into the reasons behind their remarkable effectiveness in today’s business environment .
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What are digital business models?
Let’s delve into the fundamental underpinnings of digital business models . As with all comparatively new terms, there is no clear agreement on a universally valid definition. However, one can limit oneself to certain commonalities .
Interestingly, when you examine this definition closely, you’ll find that it shares substantial similarities with traditional business models . The key distinction lies in the integration of digital technologies. This begs the question: What sets digital business models apart and accounts for their significant success in today’s business landscape? To unravel this, we must embark on a deeper exploration of the intricacies that define digital business models and elucidate the precise factors contributing to their contemporary prominence.
Digital business models revolve around delivering added value to one or more customers through the strategic use of digital technologies. The ultimate objective is to ensure that the customer benefits derived from these digital solutions reach a level at which consumers are not only satisfied but also willing to pay for this value. Let’s delve deeper into the foundational principles that make digital business models so integral to contemporary business success:
- Digital Transformation: Digital business models are the result of a transformative shift in how businesses operate. They harness the potential of digital technologies to fundamentally reshape traditional processes and create innovative ways of delivering value.
- Customer-Centricity: Central to digital business models is a relentless focus on meeting customer needs and preferences. Through data-driven insights and personalized experiences, they aim to not only satisfy but delight consumers.
- Agility and Innovation: These models thrive on agility and rapid innovation. They empower businesses to adapt swiftly to changing market dynamics, experiment with new offerings, and iterate based on real-time feedback.
- Global Reach: The internet has erased geographical boundaries, providing digital business models with access to global markets. This expansive reach allows companies to connect with diverse customer bases and unlock new revenue streams.
- Data as a Driver: Data lies at the heart of digital business models . They leverage data analytics and insights to make informed decisions, identify emerging trends, optimize operations, and enhance customer experiences.
Importance of Digital Business Model
The importance of digital business models in today’s world cannot be overstated, and the reasons behind it are quite straightforward. It’s no longer a choice; it’s a necessity. The evolution of consumer behavior, where consumers now expect seamless digital experiences, coupled with businesses prioritizing customer-centric approaches, has given rise to an entirely new paradigm. Companies have realized that the technological capabilities that are now available to them are so much more than a website.
Simultaneously, consumers have developed a newfound trust in digital business models. What was once viewed skeptically as a “subscription trap” a decade ago is now exemplified by the likes of Netflix, and the traditional catalog people used to order from has transformed into the convenience of Amazon. This transformation underscores the imperative for businesses to embrace digital business models to remain competitive and meet evolving customer expectations.
Comprehending digital business models is pivotal for organizations aiming to thrive and excel. These models offer a multifaceted toolkit for businesses, providing advantages that extend far beyond their basic functions.
Characteristics of Digital Business Models
In the constantly evolving realm of contemporary commerce, digital business models have emerged as powerful catalysts, reshaping the very essence of how organizations conduct their operations and engage with their customer base. These models are marked by a distinct set of core qualities that collectively serve as the bedrock of their triumph and prominence in the fiercely competitive landscape of today, distinguishing them from classic business models . Let’s explore these fundamental characteristics more comprehensively to grasp their profound influence on the tactics and functioning of enterprises in this digital era.
- Digital Transformation: Digital business models represent a profound shift in business operations, encompassing the adoption of cloud computing, data analytics, artificial intelligence, and automation. These technologies enable organizations to not only optimize existing processes but also create entirely new ways of delivering value to customers.
- Digital Value Generation : The added value in digital business models can only be generated digitally, setting them apart from traditional models that primarily create value in analog form. While traditional models may undergo digital transformation , the core value remains unchanged, only altering the means of obtaining it. In essence, the Internet is the cornerstone of the digital business model’s core operations, without which its core business would not be possible.
- Customer-Centric: At the core of digital business models lies an unwavering commitment to understanding and satisfying customer needs. Leveraging data-driven insights, organizations can segment their customer base, personalize offerings, and anticipate customer desires, fostering deep customer loyalty.
- Data-Driven: Data serves as the lifeblood of digital business models. These models collect, process, and analyze data on customer behavior, market trends, and operational performance. The insights derived from data empower businesses to make informed decisions, refine strategies, and continually enhance the customer experience.
- Agility: Digital business models thrive on agility, allowing organizations to pivot swiftly in response to market shifts, emerging technologies, and customer feedback. This adaptability ensures that businesses remain competitive and innovative in a rapidly changing landscape.
- Innovation: A culture of innovation permeates digital business models. Companies are encouraged to experiment with emerging technologies, develop new products and services, and explore novel revenue streams. This commitment to innovation is vital for staying ahead of the competition.
- Global Reach: Enabled by the internet, digital business models transcend geographical boundaries. They provide organizations with unprecedented access to global markets, allowing them to connect with diverse customer bases and capitalize on international growth opportunities.
- Revenue Diversification: Digital business models often incorporate a variety of revenue streams. These can include subscription models, freemium offerings, advertising revenue, and data monetization. This diversification reduces reliance on a single source of income and enhances financial stability.
- Ecosystem Orientation: Many digital business models foster ecosystems that bring together various stakeholders, such as customers, partners, and developers. These ecosystems create a network effect, generating additional value and enhancing the overall customer experience.
- Efficiency: Efficiency gains are a hallmark of digital business models. Automation, streamlined processes, and optimized resource allocation not only reduce operational costs but also enable businesses to deliver products and services more efficiently and at a lower cost.
- User Experience Focus: Delivering an exceptional user experience is paramount. Digital business models prioritize creating intuitive, user-friendly interfaces and applications that enhance customer satisfaction, foster brand loyalty, and drive customer retention.
- Disruption: Digital business models have the potential to disrupt traditional industries by introducing innovative approaches that challenge established norms. This disruption can lead to the creation of entirely new markets and business opportunities.
- Scalability: These models are inherently scalable, allowing organizations to accommodate rapid growth without a proportionate increase in costs. Scalability is a critical factor in achieving sustainable expansion and competitiveness.
- Sustainability: Ensuring long-term sustainability is a key consideration. Digital business models focus on maintaining profitability by aligning revenue streams with operational costs, ensuring financial stability and continued growth.
Types of Digital Business Models with a Real-Life Examples
Let’s take a closer look at the individual models to understand how they work and how they are structured to align with digital business strategy. Because even if the differences sound simple, they are not always. And especially with digital business models, it is interesting to see how the revenue streams emerge again. While in the beginning there was a lack of definition, there are now more and more possible distinctions. The largest and most established models are the following:
- In this model, the approach is still relatively intuitive. The entire offer in the form of the product or service is provided free of charge.
- The “Free” model offers core products or services at no cost to users.
- Revenue is generated purely through advertising on the respective URL. through alternative means, such as advertising, freemium upgrades, or data monetization.
- Example: Facebook is a social media platform that offers its core services (connecting people, and sharing content) for free to users. It generates revenue primarily through digital advertising. Advertisers pay to display targeted ads to users based on their interests and behaviors.
- On-demand models provide immediate access to products or services when users need them.
- Examples include ride-sharing services like Uber and food delivery apps like DoorDash.
- Convenience and real-time fulfillment are key features.
- Example: Uber is a ride-sharing service that allows users to request rides on-demand using a mobile app. Users can request rides in real-time, and drivers respond to these requests, providing convenient transportation.
- E-commerce businesses sell products or services online, often through their websites or platforms like Shopify or WooCommerce.
- They can range from small online boutiques to large-scale retailers like Amazon.
- E-commerce often involves various business models, including B2C (business-to-consumer) and B2B (business-to-business).
- Example: Amazon is one of the world’s largest e-commerce platforms, offering a wide range of products for sale online. It operates both as a B2C (selling products directly to consumers) and a B2B (offering marketplace services to third-party sellers) e-commerce platform.
- Online marketplaces act as intermediaries connecting buyers and sellers.
- They often charge fees or commissions for transactions.
- Marketplaces can focus on various niches, such as products, services, or accommodation.
- Example: Airbnb is an online marketplace that connects travelers with hosts offering accommodations, which can be apartments, houses, or even unique stays. It charges hosts and guests fees for bookings made through the platform, acting as an intermediary.
- This model emphasizes access to goods or services rather than ownership.
- Businesses rent or lease products to users, offering cost-effective and sustainable alternatives.
- Car-sharing services like Zipcar and equipment rental platforms follow this model.
- Example: Zipcar is a car-sharing service that allows users to rent cars by the hour or day. Users access Zipcar’s fleet of vehicles when needed, avoiding the need to own a car themselves.
- Ecosystem models create an interconnected network of products, services, or platforms.
- They encourage users to stay within the ecosystem for various needs.
- Example: Apple Ecosystem includes hardware devices (iPhone, Mac), software (iOS, macOS), the App Store, iCloud, and other services. Users are encouraged to stay within the Apple ecosystem, as products and services work seamlessly together (e.g., iCloud for data storage). The Apple ecosystem is known for its seamless integration, such as AirDrop, which can create a sense of vendor lock-in , where users are incentivized to use Apple products exclusively.
- Experience-based models focus on providing unique and immersive experiences.
- Businesses charge for access to experiences, such as virtual reality (VR) experiences, live events, or themed entertainment.
- Example: Disneyland is a theme park known for providing unique and immersive experiences to visitors. Visitors purchase tickets for entry and pay for additional experiences and attractions within the park.
- Subscription models offer recurring revenue streams and build customer loyalty.
- Businesses often offer tiered pricing with varying features or content access.
- They require a focus on retaining subscribers and continuously providing value.
- Example: Netflix is a subscription-based streaming service that offers a vast library of movies and TV shows. It offers multiple subscription tiers with varying features and content access, including options for streaming quality.
- Open-source models involve sharing software, code, or intellectual property freely with the community.
- Revenue is often generated through support, customization, or premium versions.
- Example: Linux Operating System is an open-source operating system widely used for servers and embedded systems. Companies and individuals can use Linux for free, but revenue is generated through support services, certifications, and customized solutions.
- Hidden revenue models offer a free or low-cost product but generate income through less visible channels.
- For instance, some mobile apps collect user data and sell it to advertisers without explicit user knowledge.
- This model can raise ethical and privacy concerns.
- Example: Free Weather Apps , Some free weather apps collect user location data and weather preferences, which are used for targeted advertising and data monetization. Users may not be aware that their data is being used for these purposes, raising privacy concerns.
- Freemium model attracts users with free basic features while offering premium upgrades.
- They can be effective for software, mobile apps, and online services.
- Conversion rates from free to paid users are crucial for success.
- Example: Dropbox is a cloud storage service that offers free storage with limitations and premium plans with enhanced features. Users can store and share files for free, but premium users get additional storage and advanced sharing options.
- Example: eBay is an online marketplace where individuals and businesses can buy and sell a wide range of products. It charges sellers fees for listing items and final value fees for completed transactions.
- Digital advertising models generate revenue by displaying ads to users.
- Targeted advertising, programmatic ads, and native advertising are common approaches.
- Platforms must balance user experience with ad revenue.
- Example: Google Ads is an advertising platform that displays ads on Google search results and websites within the Google Display Network. Advertisers bid on keywords and use targeting options to reach specific audiences.
- Data-driven businesses gather and analyze user data to offer insights, targeted advertising, or market research.
- Strict data privacy regulations must be followed.
- Data is often sold to third parties or used to enhance products and services.
- Example: Facebook Data Usage , Facebook gathers user data to offer targeted advertising to businesses. User data includes interests, behaviors, and demographic information. Facebook must comply with data privacy regulations and guidelines.
- IoT businesses offer solutions for connected devices, such as smart home systems or industrial sensors.
- Data generated by IoT devices can be leveraged for analytics and insights.
- Security and privacy are paramount concerns.
- Example: Nest (by Google) offers smart home products, including thermostats and security cameras, that are part of the Internet of Things (IoT). Data generated by Nest devices, such as temperature and motion data, can be used to optimize energy use and enhance security.
- Blockchain-based businesses use decentralized ledgers for various applications.
- Cryptocurrency exchanges facilitate the buying and selling of digital assets.
- NFT (Non-Fungible Token) platforms enable unique digital asset ownership.
- Example: Bitcoin is a decentralized cryptocurrency that enables peer-to-peer digital transactions without the need for intermediaries like banks. It is used for secure and transparent digital transactions, and it’s also seen as a store of value.
How to Create a Digital Business Strategy
Crafting a robust digital business strategy has become nothing short of imperative. With technology continuously shaping the way we live, work, and interact, businesses of all sizes and niches must adapt to the digital age. Whether you’re an established corporation or a budding startup, a well-crafted digital strategy is a compass that can steer you toward growth, enhanced customer engagement, and operational efficiency.
We’ll walk you through the essential steps for developing a digital business strategy that harmonizes with your goals, capitalizes on the potential of digital technologies, and positions your enterprise for triumph in the digital era.
So, Choosing the right digital business model strategy is a pivotal decision. It requires a deep understanding of your target audience, a clear definition of your unique value proposition, and a comprehensive evaluation of your resources and capabilities. Here are some key takeaways to guide you in this process:
- Know Your Audience: Understand your customers’ needs, preferences, and pain points. Use data and analytics to gain insights into their behavior and expectations.
- Define Your Value Proposition: Clearly articulate what sets your business apart. How will your digital strategy address customer challenges or provide unique solutions?
- Leverage Technology: Embrace digital tools and platforms that align with your strategy. Whether it’s e-commerce, mobile apps, or data analytics, technology should support your goals.
- Stay Agile: Be prepared to adapt and iterate. Digital landscapes evolve rapidly, and your strategy should have built-in flexibility to respond to market changes.
- Invest in Talent: Build a team with the right skills to execute your digital strategy effectively. Training and upskilling may be necessary to keep pace with technological advancements.
- Measure and Analyze: Implement metrics and KPIs to monitor the performance of your digital initiatives. Regularly review the data to make informed decisions.
- Customer-Centric Approach: Put the customer at the center of your strategy. Tailor your digital offerings to meet their needs and provide exceptional user experiences.
- Stay Informed: Keep abreast of industry trends, emerging technologies, and competitors’ strategies. Continuous learning is essential in the digital business landscape.
Remember that there is no one-size-fits-all digital business model. Your choice should align with your industry, target market, and organizational strengths. By following these guidelines and staying committed to innovation and customer satisfaction, you can create a digital business strategy that not only survives but thrives in the digital age.
Business Model Vs Digital Business Model
A business model serves as a comprehensive framework that delineates the fundamental operations and sustainability strategies of a business. It encompasses diverse facets, including how the business delivers value to its customers, the channels employed to reach these customers, the relationships cultivated with them, the requisite resources and activities for value delivery, the revenue streams generated, and the associated cost structure.
In contrast, a digital business model represents a specialized subset within the broader business model framework, meticulously tailored to harness the capabilities of digital technologies and resources. It notably accentuates the strategic utilization of digital tools, platforms, data, and communication channels to elevate and revolutionize various aspects of the business. Digital business models frequently encompass:
- Digital Customer Engagement: Utilizing digital channels such as websites, mobile applications, and social media to foster customer interactions, offering personalized experiences and real-time connectivity.
- Innovative Revenue Streams: Pioneering revenue streams facilitated by digital technologies, which may encompass subscription-based services, data monetization, or digital product sales.
- Efficient Cost Structures : Optimization of operational costs through automation, cloud computing, and data analytics to enhance overall efficiency.
- Data-Driven Decision-Making : Heavy reliance on data analytics to inform strategic decisions, enrich customer experiences, and drive continuous business enhancements.
- Agility and Adaptability : Structured for agility, digital business models enable organizations to promptly respond to market fluctuations and technological advancements.
Connecting The Dots With Business Model Canvas
The Business Model Canvas (BMC) is a powerful tool in the realm of digital business models due to its adaptability and versatility. It offers businesses a structured framework to define, conceptualize, and iterate on their digital strategies. One of its key advantages is its ability to encourage customer-centric thinking, driving businesses to identify and address the evolving needs of their digital audience. You can download it now.
Furthermore, the BMC promotes innovation by allowing organizations to experiment with different components of their model, aligning well with the ever-evolving nature of digital technologies. Its agility enables rapid adjustments to respond to market dynamics and emerging opportunities. Ultimately, the BMC is a valuable asset for organizations navigating the intricacies of the digital age, aiding in the development of comprehensive and strategic approaches to digital business models. You can easily access and utilize it to refine your own digital strategies and models.
In conclusion, crafting a digital business strategy is essential in today’s tech-driven world. To remain competitive, leverage tools like the Business Model Canvas to align your operations with evolving customer expectations and digital opportunities. Your Business strategy should adapt to the dynamic digital landscape, incorporating data analytics, online platforms, and customer-centric approaches. Remember, there’s no one-size-fits-all solution; tailor your strategy to your industry and strengths. By blending digital strategy principles with the Business Model Canvas , you can navigate the digital age and ensure your business thrives amid constant change.
Frequently Asked Questions
1- what are the key elements of digital business.
Key elements of a digital business include:
- Digital Technologies: Utilizing tools like AI, IoT, cloud computing, and data analytics.
- Customer-Centricity: Focusing on meeting customer needs through personalization and user-friendly experiences.
- Data-Driven Decision-Making: Leveraging data for insights and informed choices.
- Innovation Culture: Encouraging creativity and experimentation to stay competitive.
- Agility: Adapting quickly to market changes and technological advancements.
- Ecosystem Engagement: Collaborating with partners, suppliers, and platforms.
- Efficiency: Optimizing processes for cost-effectiveness and productivity.
2- What is a digital business structure?
A digital business structure refers to the organizational framework designed to effectively operate within the digital landscape. It involves roles, responsibilities, processes, and technologies that support digital strategies. Common elements include digital teams, data analytics divisions, agile workflows, and technology infrastructure to facilitate digital transformation.
3- What are the 7 principles of a digital transformation strategy?
The seven principles of a digital transformation strategy are:
- Customer-Centricity: Prioritize understanding and meeting customer needs.
- Leadership Commitment: Engage leadership in championing digital initiatives.
- Innovation Culture: Foster a culture of experimentation and adaptability.
- Agile Methodologies: Implement agile practices for quicker responses to changes.
- Data-Driven Decision-Making: Base choices on data and analytics insights.
- Ecosystem Collaboration: Partner with external stakeholders and platforms.
- Continuous Learning: Invest in upskilling and learning to keep pace with digital advancements.
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The Leading Source of Insights On Business Model Strategy & Tech Business Models
Digital Business Models Map: Digital Business Model Types
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
Table of Contents
A few myths about digital business models
We all like to think of digital business models as innovative for their own sake.
However, in many cases innovation happens by combining aspects of existing business models to create a unique formula.
Not a single formula, but rather a recipe with ingredients to be tested
Almost like taking the existing ingredients, and remixing them by using different quantities and cooking time, an “innovative” business model is often the result of those recombinations.
And it requires a lot of tweaking.
Digital is not just about the product/service
You create an ebook, sell it on the web and you call your business a digital business.
Sure, that is a digital product but the fact that your product is delivered digitally doesn’t make it a digital business.
There are a few other things to take into account.
Digital is not just about distribution
You build a website, call it a platform, and you have a digital business.
However, a website is just like a physical window shop, in order for you to create a sustainable flow of customers/partners/users you need to make it scalable.
That requires understanding what models fit best the potential customers/users identified.
Start simple, make it viable
If you look at a business model like Google , you think of it as a complex platform from the start.
However, it took years before Google would develop all the building blocks (former Google AdWords, and Adsense) to make it extremely scalable.
Initially, Google was just closing advertising deals on its search pages leveraging on salespeople, just like a traditional organization.
When Google finally built its two primary ad platforms (AdWords, now Google Ads and AdSense) its business growth picked up together with its traffic growth.
Before Netflix would become a viable streaming platform it took decades. And before that, it was primarily a DVD-rental company.
DVD-rental, in 2019, made up less than two percent of the overall Netflix revenues (interesting enough the company still reported over two million DVD members as of 2019).
Yet, when video streaming became technically viable, Netflix’s business model also evolved, thus making the company surf a different market (video streaming) rather than DVD rental.
A simple business model that delivers enough value to potential customers will get you through the first growth stages.
A model for each stage
Amazon wanted to develop a way for third-party sellers to build their e-commerce on top of Amazon’s infrastructure (at the time that was called Merchant.com) to push on its mission to provide a wide variety of products.
Yet Merchant.com was a “jumbled mess ,” and the company over the years developed what would become Amazon AWS , now one of the most successful business units, within Amazon.
While Amazon AWS is now a company within a company.
That infrastructure helped Amazon build a more scalable business model and push to a different stage of growth, probably not possible without the contribution of AWS.
Yet, what would later become AWS only started to be developed in 2000 (Amazon started in 1994).
And only after a few stages of hypergrowth do the company goes through.
A new way of doing business
Therefore, building a digital business requires mastering new ways of looking at your business.
They primarily move around a key pillar (your customers/users or those for which your service/product provides a clear advantage) and a few elements:
Building a digital product/service requires a mindset that goes from something scarce to something potentially unlimited.
Digital products/services can also be quite expensive.
Think of how platforms like Google have to spend billions to keep operating their digital assets by also investing in massive physical infrastructures (data centers).
Yet those products often leverage network effects .
Building a digital distribution means understanding the various channels existing on the web.
New channels come every few years.
But some of the channels you might want to take into account to enhance your digital business are:
- Email marketing (newsletter),
- Search engines ( Google , YouTube , DuckDuckGo , Bing, Yahoo),
- Social media/discovery-driven platforms (Google Discover, Facebook , Instagram , YouTube),
- And creative media ( TikTok ) to mention a few.
A digital business model value proposition can often be delivered by providing the upside without the downside.
Think of how Google makes you search for anything without requiring you to bring an encyclopedia in your pocket.
Leveraging on consolidated models
As the story goes McDonald’s started to use a franchising model to grow its restaurant business, and it became over the 1960s a giant in the restaurant business (or real estate depending on the perspective).
McDonald’s leveraged the existing “ Speedy Service System ” developed by the McDonald’s brothers (what we would later call “fast food”) which was an incredible process development able to provide an improved product at a faster pace.
The speedy system itself represented the application of the manufacturing process to the restaurant business.
Later another important building block was added.
The franchising model really became widely applied during the 1920s and 1930s in the restaurant business.
As new physical communication networks (in the US the Interstate Highway System) enabled people to move long distances with their cars.
Later on, Ray Kroc would apply in its most aggressive form the franchising model (different formats already existed centuries before) to McDonald’s existing operation to create one of the most scalable restaurant businesses in the world.
But is franchising a business model, a revenue model, or a growth (expansion) strategy ?
Well, franchising alone is just a distribution/growth/expansion strategy .
Yet, franchising combined with a product delivered differently (the “speedy system”) made up a whole new experience, that made it a new business model : the heavy franchised McDonald’s business model.
Amazon’s flywheel? Part product, part distribution
The Amazon Affiliate Patent
Amazon was among those players on the web who developed a successful affiliate program, which would work as an incredible growth strategy for the company.
In 1996, Amazon associates could place banner or text links that were directed to Amazon to get a commission on the sale.
Not so different from the franchising model in the physical world, the affiliate model would enable a digital property to leverage Amazon’s brand and sell its products and get a commission in exchange.
The affiliate model wasn’t new, as it was already launched starting in 1994, yet Amazon tweaked it and made it widely successful.
Not surprised, then, if you associate affiliate marketing with Amazon.
Affiliate marketing today sounds as old as the web (indeed it is), yet back in the late 1990s that was one of those innovations (which idea was old yet applied to the web) that helped build some of the tech giants we know today.
Yet affiliate marketing alone doesn’t make a business model.
It was the combination of affiliate marketing within Amazon’s flywheel and the shift toward becoming a platform that made the overall Amazon business model .
Are digital businesses fragile?
Many of the new digital business models try to apply old or new philosophies to the web.
For such reason, they might work in the short-medium term (5-10 years), but prove extremely fragile in the long run (20-50 years).
Thus, it’s important when building a digital business to know its advantages but also its drawbacks.
And a way to prevent a digital business from failing is to have a buffer (that is also why tech giants sit on large piles of cash as a buffer).
Digital business models types
Below are some of the digital business models types (remember those can be really called business models when mixed up with a product, distribution, and value proposition):
- Open-source (see GitHub , Wikipedia , and for a hybrid open-source, see Gitlab and WordPress ).
- Freemium , (see Dropbox , Slack , and for the enterprise version, sees Zoom ).
- Subscription, (see Netflix ).
- Peer-to-peer , (see LinkedIn , Etsy , Vinted ).
- E-commerce, (see Amazon , Shopify ).
- Ad-supported, (see Spotify )
- Hidden revenue, (see Google and Facebook ).
An open-source model makes software free to access, and it generally gives a community of programmers the ability to contribute to it.
Those two ingredients are essential.
Free makes it spread very quickly. And the community side of it is what eventually determines its success.
An open source isn’t a model which companies can leverage to build a sustainable business model .
Companies like Red Hat, for instance, make money by charging premium subscriptions and for training and services associated with its open-source software.
Indeed, in 2018, Red Hat generated over $2.9 billion in revenues, of which, $2.57 was from subscriptions and $346 million from training and services.
Red Hat isn’t the only possible way to monetize open-source software.
For instance, we have already covered the Mozilla Business Model and how its for-profit side makes money through partnerships and distribution agreements with search engines.
Going back to the Red Hat case study by looking at its annual report Red Hat explains its business model as follows:
Development . We employ an open source development model. The open source development model allows us to use the collective input, resources and knowledge of a global community of contributors who can collaborate to develop, maintain and enhance software because the human-readable source code for that software is publicly available and licenses permit modification. Licensing . We typically distribute our software offerings under open source licenses that permit access to the software’s human-readable source code. Subscriptions . We provide our software offerings primarily under annual or multi-year subscriptions as well as ondemand through our certified cloud and service providers (“CCSPs”).
- Quick and effective development via a global community of qualified contributors who are not on the company’s balance sheet.
- Great distribution via free licensing of its software.
- Paid subscriptions for premium and enterprise customers.
Building up an open source-based business model isn’t simple and its success highly depends on the ability of the project to engage the community of developers and contributors in working on the source code to improve it and make it very valuable.
Also, such a model where a free service does allow strong marketing for the product.
But it doesn’t necessarily translate into revenues for the company.
For instance, Red Hut 2018 employed $1.2 billion in sales and marketing expenses to distribute its paying subscriptions.
That represented 41% of its total revenues which comprised “ primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials and trade shows. “
The free model has become quite pervasive on the web.
Starting from Netscape going on, companies have built great products and released them for free with the hope that once enough people would get used to them, monetization would not be an issue.
While this model worked pretty well for products that scaled up quickly, amassed investments to sustain their infrastructure in the short term, and then found a monetization strategy .
Companies like Google and Facebook have started in this way.
They released a free service to a larger and larger user base.
Attracted the first angel investors , then venture capitalists they had to then quickly turn to the advertising model to monetize their users, to avoid being left without cash and investors.
Thus, while a free service allows to scale up at a marketing level, the company will still have to figure out how to monetize the service provided.
There are usually a few routes:
- A basic version of the product, and a more advanced paid version (freemium model).
- One side gets the service for free, and the other side finances it (asymmetric model).
- Training materials or info products adjacent to the core topic of the product (educational model).
- A free basic service, and a more advanced paid service (usage model).
- A job board that connects talented people with employees (job board model).
Those are just some examples of how an open-source model can be monetized.
The freemium model has gained popularity in the last decade. The reason is simple; this model allows a high virality growth.
Cases like Dropbox , MailChimp , Spotify , and many others have created viral growth thanks to these models.
At its core, a freemium model has a free version available to anyone, with no friction.
Prompts within those free services to switch to paid subscriptions to get more volume, no advertising, or more data.
For instance, Spotify offers a free limited service, advertising-supported.
But if users decide to get the premium service, they can listen to music without interruption from advertising and also download music to listen to offline.
Dropbox, instead, makes you use more space with a premium service.
And MailChimp gives you advanced features and the ability to handle more subscribers in your email list.
If you opt for this model, you need to make sure you have the following:
- A strong enterprise customer base.
- An optimized conversion funnel to switch free users to paid ones.
- A robust technological infrastructure that can handle a broad base of free users.
We’re living in a subscription economy.
The most entertaining and customer-centered services we know today, from Netflix to Spotify and Amazon Prime , follow a subscription model.
This model can be very powerful as it carries a few built-in advantages:
- A loyal user base.
- A continuous stream of predictable revenues.
- A more predictable sales pipeline.
In short, many companies are “subscribing” to this model as it allows them to build a sustainable revenue stream over time.
However, it is essential to remark that creating this kind of model isn’t a simple task.
Indeed, companies like Netflix and Spotify spend billions of dollars in producing original content that can make those subscribers want to renew their plans.
Usually, a model that relies on a subscription also requires essential investments in infrastructures, as what makes the services offered through this model is the ability of those platforms to know precisely what to watch or listen to next.
Also, you’ll need to build a process skewed toward a great customer experience to minimize churn rates and improve lifetime customer value.
When your CAC or customer acquisition cost is higher than the lifetime value of your customers, your business will soon be bankrupt.
The Web finally allowed people to consume content at their own pace and schedule.
What mass media, like TV and Radio, didn’t accomplish, the Web did.
An on-demand consumption allows people to have access to the content at different time intervals.
Also, it doesn’t make sense any longer to have a single product or service offering for anyone at scale.
Thanks to the on-demand model
This is true for content but also for any other kind of service. Netflix had popularized this model when it made it available at any time its shows through the platform.
Yet other services, like Uber , and Lyft also built their success by leveraging the on-demand model.
Technological platforms allow people to interact instantaneously, making those kinds of services possible.
The on-demand model can be monetized in several ways. From subscriptions to fees for each transaction on a platform.
The critical ingredient is to create a smooth user experience, in which you barely realize there is someone in the backend manufacturing that experience.
Peer-to-peer, two-sided marketplace
A peer-to-peer marketplace is a platform where usually two sides are participating in a transaction, which can be about products (Etsy) or services ( Uber , Airbnb , LinkedIn ).
A peer-to-peer, or two-sided marketplace often falls into the chicken or the egg dilemma, where the marketplace to work needs both sides to interact.
Yet the paradox is that to have demand on the platform you need a continuously generated supply.
At the same time to have the supply you need to create demand.
Imagine the Uber case; the platform works as soon as there are enough drivers on the road to offer an on-demand and convenient service when riders need it.
However, drivers want to drive at their convenience and when the fees are high enough to justify their effort.
Therefore, the peer-to-peer marketplace usually faces several challenges in making sure the supply side is served adequately to justify the demand.
Uber, Airbnb, and Etsy all face this issue. For instance, Uber uses several strategies to enhance the supply of drivers on its platform by using dynamic pricing strategies, like surge pricing.
You can appreciate the importance of drivers’ supply for Uber by the fact that companies like HyreCar have built their whole value proposition based on the supply scarcity on Uber.
One of the first companies that proved the web wasn’t made just of connected computers but of people ready to purchase physical stuff on it was Amazon .
Started as a book store the company soon branched out to sell music and related products.
Until it became the everything store!
Today an e-commerce business model is taken for granted and is among the most used digital business models.
If Amazon had proved that the web could become an everything store, a company that changed the way media could be consumed was Google.
Rather than just having to type a website address in a browser, people could search for anything they wanted.
Google made all its services and apps completely free.
While on the other side, it monetized the data captured via its search engine pages with an advertising network called AdWords (now Google Ads).
When Google IPOed back in 2004, it showed the business world how powerful its digital advertising business was.
Indeed, in a matter of a few years, Google passed the billion dollars mark. In 2017 its advertising business passed the hundred and ten billion dollar mark!
To make sure, while a digital advertising business might be easy to set up, it’s not an easy one to run and make profitable.
Unless you’re Google or Facebook with their dominant advertising marketplaces, you won’t be probably able to make money via advertising alone unless you have a very large user base.
Hidden revenue generation model
Hidden revenue generation is about making money while the people that most use your service barely realize that.
A great example is Facebook (and Google).
If you ask an average Facebook or Google user, she won’t know how the company monetizes.
That’s because those companies have invested massive resources in creating this kind of experience.
It’s all about mixing things up to find your own recipe
Each model we saw above isn’t a complete business model that can be applied entirely to a company.
Often business models are the fruit of the combination of several parts. For instance, Airbnb and Uber are on-demand, peer-to-peer marketplaces.
Amazon is an e-commerce platform, which leveraged over the years on affiliates to spin its flywheel .
Many businesses we analyzed throughout the research use several models to build a successful business model.
For instance, Google leverages an open-source model for some of its products, while it monetizes its core product (the search engine) with a hidden revenue model and it also leverages on making its products free to large masses to gain traction quickly and make of its products a standard!
Thus, finding your digital business model will require time, customer feedback, vision, understanding of the existing market, and potentially opening new markets.
Level of digitalization of a business model
When looking at a digital business model, there might be several layers of digitalization of a company.
You start from a level where digital channels are primarily leveraged to amplify the reach of the product and service. Thus, there is no change in real terms of the product or service, but only in terms of perceived value.
A second step, if when the wall between product and marketing/distribution is wrecked off, there you start getting a digital business, in a sense, as finally, the digital part becomes a key component of the product’s value proposition.
And from there you can move to tech business models or platforms, where the technology becomes the key enhancer of the value proposition.
How do you analyze digital/tech business models?
You can leverage the VTDF framework :
Blockchain-based business models and the Web 3.0
As we move toward Web 3.0, it’s important to understand how Blockchain Business Models work, and below is a FourWeekMBA framework to analyze them:
The new era of AI Business Models
With the rise of a new AI paradigm, which relies on large language models, able to generalize across many tasks, the whole software industry is undergoing a massive change.
The wave of generative AI which was prompted by software (from narrow to general) and hardware paradigms (from CPU to GPU) is creating a whole new industry, which can enhance the software industry developed in the last twenty years by many times.
In this context, AI business models are becoming de facto the new digital business models. Where every company on earth will have a component of AI in it.
Just like today, we don’t talk anymore about “Internet business models” as any company is – in some way – an internet company (at least the majority of companies out there), in the future we won’t talk anymore about AI companies, as every company will leverage AI in one of more parts of their business model, to enhance the value proposition for their customers!
Myths about Digital Business Models: The article addresses some misconceptions about digital business models. It highlights that innovation often results from combining existing business model elements in unique ways, and that it’s important to understand that digital doesn’t just pertain to the product or distribution.
Digital Business Models are More than Just Products and Distribution: The article emphasizes that having a digital product or distribution method isn’t enough to be considered a true digital business. It’s necessary to focus on various other aspects, including value proposition, customer relationships, and understanding the best models that fit the identified customer/user base.
Start Simple and Evolve: The article cites examples of well-known companies, such as Google and Netflix, that started with simpler business models before evolving into more complex and scalable ones. It stresses the importance of starting with a simple model that delivers value and then adapting it over time.
Different Stages of Business Models: The article discusses how successful companies often go through different stages of growth and business model evolution. It uses Amazon AWS as an example of how developing a new way for third-party sellers to build their e-commerce on top of Amazon’s infrastructure (Amazon AWS) contributed to the company’s growth.
Digital Business Requires New Perspectives: The article emphasizes that building a successful digital business requires a new way of looking at the business. It revolves around understanding key pillars (customers/users) and elements (product/service, distribution) that drive value.
Types of Digital Business Models: The article outlines various types of digital business models, including:
- Open-source Model: Making software freely accessible to a community of developers, often monetized through premium subscriptions and services.
- Free Model: Offering free services to a large user base and finding monetization strategies later.
- Freemium Model: Providing both free and paid versions of a product/service, where advanced features are available in the paid version.
- Subscription-based Model: Charging users on a recurring basis for access to services.
- On-demand Model: Allowing users to access content or services at their preferred time intervals.
- Peer-to-peer, Two-sided Marketplace: Connecting users to exchange products or services, relying on supply and demand dynamics.
- E-commerce Model: Selling physical products online.
- Ad-supported Model: Offering free services and monetizing through advertising.
- Hidden Revenue Generation Model: Monetizing services without users being fully aware, often through data utilization.
Mixing Business Models: The article highlights that successful digital business models are often a combination of different types and elements. It cites examples of companies like Google and Amazon that leverage multiple models to create a successful business strategy .
Analyzing Digital and Tech Business Models: The article introduces the VTDF framework (Value, Technological, Distribution, and Financial models) as a way to analyze digital business models. It underscores the importance of understanding each component and how they come together to form a solid tech business model.
Blockchain and Web 3.0 Business Models: The article briefly touches on the concept of Blockchain Business Models within the context of Web 3.0. It presents a framework for analyzing these models, including components related to value, blockchain protocol, distribution, and economic dynamics.
AI Business Models: The article briefly mentions the rise of AI-driven business models, highlighting that AI will likely become an integral part of most businesses in the future.
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Top 5 digital business models you must know
Home » Blog » Top 5 digital business models you must know
We live in a world where if something is not on the internet, it doesn’t exist. In this digital age, businesses have had to modify their business models to accommodate the new reality. Digital first built and created a demand for new business models that help customers with quick and convenient access to any product and service online. This helps companies to stay relevant and be able to deliver in an appropriate manner.
For the numerous brick and mortar who went through digital transformation to become digital first model or transformed into a strictly online operation, they needed a proper and functional business model to adapt to. When a company undergoes digital transformation, they need to design a functioning framework that considers how the internet and modern software solutions will enable them to build a bridge between the customer’s needs and their products. The digital business models aid them to respond better to their customers’ needs. Before we scratch the surface to understand what these digital business models are, lets understand better on what a digital business model is. How your business makes sales and money online to how your company is able to make use of the internet real estate to exchange your products/ services for a profit – is what a digital business model is. In the digital first world, these business models are largely dependent on technological progress and innovations. We all are rather aware of the eCommerce model , which is one of the most popular ones. It is easy to adopt both by brands seeking to adopt digital transformation and by businesses that start online from scratch. Amazon, Etsy, Flipkart, Myntra are some great examples of platforms that have successful ecommerce platforms and go-to place for customers in India and globally. Along with ecommerce, what is famously taking over these days is also the social commerce model that enables customers to make in-app purchases on social media networks. Main benefit of this is how it does not require a stand-alone online unit/store.
Also read: Amazon and Etsy’s content strategy: Does SEO work? Let’s discuss the top 5 models known to be successful in the digital world: 1. Freemium Model One of the popular models for SaaS products and primarily for subscription based services. Freemium is a combination of ‘free’ and ‘premium’ – and became a dominant business model especially amongst internet start-ups, app and smartphone developers. It helps the user to get basic features at almost a free membership – or no cost and then access the richer function/content for a subscription fee. We have all networked on LinkedIn, shared multiple files via Dropbox and watched many TV shows on online streaming platforms – these are all Freemium business models that we have experienced firsthand. They offer you to subscribe for the paid services at a monthly subscription fee, some brands offer the free access only for a limited number of days/ months in hope that users will get used to the application and will end up converting into paid users. What works? Free features are a potent marketing tool, especially for new business or a business launching a new product. They help attract a user base without spending on the traditional and online ad campaigns or a sales force. Benefits – Build brand awareness – Acquire a large audience -Test the product/service features and get responses to keep making your service better – Build attractive free models to attract users – gather data and keep building further appealing services to convert free users into paying users. Brands using Freemium model – Slack, Dropbox, Evernote are a few examples of brands using the Freemium digital business model. Also read: Is digital optimization the new digital transformation?
2. Subscription model One of the ways to make your product become more accessible and affordable to your users/clients is via the subscription-based model. It is essentially a recurring revenue model in which users are paying for the use of the product/ service every week/ month or year. Users here have the choice to renew their subscription after a certain period of time as per the terms and conditions of the brands. With increase in adoption and adaptation to the new technology advancements, many businesses are moving from one-time purchases to subscription models that are proving to be more cost effective for them. Many different sectors and industries can use this model. This includes cable and dish television services, satellite radio, website, gyms, storage units and many others . What works? In the digital first world, many businesses are moving from revenue model (one time purchase) to subscription model – where revenue is more recurring in return to consistent access to the services offered by the business or the product. It helps in building a strong customer relationship by maintaining a direct relationship with each. Benefits – Maintain customer relationships – Recurring revenue than one-time sale – Gather large customer data, their usage and make improvements. – Automatic renewals for customers without causing the hassle to renew each month – Businesses receive the payment in advance Brand/s using Subscription model: The New York Times, Netflix and others. 3. Ad-supported model In this model, while the model offers users free access to the services of the business on their website – the user is also exposed to unsolicited third-party content. To monetize via this model, the businesses ideally host ads from other brands on their site and on their services offered. A fine example is the Google Play store where we can find thousands of applications for free that offer their services. The game apps on the play store offer rewards to its user for watching an ad, while others use ads as a gateway. Users in this way have to watch the ads before they can access certain functionalities of the app. What works? Businesses using this model are able to gain revenue from ad clicks. The more relevant the ads and well-targeted to its users – the more the business is bound to make profits via the ad clicks done by users. What works for the Freemium model also works here for the ad-supported model – the free features on the website are a potent attraction value point for users. Benefits – A potent way to build quick audience to your services/ website – offering free access – Building lasting B2B networks and client relationship for recurring reveunve’s – Gathering data to improve stats on what your customer click on more and target such businesses for ads – Offering quality product for free to the users Brands using this model: Spotify, Facebook and Google are some extinguished examples of leading global brands that use ad-supported business models and have proven how to be successful.
Also read: GenZ and technology – the new power couple 4. Ecosystem Model Another promising model in the digital world is the ecosystem model. The business ecosystem consists of a network of interlinked companies that dynamically interact with each other through cooperation to grow sales and also to survive in the global cutthroat competition. This ecosystem includes suppliers, government, distributors, consumers, products, processes and competitors. The ecosystem’s business models are appearing more often now as companies are seeking to optimize capital and create new forms of value. Ecosystem business models were mainly considered the context of large tech firms and platform companies. Ecosystem business models are now explored by organizations across industries to create more value and minimize capital intensive internal processes. What works? In our digital first world and age of business ecosystems the companies that utilize business ecosystems models will be better positioned to drive innovation and capital efficiency to create customer value. This ecosystem model is based on one main product and gradually launching other related products to provide an all-inclusive experience. Benefits -Unlimited growth potential -Can aid a company become a household name -Customers prefer full-packages – this model helps companies to get users hooked, making it easier to upsell and cross-sell add-ons and upgrades. Brand/s that use this model: There is no better example for this than Google. It is one of the most successful ecosystems. Google started as an investor-funded search engine and launched their own keyword-related ad service later. They also designed supporting products like Analytics tools, Search Console, Google Tag and more. Google further acquired Youtube, Waze and other consumer products focused platforms and software’s.
Read more: Data visualization tools employers are looking for
5. Platform Model Also known as peer-to-peer or two-sided marketplace. This digital business model is where a provider creates a digital space to connect third-party buyers and sellers. The aim of this business model is to generate and enable value interaction between different people, groups, and users by leveraging on network. What works? This model helps in building and creating value by facilitating exchanges between two or more independent groups, which are usually the consumers and the producers. Businesses that offer the platform services make a profit from the transactions, subscriptions and advertising. Customers get access to a variety of sellers and hence value such spaces more with wider access to multiple product/service lines. Benefits – Offers a great scalability potential – A successful platform can develop further into additional relevant services – Offers wide variety of product/ services to consumer under one roof – Does not require heavy investments in products/ service to design, produce and store since you only offer a platform to brands to sell. Brands using this model Airbnb, Uber, Amazon are some of the most successful examples of how to build and scale up a platform business model. There is another version of the platform model that is the user-generated content model – this is where customers contribute with content that is consumed by other customers. A fine example of this is YouTube, Wikipedia and TikTok. A few other models one should look at in the digital world are Sharing Model ( examples – Uber, Lyft, Airbnb etc.), On-demand model ( examples – Spotify, Prime Video, Netflix etc.) and others. What comes across clearly is that every business needs a digital strategy and an efficient business model that is optimized. Building a digital business model will always be a work-in-progress, a constant work for the company. Since new technologies keep coming and innovation is the only constant of our digital world, what defines a successful digital business model and framework is the capability to develop, adapt and scale.
Also read: Lead generation using AI – future of marketing
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7 Patterns of digital business models
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Digital business models – they are on everyone’s lips. But what exactly is behind them? We explain seven common patterns of digital business models in order to give you inspiration for your own digital business model. Be sure to include these considerations in your digital strategy .
What are digital business models?
The subscription model has been around since the 18th century. Many people are familiar with it through the local newspaper or a mobile phone contract. The customer pays a constant amount to the seller of the product or service on a regular basis (e.g. monthly). In recent years, many new digital business models based on the subscription model have emerged – and changed entire industries in the process. Instead of the one-time purchase of a DVD or CD, customers gain unlimited access to the entire library of films, series, or music tracks through a monthly payment. Prominent examples here are Spotify (music) and Netflix (video). Amazon is represented in several categories at once: music, videos, audio books, and eBooks. Increasingly more software solutions are also being offered as subscriptions. These include the Creative Cloud from Adobe, CRM systems such as Salesforce , and shop systems like Shopify .
The advantage of a subscription is that customers get used to the service and are reluctant to give it up if they get a lot of added value from it. Thus, bounce rates are relatively low, and the providers can expect regular revenues.
However, if a provider wants to switch to the subscription model, this means a fundamental change in both the business model and the structures behind it. The product or service may have to change completely in order to justify the recurring fees.
As soon as the customer feels a need, they can satisfy it immediately by ordering and receiving the product or service almost in real time.
The customer wants to get from A to B. This can be done immediately by renting an electric scooter from TIER or Lime , for example, or by ordering a vehicle for passenger transport such as Uber or Lyft . Videos and music can be instantly retrieved from Netflix , Spotify , and Amazon Prime . Even groceries are now delivered within 10 minutes as is promised by Gorillas .
In order to achieve the on-demand advantage in your business, you must offer either content or services completely digitally or have your other processes optimised and under control so that it works smoothly – from order to delivery. If you can manage this, you can create enormous added value for the customer when real-time execution is important.
In a peer-to-peer model, an independent company creates a platform/marketplace where people can trade with each other. Even though these marketplaces now also host a large number of commercial suppliers, the original idea was to bring private individuals together to trade with each other.
Prominent examples of this are:
- AirBnB : (Sub)letting of private flats to travellers
- eBay : Sale of used items
- Etsy : Sale of unique handicrafts
The platforms generate revenue by collecting a commission on sales. In return, they provide the infrastructure and marketing for the marketplace. Peer-to-peer marketplaces can also offer additional services such as a fiduciary relationship or insurance services.
E-commerce should be a household word by now: the online sale of goods. However, what few realise is that most e-commerce shops are also marketplaces. First and foremost Amazon : This is a platform for goods that are sold directly by Amazon as well as a marketplace where other commercial sellers can sell their goods. For the end user, it is a uniform portal, and the items are not sorted by supplier. This makes it seem as though Amazon can offer “everything”, even though the goods are often sold by independent retailers and not Amazon itself.
Other specialised marketplaces include AboutYou for fashion and Conrad for electronics. There are also marketplaces for services such as myHammer and hotels ( Booking.com ). The AppStore from Apple is also a marketplace. Very few applications are developed by Apple itself. Instead they are developed by third-party providers who use the AppStore as a sales platform.
Here, the marketplace providers also generate their revenues in the same way as the peer-to-peer providers: They receive a commission on the sales.
If you build an ecosystem , you offer customers much more than a simple product or service. The combination of diverse offers creates an added value that would not be achieved by the sum of all individual parts.
The car manufacturer Tesla can be listed as an example here. In addition to the pure vehicles, Tesla also offers its Supercharger network to its customers, who receive enormous charging benefits as a result. Tesla has also added the Powerwall and the Solar Roof to its portfolio as add-ons.
Peloton takes a similar approach: It sells the hardware (exercise bike and treadmill) and the monthly membership. In addition to the complete dovetailing of the previously individual elements – timing (live and on-demand), hardware, and software – clients gain access to a highly dedicated community that supports each other. That is what makes this ecosystem so unique.
One example from the B2B sector is the LEGIC security platform . Starting with the sale of key cards, a complete ecosystem around locking systems was created. Here, customers receive ready-made and scalable solutions for the security of their buildings.
Freemium is a portmanteau of “Free” and “Premium”. It describes a pattern for business models in which part of the product is accessible for free. As a rule, these are basic functions. However, if users want to activate more options of this product, they are forced to switch to the paid tariff. These can be various options such as using the app on multiple devices ( Evernote ) or the possibility to use additional communication methods ( Slack ). Dropbox has also chosen this model: a small amount of cloud storage is free; however, if you need more space, you must purchase a subscription. LinkedIn can also be used free of charge. However, only by signing up for premium membership do you get additional functions such as the ability to send messages to non-contacts.
The challenge with the freemium model is that you offer a stripped-down version of your product that is still good enough that many users want to use it but at the same time still leaves enough room for improvement in order to create a premium version that is so valuable that users are willing to pay extra for it.
This model is also quite valuable when it comes to building a platform that unfolds its full value only through a high number of users. It is easier to gain many users in the first step via the “Free” product.
Hidden revenue through data
It is not only the direct transactions with customers that bring in revenue. Even if you are the operator of a service or platform that is free of charge for the end customer, income can be generated. This is done by generating income streams based on user data.
A first option is to serve highly targeted ads to users based on their interests and behaviour. This highly relevant targeting option is worth a large budget to advertisers as can clearly be seen in the sales figures of Facebook and Google . Spotify also uses the ad model to finance its free memberships.
Another way to monetise user data is the affiliate model. Here, the advertising or mediating platform receives a commission when customers buy the product. Well-known examples are comparison portals such as Check24 , Idealo , and billiger.de . The beauty of these portals is that they ideally show users the products that are most relevant to them. To ensure this, a considerable amount of (user) data is analysed.
Now your innovative strength counts
You will have noticed that some business models use two or more of the patterns we have presented here. A combination is advantageous and necessary in order to create a fundamentally new business model. Perhaps you have already thought about how you can expand your business model or rebuild it from the ground up while reading these different patterns. But if you haven’t quite got your thoughts in order yet, ask yourself the following questions when thinking about a new business model:
- What is the “unfair advantage” that I have over my competitors? How can I highlight this using digitisation or the above patterns?
- Where is there a risk that I will be attacked? How can I prevent this?
- How can I disrupt myself? What kind of offer can I create that could completely replace my current business model and make it obsolete?
However you approach business model evaluation, start now. Don’t wait until others do it and you have to defend yourself. Only those who score goals can win. Play on the attack, not on the defensive.
9 Digital Business Models: An Intro to Production Ecosystems (1 of 2)
I have described digital business models as either pipelines or platforms. That’ s a standard distinction.
- In a pipeline, a firm creates value with a linear process (similar to a pipeline), where inputs are turned into something more valuable for the customer. You concentrate assets and activities in a linear sequence internally to achieve this.
- A platform is a network-based business model where value is created by enabling interactions between users. And I have argued that platforms are just a simplified version of an ecosystem, where multiple parties also interact to create value. I have outlined 5 common types of platforms.
9 Types of Digital Business Models
Here is my current list of common digital business model types. You can also make a distinction between web2 and web3 models. Common in Web2:
- Linear business models (i.e., pipelines)
- Production Ecosystems
- Consumption Ecosystems
- Company Ecosystems
- Pipeline plus Platform Business Model
Common in Web3 (and some Web1):
- Protocol networks (i.e., blockchains) as stand-alone businesses
- Platform-protocol hybrids
- Protocol ecosystems (i.e., building blocks)
An Introduction to Production Ecosystems
Production and Consumption Ecosystems are terms by Professor Mohan Subramaniam, who wrote the book The Future of Competitive Strategy: Unleashing the Power of Data and Digital Ecosystems . This is a good, straight-forward book about how traditional linear businesses commonly digitize and begin to build out their interactions.
This means putting in lots of sensors and software systems. It means gathering data and getting real transparency into the company. The early wins for this are usually smarter, faster and more effective management. As well as improving the existing operations, usually by improving cost efficiency.
From there, digital transforming businesses usually focus on DOB2: Never-Ending Personalization and Customer Improvements . This when they start using their data and data-driven operations to improving the customer experience. Better and more cost-effective marketing is usually the first use case. They also begin to personalize their services (or at least communications) to customers or groups of customers, which does add tremendous value.
From there, businesses often do DOB4: Connectedness, Interoperability, and Coordination Based Operating Models (including Platforms and Ecosystems) .
This means beginning to connect their data and operations externally with other companies. This usually begins with data sharing. And they usually focus on their supply chain partners first. But it can increasingly mean coordinating in areas like product development and research. And it can mean creating new customer solutions that require all parties to operate in a coordinated fashion.
- Another example is doing predictive demand and inventory management in FMCG companies. Or doing predicative analytics for agriculture assets.
- It can capture a dvanced operational efficiencies . This is from interactive data from products / services and users . Look on the right in the graphic and you can see that products and services are now smart and connected. The factory is no longer selling dumb tractors, it is selling smart tractors. This creates connectivity and data flows between the customer, the product, and the company, which you can see in dashed red lines. Real-time interactive data can is now coming in from products / services and users. And this can used to capture more advanced operational efficiencies, such as more effective research and development.
- This could be predicative maintenance services by companies like Caterpillar. Clients who buy their tractors can now get warnings when it needs to be maintained and have parts replaced. This can save lots of money. This can be a new source of revenue.
- This can be new informational programs by mothers who buy Pampers diapers. This could be a new revenue source. Or it could improve customer relationship management and get greater customer engagement.
Here is how I described the company previously:
“Snowflake is referred to as a “data warehouse as a service” company”. Or as a “cloud computing data warehousing company”. However, the company refers to itself as a platform, with a “Data Cloud” as its primary product offering. It also refers to itself as a data ecosystem. At this stage, Snowflake is a service for companies to consolidate, store and analyze their data. Those three initial activities for a corporate customer are important.
- Snowflake consolidates all the company’s structured and semi-structured data into one place. They create a warehouse for storage and create a “single version of the truth” for the company.
- The consolidated data can then be analyzed for insights. This can be in real-time for current decisions as well as for looking back in time at historical data. AI is getting really good at analyzing large corpuses of data.
Then it gets more interesting.
- The data can also be shared internally and used in team collaborations and projects.
- The data can integrate with many other enterprise IT systems and apps. Most enterprise apps run on data.
- The data can also be shared externally with partners, suppliers and customers.
- The data lakes of Snowflake’s growing list of clients can be used by developers creating data-intensive apps. A large volume of data is especially valuable for machine learning apps, where functionality and effectiveness are highly dependent on the quality and quantity of data. Note: data is the critical complement for algorithms – and is rapidly rising in value.
And finally in 2019, Snowflake launched a data marketplace, where data can be purchased and sold by various users.”
Doesn’t this sound like the digital operating basics? And doesn’t it sound mostly like how you go from a pipeline business to a production ecosystem?
Final Example: Tuya
Tuya is basically in the business of helping traditional product companies make their products smart and connected. It’s a Chinese company, which makes sense because that’s where these products are manufactured anyways.
Here’s is how I described the business previously:
“Tuya is a Hangzhou-based company that offers an IoT platform-as-as-service (PaaS) to brands and original equipment manufacturers (OEMs). They sell this service to several thousand corporate customers, including Schneider Electric and Philips. For their brand customers, they enable them to take a product like a toothbrush or humidifier and turn it into a smart device. They add the IoT hardware (semiconductors, Bluetooth, etc.) and software such that it is a connected device. And they provide the network and platform so both the users and the brand can connect with the device. And, given that most manufactured products come out of China / Asia, it is not surprising that a Chinese company has emerged early in IoT PaaS.”
That also sounds like a lot of branded products and OEM companies putting data-sharing ecosystems into their traditional businesses. Anyways, that is a bit of theory. In Part 2 , I’ll summarize Consumption Ecosystems and Pipeline Plus Platform models. Cheers, Jeff
- 9 Digital Business Models: An Intro to Consumption Ecosystems (2 of 2)