In the recent decade, the world has strongly tuned to a digital format in everything. Consistently evolving technology has redefined the way we work, study, entertain, shop, communicate, and simply live our lives. The same is true for business.
A huge shift to online operations along with the latest technological breakthroughs push entrepreneurs to step away from tried-and-tested traditional business models. Companies have to seek and implement new approaches to stay competitive, keep generating revenue, service customers, and win over new clients in a digital business environment.
While most entrepreneurs understand the need to switch to digital business models, not all of them are quite clear about what those models are and how they actually work. Let’s take a deep dive into this subject to explain all the nuances.
The Basics of Digital Business Models
A digital business model is an outline or scheme that describes how an enterprise will utilize technology to establish value for its customers and generate revenue. Normally, it embraces the entire process of providing products or services, from the initial client engagement to the final sale or shipment.
Digital solutions are meant to leverage the Internet, mobile gadgets, social media, and other digital tools and technologies to create new business opportunities, streamline operations and transactions, and deliver more benefits to customers. Such solutions enable companies to reach a wider target audience, bring customer experience to a new level, and cut down costs through process automation.
A few examples of successful and efficient digital business models include:
- E-commerce platforms such as Amazon, Alibaba, and Shopify;
- Online marketplaces like Etsy and Uber;
- Subscription services like Spotify, Netflix, Zoom, and Dropbox;
- Social media platforms such as Facebook, YouTube, Instagram, and Linkedin.
Importance of Understanding Digital Business Models
Technology has fundamentally transformed the way modern businesses operate. And organizations have to accept those changes and adapt to them to survive and thrive in the digital economy. With more and more companies moving their operations online, digital business models become rather a standard that an exception or something extraordinary.
It’s vital for business owners to understand digital solutions to stay competitive in their industries or niches and successfully grow their ventures. Built around technology and innovation, digital business models have disrupted traditional business approaches to create new ways of doing business.
Thus, those entrepreneurs who get to the gist of this modern business concept and understand how it works will be able to identify new opportunities, develop revolutionary strategies, and easily adapt to fast-changing market conditions.
In the meantime, those who fail to understand digital business models take the risk of becoming irrelevant and losing their market share to more up-to-date digital-savvy contenders.
Distinguishing Features of Digital Business Models
At this point, it’s worth noting that many businessmen still confuse full-scale digital solutions with digital offerings. A digital offering just provides a kind of upgrade to your existing traditional model like a mobile app for your product or service, support chatbot, online ordering, etc.
Yet, it’s rather a primary step to a digital business model than an entirely new approach to catch up with the business digitalization trend. There are four major features or characteristics that clearly distinguish digital business models:
- Added value generation via digital technology: The added value of the product or service solely relies on digital technologies. It’s not about digital transformation that simply changes the way of obtaining the value and not the value itself. It’s about the business in the center of a digital concept being dependent on digital tech. To make it clear, Google, Airbnb, Amazon, or Uber wouldn’t exist without the Internet.
- Innovation-driven strategy: Usually, at the core of digital business models are services and products that are based on innovation or are new to this market. They introduce a whole new concept rather than seek to refurbish an existing model with digital advancements.
- Using digital channels for acquiring and distributing customers: Digital solutions use only digital channels to get clients hooked and convert them to customers. Companies use sales automation tools and early onboarding principles, with no methods pertaining to traditional business models.
- Digitalized USP: A unique selling point or unique selling proposition is virtually digital. Customers eagerly pay for an online product or service which is both created and monetized digitally.
A few features and aspects peculiar to digital business models from the operational point of view include the following:
- Platform-based format which implies providing a marketplace to connect customers and sellers, facilitate transactions, and reap network benefits;
- Data-driven approach relying on data analytics to optimize the processes and operations in accordance with customer behaviors and detect the customer needs to come up with appropriate products and services;
- Focus on customers which means using technologies to personalize customer experiences, ensure convenient services, and establish long-lasting relationships;
- Agility that makes digital models more responsive to change and allows organizations to quickly and smoothly adapt to new market conditions, varying customer needs, and emerging innovations;
- Diverse revenue streams maintaining greater financial stability and flexibility.
The Most Common Types of Digital Business Models
Given the diversity of modern business ideas and initiatives in the digital business field, there are multiple viable digital business models that will come in handy to realize various entrepreneurial scenarios. However, there are 11 types that appeared to be the most successful and popular.
As the name suggests, the basic idea behind this model is that companies offer valuable services or content to users for free. And they display ads alongside or within the service. Advertisers pay to have their ads shown to the target audience, and the platform earns revenue based on the number of ad clicks generated by its users.
It’s often used by websites, mobile apps, and digital platforms with high user traffic to monetize on ad volume. Google and Facebook are the best examples of this model.
This model is the one you’ll come across most often. It’s widely favored by software providers. The name stems from two words, “free” and “premium” which greatly explain the meaning behind it. Usually, a company provides a basic product or service for free while an upgrade to a premium or more extended version comes at a cost.
Freemium can be an effective strategy for organizations seeking to attract new users, build a loyal customer base, and generate revenue from paying users. Spotify, Zoom, and Linkedin are among the vivid examples of this model.
The model is simple and straightforward. Goods or services are provided to customers on an as-needed basis, often using a mobile app or website. The customer only pays for the products or services they need.
It is often associated with the sharing economy and the gig economy, as it relies on a network of independent contractors or providers who can fulfill customer requests quickly and efficiently. Examples include ride-hailing services like Uber and Lyft, food delivery services like Grubhub and DoorDash, and home services platforms like TaskRabbit and Handy.
This model has already become a standard for online shopping. It involves selling products or services directly to individual customers or businesses via digital platforms. Today, an e-commerce model can take many forms such as:
- Online stores, which are product-specific websites for direct online sales;
- Marketplaces bringing together sellers and buyers using a specialized platform;
- Subscription services that offer products or services on a recurring basis;
- Digital products delivered in a digital format like e-books, software, or music.
The best examples in this category are Amazon and eBay.
- Marketplace of Peer-to-Peer Model
Strongly connected to an E-Commerce model, the marketplace concept is a bit different from it. Pure E-commerce implements a one-sided sales approach when a company sells its own products directly to customers.
A marketplace, on the other hand, is about a two-sided approach. It links sellers and buyers in a digital platform and takes a commission for each transaction. This model is good both for service-oriented businesses (Upwork, Uber) and for product companies (Etsy, Amazon).
This type of model is based on creating a network of companies that work together to provide a complete solution for customers. In this model, stakeholders collaborate to create an ecosystem of products and services that complement each other and deliver a more complete and advanced experience for customers.
Offering value and diversity, ecosystems create a “vendor lock-in” effect to make the customer stay in the system for further upsells. Due to its complexity and dynamics, this business model is the most complicated and powerful one at the same time. Perfect ecosystem orchestrators are App Store, Google Play, Amazon, and Alibaba.
- Sharing Model
The approach is similar to that utilized in a rental business, yet, it’s implemented in a digital format. Thus, you don’t have to own a product or service to use it. You simply pay for access to that product or service for a certain period of time. Examples of this model are Airbnb, Sixt, and Zipcar.
- Experience Model
This model engages a strategy that focuses on creating a seamless and engaging customer experience entirely ensured by digital technology. In other words, the value or benefit offered wouldn’t be possible without digital technology.
The brightest example here is Tesla. They introduced digital service, which now makes their business models confidently stand out from the crowd. This add-on service offers a whole new experience to the driver and can be added on demand.
- Subscription Model
Many of us use subscription services on a daily basis. The gist is in providing access to services on a daily/monthly/annual basis at a fixed fee. This model is a great choice for SaaS products, content and software providers, streaming services digital publishers, etc. Good examples are Semrush and Netflix.
- Open-Source Model
This approach leverages the principles of open-source software development to create and deliver products or services. The company provides free access to software downloads allowing users to modify, improve, and distribute it freely. Thus, users contribute to the product or service, and it spreads and gets popular fast.
Though this model doesn’t ensure direct sales, it brings diverse opportunities for revenue generation such as associated upsells, royalties, etc. Companies that have successfully implemented this digital model include Firefox, Red Hat, WordPress, and MongoDB.
- Hidden Revenue Model
In this time of model, revenue streams are not obvious. Companies don’t charge customers for their products or services. Instead, they get revenue from third parting by providing payable access to their customers. Thus, Facebook and Google are free for users and earn profit from advertising.
How to Choose the Right Digital Business Model
While understanding the need to leverage the power of digital technology to match the modern business landscape, many beginner businessmen and experienced business leaders still wonder which is the best or most effective digital business model.
Yet, there is no single right answer to this question since it depends on multiple factors. Besides, each model is intended to succeed under certain conditions and bring certain effects. What is an optimal choice for one business scenario might be non-feasible for the other.
Thus, e-commerce, subscription, and freemium models work great for faster monetization while digital ecosystems and two-sided marketplaces are more complex strategies aimed at business scaling by the use of the networking effect and delayed monetization.
Hence, to choose the right digital business model and develop an efficient strategy for the digital transformation of your business, you should get prepared and do the following:
- Identify your goals: Making up your mind about what you want to achieve with digital business (revenue generation, brand awareness, higher market share, new customer experience) will help you determine which type of model is good for you.
- Analyze your resources: Consider your existing human, technological, and financial resources to implement a model that aligns with your capabilities.
- Investigate the industry: Look at your competitors and the digital models that make a success for them to better understand what works in your niche.
- Understand your target audience: Your prospective customers will dictate the type of digital business model that will work for you. Consider their demographics, behavior, and needs to define your major buyer personas.
- Estimate the competition: Analyze your prime competitors and the models they use. Look for the gaps in the market and areas where you can stand out to determine a strong value proposition.
Digitalization keeps gaining pace and emerging technologies keep throwing new opportunities and challenges at businesses. All of this forces organizations to change and transform their strategies and business formats.
Obviously enough, digital transformation is inevitable for all industries and companies to thrive in a new business environment. Those who will disregard the necessity for transformation and fail to catch up with changes risk being left out of the picture.