11 Digital Business Models you should know incl. examples
What are the characteristics of digital business models? How do they differentiate themselves from digital offerings and what should you know?
Digital Business Models incl. examples – Here is what you need to know, we explain the characteristics of digital business models and give advice on how to start and where to be cautious.
While most executives now have a basic understanding of technologies such as artificial intelligence, machine learning, Big Data, IoT and digitization/digital transformation, there is sometimes still confusion about how digital business models work. These new business models are some of the most disruptive business models of our time, driven by technology and the power of networks.
As we all know, the drivers of these business models are not technology. In fact, technology plays only a minor role. As in digital ecosystems, the digital business models only serve the customer experience. So we only need to ask ourselves one question: How can we create value for customers with digital tools like platforms, apps, websites and more?
The power lies in direct access to the customer and to the data. You can put your offer right in their hands, you send them messages in their pocket, and they are instantly able to consume your product because it is simply transmitted and consumed digitally.
Another important point is that digital services can be easily created, duplicated and automated. This means that there is no big cost involved if you want to expand your business to more customers. On the contrary, that’s the beauty of digital business models: They can be scaled without much effort – you can sell your product 100 times or over 1 million times and not break a sweat.
What are Digital Business Models?
Digital business models are how companies can create, deliver and capture value in a digital economy. To do this, digital business models use mostly different digital technologies to create and deliver their products and services digitally. There are many different dynamics in digital businesses because the products offered usually have no marginal cost, which has different implications for price and supply and clearly differentiates them from classical business models.
One consequence is that the barriers to entry for these businesses are much lower than for traditional businesses. This lower barrier to entry is due to the fact that the cost of starting a digital business is much lower and you don’t need as much physical infrastructure. Also, the reach of a digital business is much greater, as with a website or app you can potentially reach customers all over the world without physically leaving the country.
Another consequence is that digital businesses, which can expand very quickly, are often based on economies of scale. That’s because they don’t need as much physical infrastructure to grow, and they can easily reach more customers. Also, digital businesses can often be automated or outsourced to reduce costs, making them profitable on a larger scale than traditional businesses.
However, there are also some disadvantages of digital businesses. One is that they can be very competitive because, as mentioned earlier, it is easy for new players to enter the market. In addition, new technologies or changes in customer behavior can quickly upset digital companies and displace existing successful business models since switching costs for customers are also nierd. Finally, digital companies are often less loyal to their customers than traditional companies because they tend to have a shorter lifespan (also a lower Customer Lifetime Value – CLV) and are less likely to build long-term customer relationships, so a Strong Brand is often important.
Important to understand: Digital business models can usually be combined. Companies can use different models, but they usually fall into one of three categories: product-centric, service-centric, or process-centric. Product-centric companies sell physical or digital products to customers, service-centric companies provide services, and process-centric companies provide a process or platform that enables other companies to create and offer digital products or services.
Digital business models have 4 characteristics
A distinction is often made between digital offerings and digital business models. Generally, a digital offering is just an addition to existing services or products, e.g., an app for your product, a chatbot to contact support, or an interface to control the product. Digital business models, on the other hand, have certain characteristics that distinguish them from digital offerings:
1. The value is created using digital technologies
If the value proposition of the service offered is based (exclusively) on digital technologies, then we have a great indicator of a digital business model. Amazon, Alibaba, Facebook, Google, etc. would not be possible without the use of the Internet, so we can say with relative certainty that these companies use digital business models although many also offer hardware or other services.
2. Digital business models are new to the market
One of the best examples is the difference between digital offers and digital business models. If you read your electricity usage through an app, that’s a digital offering from your electricity provider. If you order transportation through an app that matches your request with a driver, that’s a digital business model.
3. Digital customer acquisition and distribution
To become a customer and use a service, you have to use digital channels. Digital business models are sometimes based exclusively on digital channels. This is especially important for business models that rely on early onboarding (freemium model) or marketplaces (e.g., Amazon displays ads when you search online).
4. USP is created digitally
If the customer is willing to pay for your services and offerings that are created online, then that is a strong indication of a digital business model, as customer value can be created digitally and also monetized.
Different kinds of digital business models
1. Ad-supported Model (Free Model)
The ad-supported model offers free services to users, with revenue coming from advertisers who pay to display their ads to those users. This model is often used by social media platforms and search engines. Google, for example, offers free search and a number of free tools such as Google Drive and Gmail, but makes money by serving targeted ads based on user data. Facebook and Instagram also follow this model: They offer free social networking services and use user data to serve personalized advertising.
2. Freemium Model (SaaS Business Model)
In this model, the basic service is provided free, but premium features are locked behind a paywall. Spotify offers a free version with limited features and ads, but for ad-free listening and better quality audio, users must pay for Spotify Premium. Similarly, Dropbox offers a limited amount of storage for free, with additional storage and features available for a subscription fee. Evernote also follows this model, offering basic note-taking functionality for free but charging for features like offline access and more storage.
Freemium is one of the most used in the SaaS world where most online services offer a free entry package and then try to upsell users for premium subscriptions.
3. Usage Based / On-Demand Model
Here, customers pay exactly for the amount of services they use. Amazon Web Services (AWS) charges users for the resources they use (E.g. API calls, Storage, Server Capacity). Similarly, ride services like Uber and Lyft charge by distance traveled and time, while streaming services like Amazon charge a fee for access to their content libraries or special movies to be viewed “On-Demand”.
We also see the on-demand model in the gig economy. Here, for example, you book a consultant and automatically get a bill based on how long you need help. (Upwork, UpCounsel, Fiverr, etc.).
4. E-Commerce Model
This model involves selling physical products online. Companies like Amazon and eBay started by selling their own inventory. Another example is Apple, which sells its own products like iPhones, iPads, and Macs directly to consumers through its online store.
In contrast to a marketplace model, as Amazon is today, where other companies offer their goods on Amazon Marketplace, pure e-commerce models are based on a one-sided sales approach. A company sells its own goods to customers.
5. Marketplace Model (Peer-to-peer, two-sided marketplace)
In this digital business model, a platform connects buyers (demand) and sellers (supply) and charges a fee, membership or other consideration for each transaction. Amazon and eBay have evolved to this model, offering third-party sellers the opportunity to sell on their platforms. Another example is Etsy, which connects artisans with buyers interested in handmade and vintage goods.
The biggest problem with this business model is its complexity and dynamics. If you don’t have sellers, you’ll never attract buyers, and if buyers can’t find sellers, you’ll lose the buyers. So a two-sided platform must carefully scale demand and supply simultaneously to attract both sides. Crowdfunding is a special form of marketplace, as knowledge or resources are collected and distributed from one side to the other. More on this later.
6. Ecosystem Model
A company offers a range of interconnected services that create a network effect that binds customers. Apple’s ecosystem includes hardware (iPhones, iPads, Macs), software (iOS, macOS), and services (App Store, iTunes, iCloud). Similarly, Google offers an ecosystem that includes Android, Chrome, Google Search, Google Docs, and the Google Play Store. Microsoft’s ecosystem includes Windows, Office 365, and Azure Cloud Services.
Digital ecosystems are one of the most complex, yet powerful digital business models in existence today. Ecosystem orchestrators such as Amazon, Alibaba, Google, Apple, Tesla and many others leverage customers with different services across different platforms. They can then use the knowledge and data to upsell to existing customers and acquire new customers through the “vendor lock-in” effect of their ecosystems.
Just think what services you use from Google, Apple, Amazon, Alibaba, etc. and how hard it would be to leave their digital ecosystem. This lock-in effect is also an important factor for future revenue. But you don’t have to be an ecosystem orchestrator, maybe you are a user of ecosystems or you provide modules for an ecosystem. A good example of a modular provider is PayPal, which enables seamless payments for many different digital business models and ecosystems.
7. Access-Over-Ownership Model / Sharing Model
This model allows consumers to access goods and services for a certain period of time without owning them. Airbnb makes it possible to rent apartments for short periods of time, while Zipcar makes it possible to rent cars for a few hours or days. Similarly, Rent the Runway allows renting designer clothes and accessories – so the possibilities are endless from watches to clothes, cars, houses and boats.
This was one of the most disruptive business models because of the impact it had on ownership and the resulting revenue you can earn from a commodity. Imagine: A car could suddenly be a source of revenue instead of just a cost.
8. Experience Model
This model aims to enhance physical products with digital services. Tesla not only sells electric cars, but also offers software updates that improve vehicle performance and add new features. The Nike+ Run Club app provides a digital experience by tracking your runs, offering personalized coaching and connecting you with a community of runners.
Another take on the experience model is also to combine different experiences together and create a new customer centric ecosystem that leverages the physical product to build a digital offering.
9. Subscription Model
In this widely used business model, customers pay a recurring fee for access to a product or service. Netflix charges a monthly fee for unlimited streaming of TV shows and movies. Adobe Creative Cloud offers access to a range of creative software such as Photoshop, Illustrator, etc. for a monthly or annual fee. Microsoft Office 365 also charges an annual or monthly fee for access to its productivity software. However, it may also be an annual license for software (e.g., ERP).
10. Open-Source Model
Here, the software is made available free of charge, whereby the source code can be modified by anyone or the “community” ensures that the code continues to develop. The income for the open source providers can come from associated services such as training, support or premium features (e.g. hosting, premium plugins). Mozilla Firefox is a free and open source web browser whose revenue comes from partnerships with search providers, for example Google pays Firefox to be the default browser there. Linux distributions such as Red Hat and Ubuntu are offered for free, with revenue coming from support, training and business services.
11. Hidden revenue generation Model
Some companies generate revenue in ways that are not immediately apparent to the user. As explained in the open source model, Mozilla Firefox, for example, makes its revenue through partnerships with Google and gets paid so that users use Google by default. Google gives Android away for free to device manufacturers, but makes money from sales in the Google Play Store (commission on app sales, ads in the App Store) and data collection for targeted advertising. Users need to be aware of the possible misuse of data; as the Cambridge Analytica scandal has shown, hidden revenue generation can also lead to false incentives and possible abuse.
Addition: Crowd Sourcing / Crowd Funding Model
Crowd sourcing is another digital business model where you harness the potential of the crowd. A good example is Wikipedia, where anyone can contribute, edit and improve articles. In this way, Wikipedia has a large knowledge base without paid authors or staff. Also, money for projects can be raised through the “crowd” and well-known platforms are Kickstarter, GoFoundMe, etc…. These platforms are usually a combination of various digital business models such as marketplaces, ad-supported platforms or subscription models.
Choosing the right digital business model
That’s always the answer when you don’t have a straight answer. So what is the best/correct/most profitable/successful business model? – Well … IT DEPENDS
Every business needs to see what type of offerings they want and where they want to optimize. Two-sided marketplaces are extremely complex and take longer to grow, freemium is widely used and can be combined with ad-supported business models, or even of course you can go straight to a SaaS subscription model. As we have seen with Spotify, SaaS works well when you can deliver enough “free” to attract customers and the premium creates “enough value” for someone to pay. Digital ecosystems are perhaps the most complex and risky business models because they require massive investment, a large user base, and the orchestration of many partners and streams, but can also be some of the most powerful business models when they work, among other things.
When thinking about new business models, it’s always good to think about the customer and the unique value proposition you want to have. Make sure you don’t overthink it and keep it simple and clear rather than developing too many business models at once. Find something where the customer is interested and start with offering something of value – free or paid, it’s up to you – but at least start offering something and later you can still decide how to monetize it when it works.
Especially with platforms, marketplaces, and digital ecosystems, it’s important to note that immediate monetization can hinder growth and lead to a supply/demand gap. Sometimes digital business models need a critical mass (a large enough number of users) and a critical base to leverage a monetization model, and therefore need some time and investment before they can even start generating revenue. For this reason, there are 2 different strategies:
For earlier/faster monetization, it is therefore better to choose freemium, e-commerce or subscription models. They are easier because the supply side is already fixed/ better controlled, you can generate direct revenue and only need to focus on generating the demand side.
Business models that are more long-term and rely on network effects are usually two-sided platforms, two-sided marketplaces and especially digital ecosystems. They have to grow for a long time before monetization makes sense, and therefore have a long funding gap to overcome. In the long term, however, they can outperform other companies financially because they use the network effect, which could also be called the “the winner takes it all” effect, to dominate a market because of its size and make it difficult for new competitors to enter because they first have to catch up. (Example Facebook and Google+ – Facebook has already conquered the market and Google had no chance with its social media platform due to the network effect).