Digital Business Models

What is it?

A digital business model can be defined as a model that uses digital technology to improve various aspects of an organization (from the way customers interact to how the company can profit) unlocking long-term value.

The goal of the digital solution is to generate a significant advantage that customers are willing to pay for.

The development of digital business models is an important task, which requires innovation. Therefore, although, in many cases, innovation occurs because of combining aspects of existing business models to create a unique formula, the simple extension of an existing business model to a digital component is only a preliminary changing phase. The development of such a model goes beyond that.

Digital Business Model Elements

What makes a digitally robust business model different from traditional contexts? This issue was addressed by the authors of an article in the MIT Sloan Management Review (Spring 2014). Based on the findings of a two-year research project at MIT’s Information Systems Research Centre (CISR), the research team interviewed CIOs and CEOs about the challenges of operating in the digital world.

And it theorizes that a digital business model has three components:

– Content (“what is consumed”): When transitioning to a digital business model, it is important that digital content exactly mimics offline content. The next step would also be to provide alternative products / services that can only be accessed online, that is, exclusive from the Internet, but offer added value using the Internet.

– Customer experience (“how it’s packaged”): Making products easily accessible to customers is critical. It allows them to use it on their own (without human interaction from the supplier) and receive the “goods” they want when they want them. Understanding how customers use the digital platform is essential to optimizing their experience, because not all customers will use your platform for the same purposes or in the same way.

– Platform (“as delivered”): The platform on which this service is provided must be strong (internally and externally). It must also be easy to use on the web by current and/or potential customers, being tested beforehand.

Characteristics of Digital Business Models

– The added value generated would not be possible without the use of digital technologies. Amazon, Uber, and Airbnb are companies that wouldn’t do business without Internet technologies.

– The model is characterized by innovation in digital business, based on services new to the market.

– Customer acquisition and distribution are based on digital channels. Companies that develop and run models of this type primarily use digital technologies to reach potential audiences.

– Customers are willing to pay for the digital service or the service, creating independent value. This is a striking feature because it differentiates purely digital services (application that allows us to monitor energy consumption, for example) from digital business models.

Digital Business Model Types

– Hidden revenue business model: Free apps and platforms available to billions of people around the world, profiting from the compilation of personal data and reselling it in advertising format. This strategy is used by platforms such as Facebook or Google.

– One-for-one business model: This model is seen as a combination of profit and non-for-profit models. At a first glance it appears to be a non-profit model, however the non-profit side of the model generates more customer empathy, exponentially increasing the profit on the profitable side. This strategy is used, for example by TOMS Shoes, which for every pair of shoes sold, another is given to children all over the world who cannot access them.

– Razor and blade revenue model: Companies make their customers loyal and comfortable with their base products, making them willing to purchase related products (accessories) leveraging the price of these seconds. An example of this model is Apple, creating its own operating system, directly associated with the App Store or iTunes (base product), making customers buy (accessory products) such as iPhone, iPad or Mac at exorbitant prices, with reduced levels of price elasticity.

– Peer-to Peer business model: This model is built on the idea that it is possible to create value for both the demand and offer sides, while the company acting as an intermediary, profits through commissions. A great example of this model is Airbnb that allows individuals to rent private homes for free, with both sides paying commissions to it for providing the possibility of such a deal.

– Freemium business model: Companies offer a free version of the product that is only usable for a certain time limit or without access to some potentially important features. Thus, they provide a limited experience enticing customers to purchase the full and paid version. This mix of free and paid service is heavily used in SaaS business model.

– On-demand model: The web has finally allowed the content consumption at the consumers’ own pace. Something that radio, TV and mass media could not provide. Thus, on-demand consumption allows everyone to access the content they want at different rates and intervals. Companies like Netflix have become popular for precisely this type of action.

– E-commerce model: This model consists of using online platforms for physical sales, combining 3D reality with virtual reality. The first to use this type of model was Amazon, that started by just selling books and now is selling everything you could possibly imagine.

Strategic Benefits

Even though adopting a digital business model is not an easy task (much less for all companies), without a doubt, this has aspects that are not only beneficial to the customer – in terms of their experience and operational improvements. But also, for the company’s profit, that enters a new market, whose profitability sees a growth, and its market power increases.

All these are benefits that are very difficult to achieve and coordinate with technological development.

If you want to know more about the most popular Digital Business Model types, check out this article. And to learn more about the most successful Business Model types you need to know as a business student go here.