Digital Business Models: All you need to Know
Published: 15 June, 2021
By now, a general understanding has been established that modern technologies and software exist and represent legitimate products. Everyone has heard the term artificial intelligence and has at least some idea of what it means. However, one thing is often still unclear to many, including some CEOs: What are digital business models and why do they work so well?
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Why do we need to understand digital business models?
The answer to this question is very simple: Because it is no longer possible without it. But why is that? Consumers have now become accustomed to the system and providers are doing their best to put the consumer first. As a result, an entirely new system has evolved. Companies have realized that the technological capabilities that are now available to them are so much more than a website. At the same time, customers have developed whole new confidence in digital business models. What was called a dodgy “subscription trap” 10 years ago is now Netflix. What used to be the big catalog that people ordered from is now Amazon.
And how have many of these classic companies dealt with this? They refused to embrace progress and began their own demise. Just because some people couldn’t explain why the online service or product was suddenly cheaper or even free.
What are digital business models?
But let’s take a look at the basis 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:
Digital business models offer some kind of added value for one or more customers through the use of digital technologies. The goal is for the customer benefit to reach an appropriate level for which consumers are willing to pay.
Do you notice anything? This is only marginally different from a traditional business model. To be precise, it only differs in that it uses digital technologies. So why exactly are they so successful at the moment? To understand this, we need to dig deeper into the concept of digital business models.
The characteristics of digital business models
In order to additionally delineate the concept of digital business models, we look at the various characteristics that shape the meaning. It is only through them that a clearer distinction from classic business models really becomes clear:
- The added value can only be generated digitally. Traditional models, on the other hand, always generate added value in analog form. They may undergo a digital transformation, but this does not change the added value, only the way to obtain it. In short, without the Internet, the corresponding core business of the digital business model would not be possible.
- The USP is generated digitally and is also exclusively digital in nature.
- The corresponding digital business model is based on innovation. The product is usually new on the market.
- The generation and acquisition of customers take place digitally. There is now a large number of possible channels that can be used for this purpose by digital business model marketing. There are no hybrid forms, such as offline sales, which attempt to acquire customers by means of analog registration.
- Geographically independent scalability. This is where we need to pay attention. Of course, not every digital business model can easily scale to every country. Legislation, politics, and other regulating factors can be a barrier to entry. However, the foundation, the Internet, enables limitless scalability, at least in theory. To put it more simply and tangible, there is no ocean between America and Europe on the Internet.
What types of digital business models exist?
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 11:
- Marketplace (also peer-to-peer)
- Open Source
- Hidden Revenue
Digital business models examples and types
Let’s take a closer look at the individual models to understand how they work and how they are structured. 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.
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. Revenue is generated purely through advertising on the respective URL. Users are shown classic display ads, for which the advertisers pay the platform provider. Due to the increasing use of AdBlock services, some providers are hiding the free content as long as an adblocker is active.
This is the model we now encounter most often. It is particularly popular with software providers. As a user, you get access to the corresponding content, which is usually limited. As soon as you want to remove this limitation, you have to switch to the paid version. There are different forms of limitation. In one scenario not all features and functions of software are unlocked. At the same time, it is possible to have access to all functions but to be limited in other areas. If you take an image editing program as an example, you can use all functions, but you can only edit one project.
This model is a further development of on-demand offers on TV, such as Premiere or later Sky. Services such as Amazon Video or AppleTV+ have emerged from them. In this case, however, we are talking about Amazon Video and NOT Amazon Prime, which we will get to later. The on-demand services work in a relatively simple way. There is a certain range of products, e.g. various movies, that can be purchased or rented On Demand. The customer only pays for the respective usage.
What do we have to say about this? E-commerce has become a standard digital business model. Here, a supplier sells its products via a digital platform. This concept has been integrated by many major players. The best digital business model example is Amazon.
At this point, you intuitively come to Amazon. However, it is not quite that simple. Even though Amazon is increasingly developing in this direction, it was not a marketplace model at the beginning. The difference lies in the offer structure. One-sided offers are considered e-commerce, two-sided variants are marketplaces.
Ecosystems, also known as orchestrators, are the most complex versions of digital business models. The purpose of these models is to keep users in their own ecosystem as much as possible. Amazon, Apple, and Google serve as business model examples. The principle is considered so complex because theoretically many services can be substituted within the ecosystem. The providers pursue the following strategy: They can identify the best possible up-selling potential from the user data. In addition, they limit functions so that they only function optimally within the ecosystem.
As a digital business model example, Apple is right at the top. Just think of AirDrop. Great, isn’t it? Welcome to the vendor lock-in!
This is a very classic rental business, but digital. The business model example for this is Airbnb, but also Sixt or others. In principle, it is only a matter of purchasing or renting products or services for a certain period of time. The costs are also only based on this period.
The best digital business example is Tesla in this case. Tesla has managed to develop the experience in its products into a business model of its own. You can either use your Tesla “only” like a car, or you can take the whole package. In this case, you simply add a digital service or function that creates a completely new experience.
For a suitable digital business model example, we need one word here: Netflix. There is not much to explain here. For a monthly or annual fee, the customer receives a corresponding product until he cancels the subscription.
This is one of the most interesting variants. Although it does not generate enormous sales, products in this segment usually have an extremely high reach. Business model examples are Wikipedia or Firefox. The offers are completely free of charge. Neither receipt nor use costs the user anything. In return, everyone can contribute to the corresponding product or service. Because of the omitted costs, these offers spread very quickly. Companies can use them, for example, to subsequently sell associated products and thus generate sales.
Hidden revenue models are another interesting strategy. The motto here is in transparency. It is no longer about persuading a user to buy. One simply saves a complex sales process and replaces it with user data. Here, a product is offered free of charge or at a very low price, in exchange for which the user data left behind is sold to third-party companies. One example of this digital business model is Slideshare. Does it look familiar to you?
In the meantime, a variety of these models exists, we have presented the 11 most popular ones to you here. It’s hard to imagine our world without digital business models, and let’s face it, they’re good! Let’s stay curious about which models will develop in the future.