Digital Business Models

What are Digital Business Models?

Digital business models are those that allow businesses to create value and generate revenue online or via the cloud. They leverage software to deliver products, services, and experiences to customers without the need for a physical presence.

Examples of digital business models include:

• Ecommerce
• Software-as-a-Service (SaaS)
• Subscription services
• Online marketplaces
• Digital products
• Data monetization
• Ad-based models
• Peer-to-peer (P2P) networks
• Affiliate marketing
• Any other type of online business

Technically, any business that has an online presence can be considered a digital business. But true digital business models are intentionally designed to take advantage of the unique opportunities an online platform provides.

Synonyms

• Digital economy
• Online business models

The Rise of Digital Business Models

The growth trend in digital business models in the 2020s reflects a dynamic and rapidly evolving landscape. Since the birth of the first SaaS platform (Salesforce) in 1999 and the continuous growth of ecommerce, the subscription economy, and the Fourth Industrial Revolution, digital transformations have even transformed the way traditional business models operate.

Generative AI

This technology captured significant attention in 2023, with applications like ChatGPT, Midjourney, and DALL-E (that generate images, text, videos, and more) taking the world by storm. Businesses across various sectors are rapidly adopting generative AI, which is starting to transform roles from sales to software development.

While some seem to think it’s coming for people’s jobs, the reality is generative AI is more of an enabling technology. It can improve our quality of life, streamline processes, and help businesses scale faster.

Frictionless Digital Experiences

Designing and building engaging, connected, and frictionless digital experiences to attract and retain customers and employees is becoming increasingly important. According to data from PwC, 43% of customers would pay more for additional convenience.

This means that, in addition to being more profitable in the digital ecosystem, digital business models can also leverage convenience as a competitive differentiator. You can use technology to eliminate roadblocks in the customer journey, make it more personalized, and deliver a better experience overall.

A “frictionless digital experience” also refers to the increasing intertwinement between digital and physical realities. The expectation for everything to be connected, from personal lives (like smart homes) to broader applications (like smart cities), drives this trend. Harnessing data through flexible and smart APIs is also a key focus, emphasizing the importance of data-driven decision-making​​.

Cybersecurity and AI

As technology becomes more accessible and democratized, cybersecurity and artificial intelligence are emerging as critical components for maintaining organizational safety and driving unique business opportunities and efficiencies. This trend underscores the growing importance of secure and intelligent digital infrastructure​​.

A key area of focus in the cybersecurity and AI space is threat intelligence — the practice of gathering and analyzing data to identify potential cyber threats before they escalate. This can help businesses stay one step ahead of cybercriminals and protect their digital assets, including sensitive customer information.

Hyperautomation and Cloud Technologies

There’s a growing focus on hyperautomation, where organizations rapidly identify and automate as many business processes as possible. AI, machine learning, and robotic process automation (RPA) are the key technologies driving this trend. As an example, the average company today uses 130 SaaS applications to automate their workflows.

At the same time, businesses are increasingly turning to cloud technologies to enable their digital business models. Cloud-based platforms provide scalability, flexibility, and cost savings that traditional on-premise systems cannot match. This is especially important as digital business models often require a high level of agility.

Digital Accessibility and Inclusive Design

With a significant rise in digital accessibility lawsuits, there is an increased focus on making digital products and services accessible and inclusive. Design processes are now considering a broader range of factors including disability, race, sociocultural background, gender identity, age, and sexual orientation.

To make accessibility part of their digital strategy, business leaders need to keep track of evolving regulations and trends and proactively integrate technology that makes their digital interfaces accessible to all users. This is not only becoming a legal requirement, but it also allows businesses to tap into an important segment of potential customers that may have been overlooked before.

Mobile Optimization

The emphasis on mobile-first design is continuing, as more than half (57.8%) of annual website traffic comes from mobile devices and tablets. This trend is driven by the necessity of providing seamless experiences across all devices and the importance of mobile-optimized content in search engine rankings​​.

Moreover, mobile technology is becoming increasingly integrated with various digital business models — for example, mobile banking and ecommerce. As smartphone usage continues to rise globally, businesses that want to stay competitive have to prioritize fast loading times, user-friendly interfaces, and secure transactions on these platforms.

Regulatory and Policy Shifts

Like any type of new business, there’s a rapidly changing landscape regarding legislation and regulation for digital businesses. Governments are starting to take a more active role in regulating data privacy, cybercrime, and other areas impacted by digital business models.

For example, the European Union’s General Data Protection Regulation (GDPR) has significant implications for how companies handle personal data. And Google’s shift to cookieless advertising creates challenges for monetization models that rely heavily on internet advertising or data sales.

Policymakers are also looking at ways to support and encourage the growth of digital businesses. Initiatives like tax incentives for tech startups or investment in digital infrastructure. Staying informed on these shifts is essential for digital businesses to ensure compliance and take advantage of potential opportunities for non-dilutive, non-secured funding.

Key Components of Digital Business Models

Characteristically, digital business models emphasize flexibility, innovation, and agility. They leverage technology in a way that fundamentally changes how an organization operates, making it more efficient and better positioned to create new revenue streams, reach new customers, and gain a competitive edge.

Here are the ten key components of digital business models:

1. Value proposition — How your unique product/service addresses specific customer needs and pain points.
2. Customer segments —Customer segments — Separate groups of interrelated target customers to which different parts of your offering serve or appeal.
3. Product strategy — Everything from UX, features, development cycles, and new product releases that drive product-market fit.
4. Sales, marketing, and distribution channels — The unique mix of channels you use to reach customers and deliver value. Examples include online marketplaces, social media, channel sales partners, and email marketing.
5. Revenue streams — The different ways your business makes money (e.g., a subscription model, affiliate marketing, ad hoc services).
6. Customer relationship management — How you build meaningful connections with your target audience, retain customers, and turn them into long-term brand advocates.
7. Cost structure — Planning for and optimizing the costs associated with delivering your products/services.
8. Key activities — Your day-to-day workflow that ultimately delivers the value proposition to customers.
9. Data strategy — How you gather, analyze, and use data to improve decision-making, enhance the product experience, drive innovation, and monetize your offering (while managing regulatory compliance).
10. Tech stack — Software, hardware, and networking technology you use to run your day-to-day workflow.

Common Types of Digital Business Models

Really, there are tons of different digital business models. Here’s a look at the most common ones:

Ecommerce

Any business that sells products or services online can be considered an ecommerce business. The industry itself actually comprises tons of different types of business models, including:

• Traditional retailers like Walmart and Amazon
• Marketplaces like Etsy and eBay
• Website builders like Shopify and BigCommerce
• Digital products like ebooks, online courses, and monthly subscription boxes
• Direct-to-consumer (DTC) brands like Warby Parker and Allbirds
• Online wholesalers like Alibaba and Amazon Business
• B2B manufacturers that sell over the internet

Today, it’s easier than ever to start selling something online. Thanks to platforms like Shopify and Amazon, it’s easy to start selling products from your bedroom, use a 3PL (third-party logistics) to handle order fulfillment, and scale your business using algorithms.

Subscriptions

Besides ecommerce, the subscription business model is what we generally think of when it comes to digital products. It’s the business of selling access to data or services for a recurring fee rather than a one-time payment.

Examples include:

• Software-as-a-Service (SaaS) like Slack, Salesforce, and pretty much every app you subscribe to today.
• Platform-as-a-Service (PaaS) like Google Cloud Platform and AWS
• Infrastructure-as-a-Service (IaaS) like Microsoft Azure and Rackspace
• Membership sites like Amazon Prime and Netflix
• Subscription boxes like Stitch Fix and BarkBox

The beauty of this model is that it provides predictable revenue for businesses while offering convenience, customization, and sustainability for customers. Since it’s all hosted remotely, the digital subscription model is also one of the most scalable.

Marketplaces

Marketplaces connect buyers and sellers. This model is all about creating a shared platform where people can buy and sell goods or services. Companies that have leveraged this digital business model include:

• Airbnb (renting out space)
• Turo (renting out your car)
• Uber (transportation)
• Upwork (freelance work)
• Fiverr (gig work)

Marketplaces are often able to scale quickly because they don’t have the burden of inventory or physical locations. Plus, they allow both buyers and sellers to benefit from network effects.

Freemium

The freemium business model is similar to subscription-based SaaS models but with a twist: customers can access basic features for free, but must pay for advanced features or an ad-free experience.

Common examples include:

• Spotify (music streaming)
• LinkedIn (professional social media)
• Dropbox (cloud storage)
• Evernote (productivity software)

The goal of the freemium model is to convert free users into paying customers, and it can be an effective way to reach a larger audience while still generating revenue. However, it also requires careful balancing of feature offerings in order to entice enough users to upgrade to operate profitably.

Digital Advertising

In an ad-based revenue model, businesses generate the bulk of their revenue from, well, advertising. They sell ad space on their website or app to other businesses in order to keep the service free for users. Popular examples of companies using this model are:

• Google
• Facebook
• YouTube
• Instagram

The digital advertising model has come under fire in recent years due to concerns over user privacy and the spread of misinformation. However, it remains a popular way for businesses to monetize their online platforms. Plus, it’s how tons of ecommerce and subscription businesses reach their target audience and understand customer behavior.

Affiliate Marketing

Affiliate marketing is essentially referral-based revenue. It’s a success-based model where companies pay affiliates (individuals or businesses) a commission for promoting their products or services. The main goal is to drive traffic and sales, but businesses also use it for lead generation and brand awareness.

Examples include:

• Amazon Associates (commission on products sold through affiliate links)
• CJ Affiliate (affiliate network connecting businesses with publishers)
• TikTok Affiliates (network of creators and brands)

Affiliate marketing is a low-risk way to reach your audience through someone else’s platform. However, it also requires careful monitoring to ensure affiliates are promoting your brand accurately and ethically. And you need to ensure the people promoting your product have an audience relevant to it.

In-App Purchases

Mobile apps (and sometimes SaaS products) have in-app pruchase options for users. This means they can purchase extra features, virtual goods, or premium content within the app. The most common place we see in-app purchases are in mobile games (think Candy Crush’s colorful array of power-ups and extra lives), but you’ll also find them in productivity apps and other types of media.

The idea behind in-app purchases is similar to the ad-based revenue model: by offering a residual source of revenue that isn’t directly tied to one transaction, businesses can boost their overall revenue and profitability while offering a free or low-cost experience to users.

Digital Consulting and Services

The digital services business model involves offering a range of consulting, advisory, or specialized technical services to clients. This can include:

• Web design and development
• Digital marketing
• Search engine optimization (SEO)
• Social media management
• Content creation

One of the main advantages of this model is that you can personalize it to the specific needs and goal of your clients, making it a more lucrative option compared to traditional consulting or services.

That said, the fact that you can start it from just about anywhere (with little to no capital) makes it a highly competitive space. To succeed, you have to stand out by offering quality, niche-specific services and constantly upgrading your skills.

The Future of Digital Business Models

Although cloud-based technology and the evolution of the customer experience have contributed to the success of digital business models, there are still plenty of challenges and opportunities ahead. As technology continues to advance and consumer behavior evolves, businesses will have to continually adapt and innovate in order to stay ahead of the curve.

Beyond cloud-based technology, some trends shaping the future of digital business models include:

Decentralized Business Ecosystems

Leveraging blockchain technology, future digital business models could operate in highly decentralized ecosystems. This might involve businesses that are not only decentralized in terms of their operations but also in their ownership, with stakeholders and customers having a share in the decision-making processes and profits through tokenization.

Take VAKT, a blockchain platform developed in partnership with Thoughtworks. VAKT brings together commodities trading organizations, including major companies like BP, ING Group, Saudi Aramco, Shell, and Société Générale. It aims to make the energy post-trade process more efficient by using blockchain for digital record-keeping and implementing smart contracts. 

Autonomous Business Operations

Advanced AI and machine learning could evolve to manage significant portions of business operations autonomously. Businesses might have AI-driven departments that can make decisions, execute strategies, and adapt to market changes without human intervention, significantly enhancing efficiency and decision-making speed.

Siemens’ implementation of AI-infused generative design features in engineering software is the perfect example of this. This software allows engineers to specify design and cost parameters, and it autonomously explores the design space to generate a range of options. This automation has led to reduced manufacturing costs and improved product performance for Siemens’ customers.

Virtual Reality (VR) and Augmented Reality (AR) Commerce

With the rise of VR and AR technologies, future digital businesses could create immersive shopping and service experiences. This would allow customers to virtually try products, experience services, or navigate through digital spaces that simulate physical stores or environments.

IKEA, Amazon, and plenty of other large-scale ecommerce brands have already started using AR right on their websites and mobile apps. Users can point their cameras at an empty space, and AR-powered apps will display how a piece of furniture or home décor item would look in that space.

Technology Enabling Digital Business Models

Ecommerce

Ecommerce is really more about the technology than it is about the business model. It’s no longer “selling stuff online.” It’s about the software and processes behind why and how a customer can make a purchase online.

SaaS companies in the ecommerce space like Shopify, Oberlo, and BigCommerce have played a massive role in enabling digital business models. Their software allows businesses to easily create online stores, manage inventory, track sales, and process orders.

Cloud Computing

Cloud infrastructure is what enables SaaS and ecommerce solutions. Without cloud computing, none of these digital business models would be possible or scalable.

AWS, Google Cloud, and Azure allow businesses to host their apps and websites on reliable servers with intuitive management interfaces (unless they host their own cloud). This significantly reduces the costs associated with hosting services in-house while providing all the benefits of highly available infrastructure.

Configure, Price, Quote (CPQ)

CPQ software is a vital tool for businesses that use subscription-based, usage-based, or other complex pricing models. CPQ solutions allow businesses to create custom quotes and packages based on individual customer needs and preferences, automate the approval processes, and seamlessly update pricing as service offerings evolve.

This simplifies the sales process while allowing businesses to be more agile and responsive to market changes. Overall, this technology has played a massive role in the success of digital business models and will continue to do so in the future.

Subscription Management

Subscription management software enables software companies to manage all their users’ billing and subscription needs without manual intervention. It helps businesses offer a range of subscription plans, charge customers based on usage, and automate invoicing processes while ensuring compliance with tax regulations.

Billing Platforms

Billing software is either a part of CPQ and subscription management or an add-on that fulfills a specific set of billing needs. These platforms enable businesses to manage payment plans, track recurring revenue, and ensure timely payments from customers.

AI and Machine Learning

AI and machine learning tools come in all shapes and sizes. It could be predictive analytics solutions that help businesses understand customer behavior and improve their product offerings, or it could be autonomous decision-making tools that enable businesses to continuously optimize efficiency.

As AI and machine learning technologies continue to evolve, they will play a vital role in shaping the future of digital business models. From improving user experiences to automating complex processes, these innovative technologies will undoubtedly contribute to the success of businesses in the digital world.

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