Digital Business Models

What makes a business digital?

Most businesses have an aspect of digitalization, from their product offering to their generation of new customers. However, it is usually a combination, not the sole existence of these aspects, that truly make a business model digital. You can sell digital products online but that does not necessarily make it a digital business. Another aspect of a digital business model is how a large amount of value is generated from utilizing the internet. Looking at Amazon, Uber, and Airbnb, it would be safe to say that these companies would probably not exist in their scale without the use of the World Wide Web. 

Types of digital business models

Although many digital business models have similarities in how they derive value for consumers, there are also many ways in which they differ from one another. A simple search online finds upwards of 8-10 different types of digital business models ranging from open-sourced, subscription-based, ad-supported, etc. This article aims to highlight 2 of them and dive deep into what makes them digital and how they derive value for their customers.

Freemium Model

The freemium model builds itself around providing limited functions of their software to the public for free, with hopes of converting these free users to paid users in time. This makes for easy onboarding of customers with little sales efforts. An example is Spotify, which has a free and premium version. In the free version, there are advertisements and music is unable to be played offline. In the premium version, advertisements are removed, and you can download music to be played when you do not have an internet connection. The freedom from advertisements and downloadable music provides enough value so that customers want to pay for it, making this freemium model successful. Thus, the key considerations when building the freemium model would be to ensure that the infrastructure and operations in place can support many free users while providing strong incentive for users to upgrade to the paid version.

Marketplace Model

A marketplace model derives its value from being a middleman of sorts between buyers and sellers. Think of Airbnb – there are people with homes to rent out and people who need to rent a room for the weekend; without an app, it would be next to impossible for them to find one another to make a deal and that is where the value of a marketplace comes from. Marketplace models usually earn income by charging commission fees on each transaction, but the biggest challenge is to provide enough value to both the customer and provider so that they do not bypass your marketplace, which thereby leads to a loss in income. Another consideration is the pricing model. Should we start off with lower commissions to attract customers before raising it? Should we charge the customer, provider, or both? These are questions to ask yourself before embarking on such ventures.

What next?

There are numerous types of digital business models that companies have utilized in recent years to drive value for customers as well as their own stakeholders. With Covid-19 amidst, digital transformation has been forced upon many companies. While many have done well in retaining the value they provide, in a new environment like now, there is always an opportunity if you are able to identify a gap in the current market and fill it with an innovative solution.

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