Digital Business Models

Digital business models are reshaping how companies create and capture value. By understanding the layered nature of digital business, embracing service-oriented approaches, focusing on long-term relationships, and leveraging platform dynamics, companies can position themselves for success in the digital economy. However, this requires more than just adopting new technologies. It demands a fundamental rethinking of business strategies, organizational structures, and core capabilities. As the pace of digital transformation continues to accelerate, the ability to innovate and adapt business models will be a key determinant of long-term success.

The digital transformation has revolutionized how businesses generate and capture value. A layer model of digital business provides a useful framework for understanding these changes. This model consists of interconnected layers, from infrastructure at the foundation to business models at the top, each playing a crucial role in the digital ecosystem. By examining these layers, we can gain insights into how digital technologies are reshaping industries and creating new opportunities for innovation👉 Practical application of new ideas to create value. and growth. To understand these changes, it’s helpful to consider a layer model of digital business.

• Infrastructure
  At the foundation is the infrastructure layer, which includes the physical hardware, networks, and basic software that enable digital technologies. This encompasses things like data centres, cloud computing platforms, and communication networks.
• Data
  Built on top of this is the data layer. As businesses digitize their operations and interactions, they generate massive amounts of data. This data becomes a key asset that can be analysed to gain insights and drive decision-making.
• Application
  The next layer is the application layer, which includes the software and digital services that leverage the infrastructure and data to deliver specific functionality. This could be anything from enterprise resource planning systems to mobile apps.
• Business Model👉 A business model outlines how a company creates, delivers, and captures value.
  At the top is the business model layer. This is where companies determine how to package and monetize their digital capabilities to create value for customers and capture some of that value for themselves.

As we move up the layers, from infrastructure to business models, a few key trends emerge:

• Increasing abstraction and flexibility:
  The layer model of digital business demonstrates a progression from concrete to abstract elements. At the foundation, infrastructure components like hardware and networks tend to be more standardized and fixed. As we move up the layers, there is increasing room for customization and rapid changes, particularly in the application and business model layers. This flexibility at higher levels allows companies to quickly adapt their offerings and strategies to meet evolving market demands and customer needs.
• Shifting sources of competitive advantage:
  In the early days of digital business, owning proprietary technology infrastructure or exclusive data sets often provided a significant competitive edge. However, the landscape has evolved, and today’s competitive advantages are increasingly derived from innovative applications and business models that leverage shared or commoditized infrastructure. Companies now differentiate themselves through unique value propositions, customer experiences, and the ability to rapidly iterate and improve their digital offerings.
• Growing importance of ecosystems:
  The interconnected nature of the digital economy has made it crucial for businesses to participate in and cultivate broader ecosystems. Success in the digital realm often hinges on a company’s ability to integrate with complementary services, platforms, and partners. By fostering these ecosystem relationships, businesses can extend their capabilities, reach new customers, and create more comprehensive solutions that provide greater value to end-users.
• Blurring of industry boundaries:
  The modular and recompilable nature of digital capabilities has significantly reduced barriers between traditional industry sectors. Companies can now leverage their digital assets and competencies to expand into adjacent markets or even create entirely new categories of products and services. This fluidity allows for rapid innovation and the emergence of cross-industry solutions, challenging established market definitions and creating opportunities for disruptive business models.

Understanding this layered model helps explain why digital transformation goes far beyond simply digitizing existing processes. It requires rethinking value creation and capture at every level.

One of the most significant shifts enabled by digital technologies is the move from product-centric to service-oriented business models. This transition is reshaping industries and creating new opportunities for value creation.

In traditional product-centric models, companies develop, manufacture, and sell physical goods. Value is primarily created through the one-time sale of these tangible assets. In contrast, service-oriented models focus on delivering ongoing value to customers through digital capabilities and experiences.

Some key characteristics of service-oriented business models include:

• Subscription-based pricing:
  Subscription models allow customers to access services for a recurring fee, eliminating the need for large upfront investments. This pricing structure provides businesses with a steady, predictable revenue stream, enhancing financial stability and forecasting. Moreover, it often leads to increased customer lifetime value as users continue their subscriptions over extended periods.
• Continuous improvement:
  Digital services enable rapid iteration and enhancement based on real-time usage data and customer feedback. This agile approach allows companies to quickly address user needs, fix issues, and introduce new features at a pace unmatched by traditional product development cycles. The ability to continuously improve also fosters stronger customer relationships, as users see their input directly shaping the service they use.
• Personalization:
  Digital services can leverage user data to create highly tailored experiences that adapt in real-time to individual preferences and needs. This level of personalization enhances user engagement and satisfaction, potentially leading to increased customer loyalty and retention. Furthermore, it allows businesses to differentiate their offerings in increasingly competitive markets.
• Scalability:
  The low marginal costs associated with serving additional customers make digital services highly scalable. This scalability allows businesses to rapidly expand their user base without proportional increases in operational costs. Additionally, it enables companies to enter new markets or serve niche segments that may not have been economically viable with traditional business models.
• Data-driven insights:
  The usage of digital services generates vast amounts of data that can be analysed to gain valuable insights into customer behaviour and preferences. These insights can drive product improvements, inform marketing strategies, and uncover new business opportunities. Moreover, the ability to harness data effectively can create a competitive advantage, allowing companies to stay ahead of market trends and customer needs.

The shift towards service-oriented business models is transforming various industries:

• Software Companies and SaaS
  Software companies have largely transitioned from selling packaged products to Software-as-a-Service (SaaS) models. This shift offers several advantages:
  • Continuous Updates: SaaS models allow companies to push updates and new features automatically, ensuring users always have the latest version.
  • Subscription Revenue: Instead of one-time purchases, companies now enjoy recurring revenue streams through subscription models.
  • Scalability: Cloud-based SaaS solutions can easily scale to accommodate growing user bases without requiring customers to upgrade their hardware.
  • Data-Driven Improvements: SaaS providers can analyse usage data to continually refine and improve their offerings.

For example, Microsoft has shifted its Office suite from a packaged software model to the subscription-based Office 365, now Microsoft 365, which includes cloud storage and collaboration tools.

• Manufacturers and Product-as-a-Service
  Manufacturers are augmenting physical products with digital services and moving towards “product-as-a-service” models. This approach offers several benefits:
  • Predictable Revenue: Instead of relying on one-time sales, manufacturers can generate ongoing revenue through service contracts.
  • Enhanced Customer Relationships: Continuous service provision allows for deeper, longer-lasting customer relationships.
  • Data Collection: Connected products provide valuable usage data that can inform product improvements and new service offerings.
  • Increased Product Lifespan: Regular maintenance and updates can extend the useful life of products.

For instance, Rolls-Royce’s “Power by the Hour” model for aircraft engines charges airlines based on engine flying hours rather than selling engines outright, bundling maintenance and support services with the product.

• Media Companies and Streaming Services
  Media companies are transitioning from selling individual content items to streaming subscription services. This shift has several implications:
  • Content Libraries: Instead of selling individual movies or albums, companies now offer access to vast libraries of content.
  • Personalization: Streaming services can use data analytics to offer personalized recommendations, enhancing user experience.
  • Original Content Production: Many streaming services now produce their own content to differentiate themselves and reduce reliance on licensed content.
  • Multi-Device Access: Users can access content across various devices, increasing convenience and engagement.

Netflix’s transition from a DVD rental service to a streaming platform with original content production exemplifies this trend.

• Transportation and Mobility-as-a-Service
  Transportation companies are exploring mobility-as-a-service models that provide on-demand access to various transport options. This approach offers several advantages:
  • Flexibility: Users can choose from multiple transportation modes based on their specific needs at any given time.
  • Reduced Ownership Costs: Consumers can access transportation without the costs and responsibilities of vehicle ownership.
  • Data-Driven Optimization: Service providers can use data to optimize routes, vehicle placement, and pricing.
  • Integration of Multiple Services: MaaS platforms can combine public transit, ride-sharing, bike-sharing, and other modes into a single service.

For example, Whim, a MaaS platform in Helsinki, Finland, offers users access to public transport, taxis, car rentals, and bike-sharing through a single app and subscription.

These examples demonstrate how service-oriented models are reshaping industries, focusing on ongoing customer relationships, data-driven improvements, and flexible, on-demand access to products and services.

Digital business models are increasingly focused on building long-term customer relationships rather than maximizing individual transactions. This shift is driven by several factors enabled by digital technologies, including reduced transaction costs, rich data collection, network effects, and subscription models. These elements collectively foster an environment where ongoing customer engagement becomes not just feasible, but essential for business success.

The advent of digital platforms has dramatically lowered the costs associated with frequent customer interactions. This cost reduction makes it economically viable for businesses to engage in numerous small interactions over time, rather than focusing on infrequent large transactions. The ability to maintain consistent, low-cost touchpoints with customers enables companies to build deeper, more meaningful relationships.

Digital touchpoints provide companies with unprecedented opportunities to gather detailed data on customer preferences and behaviours over time. This rich data collection allows businesses to create increasingly personalized and valuable offerings, tailoring their products and services to individual customer needs. As companies learn more about their customers, they can anticipate needs and provide solutions proactively, further strengthening the relationship.

Many digital business models benefit from network effects, where the value of the service increases as more users join. This phenomenon creates strong incentives for companies to focus on user retention and growth. By prioritizing long-term relationships, businesses can leverage these network effects to create a virtuous cycle of value creation for both the company and its customers.

The widespread adoption of subscription models in digital businesses naturally orients companies towards ongoing relationships rather than one-off sales. Subscription pricing encourages businesses to continuously deliver value to retain customers, fostering a mindset of long-term engagement and customer success.

This shift towards relationship-focused business models manifests in several ways. Many digital businesses now have dedicated customer success teams focused on ensuring customers derive ongoing value from their products. Companies are investing in creating communities around their products or services, fostering a sense of belonging and increasing switching costs for users. Personalization has become a key strategy, with businesses leveraging data collected over time to provide increasingly tailored experiences.

Continuous engagement strategies, such as notifications, emails, and other touchpoints, are employed to maintain ongoing interactions with users. The goal is to make the product or service a regular part of the user’s life. Some companies are building broader ecosystems of complementary products and services, creating a more comprehensive relationship with customers, and increasing lock-in.

This focus on relationships over transactions has several implications for how businesses operate. Customer acquisition costs may be higher, but this is offset by increased customer lifetime value. There’s a greater emphasis on user experience and customer satisfaction metrics. Product development becomes more iterative, with a focus on gradually expanding value for existing users. Marketing efforts shift towards content and community building rather than pure acquisition.

While this approach can create deeper, more valuable customer relationships, it also comes with challenges. Companies need to carefully balance engagement with respect for user privacy and attention. There’s also a risk👉 The probability of adverse outcomes due to uncertainty in future events. of over-investing in existing customers at the expense of expanding to new markets. Nevertheless, the shift towards relationship-centric digital business models represents a fundamental change in how companies create and capture value in the digital age.

This relationship-centric approach manifests in several ways:

• Customer Success: Many digital businesses now have dedicated customer success teams focused on ensuring customers get value from their products over time. This goes beyond traditional customer support to proactively help customers achieve their goals.
• Community Building: Companies are investing in creating communities around their products or services. This could involve user forums, events, or social media engagement. These communities foster a sense of belonging and increase switching costs for users.
• Personalization: By leveraging data collected over time, companies can provide increasingly tailored experiences. This could involve personalized recommendations, customized interfaces, or adaptive pricing.
• Continuous Engagement: Digital businesses often use notifications, emails, and other touchpoints to maintain ongoing engagement with users. The goal is to make the product or service a regular part of the user’s life.
• Ecosystem Development: Some companies are building broader ecosystems of complementary products and services. This creates a more comprehensive relationship with customers and increases lock-in.

The focus on relationships over transactions has several implications for how businesses operate:

• Customer acquisition costs can be higher, but this is offset by increased customer lifetime value.
• There’s a greater emphasis on user experience and customer satisfaction metrics.
• Product development is more iterative, with a focus on gradually expanding value for existing users.
• Marketing efforts shift towards content and community building rather than pure acquisition.

While this approach can create deeper, more valuable customer relationships, it also comes with challenges. Companies need to carefully balance engagement with respect for user privacy and attention. There’s also a risk of over-investing in existing customers at the expense of expanding to new markets.

One of the most powerful and disruptive digital business models is the platform or orchestrator👉 A central entity coordinating interactions in a digital business network. model. These models create value by facilitating interactions between different groups of users, rather than by producing and selling goods or services directly. Key characteristics of platform business models include:

• Multi-sided markets
  Multi-sided platforms serve as intermediaries connecting two or more distinct user groups, facilitating interactions and transactions between them. These platforms create value by reducing transaction costs and enabling efficient matchmaking between different sides of the market. For example, ride-sharing platforms like Uber connect drivers with passengers, while e-commerce marketplaces like Amazon bring together buyers and sellers.
• Network effects
  Network effects are a fundamental driver of value in multi-sided platforms, where the utility of the platform increases for all users as more participants join. This creates a self-reinforcing cycle of growth, as the expanding user base attracts even more users, further enhancing the platform’s value proposition. Successful platforms leverage these network effects to achieve rapid scaling and establish dominant market positions, making it challenging for competitors to replicate their success.
• Low marginal costs
  Once a multi-sided platform is established, it can often scale to serve additional users with minimal incremental costs, leading to significant economies of scale. This low marginal cost structure allows platforms to grow rapidly without proportional increases in operational expenses. For example, digital platforms like social media networks or software marketplaces can accommodate millions of new users without substantial additional infrastructure investments.
• Data advantages
  By mediating interactions between users, multi-sided platforms gain access to vast amounts of valuable data on user behaviour, preferences, and transactions. This data can be leveraged to improve existing services, personalize user experiences, and develop new offerings that address unmet needs in the ecosystem. Additionally, platforms can use data analytics to optimize matchmaking algorithms, enhance fraud detection, and provide valuable insights to participants in the ecosystem.
• Ecosystem leverage
  Successful multi-sided platforms often evolve to become the centre of broader ecosystems, attracting complementary products, services, and innovations that enhance the overall value proposition. These ecosystems create additional network effects and increase switching costs for users, further strengthening the platform’s competitive position. For example, mobile operating systems like iOS and Android have fostered extensive ecosystems of app developers, hardware manufacturers, and service providers, creating a rich and diverse environment for users.

There are several types of platforms, including:

• Transaction platforms: These digital marketplaces facilitate exchanges between buyers and sellers, creating value by reducing transaction costs and improving market efficiency. Amazon’s marketplace connects millions of sellers with consumers worldwide, revolutionizing retail. Airbnb disrupted the hospitality industry by enabling homeowners to rent out their spaces to travelers. Uber transformed urban transportation by connecting riders with drivers through a user-friendly mobile app.
• Innovation platforms: These platforms provide technological foundations that enable third-party developers to create complementary products or services, fostering innovation ecosystems. iOS and Android, the dominant mobile operating systems, have spawned millions of apps that enhance smartphone functionality. Amazon Web Services (AWS) offers cloud computing infrastructure that allows businesses to scale their operations without significant upfront investments. These platforms create value by reducing barriers to entry for innovators and accelerating the pace of technological advancement.
• Integration platforms: By combining features of both transaction and innovation platforms, these solutions offer comprehensive business ecosystems. Salesforce, for example, provides customer relationship management (CRM) tools while also allowing third-party developers to create custom applications on its platform. This integration enables businesses to tailor their CRM solutions to specific needs while benefiting from Salesforce’s core functionality. Such platforms create value by offering flexibility and customization within a unified ecosystem.
• Investment platforms: These digital marketplaces connect investors with various investment opportunities, democratizing access to capital and financial products. Crowdfunding platforms like Kickstarter enable entrepreneurs to raise funds for creative projects directly from supporters. Peer-to-peer lending platforms facilitate loans between individuals, bypassing traditional banking intermediaries. These platforms create value by expanding access to capital, reducing costs, and offering new investment options.

Successfully building and scaling a platform business is a complex endeavour that requires navigating several key challenges. At the forefront is the notorious chicken-and-egg problem, where platforms must simultaneously attract participants from both sides of the market. This often necessitates a strategic approach of subsidizing one side initially to build the critical mass needed for the platform to thrive. As the platform grows, a delicate balance must be struck between openness and control. While openness is crucial for attracting a diverse array of participants, maintaining a certain level of control is essential for ensuring quality and capturing value.

Trust and safety management becomes paramount as platforms serve as intermediaries between parties who may never interact face-to-face. Establishing robust mechanisms to foster trust and ensure the safety of all participants is critical for long-term success. As platforms scale, they must also evolve their governance structures, developing increasingly sophisticated rules and enforcement mechanisms to effectively manage their expanding ecosystems. This evolution is crucial for maintaining order and fairness as the platform grows in complexity and size.

Perhaps one of the most nuanced challenges faced by successful platforms is maintaining neutrality. As platforms grow and potentially expand their offerings, they often find themselves under scrutiny regarding how they balance their dual roles as both facilitators of the ecosystem and potential competitors to their participants. Navigating this delicate balance requires careful consideration and transparent practices to maintain the trust and engagement of all stakeholders in the platform

For established companies, transitioning to or competing with platform business models can be challenging. It often requires significant changes to organizational structure, culture, and capabilities. However, the potential rewards are substantial. Successful platforms can achieve rapid growth, high profitability, and strong competitive moats.

Looking forward, we’re likely to see continued evolution of platform models:

• Increased use of artificial intelligence to match participants and optimize interactions:
  AI will play a crucial role in enhancing the efficiency and effectiveness of platform matchmaking and interactions. Machine learning algorithms will enable more sophisticated recommendation engines, improving the user experience and increasing the value of the platform for all participants. This AI-driven optimization will lead to faster, more accurate matches between users, products, and services, ultimately driving higher engagement and transaction volumes on platforms.
• Greater integration of financial services into platforms:
  Platforms will increasingly incorporate financial services to create more comprehensive ecosystems and capture additional value. This integration may include features such as payment processing, lending, insurance, and investment services directly within the platform environment. By offering these financial services, platforms can reduce friction for users, increase customer loyalty, and create new revenue streams beyond their core offerings.
• More specialized platforms serving niche markets or industries:
  As the platform model matures, we’ll likely see a proliferation of niche platforms catering to specific industries or market segments. These specialized platforms will leverage deep domain expertise and tailored features to address the unique needs of their target audiences. By focusing on particular niches, these platforms can create strong network effects within their specific markets and potentially achieve higher user engagement and monetization rates.
• Growing regulatory scrutiny and potential for new governance models:
  As platforms become increasingly influential in various sectors of the economy, they will face heightened regulatory scrutiny. Governments and regulatory bodies will likely develop new frameworks to address issues such as data privacy, market dominance, and fair competition👉 Rivalry between entities striving for a shared goal or limited resource. in platform ecosystems. In response, platforms may need to adopt new governance models that balance innovation and growth with regulatory compliance and user protection, potentially including more transparent decision-making processes and increased user participation in platform governance.

As digital technologies continue to advance, platform business models will likely play an increasingly central role in the economy. Understanding how to effectively create, compete with, or participate in these ecosystems will be crucial for businesses across industries.