We’ve clarified the meaning of the term digital business model in the previous posts and now we’re going to look at the most common components of digital business models. Choosing the right mix of components in a digital business model will be the key to designing a model that’s flexible enough to support improvement cycles and pivots, while still providing a comprehensive view on how you’re going to create, deliver and monetize value.
Understanding a model’s components is also extremely useful in defining a minimum viable digital business model, akin to the MVP (minimum viable product) concept used in startups which apply the lean startup methodology.
With that in mind, let’s take a look at the most common components used in business models:
Digital Business Model Components
As we’ve previously noted, business models and digital business models don’t really have a universally-accepted definition, structure and methodology behind them, so we’ll explore the most common components and component-combinations used in various business model design frameworks and canvases.
The Business Model Canvas
While business models have been slowly gaining attention since the 1990s, the term became extremely popular during the Dotcom Boom, although it was used to describe anything from business strategies & business plans to revenue models. The business model canvas itself turned business models into an actual framework centered around value and has since become a somewhat fundamental business development tool, lately at the forefront of digital transformation strategies.
But what are its components? Well, it’s basically a 9 component template:
- Value Proposition
- Customer Relationship
- Customer Segment
- Distribution Channels
- Cost Structure
- Revenue Stream
- Key Resources
- Key Activities
- Key Partners
The canvas itself is extremely easy to use, but making the most out of it (as with any tool) actually requires a lot of research and understanding concepts around value creation, distribution and capture, plus subtle differences between concepts such as revenue models and revenue streams. But there’s nothing to worry, we’ll go over each concept, component and model in due time.
The Lean Startup Canvas
The lean startup canvas, created by Ash Maurya, is basically an adaptation of the Business Model Canvas by Alexander Overwalder. Based on the idea that “Startups operate under conditions of extreme uncertainty.”, the Lean Canvas was positioned as the alternative canvas that was more actionable and focused on entrepreneurs going from the ideation to the implementation phase of their startup.
- Customer Segments
- Unique Value Proposition
- Key Metrics
- Cost Structure
- Revenue Streams
- Unfair Advantage
As you can see, this canvas simply feels more focused around the disruptive nature of tech startups (problem-solution focused, leveraging technology or innovative models / patterns to gain an unfair advantage, measuring everything in order to optimize & scale etc.) and, while it’s an amazing tool for the disruption-minded folk, it doesn’t really add much more value for the entrepreneurs who aren’t necessarily looking to create the next Uber / Airbnb / Facebook.
Of course, there’s nothing stopping you from using both of them or combining them – they’re just boxes in a document or a piece of paper in the end.
What other components do other business model frameworks use? Well, it’s pretty much the same fundamentally speaking, it’s just that they prefer to cluster them into different component-models. One such business model structure is composed of Value Proposition, Core Product / Service, Value Architecture & Revenue Model, with sub-structure in Value Architecture & Revenue Model.
One exception to the point above would be the Blitzscaling model, which actually helps entrepreneurs a lot more than other models which I would call “dry”, since it factors in growth growth factors and growth limiters and emphasizes the role of digital technologies in building successful companies.
Deconstructing Models: Components & Dimensions
Let’s deconstruct and look at the components we could use in our design:
- Problem – what problem is your business trying to solve / what are the customers’ pain points?
- Solution(s) – how does your business intend to solve that problem?
- Value Proposition – why would customers buy your solution (product / service)?
- Customer Segment(s) – what’s the target market and how accurately can you define customer segments for your solution(s)?
- Customer Relationship – how are relationships with customers build & maintained from a customer life cycle perspective?
- Distribution Channels – how will you reach your customers from a distribution channel perspective?
- Revenue Model – what is the framework under which the company would be most profitable?
- Revenue Streams – what are the revenue streams for the company and how can they be diversified (the more the merrier)?
- Cost Structure – what are the cost structures the company operates under and how can they be minimized?
- Unfair Advantage(s) – what unfair advantage can you create over your competitors and how will you leverage it?
- Key Resources – what specific resources – human / skill set & capability, capital, physical, digital – are essential to the business model?
- Key Activities – what are the main activities the company must engage in to successfully operate under the chosen business model?
- Key Partners – what 3rd parties / partners are essential to the business model? Considered from a technology, distribution, marketing etc. perspective.
- Key Metrics – how will you measure the success of your business model in the short, medium and long term?
- Growth Factors – what do the growth factors for the business look like (market size, dsitribution, margins, network effects)?
- Growth Limiters – what do the growth limiters for the business look like (operational scalability, lack of product / market fit)?
There are lots of ways to group, re-group and organize these components and there is significant overlap between them, so we’ll have to do a great job in the design phase so that we can end up with a flexible canvas – too many elements and it may have a negative amount of redundancy, too few and it may become yet another superficial business tool that can do more harm than good.
The Digital Dimension
Now that we have the common components explained, let’s factor in the digital dimension separately and consider the main elements that will directly impact a business’ digital capability from a digital transformation point of view.
- People – what are the organization’s employees’ digital capabilities and are they adequate for the business model?
- Data – how does the business leverage data and does it treat it as an internal asset or is it a product / service in the business model?
- Things – does the business model rely on any “things” as in smart objects (IoT – Internet of Things)?
- Cloud(s) – what types and which specific clouds will the business leverage?
- Platforms – what is the platform on which the digital business is built?
- Ecosystems – what digital ecosystem(s) will the business operate in? (ex. commercial WordPress plugin development business)
As you can see, for some entrepreneurs that are not well-versed in either digital technology or the latest business development concepts, simply using a business model canvas isn’t self-explanatory or supremely helpful, especially in helping them leverage all the advantages they can by integrating the digital dimension as deep as possible in their model.
Parallel (Digital) Business Models
First, let’s reclarify the whole digital business model vs. business model debacle. There are two types of digital business models:
- Digital Focused Business Models – in this scenario, digital technology plays a significant or central role in the model.
- Digitally Enabled Business Model – in this scenario, digital technology significantly enables / amplifies / optimizes one or more components of the model.
In the case of Non-Digital Business Models, digital technology doesn’t play any significant role in any of the model’s components (although it may be able to in 99% of cases – I can’t think of many businesses that wouldn’t benefit from digital distribution channels, IoT, IA/ML etc.).
Back to the actual point, it’s important to note that business may operate under multiple business models in parallel, depending on its organizational structure, but it may operate under two simultaneous business models out of necessity – in the case of digital transformation processes.
Digital transformation is not an overnight experience in the lines of “close stores for a day, install some fancy iPads with a scrollable PDF catalog and resume business as an innovative retailer!”, so many businesses must factor in a transition period that might be more or less rocky, depending on how they plan on upgrading / replacing their traditional business model.
Platforms, Marketplaces & Ecosystems
Platform, marketplaces & ecosystem models are a whole new ballgame when it comes to adapting a business model canvas to design appropriate, viable digital business models, especially since there are the classical two-sided marketplaces (think eBay: you have the platform, but the two sides on the platform are represented by buyers and sellers – simple and easy to manage overall) or the newer multi-sided platforms disrupting various industries (think DoorDash: you have the platform, but the three main sides are represented by sellers [Restaurants], deliverers [Dasher or Couriers] and buyers [Hungry People]).
When you factor in ecosystems, things get even messier and if you have an ambitious plan of building an ecosystem around your business, the traditional business model canvases are not flexible enough. When I refer to ecosystems, I usually think of complex businesses such as WordPress or even more straightforward ones such as Domo, which is a business intelligence cloud at its core, but also operates an in-platform marketplace with 3rd party integrations and solutions. Sooner or later we’ll deconstruct their business model in this series and we’ll get some great insights on building scalable companies.
It’s YOUR Digital Business Model
These series of posts are aimed at helping you discover how to design a viable digital business model in whatever form / format / structure and leverage some great concepts such as digital business model patterns in order to efficiently experiment with various ideas. At the end of the day, there isn’t any one-size-fits all formula or any absolute truth here, just useful information, insights and methodologies which you alone will leverage.
KommerZen’s Digital Business Model Canvas
Don’t you just hate it when everything looks great on paper but somehow it ends up flopping? Well, while I can’t guarantee this framework-canvas combination will ensure your success, I’ve taken a different approach towards adapting the patterns, methodologies and canvases available to us in order to create a more flexible solution which will help you:
- Design and operate parallel digital business models (transformation);
- Adapt to new digital-focused distribution channels, revenue and growth models;
- Adapt to requirements of complex business models centered around platforms & ecosystems;
- Discover innovative combinations through modular design & digital business model patterns.
I’m not going to introduce this new canvas here, since we have many posts ahead in our Digital Business Models series which cover fundamental aspects, but I will list some of the supplementary components that will be used in it, such an existential threats dimension, amplifiers, barriers & moats.
Filling in the Blanks
“X Doesn’t Work for Me”
And that’s great! If none of the existing canvases feel like a great fit for your idea, simply build one out of the deconstructed components and keep on reading to discover how to create something unique and custom-tailored to your context. Also, if the model built around your business idea doesn’t require components such as Unfair Advantage or Key Partners for example, simply ignore those components.
Dealing with Uncertainty / Lack of Data
The truth is that no matter the amount of research you’ve done or how much business experience you might have, when it comes to digital business models (especially in emerging industries), you’ll still have to make informed guesses and rely on your intuition in many areas. Digital business models are meant to evolve and go through improvement cycles as you build the business itself, validate / invalidate some assumptions and collect sufficient amounts of data which can be used in fine-tuning your model.
Your Next Steps
Now that you know what digital business models are, why they’re important and you have a handy list of the most common types and components, it’s time to deconstruct the digital business models of a couple successful companies. Why? Because it’s a good way to show you that the actual game-changing concepts and methodologies are just around the corner, since you may be slightly bored by the theoretical approach so far.
- Deconstructing Digital Business Models