Now that we’ve removed some of the ambiguities around digital business models and hopefully we’ve captured your interest in learning more about the art & science of digital business model development, we have to ask: “Why are digital business models important?” and provide you with a comprehensive answer.
An actual digital business model won’t ever guarantee you success, but it will remove many of the reasons why most online business ideas fail, such as:
- Non-viable (digital) business model.
- Incoherent revenue generation model / strategy.
- Inconsistent allocation of resources / lack of focus.
- Insufficient traction (although commercially viable).
- Insufficient resources / short run-rate.
- Bad product / market fit.
I won’t dive too deep into the topic, as there are some great studies around this topic. If you want to dig into this topic, you can explore CBInsights’ 339 Startup Failure Post-Mortems or Fractl’s Why 193 Failed Startups Didn’t Survive study. The only side note I would add is that insufficient traction & running out of resources can also be attributed to the business model itself in most cases – a viable digital business model has to take growth, resources and revenue models into consideration.
This is why, going through this Digital Business Development series, you’ll notice there’s a lot of focus on planning, validating assumptions, mitigating risk and building flexible models that will allow you to go through optimization & iteration cycles or even pivot before you run out of money, in order to give you the best shot at succeeding online or successfully transforming your business into a competitive entity in the digital age.
Why is a Digital Business Model Important?
Let’s circle back and remember how we define digital business models:
A digital business model is a framework for creating, distributing and capturing value through digital technologies.
While slightly reductionist, this definition points us into the direction of frameworks and values, thus implying the systematization of the processes implied to create, distribute and capture value. That brings us to two fundamental truths: successful businesses operate on and within well-defined frameworks (more or less rigid depending on their culture) and businesses can’t survive without providing value in some way or form.
But perspective is always important and we can look at digital business models from multiple points of view, ranging from the business life cycle perspective to an innovation perspective. This perspective shift is important since the benefits of digital business models are wrongfully minimized at times, being mostly associated with digital transformation processes for the sake of “surviving in the digital age”. Well, we’re not here just to survive – we’re here to build successful, thriving, dynamic digital businesses.
From a business development perspective
If we consider this to be the best definition of business development: “Business development is the creation of long-term value for an organization from customers, markets and relationships.”, we notice there’s a near-perfect alignment between the framework provided by digital business models and the purpose of all business development activities.
From my point of view, all business development activities (however you want to define business development, even in a reductionist manner such as “park marketing part sales”) will be amplified working within the framework of a digital business model, simply because the process of designing a digital business model forces you to maximize the amount of value you capture and align multiple business components to position yourself for long-term sustainable growth.
From a business transformation perspective
Ah, yes, the magical digital transformation (DT or DX, where X stands for “sounds cool”) centered around the fabled digital business model. We’ve seen enough businesses go under for failing to adapt to the new realities of an increasingly digital world and for failing to not necessarily reinvent or transform, but at least adapt their traditional business model to take advantage of now-ubiquitous digital technologies (eCommerce, online payments, social media etc.).
The simple truth here is that businesses can’t afford to avoid digital transformation anymore simply because it makes them noncompetitive, open to disruption and eventually obsolete. And you can’t have a successful digital transformation process without a viable digital business model.
From an organizational culture perspective
One somewhat unexpected benefit of implementing digital business models and going through digital transformation processes that I’ve experienced with various clients has been the positive impact on the organization’s culture. Digital business models and process behind them tend to take some people out of their comfort zone and force them to adapt to changing contexts and requirements, especially when there’s clear C-level buy in. Of course, there’s always resistance to change and people that will push back on initiatives that makes them feel threatened or inadequate, but those who “survive” the process end up being much more open to testing, experimentation and optimization, especially once they start seeing the first benefits of a properly designed and implemented digital business model.
From a business optimization perspective
Digital business models are great at introducing the concept of value capture into most businesses and forces them to optimize the relationships between key components on a fundamental level and through leveraging digital technologies.
Organizations that sees the value in optimization as a philosophy & science will look at ways to apply optimization strategies at a fundamental level, touching on its core business model. Thus, a digital business model becomes a framework on which they can optimize the way they create, distribute or capture value, until they reach an optimum “design” to say so.
From a business innovation perspective
While some consider the digital part in digital business model the innovation itself, I view the model itself as a framework that enables further innovation through the introduction of digital technologies AND the additional capabilities they provide. We need to keep in mind that business innovation isn’t comprised exclusively out of product or service innovation and it can be centered on introducing new processes, methodologies and workflows. And if there’s one thing that digitization can radically improve it’s the process side of any business activity.
On top of that, digital business models open up a world of possibilities in terms of innovating through distribution, revenue & pricing models and combinations thereof. We’ll discuss the benefits of digital business models and the types of business innovation (incremental, architectural, radical and disruptive) they enable in an in-depth article further in this series, but for now we’ll move on the next perspective.
From a business life cycle perspective
Launch, growth, shake-off, maturity and decline – these are the commonly accepted phases of a business’ life cycle. Personally I would add “stagnation” between maturity (which I would turn into the apex or peak, since it’s always interesting to analyze the internal and external factors that got the company to that point) and decline, since it give us more inflection points to work with.
So, what does this have to do with digital business models? Well, there’s the concept of life cycle extension and while there are many strategies to extend a business’ life cycle depending on the context, implementing a digital business model in a digital transformation context can be most viable solution, which can do more than just extend the life cycle, but put the business back on a growth path.
Plus, digital business models can go through various cycles of improvement in data-oriented companies that put the appropriate amount of effort into developing business intelligence capabilities and the nurturing an organizational culture that will actually make use of business intelligence and make data-driven changes. These improvement cycles can translate into multiple life cycle extensions for said business. Sure, life cycle extension doesn’t sound exciting, but you can always pitch it as a concept that will “ensure indefinite growth through constant reinvention” in the next board meeting. Shareholders like growth from what I’ve heard.
Do you need a digital business model?
Most likely you do and if you’re in one of the very few scenarios where you don’t actually NEED a digital business model (gas stations for example), you still have to consider the benefits of digitization in some areas of your business and figure out what digital technologies you should leverage to keep your business competitive.
So, the question that naturally comes up is “What are my next steps?”.
The Next Steps in Digital Business Model Design
What are the Types of Digital Business Models?
Looking at the components used in designing business models, we can theoretically generate an infinite amount of digital business models and each of them would be unique (yet not necessarily viable), but in order to keep our sanity, we’ll create an easily digestible structure centered on revenue models / streams, value models and more.
- Types of Digital Business Models
What are the Components of Digital Business Models?
Digital business models are one of the few cases where the sum of all parts is greater than the whole. My favorite analogy is that of a car, which helps me explain DBMs in a fun, more engaging way. Think of it this way: a car would be useless without an engine (the value proposition), fuel (the revenue model) or wheels (customer segments). And just like any car, you always want one with better fuel consumption or more horsepower. But don’t worry, although cars have thousands of components, there are 9 to 15 components used in digital business models (depending on how granular you want to get in the design process) and we’ll go over them in detail, with examples.
- Components of Digital Business Models
What are Digital Business Model Patterns?
You can think of digital business model patterns as common (thus the name pattern) combinations of elements used in digital business models, akin to prefabricated buildings or the chassis of a car (you can have wildly different vehicles running on the same chassis). The best examples of digital business model patterns would be the eCommerce pattern and the SaaS / Software-as-a-Service pattern, because their respective (digital) business models have a lot of variations. To truly understand the concept, consider that an eCommerce businesses may be a subscription business (thus combining two popular patterns), it may run under an affiliate model, it may run on a dropshipping model or it may operate a digital marketplace with digital products and so much more that you’ll want to start an online store today.
And this is why these patterns are so beautiful and useful: they are the common, functional building blocks you can “move around” and play with in the design process of your digital business model in order to either innovate or simply build a sufficiently competitive model in the industry of your choice. Find out more about their uses, their importance and how to make the most out of them in the next articles:
- What are Digital Business Model Patterns?
- Digital Business Model Patterns Library
By going over types, components and patterns we’ll get a few steps closer to designing our own business model, so keep on reading and you’ll be fully prepared to build the model you need to succeed.
