Ok, we’re getting a better sense of what a digital business model is. While this definition sounds great, it isn’t specific enough to efficiently guide us through the process of designing a model and that’s why we’re going to go through all the components of a model in this series, starting from value creation to revenue generation (or value capture, as some would prefer to call it – I for one prefer monetization).
Before we get to that, let’s try to look at digital business models from multiple perspectives, so we can truly understand their value and why they’re one of the critical concepts one must master before venturing into the process of creating a digital-first business.
If we commit to the idea that a digital model is primarily a framework we can tweak and adapt in order to build a sustainable, scalable and ultimately profitable online business, we can look at digital business models as a:
- Framework for building, growing or transforming your business using digital technologies.
- Framework on which you can create, deliver & capture value in digital environments.
- Framework you can adapt & refine in search of a sustainable & scalable revenue generating model.
In the first view, we must understand that a digital business models is a tool used both for building new businesses and transforming existing businesses by overhauling key parts of their traditional business models.
In the second view, we can look at digital business models exclusively from a perspective where value is created, distributed and consumed exclusively online. While not a fully accurate perspective, it helps to simplify things, depending on what you’re trying to build.
And while many might disagree with the third perspective, we have to consider the fact that in their incipient phase, digital business models are a set of assumptions which will need to be validated eventually and the model will be subjected to various improvement cycles in order to optimize components such as value creation or distribution. For many startups, especially in emerging industries, the main focus is validating their value creation model and gaining traction. This leads to the paradoxical situation where companies with no revenue are valued at billions of dollars without having any actual revenue generating strategy in place. They might not be viable on their own, but they might turn out to be a “priceless cog” for another company’s strategy.
There are some proponents of using digital business models mainly as a way to communicate how you’re delivering value, but there are better tools suited for that, such as the value proposition canvas. With that in mind, we’ll stick to the “framework for creating, distributing and capturing value through digital technologies” definition.
If it’s also important to note that designing digital business models also needs to take the business’ lifecycle into account and models can vary greatly based on the stage of the business. In my mind, I further separate digital business models into 4 main types:
- Incipient Digital Business Models – digital business models designed for new digital-first startups.
- Emerging Digital Business Models – digital business models in emerging industries, focused mainly on value creation and designed to be highly flexible in order to adapt to a fast-evolving market.
- Transformative Digital Business Models – adapting traditional or outdated business models in order to leverage digital technologies & distribution channels.
- Iterative Digital Business Models – there’s always room to innovate and re-invent your business model, especially if you’re sitting on a trove of data.
Shifting perspectives allows us to better understand the applicability of digital business models and how we can use them to their full potential, regardless of the industry we’re operating in. I try to look at the process of digital business model design from every perspective I can so that I can extract as much value as possible from going through the process, since it forces me to answer some hard questions and put all the puzzle pieces together for any new business idea I might have.
And here’s where the genuinely interesting part comes in: you can use digital business model design as a framework for finding new business ideas and as a framework to turn them into actual viable businesses. So, it’s really asking yourself:
- Am I trying to build a viable digital business model for an idea I have?
- Am I trying to find viable digital business ideas through digital business model design?
In the end, how you use digital business models really depends on your context, whether you’re in search of a viable digital business idea, starting a new digital business or going through a digital transformation process.
Why is a Digital Business Model Important?
While you’ve surely deduced the importance of digital business models so far, I would like to list a few more reasons why these models are so important to any digital business or digital transformation process:
- They provide a coherent vision on value creation, distribution & capture.
- They reduce the risk of running out of cash in early stages.
- They reduce the risk of product-market misalignment.
- They’re an amazing tool for ramping up innovation.
- They help keep businesses on track.
The list goes on, especially if we’re looking at the process of designing a digital business model. So, let’s dive deeper into the importance of digital business models and how they can help you turn your vision into reality in the next article:
- The Importance 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 fuel (the revenue model) or wheels (customer segments). And just like any car, you always want a better one down the line.
Back to the point, 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.
In its most simplistic form, a digital business model would be composed of:
- Value Proposition
- Customer Segments
- Revenue Streams / Model
- Cost Structure
In most scenarios, this won’t be enough to give you a good sense of how your business idea is going to be implemented and capture value, but it’s enough if you’re in an idea generation / selection phase when it comes to starting an online business. So, let’s go further:
- Key Resources
- Key Activities
- Key Partners
- Key Channels
- Customer Relationships
At this point, we’re basically looking at the extremely popular Business Model Canvas. It’s a great tool for rapid prototyping and highly effective for pitching an idea, but I’ve asked myself: “Is it really enough?”.
From my point of view, it isn’t. Lots of (digital) business models might look great on paper under this component-mix, but as soon as you look at other internal and external factors – technology & platforms, amplifiers, barriers, moats, network effects, existential threats, value capture & revenue streams approached as separate concepts – they just fall apart.
The point I’m trying to make is that it can be a deceptive exercise if you rely on it too much and that’s why I’m building my own digital business model canvases which you can use in different stages.
With that in mind, let’s take a closer look at all the possible components and see what goes in them and why:
- Components of Digital Business Models
It’s YOUR Digital Business Model
Far too often we fall into the trap of treating various business tools, concepts and frameworks as rigid pre-requisites of success, without giving ourselves the flexibility we need to succeed in our own way, in our industry of choice, with the resources and capabilities we have available.
It’s absolutely normal to look at a digital business model canvas and feel slightly overwhelmed or unsure of what to write, but that’s why you’re reading this and I can assure you that by the end of this series you’ll know exactly how you need to design your model to maximize your chances of success with whatever digital business idea you might have.
That’s also why we’ll discuss further into this series the art of managing complexity, the concept of minimum viable digital business models (akin to MVPs used in software products), using agile methodology and designing modular models that will help you grow and maintain a healthy business.
These concepts and methodologies will help you deal with complexity, uncertainty, existential threats to your model (even when you’re in Google, Amazon or Facebook’s crosshairs) and turn your vision into reality.
It’s your digital business model and it’s just one of the tools in service of your vision.
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
The Constantly Evolving Nature of Digital Business Models
Also, let’s look at the nature of digital business models (and business models in general): they don’t last long. Consider how many of the dotcom era digital businesses have been replaced by new, innovative digital businesses in the last 20 years. Some have been disrupted by fairly simple innovations that came from the efficiency of new revenue models being adopted by younger companies.
As such, just as traditional business models have been disrupted by innovative digital business models leveraging all manners of technologies, so will today’s digital business models be disrupted by advances in technology – automation, machine learning, artificial intelligence, internet of things etc. or simply new models that keep up with consumer trends.
If there’s one thing that comes to mind when it comes to outdated digital business models, it’s how many formerly profitable websites have become extinct in the last 5-6 years by Google’s integration and rollout of its Knowledge Graph. Step by step, Google is taking over more verticals with its in-SERP features and the trend seems to be accelerating.
With that in mind, we’ll also explore how to attempt some level of futureproofing in our digital business model design (because realistically nothing will be futureproof), how to identify potential threats to our model and
But, for more on this topic, we’ll analyze the life cycle of digital business models further in this series and look at how we can ensure that we’re not operating under an outdated model that leaves us open to becoming the disrupted, not the disruptor.
Dispelling False Notions & Myths Around Digital Business Models
As previously stated, there’s a lot of misinformation and a significant degree of confusion around business models, not to mention digital business models, so let’s recap what a digital business model isn’t:
Digital Business Model =/= Digital Business Strategy
A digital business strategy explicitly lays out the course of action in order to achieve specific, measurable, achievable, realistic and time-bound goals (good old S.M.A.R.T. tool) in your organization by leveraging digital technologies, in online environments. Digital business strategy is reliant on your digital business model and, depending on how you execute and measure important metrics, you’ll end up adapting one or both of them.
Digital Business Model =/= Digital Business Plan
Digital business plans are the digital equivalent of the stuffy classic business plans that try to be all-encompassing documents covering everything from product development to staffing and finances. Your business plan might be outdated by the time you finish writing it and, honestly, there are much better uses of your time.
Digital Business Model =/= Digital Product / Service Creation
I can’t stress this enough: building a digital product (especially eBooks, courses, webinars) doesn’t mean you have a digital business model, but you can use it to discover the best way to generate, distribute and capture value around those products / services.
Digital Business Model =/= Digital Transformation Framework
The process of digital transformation may be centered around a digital business model, but the model itself is a component of the process. Digital transformation can be an all-encompassing process and the framework for this process may contain all aspects and processes of one’s business.
When it comes to digital transformation, you can think of the digital business model as the centerpiece of your digital transformation initiative.
Digital Business Model =/= Exclusively Online Businesses
Not necessarily. Digital business models are also used as the main tool in digital transformation processes, helping companies in traditional industries to survive and thrive in the new digital age. Also, there are many hybrid models, where parts of the business model are not exclusively digital.
If you’re new to digital business models, digital transformation and digital business development in general, I recommend going through this series in order and reading Why is a Digital Business Model Important – if you’re already convinced, you can skip and go to the Components of Digital Business Models, which dives deeper into the composition and structure of DBMs.
Table of Contents
If you’re curious on how this series is structured and where it will take you, here’s a temporary structure I’m working under (rough version, work in progress) for this series. I can only promise that I’m going to post a couple in-depth articles in order on a weekly basis, but it’s going to take a while to finish this series.
Part #1: Digital Business Models 101
Part #2: Digital Platforms & Ecosystems
Part #3: Digital Business Model Innovation
Part #4: Digital Business Model Design Series
Part #5: Digital Business Model Growth Series
Part #6: Agile / Lean Digital Business Models
Part #7: Disruptive Digital Business Models
Part #8: Emerging Digital Business Models