When you think about online searching, you think of Google. When you think about binge-watching, you think of Netflix. When you think about social media, you think about Facebook. You get the idea. Some brands own the monopoly of attention in some industries. How did they conquer space in your mind? By building a successful digital business model.
When you tell a fellow entrepreneur that you are thinking about launching a new business, you may hear the question: what is your business model? Although business models are a common theme in entrepreneurs talking, it wasn't always that way. The business model appears with the widespread of PCs and Excel sheets. The democratization of these tools allows companies and later individuals to pose what-if questions about consumer behavior and run simulations.
A business model is helpful for a new business or an experienced company. But the stories of innovation on business models in established companies are rare. A recent study by the American Management Association shows only 10% of the world companies' investment goes to new business models. This resistance to change is natural. Christensen, Bartman, and Van Bever, reputable business consultants, assert business models are designed not to change because of the interdependence of 4 factors: value proposition, resources, process, and profit formula (you will peruse each concept).
Key lesson to take: if you aim to disrupt an industry, you must cultivate the ability to look as an outsider at the current business models in action.
What makes a good digital business model?
All digital business models share at least one of two criteria: the value is created using digital technologies or digital channels. Sometimes the business model entails the creation of a brand new digital ecosystem to serve an audience. Take Google, Netflix, or Facebook, for example. These digital titans wouldn’t exist without creating digital platforms on the Internet.
To start to create value for people, a business model should address 3 basic questions:
1. What values the customer?
Answering this question equals building a specific value proposition that solves a customer's want or need. You need to dig in here. Why? Precision is an essential attribute of all business models. In other words, how well pinpoint and address customer's frustration. The more critical the question is for the client, and the less the satisfaction with the current solutions in the market, the greater is the chance of success of your value proposition. Keep an eye on 4 obstacles that hinder people from getting what they need:
- Lack of financial resources
- Lack of time
- Lack access
- Inability to do something
2. How will your company make money?
Money makes the world go around. And your business too. You need to figure out the profit formula that keeps the cash register moving and simultaneously generates value for clients. The math is super easy to grasp:
- Revenue model: the price charged x volume of sales
- Structure cost: indirect and direct costs the business model demands to deliver value.
- Margin model: the expected value of each transaction to reach the profits' goal.
3. What logic explains how the company will create value for the customer at a fair price?
Here enters the interplay between key resources and processes. Let's unlock both. Resources are all the elements that move forward business. List people, technologies, facilities, products, pieces of equipment, and branding. Simply, all you need to generate a value proposition for a client. Highlight this: the trick here is to focus on the vital resources to start the work and add more in the way. And what about the processes? Processes are the ways you do business. It includes the internal norms and policies, metrics, and day-to-day routines to get things done.
Don't worry if you didn't get it all first: building a business model is an iterative process, especially true in the supersonic digital world. Keep in mind that a successful business model represents a better alternative to others in the market. If your business model turns out to be more valued by a specific group of people, then you have gained a competitive advantage. Let's take a look at Netflix. The California company turned upside down the streaming business and the entertainment industry. All thanks to the way it collects a vast amount of data to know the viewing habits of its 220 million subscribers and adapt the offer of series and films. The user experience and convenient price did the rest.
A key lesson to take: if you aim to disrupt an industry, you must cultivate the ability to look like an outsider at the current business models in action.
What digital business model should you choose?
To answer that question, you need to know your customer: how old is he? What are the buying habits? What pain points is he facing? That in-depth understanding will guide you when selecting the most popular business models and the technology suited to implement them.
There are many models for digitazing services. But to keep things simple, we pick the 3 more popular digital business models, so you can dip your toes in the shore before diving in the ocean.
1. Digital platforms
Digital platforms are the middleman of the digital world: they are the meeting point for people searching for a book, a house to rent, a travel journey, and a seller. The platforms ease the interactions between these two groups and generate value by providing a superior User Experience. Digital platforms owners can monetize the service by targeted ads charging a fee for ranking offers.
Examples: Airbnb, Uber, OpenTable.
2. Freemium model
One of the oldest models on the Internet. The users get free access to content. The service is supported by advertising shown to the user. In this business model, the user is the product. The brand sells valuable tracking information to companies interested in displaying targeted ads.
Besides the free tier, you can also offer a premium one. If the user wants to use more features or resources and is willing to pay for them. The premium pack is also advertising-free.
Examples: Spotify, LinkedIn, Dropbox.
3. Subscription model
Nowadays, almost every business is turning the spotlight to subscription models. To grant access to full service or a digital product, you charge a subscription fee on a monthly/annual basis. The subscription model is used for content, software, and entertainment. The model is clear and transparent to the user: at an affordable price, he can get access, updates, services. This model is so popular because of its convenience for the consumer.
Examples: Netflix, HBO, Dollar Shave Club.
Nailing a digital business model gives you a competitive advantage. Disruptive models arise from understanding your customer's needs and building a value proposition specific to them. The next step is to gather all the resources and set the processes to turn your model to life.