Digital Business Models

Does it always have to be the platform?

A wide range of digital business models can be applied to any industry. Finding the right solution requires openness, courage and a systematic approach.

Attempts are often made to transfer existing value chains one-to-one from the analog to the digital world. However, the fact that the latter is subject to different laws has still not been internalized everywhere. To better understand the central differences, it is first helpful to take a closer look at the four elementary components of business models. The BMN Magic Triangle serves as a basis here.

The cornerstones can be used to identify the special features of digital markets, because all four dimensions are in a state of flux:

  • 1.

    The customer ("Who?") at the center develops a new sense of entitlement. Everything must be available quickly and everywhere, while the willingness to pay for basic services is low. The situation is different for new, innovative services with real added value: Our experience shows that there is a willingness to pay a reasonable price for them. Companies must find models to circumvent the expectation that "online = free". On the one hand, by establishing relevant, target group-specific offers or, on the other hand, by establishing alternative sales channels. The latter often leads to third parties rather than the users themselves becoming paying customers.

  • 2.

    Rapid technological progress as well as global networking enable new value propositions ("What?") and here we see great opportunities especially for niche markets. While the scope for design is increasing across the board, the pressure is growing on the other side due to shorter product life cycles and global competition.

  • 3.

    Compared with manufacturing, digital value creation ("How?") takes place less evenly. Often, digital products initially require high investments in development, while subsequently low-cost duplication enables good scalability. This is precisely what makes digital business models worthwhile. Customer loyalty is more important than ever before: those who retain users in the long term minimize the costs of acquisition and variable expenses while maintaining constant revenues.

  • 4.

    "Data is the new gold": Beyond the willingness of end users to pay, data and traffic are
    the core elements in the design of digital revenue models ("Value?"). The key is to understand that data is cash. AI helps to generate effective predictions and patterns at this point and is therefore an opportunity that every company must specifically address.

How can these opportunities be exploited?

Six common business models we encounter again and again.

E-commerce: Online buying and selling of goods and services.
In addition to the use of external sales platforms, digital channels offer great opportunities, especially in direct-to-consumer (D2C) sales. Startups like Foodspring make exemplary use of this by integrating online stores into their own website, thus enabling a low-threshold "one-stop" buying experience.

Platforms: digital marketplaces (B2B/B2C) or social networks.
Target group-specific content or the possibility of social interaction serve to attract as well as retain platform users. And users mean data and advertising value.
As the example of the marketplace avocadostore nicely shows, we recommend focusing on a niche in the early stages in order to grow from there via high-quality content and offers. Many platforms make the mistake of thinking in "Amazon dimensions" right from the start and lose sight of their clear USP.

Freemium: "Free" & "Premium".
Here, traffic and user loyalty are targeted via a free basic version. Once the user is in an existing system, conversion to the paid premium offer is easier.
Related approaches for physical goods are so-called razor-and-blade models, in which low-priced basic products merely serve as a springboard for supplementary products (e.g., inexpensive coffee machine & expensive capsules à la Nespresso). Here, too, the customer is tied to a system in order to develop an increased willingness to pay in the further course.

Subscription: Subscription models.
Subscription services have increased significantly in recent years and include both digital (e.g. Spotify) and physical goods (e.g. LILLYDOO diapers). Subscription is therefore also becoming an increasingly relevant topic for FMCG brands. For products ranging from candy bars to protein powders, the focus is no longer on one-time consumption, but often on recurring needs (e.g., every two weeks). Collected data sets and a direct customer channel enable automated ordering processes.

Pay-per-use: Variable payment per usage.
This model is also an increasingly popular payment mechanism behind digital products. Since services in particular are often only used temporarily, payment per use is a way of getting around a low propensity to buy on the part of the target group. With a little imagination, this could serve as a model for other areas: in personal consulting, the use of packaging materials, or the streaming of online content.

"Hidden Revenues": Data-based models.
In this approach, revenues are generated through the collection of data and the resulting services (e.g., advertising placements). The user becomes the product without necessarily being aware of it. The most prominent example is Google.
But most successful online players use a hybrid model. Amazon, for example, is a platform at first glance, but it primarily operates data-based businesses and e-commerce.

How do I decide on the right digital business model?

Even if this question unfortunately cannot be answered with a blanket recipe, the path to the ideal business model also harbors some digital peculiarities and methods that differ from classic management. In addition to the dynamic field of tension between target group, market, competition and stakeholders, the fast-moving nature of trends and technological innovations must be taken into account. It is therefore essential to know the state of the art on the technological side in the preparation phase and also to deal intensively with current benchmarks of potential business models.

During the development phase, agile methods are even better suited in the digital world than in the physical world to feel one's way through the often "unknown waters". Versions can be launched and validated in short, iterative cycles. Real-time data and user feedback make hypotheses made about the business model even more quickly testable. Adaptations subsequently do not require costly production changeovers, but can ideally be implemented immediately by IT. What is important is the constant willingness to question one's previous assumptions and, if necessary, to pivot (i.e., to make a U-turn). Only in this way will innovative and maximally customer-centric digital business models emerge in the end.

denkwerk is working on precisely these topics again this year and is looking forward to many new service and platform solutions. This is where our Business Design Sprint (LINK!) comes into play in particular, in which we develop validated prototypes and business models together with our customers within a very short time.

Thomnas Speicher, Digital Story Director Denkwerk

Let's chat...

Thomas Speicher
Digital Strategy Director
Tel.: +49 221 2942 100
thomas.speicher@denkwerk.com