Digital Business Models Map: The Most

Popular Digital Business Model Types

A digital business model might be defined as a model that leverages digital technologies
to improve several aspects of an organization from how the company acquires customers, to what
product/service it provides. A digital business model is such when digital technology helps
enhance its value proposition.

A few myths around digital business models

We all like to think of digital business models as innovative in their own sake. However, in many
cases innovation happens by combining aspects from existing business models to create a unique
formula.

Not a single formula, but rather a recipe with ingredients to be tested. Almost like taking the
existing ingredients, remixing them by using different quantities and cooking time, an “innovative”
business model is often the results of those recombinations. And it requires a lot of tweaking.

Digital is not just about the product

You create an eBook, sell it on the web and you call your business a digital business. Sure, that is
a digital product but the fact that your product is delivered digitally doesn’t make it a digital
business.

There are few other things to take into account.

Digital is not just about distribution

You build a website, call it a platform, and you have a digital business. However, a website is just
like a physical window-shop, in order for you to create a sustainable flow of
customers/partners/users you need to make it scalable.

That requires to understand what models fit best the potential customers/users identified.

Start simple, make it viable

If you look at a business model like Google, you think of it as a complex platform since the start.
However, it took years before Google would develop all the building blocks (former Google
AdWords, and AdSense) to make it extremely scalable.

Initially, Google was just closing advertising deals on its search pages leveraging on salespeople,
just like a traditional organization. When Google finally built its two primary Ads platforms
(AdWords, now Google Ads and AdSense) its business growth picked up together with its traffic
growth.

Before Netflix would become a viable streaming platform it took decades. And before that it was
primarily a DVD-rental company. DVD-rental, in 2019, made up less than two percent of the
overall Netflix revenues (interesting enough the company still reported over two million DVD
members as of 2019).

Yet, when video streaming became technically viable, Netflix business model also evolved, thus
making the company surf a different market (video streaming) rather than DVD rental.

A simple business model that delivers enough value to potential customers will get you through
the first growth stages.

A new way of doing business

Therefore, building a digital business requires mastering new ways of looking at your business and
they primarily move around a key pillar (your customers/users or those for which your
service/product provides a clear advantage) and a few elements:

Product: Building a digital product requires a mindset that goes from something scarce, to
something potentially unlimited. Digital product can also be quite expensive. Think at how
platforms like Google have to spend billions to keep operating their digital assets by also investing
in massive physical infrastructures (data centers). Yet those products often leverage Network
Effects.

Distribution: Building a digital distribution means understanding the various channels existing
on the web. New channels come every few years. But some of the channels you might want to take
into account to enhance your digital business are Email marketing (newsletter), search engines
(Google, YouTube, DuckDuckGo, Bing, Yahoo), social media/discovery driven platforms
(Google Disccover, Facebook, Instagram, YouTube), and Creative media (TikTok) to mention a
few.

Value Proposition: A digital business model value proposition can often be delivered by
providing the upside without the downside. Think at how Google makes you search for anything
without requiring you to bring an encyclopedia in your pocket.

Leveraging on consolidated models

As the story goes McDonald’s started to use a franchising model to grow its restaurant business,
and it became over the 1960s a giant in the restaurant business (or real estate depending on the
perspective). McDonald’s leveraged on the existing “Speedy Service System” developed by the
McDonald’s brothers (what we would later call “fast food”) which was an incredible process
development able to provide an improved product at a faster pace. The speedy system itself
represented the application of the manufacturing process to the restaurant business. Later another
important building block was added.

The franchising model really became widely applied during the 1920s and 1930s in the restaurant
business. As new physical communication networks (in the US the Inter-state Highway System)
enabled people to move long distances with their cars.

Later on, Ray Kroc would apply in its most aggressive form the franchising model (different
formats already existed centuries before) to the McDonald’s existing operation to create one of the
most scalable restaurant business in the world.

But is franchising a business model, a revenue model or a growth (expansion) strategy?

Well, franchising alone is just a distribution/growth/expansion strategy. Yet, franchising combined

with a product delivered differently (the “speedy system”) making up a whole new experience that
made it a new business model: The heavy franchised McDonald’s business model.

Digital Business Models Types

Below some of the digital business models types (remember those can be really called business
models when mixed up with product, distribution and value proposition):

1. Open-source
2. Free
3. Freemium
4. Subscription
5. On-demand
6. Peer-to-Peer
7. E-commerce
8. Ad-supported
 9. Hidden revenue

1. Open Source Model

An open source model makes software free to access, and it generally gives the ability to a
community of programmers to contribute to it. Those two ingredients are essential.

• Free makes it spread very quickly, and

• The community side of it is what eventually determines its success.

An open source isn’t a model on which companies can leverage to build a sustainable business
model. Companies like Red Hat, for instance, make money by charging premium subscriptions
and for training and services associated with its open source software.

Indeed, in 2018, Red Hat generated over $2.9 billion in revenues, of which, $2.57 from
subscriptions and $346 million from training and services. Red Hat isn’t the only possible way to
monetize an open source software.

Red Hat explains its business model as it follows:

Development: Red Hat employs an open source development model. The open source
development model allows Red Hat to use the collective input, resources and knowledge of a
global community of contributors who can collaborate to develop, maintain and enhance software
because the human-readable source code for that software is publicly available and licenses permit
modification.

Licensing: Red Hat typically distributes its software offerings under open source licenses that
permit access to the software’s human-readable source code.

Subscriptions: Red Hat provides its software offerings primarily under annual or multi-year
subscriptions as well as on demand through our certified cloud and service providers (“CCSPs”).

Therefore, as highlighted in its annual report, thanks to the open source business model, Red Hat
has three key advantages:

• Quick and effective development via a global community of qualified contributors which
are not on the company’s balance sheet
• Great distribution via free licensing of its software
 • Paid subscriptions for premium and enterprise customers

Building up an open source-based business model isn’t simple and its success highly depends on
the ability of the project to engage the community of developers and contributors in working on
the source code to improve it and make it very valuable. Also, such a model where a free service
does allow strong marketing for the product. But it doesn’t necessarily translate in revenues for
the company. For instance, Red Hut in 2018 employed $1.2 billion in sales and marketing expenses
to distribute its paying subscriptions. That represented 41% of its total revenues which comprised
“primarily of salaries and other related costs for sales and marketing personnel, sales commissions,
travel, public relations and marketing materials and trade shows.“

Mozilla Business Model

How Mozilla’s for-profit side makes money through partnerships and distribution agreements with
search engines?

The 94% of Mozilla Corporation’s revenue comes from royalties earned through Firefox web
browser search partnerships and distribution deals. According to StatCounter back in 2008 Mozilla
Firefox controlled over 26% of the browser market. Today, due to the market dominance of Google
Chrome and Safari, Mozilla has a 5% market share.
Free Model

The free model has become quite pervasive on the web. Starting from Netscape going on,

companies have built great products, released them for free with the hope that once enough people

would get used to them, monetization would not be an issue. While this model worked pretty well

for products that scaled up quickly, amassed investments to sustain their infrastructure in the short

term, and then found a monetization strategy. Companies like Google and Facebook have started

in this way. They released a free service to a larger and larger user base. Attracted the first angel

investors, then venture capitalists they had to then quickly turn to the advertising model to

monetize their users, to avoid being left without cash and investors.
Google’s Business Model

Thus, while a free service allows to scale up at a marketing level, the company will still have to

figure out how to monetize the service provided. There are usually a few routes:

• A basic version of the product, and a more advanced paid version (freemium model)

• One side gets the service for free, and the other side finances it (asymmetric model)

• Training materials or info products adjacent to the core topic of the product (educational

model)

• A free basic service, and a more advanced paid service (usage model)

• A job board that connects talented people with employees (job board model)
Those are just some examples of how an open source model can be monetized.

Freemium Model

The freemium model has gained in popularity in the last decade. The reason is simple; this model

allows a high virility growth. Cases like Dropbox, MailChimp, Spotify, and many others have

created viral growth thanks to these models.

At its core, a freemium model has a free version available to anyone, with no friction. Prompts

within those free services to switch to paid subscriptions to get more volume, no advertising or

more data.
Spotify’s Business Model

Spotify is a two-sided marketplace where artists and music fans encounter on a single platform.

Founded in 2008 with the belief that music should be universally accessible with a seamless

experience based on streaming audio and video. It generated over €4 billion in 2017, of which

almost 90% based on premium memberships and 10% based on a free service which is ad-

supported. The company recorded an operating loss of €378 million in 2017.

For instance, Spotify offers a free limited service, advertising-supported. But if users decide to get

the premium service, they can listen to music without interruption from advertising and also

download music to listen offline.

Dropbox instead, makes you use more space with a premium service. And MailChimp gives you

advanced features and the ability to handle more subscribers in your email list.

If you opt to this model, you need to make sure you have the following:

• A strong enterprise customer base

• An optimized conversion funnel to switch free users in paid ones

• A robust technological infrastructure that can handle a broad base of free users

Subscription Based Model

We’re living in a subscription economy. The most entertaining and costumer-centered services we

know today, from Netflix to Spotify and Amazon Prime follows a subscription model.

This model can be very powerful as it carries a few built-in advantages:

• A loyal user base

• A continuous stream of predictable revenues

• A more predictable sales pipeline

In short, many companies are “subscribing” to this model as it allows them to build a sustainable

revenue stream over time. However, it is essential to remark that creating this kind of model isn’t

a simple task.

Indeed, companies like Netflix and Spotify spend billions of dollars in producing original content

that can make those subscribers wanting to renew their plan.

How does Netflix Make Money

Netflix is the subscription service that is changing the way we consume traditional media. From

series like Stranger Things, Narcos and Black Mirror Netflix have been able to become a titan of

the media industry, with more than a hundred and fifty thousand members across the globe.

Usually, a model that relies on a subscription also requires essential investments in infrastructures,

as what makes the services offered through this model is the ability of those platforms to know

precisely what to watch or listen to next.

Also, you’ll need to build a process skewed toward a great customer experience to minimize churn

rates and improve the lifetime customer value. When your CAC or customer acquisition cost is

higher than the lifetime value of your customers, your business will soon be bankrupt.

On Demand Model
The Web finally allowed people to consume content at their own pace and schedule. What mass

media, like TV and Radio, didn’t accomplish, the Web did. An on-demand consumption allows

people to have access to the content at different time intervals.

Also, it doesn’t make sense any longer to have a single product offering for anyone at scale. Thanks

to the on-demand model. This is true for content but also any other kind of service. Netflix had

popularized this model when it made available at any time its shows through the platform.

Yet other services, like Uber, and Lyft also built their success by leveraging on the on-demand

model. As technological platforms allow people to interact instantaneously, it makes possible those

kinds of services.
Uber Business Model

Uber follows a business model become popular in the era of technological innovation. This is

called two-sided marketplace, and it has a simple premise. You create a platform with great user

experience, some elements of gamification, make it easy for two sides of a transaction to connect.

This happens especially in industries where those two sides were prevented from transacting as

the industry was dominated by a third party, which extracted most of the profits for that industry.

When that third party is removed via the two-sided marketplace, the owner of the platform collects

a fee from both sides of the transaction.

The on-demand model can be monetized in several ways. From subscriptions to fees for each

transaction on a platform. The critical ingredient is to create a smooth user experience, in which

you barely realize there is someone in the backend manufacturing that experience.

Peer-to-Peer, Two-Sided Marketplace

A peer-to-peer marketplace is a platform where usually two sides are participating in a transaction,

which can be about products (Etsy) or services (Uber, Airbnb, LinkedIn). A peer-to-peer, or two-

sided marketplace often fall into the chicken or the egg dilemma, where the marketplace to work

needs both sides to interact. Yet the paradox is that to have demand on the platform you need a

continuous generated supply. At the same time to have supply you need to create demand.

Imagine the Uber case; the platform works as soon as there are enough drivers on the road to offer

an on-demand and convenient service when riders need it.

However, drivers want to drive at their convenience and when the fees are high enough to justify

their effort. Therefore, the peer-to-peer marketplace usually faces several challenges in making

sure the supply side is served adequately to justify demand. Uber, Airbnb, Etsy all face this issue.
For instance, Uber uses several strategies to enhance the supply of drivers on its platform by using

dynamic pricing strategies, like surge pricing.

Dynamic Pricing

You can appreciate the importance of drivers supply for Uber by the fact that companies like

HyreCar have built their whole value proposition based on the supply scarcity on Uber.
Hyrecar Business Model

HyreCar is a peer-to-peer marketplace where owners of cars can rent their idle vehicles to drivers

that want to make an additional income via ride-sharing services like Uber, and Lyft. As a two-

sided marketplace, HyreCar makes money by charging drivers for direct insurance and a 10% fee

on the weekly rental expense. And by taking a 15% fee from owner’s weekly rental income.

E-Commerce Model

One of the first companies that proved the web wasn’t made just of connected computers but of

people ready to purchase physical stuff on it was Amazon. Started as a book store the company

soon branched out to sell music and related products until it became The - everything store.
Amazon Business Model

Today an e-commerce business model is among the most used digital business models.

Ad-supported model

If Amazon had proved that the web could become ‘An Everything Store’, a company that changed

the way media could be consumed was Google. Rather than just having to type a website address

in a browser, people could search for anything they wanted.

Google made all its services, and apps completely free. While on the other side it monetized the

data captured via its search engine pages with an advertising network called AdWords (now

Google Ads).
Back in 2004, Google with its IPO showed to the business world how powerful its digital

advertising business was. Indeed, in a matter of a few years, Google passed the billion dollars

mark. In 2017 its advertising business passed the hundred and ten billion dollars mark!

To make sure, while a digital advertising business might be easy to set up, it’s not an easy one to

run and make profitable. Unless you’re Google or Facebook with their dominant advertising

marketplaces, you won’t be probably able to make money via advertising alone unless you have a

very large users’ base.

How Does Google Make Money

Google primarily makes money via its advertising network that in 2017 generated 86% of its

revenues. Then, the other side of the business – almost 13% of its revenues in 2017 – comprised

money from the Apps, in-app purchases, and digital content in the Google Play store, Google

Cloud offering and Hardware products. The remaining part is attributable to Google “other bets”

a set of risky businesses Google is betting on.

Hidden Revenue Generation Model

Hidden revenue generation is about making money while the people that most use your service

barely realize that. A great example is Facebook (and Google). If you ask an average Facebook or

Google user, she won’t know how the company monetizes. That’s because those companies have

invested massive resources in creating this kind of experience.

Facebook Mobile Advertising Business

In the first nine months of 2018, mobile advertising was estimated at 92% of the total advertising

on Facebook products. Active monthly users decreased from 376 million to 375 million in Europe.

In the US and Canada, users increased from 241 million to 242 million. At the same time, average
revenue per user grew worldwide. Besides all the buzz of 2018, the Facebook business model

seems (for now) unshakable.

It’s all about mixing things up to find your own recipe

Each model we saw above isn’t a complete business model that can be applied entirely to a

company. Often business models are the fruit of the combination of several parts. For instance,

Airbnb and Uber are on-demand, peer-to-peer marketplaces. Amazon is an e-commerce platform,

which leveraged over the years on affiliates to spin its flywheel. Many businesses we analyzed

throughout the article use several models to build a successful business model. For instance,

Google leverages on an open source model for some of its products, while it monetizes its core

product (the search engine) with a hidden revenue model and it also leverages on making its

products free to large masses to gain traction quickly and make of its products a standard!

Thus, finding your digital business model will require time, customer feedback, vision,

understanding of the existing market, and potential opening new markets.

Concluding Remarks

After going through various arguments and detailed understanding:-

A business model may be described as the rationale of how an organization creates, delivers, and

captures value, in economic, social, cultural or other contexts.

In theory and practice, it is used for a broad range of informal and formal descriptions to represent

core aspects of a business, including;

• Purpose, • Target Customers,

• Business Process, • Offerings,

 • Strategies, • Trading Practices, and

• Infrastructure, • Operational Processes and Policies

• Organizational Structures, Including Culture.

• Sourcing,

Compiled by: Dr. Vikas Gautam

Note: This content is for individual learning purpose.