A Netflix subscription or renting a car online to go away for the weekend are things that have only been able to happen thanks to Digital Transformation. The new digital business models have opened a range of possibilities in the business sector with which they have managed to meet the demands of customers and the current market.
With the technological evolution, we have seen changes in the Digital Business and its new digital business models. Thanks to this, they have emerged in companies in various media, airlines, tourism, or financial intermediaries. We are already facing an era in which a company manages its relationship with consumers to surpass the current business-to-business intermediation model.
Do you want to know what kind of models Spotify, Uber, or Airbnb use? Well, keep reading this post where PaperHelp (https://www.paperhelp.org/) tells you what the most popular digital business models are and how they work.
What is a business model?
A business model is a representation of how a company creates and delivers value to its potential customers.
This value delivery is done through the natural interaction of several interdependent variables that have to be identified and optimized during the execution of the business model.
These business models have been described and studied over time by different operations experts and business schools, going back to the first texts with Peter Drucker in the 1950s. However, the passage of time has allowed businesses to encounter new innovative variables that have improved the production and delivery of value and how we charge our customers.
One of the events that have most enabled innovation in the operational structure of companies is the advent of the Internet and, with it, the arrival of digital business models.
Digital business models
Digital business models are the forms of business applied in the digital world. What is a digital business? This online business model leverages technology to improve its services both within the company and with its stakeholders and customers and to realize value propositions and monetization. If all this is successfully achieved, the results will be great digital businesses that enter an innovative market with more and more players.
How can I represent my business model?
During the first steps in creating a business, has historically been taught the need to have a Business Plan or Business Plan. However, in a BANI environment as changeable as the one we live in, these business plans do not tend to withstand the impact with the market, as they are usually developed to operate in static conditions where disruption is not the order of the day.
For entrepreneurs starting a business, the best way to represent a schematic flowchart of how your company or startup will work is through the so-called Business Model Canvas.
How to know what my business model is
The question you need to ask yourself when determining which business model to apply is “How do I plan to charge my customers?”
Once you are clear on the answer to this question, the chances are that the business you want to replicate falls into one of the following business model categories:
- SaaS or software as a service (Software as a service)
- E-commerce or e-commerce
- Ad-based model and monetization of customer data
- Hardware sales
- Open Source
After reading this post, if you still think that your business model does not fit any of the above categories, the chances are that you are building something complicated (usually known as Moonshot). In that case, we recommend that you review your business model as experts like Anu Hariharan recommend launching with a proven and solid business model (like the 9 above).
1. Enterprise model
The enterprise model is characterized by selling services or software to other businesses, usually on a single-use license (not a subscription basis).
The contracts established between these companies and the customers usually have fixed and temporary terms and are renewed every certain period at the expiration of the service.
Some examples of companies that apply this business model are:
- Large consulting firms such as McKinsey or KPMG.
Metrics to measure the success of an enterprise:
- The total value of all active contracts (Bookings)
- Total number of unique customers we have
- Turnover. The difference between invoicing and the total value of contracts is that the money from customers usually arrives once we have delivered the product or service in this type of business. The difference between the total value of contracts and billing is the ability to service all of our customers.
The model has developed the most since the explosion of the Internet in the new millennium, and we are indeed living in a subscription economy.
A subscription model sells a product or service to customers for which they have to pay regularly (usually monthly) to access it. If they stop paying, they no longer have access to the product.
They are usually services focused on customers rather than companies since these typically require customized products, like SaaS.
The most entertaining and customer-centric services we know today, from Netflix, Showtime, and Amazon Prime, follow a subscription model.
This model can be compelling as it has several advantages:
- A fixed customer base over some time.
- A steady stream of predictable revenue as subscribers pay in advance.
- In terms of business planning, this system provides a clearer picture of the company’s needs.
In short, many companies are “subscribing” to this model as it allows them to create a sustainable revenue stream over time. However, it is essential to note that creating this type of model is not a simple task. Companies like Netflix and Spotify spend billions of dollars to produce original content that can make subscribers want to renew their plans.
Success metrics of a subscription model:
- MRR or Monthly Recurring Revenue: By the nature of subscriptions, revenue comes in regularly from user activation. The larger the base of paying users we have, the higher the monthly recurring payment of our product.
- ARR or Annual Recurring Revenue: Similar to the previous case, it may be that the product or service can be paid with an annual fee (generally associated with a discount compared to the monthly payment).
- Churn Rate (%): This is the percentage of the customer base lost each unit of time (generally every month).
- CAC or Customer Acquisition Cost: This is the price we pay for each customer that comes to our platform.
3. SaaS (Software as a Service)
The SaaS model is one of the most frequent business models for digital companies or startups today. It is a variation of a subscription model in which the customer has to pay a monthly/annual fee to access the service offered by the company.
Some of the most famous examples of SaaS companies are Asana, Slack, Zoom, or Talkdesk.
The SaaS model has several advantages compared to the private licensing business model. Because what the customer pays is not for the software as such (paying to build a road) but for the use of the software (paying a toll to pass through the road), the service provider will have more control over the status and quality of the software (making sure that the road is in good condition).
Metrics to measure SaaS success
- MRR or Monthly Recurring Revenue: As this is a variant of a subscription business, its nature is recurring revenue on a monthly or annual basis.
- ARR or Annual Recurring Revenue
- Churn Rate (%): This is the percentage of the customer base lost each unit of time (generally every month)
- .CAC or Customer Acquisition Cost: This is the price we pay for each customer that comes to our platform.
4. Transactional Business
It is a relatively new business model that has developed a lot over the last 10 years with the emergence of Fintech or financial technology companies.
A company with a transactional business model generates revenue by billing commissions for allowing trading through its platform. They are usually companies associated with finance or banking, and the model is to retain a commission for each transaction made.
Metrics to measure the success of a transactional business:
Total transaction volume or VTT: This is the total payments processed through the company’s platform.
Net Profit: The % of the VTT or Total Transaction Volume that the company keeps for providing the services (the payment gateway commission).
CAC or Customer Acquisition Cost: This is the price we pay for each customer that comes to our platform. It is calculated by dividing the total marketing spend by the number of new customers acquired (for a given period).
In the market, marketplace, or peer-to-peer (p2p), business models are differentiated by contacting two parties involved in a transaction, either products or services. In this business model, we have Uber, Airbnb, eBay, or Blablacar.
Why is it necessary for both parties to participate? Because one of these parties cannot happen without the other. None of these three examples we give you could happen if they did not have the contact of their customers. In addition, the market needs both parties to interact.
In this model, businesses are very attentive to market demands. Let’s give you the example of Airbnb. If a group of friends wants to vacation near the beach on a budget or a couple is looking to live for a few days in a house in the center of Paris, they can find it on the app quickly and easily and at different prices that match what they want. This arises when emerging businesses seek to cover needs that others do not offer, and at the same time, demand is created.
Let’s see a diagram explaining the business model of Marketplaces. We see that the platform aggregates the supply of the “owners” of the product or service (Owners) and customers’ demand. In other words, the marketplace is a provider of market access to both owners and seekers.
Advantages of a Marketplace
- The owner does not invest in the platform or marketplace; the supply provider or the owner makes it.
- It is a great actor in favor of the circular economy since instead of producing the necessary goods for the service loan to the user. It is in charge of optimizing those already in the market (example of Airbnb houses).
- It allows generating extra income for the owners of the services or products.
- The service demander does not have to buy the product but can acquire it temporarily from the marketplace.
Disadvantages and risks of a Marketplace
- The most complicated part of starting up a marketplace is creating a secure environment in which owners and seekers can safely exchange their assets.
- A threshold of owners is necessary to offer a quality service, so it will be required to take care of the acquisition and activation of both owners and seekers.
Success metrics of a Marketplace
- Total Sales Volume: This is the total volume of products or services invoiced from the marketplace in a specific time unit.
- Net Profit: This is the % of the total sales volume that the company keeps as a fee for the service.
- User Retention (%): Percentage of customers (seekers) who purchase at least every X months (this is a cohort metric).
6. eCommerce or Electronic Commerce
Ecommerce models are based on making online sales of products and services; they are like a virtual store. A method of buying and selling that uses the Internet to conduct transactions and contact consumers.
Not only through a website but also through social networks. These are sources of information with many impacts and allow you to get closer and get to know your target audience.
This business model has been vital for small companies to grow and access other markets, something complicated to achieve through traditional channels. Not needing large infrastructures and doing without limitations such as time, space or logistics has been one of the main reasons for its expansion.
Metrics of success of a Marketplace
- Monthly revenues: All the revenues or invoicing that have occurred in the last month.
- Compound monthly revenue growth: It is crucial to measure the compound revenue growth to know if we are increasing our market share or having a solid recurrence of our customers.
- Net margin (%): We calculate this by dividing the net profit for a given month by the amount of money invoiced in the same unit of time.
7. Ad-based model or monetization of customer data.
These companies are based on offering products or services free of charge to customers and obtaining their profits by publishing advertisements on their products or selling user data to third parties.
Within these business models, we find social networks and other content platforms. Facebook, Twitter, Telefónica (they sell user data such as location, habitual movements, websites they frequent), and YouTube are well-known companies that receive revenue in this way.
These companies must focus solely on acquiring, activating, and retaining users as this is a prerequisite for their profit. That is why these large platforms are constantly improving their product, usability, or content.
If we were to schematize this business model, we would arrive at a scheme like this, in which the company collects user data to market it to third parties (it could be in the form of ads).
Success metrics of a Marketplace
- As this is a model that depends 100% on the number of users the company has, the metrics will be focused on them and how they interact with the free product or service:
- Daily Active Users (DAU): this is the number of active unique users there have been in the last 24 hours. It is crucial to be demanding with the criteria by which we define that a user is active.
- Monthly Active Users (MAU): The number of active unique users in the last month.
8. Hardware Sales
A Hardware sales company is characterized by selling physical products to consumers or businesses.
A variation of this business model is the “Bait and Hook” model, which is based on the initial sale of hardware at an artificially reduced price but then having to buy the consumables from the company to make the product work.
It is the case of the company Nespresso, which sells coffee machines at a lower price than the competition (or even below their manufacturing cost) but ensures that you will subsequently buy their coffee capsules for an extended period, and that is where they make a significant profit.
9. Open Source
The open-source model is characterized by freely available software, which empowers a community of programmers to contribute. Companies like Red Hat, for example, make money by charging premium subscriptions and services associated with their open-source software.
Last year, the company generated more than $2.5 billion in revenue, of which more than $2 million came from subscriptions, and about $345 million came from training and services. But all these amounts do not translate into direct revenue for the company; these business models also involve expenses, such as sales and marketing, to distribute its services.
As highlighted in its annual report, thanks to the open-source business model, Red Hat has three key advantages:
- Broad distribution through free licensing of its software.
- Paid subscriptions for premium and enterprise customers.
- They create a business model based on open source. Its success depends on the project’s ability to involve developers and contributors in working on the source code to improve it.
This term, coined by American entrepreneur Fred Wilson, is a combination of “Free” and “Premium.” The idea behind this model is to offer a product or content for free while reserving good content to be paid for.
Paid content for users is known as Premium. Sometimes, Freemium content includes advertising or integrated marketing, although digital businesses hope that advertising revenue and earnings from Premium users will be sufficient.
Elissa Smart is an omnipotent demiurge behind PaperHelp’s blog. Driven by seething creativity, not only she helps students with particular research and writing requests, but also finds the energy to share her extensive expertise via blog posts.