It seems like everyone is making hay out of selling digital products, and it’s tempting to jump in at the deep end with no water wings. But there’s a method to the madness. To make your venture profitable and sustainable, you need a digital business model to map out how to sell your products and monetize your idea.

What Is a Digital Business Model?

A digital business model describes how an organization creates and delivers value to customers using digital technologies. It should cover various aspects, such as customer acquisition, product or service delivery, and customer service.

Digital business models come in many shapes and sizes. Many successful businesses mix and match existing models to devise innovative ways to create value and deliver unique customer experiences to stand out in the marketplace.

A company may also adopt different business models at various growth stages. For example, many complex businesses, such as Netflix and Google, started with a simple business model. The business model then evolves over time as the company acquires more users and expands its market.

Key Elements of a Digital Business Model

Besides a customer-centric approach, which is essential for any organization, a digital business model should address these elements:

• Product or service: One advantage of having a digital product or service is the potential of unlimited scalability. You can leverage network effects to increase the value of the product or service as more people join the platform when you build a product suite.

• Distribution: To get a product or service in front of your ideal customers, you need to leverage various online and offline channels. These can include search engines, social media platforms, email marketing, and more.

• Value proposition: The lower cost of starting a digital business also makes the market more competitive. You must have a clearly articulated value proposition relevant to your target market to stand out and gain traction.

8 Types of Digital Business Models

Here are some of the most popular digital business models and monetization strategies:

Open Source

This business model offers users free access to software and relies on a community of programmers to keep evolving the product. It allows you to quickly build a user base (free is a good price!) and outsource most of the ongoing enhancements and maintenance to the community.

However, “free” doesn’t pay the bills. After using open-source software to build a community, you can generate revenue by charging for premium subscriptions or providing training and services associated with the open-source software.

Free Model

You see this model everywhere — with Google being the most ubiquitous example. It works well for highly scalable products, so you can build a large user base and attract investors to sustain the infrastructure as you develop a monetization strategy.

For example, you can offer a basic version at no cost and charge for a premium one. You may have one user group get the service for free while the other side pays for the service. Or, you may sell training or information products to support the free services you provide.

Freemium Model

A freemium model offers a free version of the software available to any user with very low friction to sign up and onboard. Then, users are prompted to upgrade to a subscription plan to get more volume, use additional features, remove advertising, and/or access more content. Some prominent brands that adopt this model include Dropbox, Mailchimp, and Spotify.

To support this business model, you need to optimize your conversion funnel to effectively move users from the free plan to the paid ones. You also need to ensure that your technology infrastructure can handle a large number of free users and deliver an outstanding experience that will entice them to upgrade.

Subscription-Based Model

This business model, used by companies like Amazon Prime and Netflix, gives you the benefits of generating recurring revenues. It can help you build a loyal customer base that will attract more users to your brand. You can create recurring revenue streams and a more predictable sales pipeline.

This model does keep you on your toes because you have to convince customers to stay subscribed month after month. You must constantly improve the customer experience and innovate your products to minimize churn and increase customer lifetime value. If you spend more to acquire a customer than they spend on subscription fees, your business will flop.

On-Demand Model

This model enables customers to consume content at their own pace, whenever and wherever they want. For example, Netflix allows users to watch any movie any time they want and stream it from any device simply by signing onto their accounts.

The on-demand model isn’t limited to content distribution. Uber and Lyft allow customers who need transportation to connect with drivers in real-time. This is an example of how advances in technological infrastructure have made it possible to deliver innovative solutions that were not possible in the past.

Peer-to-Peer Marketplace

This business model uses a platform to support a two-sided marketplace on which parties unrelated to the company that operates the site participate in a transaction of products or services. Some successful examples include Etsy, Uber, and Airbnb.

However, building a user base isn’t always easy — it’s somewhat of a chicken and egg dilemma. You need buyers to get on your platform to attract sellers. But without enough sellers, buyers won’t use the services. The challenge is to attract supply and create demand simultaneously to build momentum.

eCommerce Model

eCommerce models are the most commonly used digital business model today. With the advance in various e-commerce platforms, such as Shopify and BigCommerce, merchants can set up shop quickly to sell any items and tap into a global customer base.

There are many different ways to run an eCommerce business without the headaches associated with production, logistics, and warehousing. For example, a simple API connection can enable you to leverage a drop-shipping service to streamline the fulfillment process and eliminate the costs associated with warehousing and delivery.

Ad-Supported Model

If you have amassed a large user base, you can charge other companies to access these “eyeballs” by selling ads on your platform. Many content producers use this model by becoming part of Google’s AdSense network to show ads on their websites and earn commissions.

On a larger scale, Google makes all its applications (e.g., Gmail) available to users for free and charges advertisers who want to get their ads in front of these users. For example, brands can place ads via the Google Ads platform to target users who search for particular keywords.

Which Digital Business Model is Right For You?

Companies often need to combine different approaches at various stages of their business to support customer acquisition and growth.

You should have a digital product strategy in place to make sure you’re building the right product at the right time. Then, you must support the product roadmap with a robust audience and revenue approach to ensure that you’re applying the right digital business model with an eye on the bottom line to ensure long-term success.

Need some help navigating the complex process of launching your digital product? Get in touch, and our expert team can help you find the best way to build and monetize your idea.