The digital, online, internet, social, mobile revolution is steadily changing what we buy, how we buy, and what role we play as consumers. In the topsy-turvy world of digital business models, consumers become suppliers, products are given away for free, and big money is made from niche products.
Underlying the change is a rethinking of each step of the industrial value chain. Often this means rethinking what a company can do for its customers. I doubt many car companies thought seriously about solving the loss of productive time while commuting; now Google is developing driverless cars. Hoteliers setting up new hotels would not have considered your spare room as an option, yet AirBnB turns willing individuals into accommodation providers.
Five examples of new digital business models are: pay-as-you-use, platforms, crowdsourcing, freemium, and long-tail.
1. Turn products into services
This model makes products and services previously only available to buy or lease, accessible on a pay-as-you-use basis. It is also sometimes called fractional ownership
NetJets in the US offers private planes by the hour. GoCar in Australia offers cars by the hour, which are already parked in your neighbourhood and without the paperwork of rental companies. Pandora and Spotify make it unnecessary to own a library of music. Cloud computing enables companies to pay for computing power only when they use it.
Pay-as-you-use is attractive to companies who can turn fixed costs into variable costs, and to consumers who couldn’t previously afford the products or services. The stock market also loves pay-as-you-use as it turns one-off product sales into ongoing revenue streams.
Interestingly this model is also revealing, even for those who can afford it, there may be inconveniences to ownership many are keen to avoid, e.g. for those who live in the inner city, owning a car may be more headache than asset, if you don’t often need it and parking is scarce.
Platforms, sometimes called multi-sided platforms, match groups of customers with different but complementary needs. The original platform is a very old business – newspapers – which sold news to subscribers as well as selling subscribers ‘eyeballs’ to advertisers.
Many digital platforms follow the newspaper model and sell eyeballs to advertisers – Google, Facebook, Twitter, etc. But new versions are emerging. LinkedIn provides a professional networking tool for individuals, as well as charging recruiters to connect with potential candidates.
Another group of platforms sell economies of scale and scope. These platforms offer small businesses some of the advantages of larger businesses that have more employees, deeper pockets, and global presence. WordPress and BigCommerce make it very easy to set up websites and online stores. Fulfillment by Amazon sells global distribution capability. Salesforce includes a marketplace, visible to all customers, for third-party applications that integrate with the Salesforce software.
3. Crowdsourcing, Open Business Models, and Prosumers
The very simple version of the industrial value chain is that companies buy materials from suppliers, turn them into products or services, and sell them to customers. In the digital world, the roles of suppliers, manufacturers and customers can be combined and intertwined, and customers can participate in businesses in ways previously unheard of.
These new models are variously called crowdsourcing or open business models, and those who participate are sometimes called pro-sumers (as they combine being producer and consumer). The key feature is that value is not just something created by a company and sold to customers, but is created and shared by participants.
Open source software and Wikipedia were early examples, using volunteers to build products. Content-sharing sites like YouTube, Tumblr and Instagram enable anyone with a camera to become a broadcaster, and earn revenue from ads if you garner enough viewers. Peer-to-peer lending companies like Kickstarter turn anyone with a dollar into a banker, and AirBnB enables anyone with a spare room to become a paid accommodation provider.
The massive appeal of crowdsourcing is humans are naturally social and participative. And for companies, active customers not only create value for other customers but also are likely to be more satisfied and loyal.
Crowdsourcing is now relevant to most companies. Most at least monitor product review sites and social media for feedback and ideas, while others actively seek new ideas for innovations directly from customers. Technology companies rely heavily on user forums to provide trouble-shooting assistance.
In a freemium model, the basic version of a product is free and you pay only if you want extra features or support. The insight is that non-paying customers create value by enabling virality and scale. Of course the product has to be useful and attractive to a large audience but if it is, free means fast uptake, fast brand awareness via lots of word-of-mouth, and a much larger customer base. A large base of free customers also provides a ready audience for upselling.
Most well-known freemium businesses like Evernote and Dropbox were startups. But some are testing whether existing businesses can successfully move to a freemium model. Online newspapers are experimenting using paywalls – ’10 free articles per month and subscribe to get more’. The most successful so far appear to be NY Times and The Economist. The Economist reports an impressive 89% of their online subscribers never had a print subscription or were lapsed print subscribers.
Long-tail models are great news for those with niche tastes – which is pretty much all of us in relation to something.
The traditional retail rule-of-thumb is companies make 80% of profit from around 20% of products. Long-tail is the opposite. Long-tail companies – such as Amazon and Netflix – make a significant amount of revenue from a ‘long-tail’ of products that sell only a few each. The economics is that a lot of customers buying a lot of different books or movies equals big profits, provided storage costs are low.
Retailers can exploit this. Research by MIT shows customers who go to a website without a specific product in mind are more likely to buy less popular items provided it is easy to search and find them, and particularly if there are recommendations (‘other customers also bought’ or ‘you might also like’).