10 Patterns for successful digital business model innovation
Digital transformation and new business models
The digital transformation changed markets in a fundamental way. Therefore, today it is absolutely essential to put your business model and its mechanics to the test. In our understanding, markets are nothing less than the relationships between companies and customers. And digitization opened up completely new possibilities and approaches for shaping these relationships. New distribution channels, payment models or additional revenue streams through new services are now generally accepted due to their broad application in both b2b and b2c. And it is paramount that every company checks the underlying patterns of these models in order to apply them to its own business.
Since there are still companies that aren’t making use of these opportunities, there is still a lot of potential to be realized here. For these companies, it might be important to scrutinize their relationship with their costumers and adapt it better to their new needs and wishes. Those who establish processes and ways of thinking that focus on customer needs will be more likely to lead their respective industries, and/or be better prepared for possible disruptions of their markets.
Now, there is some good news concerning this: in order to further develop one’s business model, it is only rarely necessary to completely “reinvent the wheel”. Rather, it is possible to fall back on existing patterns that underlie most of today’s successful business models. And we have put together a list of 10 patterns for you, that are expecially important when it comes to digitizing a business.
Digital Business Models: 10 patterns (and lots of real life examples)
The following business model patterns are particularly suitable for use in a digital context. They can be found among the 55 patterns of business models identified by the authors of the St. Gallen Business Model Navigator. We invite you to try and apply the corresponding questions from our method box to your own company.
Business Model 1: Free
“Free”: Our first pattern entails that a company offers its core product free of charge. The best-known examples of this today are probably search engines or social networks. True to the well-known phrase: “If you are not paying for the product, you are the product”, they make their functions available to users completely free of charge, while monetizing their data.
Another successful example of this pattern was the mobile game Angry Birds; it is still completely free of charge and incredibly widespread today. A lot of merchandise is sold and the license to the vengeful birds is granted for movies and board games. These products subsidize the free game, whose wide distribution in turn boosts their sales. We’ve already taken a closer look at some of the thoughts behind this pattern in one of our older blog posts.
How can we make turnover when we offer our core product for free?
Business Model 2: Freemium
“Freemium”: The artificial word Freemium has even made it into common use today. For this pattern, a basic version of the product is offered free of charge; users can then subscribe to a premium version with additional functions. Well-known business models for this pattern can be found at Dropbox, Spotify or LinkedIn.
As a file hosting service, for example, Dropbox provides every user who registers with two gigabytes of cloud storage space free of charge. This can be used without further obligation and for an unlimited amount of time. However, if the storage space is no longer adequate, you can increase it for a monthly fee as well as add more users as part of company packages. Free use increases user base and awareness, while subscriptions (see Subscription) generate recurring revenue. Free and Freemium are particularly suitable for digital products such as Software-as-a-Service, as their digital distribution costs are lower than those of physical products.
How can we provide a free basic service and charge for premium services?
Business Model 3: Subscription
“Subscription”: For a long time we knew subscriptions mainly from the media sector, but through the Internet they have developed into a widespread payment pattern. This pattern is particularly suitable for software, streaming services or other services that are used repeatedly by customers. The pattern is well-known from companies such as Netflix and software providers such as Salesforce or Adobe, who make it possible to use their content or software for a monthly fee.
The tool manufacturer Hilti, whose fleet management we recently took a closer look at, also has a subscription model, in this case for the provision of physical products. For customers, this has the advantage that they do not have to buy a service again and again, but have permanent access to it within the framework of predictable payments – usually manageable amounts. For the subscription provider, this also increases predictability, as the acquisition of users is highly likely to coincide with their commitment to the service over a longer period of time. This commitment can of course be further increased by the product’s value proposition and contract modalities. (see Lock-in)
How can we provide a free basic service and charge for premium services?
Business Model 4: Lock-in
“Lock-in”: Here, customers are tied to a product by increasing the cost of switching to a competitor. This pattern is often combined with the subscription model. One world-famous example for this is Apple, whose proprietary product ecosystem consisting of a platform and hardware makes a switch to competing products extremely time-consuming and expensive.
Amazon Prime features a “softer” way to increase the cost of cancellation: the service offers many benefits, including better shipping conditions, access to streaming services for TV shows, movies and music, an unlimited cloud storage service for photos, privileged access to certain offers and exclusive items. All these benefits would be lost if the subscription is not renewed. Other ways to increase exit costs are through contract modalities (which is not always the most customer friendly way, though).
How can we force customer loyalty by high changing costs?
Business Model 5: Solution Provider
“Solution Provider”: The company not only sells a product, but also embeds it in an overall solution that solves as many product-related tasks and problems as possible. A well-known German example for this is Heidelberger Druckmaschinen, where monitoring and consulting services are offered to help customers optimize their printing processes. This all-round support package means that customers no longer have any reason to look for alternatives.
In this context, digital technologies such as intelligent machines, data analytics and remote support are making many new services possible in the first place. And as far as business model innovation in digitization is concerned, Heidelberger is one of the showcase examples from Germany that is absolutely worth looking into.
How can we provide a complete solution to our clients?
Business Model 6: Rent instead of buy
“Rent instead of buy”: Here, the company does not sell a product, but grants customers time-limited usage rights for a modest price. This potentially generates more revenue than a one-time sale, while customers have the advantage of not having to make large investments to use the product.
The pattern is known from services such as Car2Go: here a physical product – the car – is not manufactured and sold individually for each single customer, but used by multiple people instead. The use itself is coordinated via an online platform, in this case an app.
How can we offer limited usage rights instead of a product?
Business Model 7: Long Tail
“Long Tail”: Instead of fewer “blockbuster” items, many niche products are sold for a small amount each. The pattern appears with services where you can register domain names, or with services like iTunes where you can buy individual songs. This model, which would take up a lot of shelf space when selling physical products, is very interesting for trading in digital products.
Another good example of the model are job portals such as Stepstone or indeed. On these platforms (see Platform Business), companies buy the publication of individual job advertisements; each “product” is therefore sold exactly once. The same applies to well-known portals such as eBay, where millions of punctual trade relationships are made possible in exchange for a small amount that the sellers have to pay the company.
How can we sell small niche products in large numbers?
Business Model 8: User Designed
“User Designed”: Using this pattern, companies delegate their creative work to their customers, who are allowed to design their products themselves. For example, the German company Spreadshirt built an online shop for t shirts where the users have to option to think up their own ideas for the motifs or lettering that will be printed on them. They can also sell these designs on Spreadshirt’s platform, which fills the shop with lots of new ideas. And the company itself has to do (almost) nothing to achieve that.
The advantage of an online platform in this regard is that the users’ ideas can be gathered in a centralized and automatic way. It doesn’t take lots of time or manpower to organize this process. Also, creating shirts at the PC helps better visualize the ideas of the users; something, that would be impossible to do using a phonecall, for example. And a last interesting aspect: the fact that the customers have to do the company’s work designing the product, doesn’t even make them feel bad. On the contrary, the products become more personal, which increases their value in the eyes of the invididual customers. Other examples for this pattern can be found with online shops for furniture (like MYCS) or platforms like Quirky.
How can we make the customer invent and sell their products?
Business Model 9: Orchestrator
“Orchestrator”: Companies concentrate on their core competencies, while other activities are outsourced to experts or service providers. Cloud services, IT service providers, agencies or infrastructure providers, for example, make this pattern particularly interesting for the online sector, as they can solve many problems if internal know-how or resources are not available. This pattern involves actively coordinating partners and service providers, which is much easier today thanks to digital communication options.
How can we outsource everything except our core competence?
Business Model 10: Platform Business
“Platform Business”: Here, several different user groups are brought together on one platform to interact with each other. Search engines such as Google bring together users, advertisers and websites. A platform like eBay functions as a marketplace for buyers and sellers. These platform strategies are among the most successful patterns of the digital economy and can also be envisioned for the energy market or for financial transactions via technologies such as the blockchain.
The more participants use such a platform, the more interesting it becomes and the more users it attracts conversely. But platforms can also work on a small scale, as long as they bring together parties that are relevant for each other. For example, architects can list standardized construction plans on the site houseplans.com, and interested parties can then buy these for a fraction of the price of an individual plan. With its own SAP Community, SAP offers a network of forums, blogs, and wikis in different languages in which employees and users can exchange information about products and help each other with problems. Kundensupport is facilitated by user-generated content. Both platforms are far from reaching the user base of Facebook or Google, but are still successful due to their thematic focus. Similarly limited, it is conceivable to bring people together in the region where a company is located via a single platform.
How can we bring market partners together on a platform?
Digital Business Models and Innovation: A Thoughtful Approach is Essential
As you can see from the examples, these business model patterns are neither unknown nor complicated. They are also not mutually exclusive, and in many cases they can be combined. The challenge now is to figure out which patterns are suited best for one’s own company and draw as many impulses as possible from them in order to then further develop the current business model. In our consulting process, we systematically identify those patterns that give the company the best development impulses. This may sound simple on paper, but it is complex to the extent that the mechanics of a business model always have strategic and economic implications, i.e. they are associated with a considerable degree of uncertainty. For this reason, together with our clients we form innovation teams and confront the identified innovation potentials from the “business model” search field with the human context and the technology factor.
One thing is certain: Especially in the search for digital business models, there are always surprising opportunities for innovation.