What Is a Digital Business Model?

Summary of Our 7-Part Series

In our 7-article series on the fundamentals of digital business models, we’ve provided considerable insights. This article serves as a comprehensive summary, offering key takeaways and additional perspectives across the series.

What a Digital Business Model Is NOT

To begin, it’s important to clarify what a digital business model is not. Many online resources confuse business models with revenue models, and this often leads to misunderstandings. For example, models like the subscription model, freemium model, or ad-supported model are revenue models, not business models. While it’s useful to understand these, calling them a business model would be misleading.

Consider two companies using the same revenue model: Netflix (~$35B revenue) and Microsoft Office (~$50B revenue). If the subscription model were a business model, these two companies would be considered very similar, which is clearly not the case. Their actual business models — Netflix’s content streaming versus MS Office’s SaaS offering — are fundamentally different, despite using the same revenue model.

So, let’s focus on understanding what a digital business model truly is, beyond just how revenue is generated.

Defining a Digital Business Model

A digital business model can be better understood by categorising businesses based on value creation rather than value capture (revenue generation). For instance, if we classify Microsoft Office as a Software-as-a-Service (SaaS) business, we gain insights that apply to a wide range of SaaS companies. This approach allows us to group businesses that share similar value creation mechanisms, which is more meaningful than categorising by their revenue models alone.

The Global Industry Classification System (GICS) is used by investors to categorise traditional businesses by value creation, and a similar approach for digital business models leads us to 11 key verticals. The insight here is that grouping businesses by how they create value leads to more meaningful categories than simply focusing on how they make money.

The Benefits of Categorising by Value Creation

One of the most interesting verticals is Asset and Service Sharing, which includes companies like Uber, Airbnb, Lime (eBikes), and Fiverr. These companies create value by offering access to shared assets or services, such as cars, homes, or professional services. Despite the variations in their business models, they share key value creation activities such as:

- Attracting and onboarding supply-side participants

- Verifying participants and ensuring service quality

- Categorising and presenting services for easy discovery

- Matching supply and demand effectively

- Managing transactions, including payments and ratings

Although there are differences between these companies, they share many business model components, especially in how they create value. The key takeaway is that understanding these common elements can help us draw insights applicable to a wide range of similar businesses, even across different verticals.

Fundamental Concepts in Value Creation

Within digital business models, there are two broad types of value creation:

1. Linear Business Models: These create value by sourcing inputs from suppliers and transforming them into something of higher value for customers. Examples include Amazon eCommerce, Microsoft Office, and Netflix.

2. Platform Business Models: These rely on a two-sided market where both supply and demand sides are crucial for creating value. Examples include Google Search, Uber, and Apple’s app ecosystem.

Apple, for instance, uses a linear model for hardware (iPhone design and manufacturing) but operates a platform model for its app ecosystem. Many businesses combine both models in different areas of their operations, which is essential to understand when analysing the digital landscape.

Success-Defining Concepts: Network Effects and Search/Transaction Costs

A key concept for platform business models are indirect network effects where the value of a service increases as more users participate. For example, in Uber’s case, more drivers reduce customer wait times, while more customers increase drivers’ income.

However, achieving network effects isn’t enough. We must also consider Search, Transaction, and Post-Transaction Costs — the efforts, time, financial costs, and risks that users face when interacting with a platform. These “friction” factors can make or break a platform’s success, as seen in the stark contrast between the market cap of Getaround (car-sharing) and Uber (ride-hailing).

Exploring Digital Business Models: Gaining Depth

By categorising digital businesses into 11 verticals and analysing the best-performing models in each, we can dive deeper into understanding successful business approaches. For each vertical, we can identify 3–10 subverticals, bringing the total to over 100 subverticals across all industries.

We’ve identified 22 of the most successful business models today, which include the leading models across each vertical. This knowledge gives us powerful insights into how companies design their business models and helps us spot successful tactics that we can apply to other ventures.

Business Model Elements

The Business Model Canvas is a common tool for describing business models and consists of 9 elements.

These include:

- Key Partners: Supply, channel, tech, and other partners

- Key Resources: Technology, data, content, brand, network effects, etc.

- Key Activities: Data management, onboarding, balancing supply/demand, etc.

- Value Propositions: Convenience, speed, personalisation, etc.

- Channels: Customer acquisition, sales, after-sales, etc.

- Customer Relationships: Empowerment, decision support, self-service, etc.

- Customer Segments: Geographic, demographic, behavioural, persona-based, etc.

- Cost Structure: R&D, sales, marketing, admin costs

- Revenue Stream: Inventory sales, commissions, subscriptions, advertising, etc.

We’ve examined these elements both from a general digital perspective and across different verticals to understand the nuances of each business model type.

Vertical-Specific Business Model Canvases

We can further break down business models by vertical, identifying patterns of value creation and monetisation strategies that work best in each context. Understanding these patterns allows us to transfer knowledge across verticals, or even innovate by combining successful elements from different models to create something new.

Combining Ideas Across Verticals

An excellent example of combining tactics across verticals is Doximity, a platform connecting healthcare professionals, patients, and pharmaceutical companies.

By blending telemedicine, professional networking, and targeted advertising, Doximity taps into multiple markets: telehealth, healthcare staffing, and pharmaceutical marketing. This hybrid approach allows them to serve a large and lucrative customer base, demonstrating how combining ideas from different verticals can lead to significant innovation.

Learning from the Best: Case Studies

Finally, by studying the largest and most successful digital business models by market cap, we can learn from their strategies:

1. Apple: A leader in the Hardware/Software Technology Platform vertical, leveraging a powerful ecosystem of devices and third-party apps.

2. Microsoft: Dominates the Software-as-a-Service vertical with M365 and its suite of office productivity tools.

3. Google/Alphabet: Owns the Search vertical, generating revenue through its digital advertising platform.

4. Amazon: Leads eCommerce with an unmatched fulfilment and delivery network.

5. Meta: Combines powerful network effects in social media and digital communication tools to dominate advertising.

Conclusion

Learning about the largest digital business models is complex but invaluable. This article, along with our series on digital business model fundamentals, offers a solid foundation to:

- Understand the core principles behind digital business models

- Learn key business model elements and tactics at an aggregate level and across verticals

- Analyse successful business models in-depth to gain actionable insights

These insights are also the foundation for our flagship course, which dives deeper into these topics and provides more practical applications for aspiring digital business model designers.