Element
| Key Partners | Key Activities | Value Propositions | Customer Relationships | Customer Segments | |||||
| Key Resources | Channels | ||||||||
| Cost Structures | Revenue Streams | ||||||||
How: Create a digital version of a classic physical and tangible product without reducing its perceived value.
Why: Offer advantages over tangible products, like easier and faster distribution, smart cross referencing and networking, better data exploitation, and a simplified user experience.
This business model is part of the Business Model Patterns printed card deck.
A collection of business models that will help you understand the key drivers of business model success. The card deck will be ready for purchase in the end of 2023 and is now undergoing rigorous testing.
Reserve your deck!Digitization, also known as digitalization, involves the transformation of an existing product or service into a digital variant, providing benefits such as the elimination of intermediaries, reduced overhead costs, and more efficient distribution.
This model can be applied to a wide range of business types, including print magazines offering online versions and video rental stores providing online streaming services.
As automation makes digital offerings increasingly available, reliable, flexible, and efficient, the internet has had a significant impact on business models. Digitization not only allows an existing business to be reproduced online and some of its processes and functions relocated to the internet, but it can also lead to the creation of entirely new offerings. For example, the advent of the internet has made it possible to offer customers contents that could not have been produced in their current form before.
Goods that were traditionally sold in physical form are increasingly being supplemented or replaced by immaterial representations, which offer several advantages. For instance, we can now purchase music online anytime and anywhere, whereas only a few years ago, we had to rely on CDs or cassettes. However, this development also has its drawbacks, such as issues of copyright, digital rights management, and pirating, requiring a significant amount of time and effort to protect intellectual property rights.
In addition to allowing the sale of new contents, digitization can also enhance already existing electronic contents. The consumer electronics industry, for example, has been significantly impacted by the addition of interactive communication, enabling customers to watch television at any hour through video-on-demand and even participate in real-time voting or commenting on television features.
Digitization has close connections with other business models, such as crowdfunding and leveraging customer data, which would not have been financially viable without it.
Where did the Digitization business model pattern originate from?
The Digitization business model, which relies heavily on modern computers and communication technologies, is a relatively recent phenomenon that arose from the desire to automate standardized and repetitive business processes within enterprises. As the concept was gradually applied to meet customer needs, it initially served to create digital products and services in domains characterized by numbers and logical connections.
It is not surprising that the first electronic services were created by banks in the early 1980s using terminal interfaces and data transfer via telephone lines. The widespread availability of broadband internet in the 1990s facilitated more rapid digitization on a larger scale targeted at individual consumers. With the development of graphic user interfaces, browsers, and encryption, a vast array of web services became available.
Applying the Digitization business model
While internet businesses will likely find it difficult to avoid digitization, Digitization is also relevant for many other players, including manufacturers, as physical products become intelligent and networked through the Internet of Things (IoT).
New Software-Based Business Opportunities
These developments are driven by significantly reduced costs for sensors and corresponding networks, which collect data at the product’s location and efficiently communicate it. These changes have given rise to new software-based business opportunities, such as activating machines on demand at marginal costs approaching zero. For example, cars or machines can increase their power on demand (Software as a Service). While the automotive industry is actively exploring potential applications for digitization, these are still early days.
Over recent decades, the virtual and real worlds have started to merge, offering enormous possibilities. It is likely that in the future, almost all products and services will incorporate digitization in some way, such as through preventive maintenance, intelligent inventory management, real-time logistics, fully integrated supply chain management, and software-based services.
Trigger Questions
- What part of your product or service can add extra value by being supported by software?
- What touchpoints in the customer’s journey will be affected?
Examples
Skype
Pioneering digital audio and video communications, Skype helped replace both phone calls and face-to-face meetings.
Netflix
Transitioning from DVD rentals to online video streaming, Netflix transformed the market and abolished its competitors.
Hotmail
One of the first webmail service providers to use the digitization business model, Hotmail (now operated by Microsoft) provides electronic mail through a web browser or third-party software via POP3 accounts. Users can access address books, compose, store, and send emails within the user interface, and the basic service is free, with premium features available for a fee. The cost to Microsoft of offering a free basic Hotmail account is offset by revenue from premium users.
Jones International University
This American for-profit university, which offers bachelor’s, master’s, and doctoral degree programs in education and business online, became the first American university to earn recognized accreditation for courses studied and administered solely online in 1999. The courses, which offer great flexibility to students in remote locations or who work part-time, are supported by online discussions via chatrooms, forums, email, and telecommunications, and students work towards qualifications through modules, assignments, and assessments. Other leading schools, including Harvard University and MIT, also offer online courses for a small tuition fee or free of charge.
Virtual banks
The digitization business model has been heavily exploited by the banking industry, as traditional banks introduced online services to complement their existing products, and new businesses specializing in online virtual banking without physical branches have emerged. These banks often focus on specific financial products and offer lower costs that are often shared with customers in the form of higher interest rates. Examples include 1822direkt, DKB, and comdirect.de in Germany, bankdirekt.at in Austria, Swissquote.ch in Switzerland, First Direct in Great Britain, and VTB Direct Bank in Russia.
A digital iteration of a formerly common physical object, Facebook is the world’s largest social network, with over one billion active users, and it has managed to transport old concepts to their digital extremes. Despite its large user base, the company continues to try out new concepts to monetize its customers’ potential. However, Facebook and other similar services have faced criticism for their social impact, with some accusing them of replacing people’s real-life relationships.
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann