Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
There are numerous ways to classify tech business models, for the sake of the analysis done on FourWeekMBA, we’ll classify them according to the level to which tech effectively changes/enhances the value proposition for users/customers. Indeed, we initially defined a tech business model, as a business where technology plays a key role, not for its own sake, but for the sake of enhancing the value proposition for the individual user/customer and enabling that value proposition to scale. Therefore, individual enhanced value propositions (the single user/customer is better off) and enhanced collective value propositions (the more users join in the more the service/product becomes valuable – aka Network Effects) become commandments of a viable tech business model.
For the sake of it, let’s see four key types of models:
Level one: tech and digitally-enabled
Digital embracing primarily how the product is framed and communicated to the customer/user.
In this specific case, technology plays a key role in communicating/distributing the product, but little in shaping it. Thus, take the example of a company that has simply built a website and communicates its product via that (communication level).
Or a company that has learned how to integrate digital marketing within its own corporate strategy. In that case, this is the most basic way to apply technology to a business model. There is no change in how the value proposition is shaped but rather to how it is communicated or distributed.
Here technology is used to better communicate the product/service.
A digital channel is a marketing channel, part of a distributionstrategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.
Level two: tech-enhanced
Digital enhances the value proposition, therefore it hits at the core of the company’s business model (Hint: Product And Distribution merge)
In that case, technology does impact the way the product is built and delivered. Take the case of a company that built its e-commerce and distributed its products via that, while at the same time it has learned how to integrate customers’ feedback quickly from the online platform to the way the product is designed.
In that case, technology is helping shape the product/service, thus making it more valuable to potential customers.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
Level three: platforms and interactions
From transactions to interactions, ecosystems, and flywheels
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
In this specific case, a company has moved to a different level. Rather than just selling its own products/services it has moved to build the platform (both tech and business) that drives the interaction between two (two-sided platform/marketplace/peer-to-peer) or more parties (multi-sided platform/marketplace).
Think of the classic example of how Amazon moved from selling products on its e-commerce platform to becoming a hosting platform for other e-commerce to build its own stores.
Amazon Marketplace is the world’s biggest online retailer, with sales greater than the eCommerce sales of entire countries. Marketplace Pulse estimates that there are over five million sellers on the Amazon marketplace, with over two million on Amazon.com alone. Amazon had enviable sales of over $232.8 bn in 2018 just from its product sales, with over 50% of sales coming from third-party vendors.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
While network effects, help platforms pick up speed and momentum and create a long-term advantage, also negative network effects are to be taken into account.
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining.
Level four: business ecosystem
Technology is at the center of the value enhancement model. Yet in order for it to succeed a community of developers, entrepreneurs, and doers need to adopt the business platform.
This level combined technology and distribution. Where a company has moved to a point where it focuses on governance design, and the underlying tech platform is built and shaped according to that. A classic example is the App Store, and how this has become a business ecosystem, with multiple stakeholders where governance design has become a key component.
Another example that is emerging strongly as a result of the Blockchain, with protocols like Ethereum that enable smart contracts or a whole set of potential applications.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
In this case, technology becomes an enhancer of governance design, policies, and stakeholder value.
Key Highlights of Digital and Tech Business Models:
Four Levels of Transformation: Digital and tech business models can be classified into four levels of transformation: digitally-enabled, tech-enhanced, platforms and interactions, and business ecosystems.
Level One: Tech and Digitally-Enabled: Technology plays a role in communicating and distributing the product or service to customers. This level focuses on improving communication channels and digital marketing strategies.
Level Two: Tech-Enhanced: Technology impacts the core of the company’s business model, shaping the product or service to make it more valuable to customers. Customer feedback from online platforms is integrated into product design.
Level Three: Platforms and Interactions: A platform business model generates value by enabling interactions between multiple parties, leveraging network effects. It involves building tech and business platforms that facilitate interactions between users.
Network Effects: Platform business models benefit from network effects, where the platform becomes more valuable as more users join. Positive network effects enhance the platform’s value for future users, while negative network effects may reduce its value.
Level Four:Business Ecosystem: At this level, technology is central to the value enhancement model. The focus is on governance design, and the tech platform is shaped accordingly. Examples include the App Store and Blockchain platforms like Ethereum.
Governance Design: Business ecosystems require the adoption of the platform by a community of developers, entrepreneurs, and stakeholders. Governance design and policies play a crucial role in their success.
Case Studies
Case Study 1: Nike – Level One: Tech and Digitally-Enabled
Nike utilizes its website and digital marketing to communicate and distribute its sports apparel and footwear. Its online presence enhances customer engagement and sales.
Case Study 2: Coca-Cola – Level One: Tech and Digitally-Enabled
Coca-Cola employs digital marketing channels like social media and email marketing to better communicate its products and engage with consumers.
Case Study 3: Amazon – Level Two: Tech-Enhanced
Amazon uses technology not only for its e-commerce platform but also integrates customer feedback into its product design. The company constantly enhances its user experience and product offerings based on customer data.
Case Study 4: Tesla – Level Two: Tech-Enhanced
Tesla leverages technology to shape its electric vehicles, constantly improving features and performance based on user feedback and data collected from their vehicles.
Case Study 5: Airbnb – Level Three: Platforms and Interactions
Airbnb operates a two-sided platform that connects hosts and travelers. The platform creates interactions between these parties, generating value for both. As more hosts and travelers join, the platform becomes more valuable.
Case Study 6: Uber – Level Three: Platforms and Interactions
Uber’s platform connects riders and drivers, creating a multi-sided marketplace. Network effects drive the platform’s value as more users join, and the interaction between riders and drivers increases.
Case Study 7: Apple – Level Four: Business Ecosystem
Apple’s App Store has evolved into a thriving business ecosystem. It provides a platform for developers to create and distribute apps, benefiting both Apple and app developers. Governance and policies within the App Store ecosystem are key to its success.
Case Study 8: Ethereum – Level Four: Business Ecosystem
Ethereum is a blockchain platform that facilitates the creation of decentralized applications (dApps) and smart contracts. It has given rise to a business ecosystem where developers, projects, and stakeholders collaborate to build innovative solutions. Governance and protocols are central to Ethereum’s success.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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