An introduction to digital business models for your new business idea

This guide outlines some common digital business models to help you come up with ideas and choose the best option to fit your circumstances and ambition.

Guide

20 min read

1. Overview

If you’re considering starting a digital business, you could already be developing your business idea, you may be struggling to come up with any ideas at all - or you could have the opposite problem, with many potential ideas that you can’t seem to filter down!

A key step in helping you firm up your new business idea is understanding more about different business models.

This guide outlines some common digital business models to help you come up with ideas and choose the best option to fit your circumstances and ambition.

2. First step - identifying your personal goals

When you’re generating ideas and progressing these into a business plan, it’s important to first be clear on your personal goals - in other words, what YOU want or need. This might be to:

  • Earn a salary right now - in which case you should always remain open to keeping or taking some sort of paid employment while you develop your business idea and launch it (remembering to check that your employment contract permits you to work on other things).
  • Earn a salary eventually - perhaps you can use existing savings as a cushion or investment in your business while you devote yourself to it full time.
  • Achieve a bigger ambition to grow and sell a business - usually this will require committing yourself to your venture (and accepting a potentially unstable income) for at least the next five to 10 years.

3. Developing your business idea

Once you have your personal goal in mind, the next thing to consider when analysing and developing your business idea is how easy it will be to launch that business:

  • Can you get started on a small scale without much upfront cost? The growth of digital means many businesses can launch with lower upfront costs, however some require significant upfront investment or a loan.
  • Are you able to set it up on a ‘test and learn’ basis? You can minimise your risk of wasted time and resources by launching a minimum viable product or service, testing it and then using that feedback to grow.
  • How long could it take to bring in any income and become profitable? Some businesses have the potential to bring in income within a few weeks and become profitable in a few months. Others take several years before generating income, and even longer to become profitable.

To answer these questions, it’s helpful to have a rough idea of what sort of business model could fit best with your idea and your personal goals.

4. Identifying possible business models

All business models include the same basic elements regardless of whether your business could be digital, physical or a hybrid of the two. These include:

  • What product or service will you offer your customers?
  • How will you provide it?
  • How will you generate income from that product or service?
  • How will you find potential new customers and then convert them to a sale?

To achieve any level of growth (and maybe create a business you can sell one day), your model will also need to include:

  • How you will encourage existing customers to stay with you and buy more (retain, cross sell, and up sell)
  • Why and how those customers will then spread the word to bring in more new customers without you having to pay to win every new customer you get

Before going any further, it’s worth emphasising that there are hundreds if not thousands of variations of business models, so it’s not possible to go through every option here!

However, there are some common models that are useful to understand.

Let’s imagine your business idea centres around chocolate. You’ve spotted a growth trend for luxury chocolate and you think you’ve spotted a gap in the market. You want to launch a business helping customers to find and enjoy the perfect chocolate for them and you need to work out the digital business model that has the biggest potential and fits your personal goals.

Here’s some hypothetical examples for five basic business models:

  1. Ecommerce - tangible product: The most obvious option may be creating and packaging your own chocolates for sale online, reselling someone else’s product or selling a range of different brands’ products.
  2. Ecommerce - digital service: You could run online training courses and workshops for those looking to make their own chocolate, or offer a remote 1-2-1 consultancy for businesses looking to enter the sector.
  3. Content platform: Another option could be a website or app collating specialist content on chocolate. That content could be created by yourself or other contributors or even user-generated by your audience.
  4. Two-sided marketplace: Rather than making and selling your own products, you could create a digital platform attracting thousands of chocolate customers and bringing together many different specialist chocolate manufacturers for them to buy from.
  5. Technical digital product: You could design an app that helps people identify the best flavour combinations for different types of chocolate or types of bean, or create a special piece of software that helps small scale chocolatiers manage their production processes.

5. Focus on one business model initially

Your vision may eventually be for a combination model or a hybrid between digital and physical. For example, an online shop combined with physical premises in the high street. Or, a content platform combined with online training courses for chefs developing their skills.

However, there’s so much involved in setting up a business, that at the beginning, it’s usually best to focus on one model to ensure you deliver it well.

Doing the background research to develop your business plan is time consuming with all the market and competitor research and gathering insights on your target audience.

It’s useful to have a rough idea of your preferred business model as it gives you a starting point. For example, if you’re thinking of opening an online chocolate shop, you’ll be looking at very different competitors than if you’re planning to build software for a manufacturer.

6. An overview of key digital business models

Here we explain a bit more about the five common models mentioned above, to help you work out what might fit well with your overall idea and be feasible for you in terms of your personal goals and resources.

And remember, all you are trying to do at this stage is work out a model to take your idea to the next level.

Pre start-up, you may work through a few models to test your thinking. Then, once you’ve launched, and gained more insight from testing and learning what works best, like many businesses, you may evolve your model over time, or diversify into new areas.

Ecommerce - tangible product

ECommerce businesses at their simplest are online shops, selling physical products that are delivered to the customer.

As soon as you find customers, income can be generated immediately, with most goods requiring payment up front.

Options
  • Making and selling your own product. If you have identified a customer need or opportunity, one option is to manufacture your own product - this could be sold solely through your own online shop, via a platform such as Amazon, or perhaps eventually in physical premises and other retailers (or a combination of the above!). For example, a well known soap maker based in the Highlands has its own products and sells through its own online shop as well as through physical premises and B2B through hotels and specialist shops.
  • Selling products from many different suppliers. If manufacturing your own product is not viable, another avenue is to sell other brands’ products. An example of this is a company in the Central Belt that sells waterproof and walking equipment from different manufacturers on their own site in tightly defined product categories.
Critical success factors

Once you have determined your product options, the first big decision with eCommerce is your route to market and whether to focus your efforts on your own online shop (which may be cheaper for you per sale, but you’ll have to spend on attracting customers) or to use a platform such as Amazon, Not On The High Street or eBay to reach customers more easily (but there will be different competitors plus associated fees or commission to pay). Eventually many businesses will combine several of these.

Although not exhaustive, here’s some other things to think about early on.

  • Legislation. It goes without saying that whatever your route to market, you must comply with the relevant legislation for your model, sector and audience, for example distance selling legislation.
  • Imagery. An image speaks a thousand words so you will want excellent product photography and even, potentially, video, alongside clear product descriptions.
  • Pricing. You’ll need a clear pricing strategy - avoiding being ‘undercut’, but also to ensure that overall you can be profitable even when returns and damages are taken into account.
  • Fulfillment and customer service. Smooth processes for fulfillment of orders and responding to customer service queries or complaints are vital. This includes stock management, picking items, packaging, and trustworthy delivery partners. There are ways you can outsource some or all of this , e.g. through Fulfilled by Amazon or other providers.
Digital expertise required

It’s possible to launch a simple eCommerce site with basic digital capability, using ‘off the shelf’ website builders. As your business grows, you can learn or bring in/outsource additional expertise when you need it.

Investment required

It is possible to start very small with eCommerce and then grow little by little. By using the likes of Business Gateway’s Digital Boost programme you can access free training and resources to build skills to create your own online shop.

However, you will always need budget for marketing to drive traffic to your shop (or promote your products on platforms such as Amazon). And you will have to decide how much stock to invest in up front - balancing the risk of being left with stock, over the risk of losing sales or being unable to fulfil orders quickly.

Ecommerce - digital products and services

In some cases, this business model works in a similar way to a standard ECommerce business but instead of physical products, you sell digital products or services. Often, you can generate income right away, by asking for payment up front.

Options
  • 1-2-1 coaching or consultancy. Digital has always been a useful channel for instructors and consultants, but in response to Covid-19 it’s been increasingly common to offer services online rather than face-to-face, making use of tools like video conferencing, or platforms such as Teachable. For many, previously restricted to a local market, it’s now possible to reach customers across the country or even internationally.
  • Short courses of educational content. West of Scotland based Coffee Break Languages has used a freemium model combining digital content including podcasts, video content, social media posts, downloads and masterclasses to deliver language learning to a global audience.
  • Downloads. Mrs Wordsmith launched with physical products teaching vocabulary for children and in response to Covid-19 has expanded into a range of printable downloads to get content to market quicker.
  • Ongoing specialist expertise. Sites such as Smart Insights offer a range of subscription packages for users to access their constantly updated insightful content, guides and downloads on digital marketing.
Critical success factors
  • Generating income. Although you can simply charge up front for a one-off purchase of a digital product as you would with a physical product, an intangible digital product can be harder to sell, so some businesses use free trial or freemium models. Other than that, you can use subscriptions (monthly, annual or lifetime access). Some writers even use a donation model where they invite users to donate if they feel the content was useful to them.
  • Attracting new customers. Building a prospect email database and social media following will be key as using content marketing is the main tactic to sell your deeper content.
  • Preventing ‘theft’. when you sell content such as downloads, your customers could pass them one to other non-paying users, impacting your potential revenue. Technology such as SendOwl can use digital watermarking to discourage customers from doing this.
Digital expertise required

If you start small, you’ll be able to train up and build capability as you grow. You’ll need more expertise in design, audio and video to ensure your content product looks great. You’ll also need to understand about content marketing - in particular email and social media marketing and SEO.

Investment required

As with selling physical products, it is possible to start very small and then grow little by little. By using the likes of Business Gateways Digital Boost programme you can access free training and resources to build skills to create your own online platform and do some basic marketing. Remember you’ll always need at least some budget for marketing. Although you won’t need to buy stock, you will need to invest in how you present your digital service online and it is often best to test something small first before spending thousands on fancy design and images.

Content platform

This business model covers a huge range of businesses from individual influencers to massive content sites. Generally, your audience (the content user) doesn’t pay for the content - it’s other businesses that pay you to be able to reach your audience instead.

The benefit of this model is it’s possible for an individual to start very small and grow steadily over time. Although the days of apparent overnight success are long gone, in spite of the infinite amount of content out there, it is always possible for someone with something original to say to achieve cut-through and gather a following.

Options
  • Educational, helpful or interesting content. Digital only content sites such as Money Saving Expert are replacing some traditional print media, delivering professionally written and insightful content, within clear ethical guidelines and building a massive audience, which is monetised through affiliate links to products they recommend. Other sites like this will also sell display advertising space.
  • Forum with user generated content. It’s possible to build your own forum on a website, but increasingly, people are using existing platforms such as Facebook to build their forum and perhaps just use their own website to support it and monetise it.
  • Lifestyle blog/influencer content. This is where a single person in effect becomes their own brand or ‘product’, attracting like-minded followers on social media and then, potentially companies who will pay to reach those followers.
Critical success factors
  • Deep audience understanding. The most successful content platforms appeal to a specific niche audience so they can be as engaging and as relevant as possible, tailoring all text, images and video to that group and their interests. However, this niche must potentially be large enough to support revenue generation in the longer term.
  • Driving traffic. Content must be high enough quality, targeted and engaging enough for it to attract traffic - by ranking well in search engines and potentially by being actively shared by your consumers. This means you can grow your audience outwith your marketing spend.
  • Identify your long term potential revenue sources before you start. Decide if you are aiming to build a platform and following that will attract sponsorship, monetise display advertising, earn from YouTube advertising or support affiliate links (where you earn commission if you drive a customer to purchase an item on another site) and if so, identify the sort of businesses that would like to reach that audience before you choose that route. Alternatively, or in addition, you can use your profile to generate income from events or digital content products.
  • Monitoring user generated forums and comments. Comments on social media and discussion boards can spiral out of control very quickly with negative behaviours and trolling. This impacts the whole ethos of your group and can take it completely off the original purpose. Setting ground rules and monitoring or even moderating your forum is vital and can be a 24/7 job, in order to remain attractive to potential business partnerships.
Digital expertise required

For a basic platform, you can use many free resources to train yourself. Your focus will be on creating and producing great content (maybe including audio and video skills) and digital marketing and driving traffic to your content, and how to leverage SEO and social media for this.

Investment required

It is possible to start a content platform with minimal investment using an off-the shelf website builder and or existing social platforms such as Instagram and Facebook, but it will take a lot of time. Your main investment will be in content creation initially and then driving traffic. However, it will often take at least a year or two to build a large enough audience to be able to attract income.

Two-sided marketplace

The simplest way to think of this type of business is as a ‘matchmaker’ for buyers (customers) and sellers. Customers benefit from being able to compare sellers in one place. Sellers benefit from reaching a bigger pool of potential buyers.

Growth in digital technology is leading to rapid growth in the number of businesses using this model and enabling them to provide an increasingly sophisticated service.

Options
  • Digital only marketplace. Care Sourcer helps match people who need care, to providers who currently have availability.
  • Combined physical and digital. This can be done in a number of ways. For example, estate agents tend to operate a physical office as well as their website. Shoply enables customers to order online and receive rapid delivery of physical products from local shops.
Critical success factors
  • Attracting enough buyers so sellers will pay you. The focus of most businesses is to find buyers (customers). However, in this model, usually it’s the sellers who actually pay you. Your first task, therefore, is to attract enough buyers, that sellers want to be on your platform and pay you for the privilege - whether that’s a fee, subscription or commission.
  • Retaining buyers. As you do not provide the end product or service, it can be hard for your business to build a level of true customer loyalty and it’s vital to address this to be able to grow, and continue to attract sellers.
  • Retaining sellers. As sellers are YOUR customer, you need as much emphasis on providing good service to them, as you do for the buyers.
Digital expertise required

You will need to have, or be able get expertise for building a digital platform as well as significant digital marketing and content creation capability. Deep understanding of digital analytics is also vital so you can build data to evidence the value of your marketplace to sellers.

Investment required

As it is the seller rather than the end customer who pays you, there is an extra step before you can charge for your services, so it tends to take longer before you can generate any income. You will usually need a bespoke digital platform and much more marketing which requires more investment than an ‘off the shelf’ online shop.

Technical digital product

With the vast majority of the population now having access to laptops, tablets and smartphones, it’s no surprise that there’s rapid growth in the numbers of businesses creating new software (often cloud based ‘Software As A Service’) and apps. In contrast with basic digital services or content products, these businesses involve more complicated - or even unique - technical functionality. The benefit of this model is that the level of market growth and potential returns make it more attractive to investors.

Options
  • Functionality to replace an offline activity and improve efficiency. For example, FreeAgent accounting software. This took a process that all businesses had to manually (and painfully) complete, and makes it much easier for business owners to do, freeing up their time to spend on other things. Businesses pay a monthly fee to use their software.
  • Technical capability so users can do something they probably didn’t or couldn’t easily do before. Edinburgh based personal finance app Money Dashboard helps users see all their accounts in one place to better manage their money and grow their savings - previously many people would not have done this with their physical bank statements. This is a free service for users, the app is monetised by providing insight on consumer trends to other companies.
  • Entertainment and education. Sumdog is an online learning service and app which uses game-based learning to help children practice numeracy and spelling through online games, monetised through a freemium structure.
Critical success factors

Most products in this model are creating something completely new and even disruptive. So, a ‘test, learn and adapt’ approach is usually vital to ensure money is not wasted creating something completely unsuitable for the market. Success will depend on many things including:

  • Being able to quickly create a minimum viable product to test. Try to spend as little as possible to get to this stage by being brutally honest with yourself about how much actually has to be done before you can check your concept will work. This means letting go of your end vision a little – it’s often said that if you’re not still embarrassed by what your first prototype looks like, then you’ve left it too long to test.
  • Understanding different revenue models and how to test them. These include: Freemium or in-App purchases to get users to try your product (in other words offer your product free for a basic version and then charge for a premium option); pay-for-privacy (where users pay for an ad-free version or their usage data remaining private); standard monthly or annual subscription, price by level of use or number of users.
  • Identifying your key metrics and tracking them carefully. These include cost per customer acquisition, level of repeat use, user churn, etc.
Digital expertise required

This type of business will require significant previous experience in digital, both technical development and marketing, usually from you and/or co-founders.

Investment required

While it’s possible to build some sort of prototype at a low cost, generally this type of business requires significant investment over the long term with multiple funding rounds. Often there is a founding team, rather than a single founder, to ensure the correct balance of technical, financial, marketing and customer insight. They are often high risk businesses, but this is balanced by the potential for huge growth and high returns.

The different business models give a lot to consider in both the generation and development of your business ideas. Once you have developed your business idea and determined your business model, the next step is to take your idea forward to business plan. You should also identify your knowledge gaps and begin to upskill where needed.

Business Gateway can help you at every stage of your business start-up journey.

Look through our content on starting a business for a range of useful information, (including a business plan template) and get free 1-2-1 advice from our business advisers and we can also help you digitally upskill with our DigitalBoost programme.

DigitalBoost provides free online training, guides and webinars to help businesses develop their digital and digital marketing skills, and also offers 1-2-1 access to digital consultants free of charge.

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