Learning Objectives
By the end of this section, you will be able to:
- Compare digital business models and their design and integration components
- Critique digital business models
The use of IT offers businesses numerous opportunities to generate value. Since most businesses adopt IT, undergo digital transformation, or fundamentally change how the business operates and delivers value using digital technologies, the digital field is crowded with apps, services, platforms, and digital devices. Some businesses undergoing digital transformations thrive initially but then go bankrupt, and others pivot and survive. Many established companies like retailers, banks, travel agencies, and print media have struggled to survive in the face of digital disruption. Organizations confront a common challenge—the necessity to develop digital business models that deliver value to customers or users. Thus, business models act as the vital connector between technology and the strategic goals of an organization (Figure 2.7).
Defining Digital Business Models
A successful digital business model provides a logical framework that unlocks the value of a technology, allowing businesses to benefit economically. The business model serves as a blueprint for how a company generates and captures value from new products, services, or innovations. It is not solely IT that determines success, but the business model behind it that plays a key role in enabling high-tech companies to achieve their strategic goals and objectives. There are several common digital business models, each of which has specific information technology strategies.
The e-commerce model involves buying and selling goods or services online through websites or apps, and offers convenient shopping experience for various customer segments. Notable examples of companies using this model are Amazon, Alibaba, and Shopify. In terms of IT strategy, a company using this model should develop robust and secure e-commerce platforms to align with business objectives, such as providing a seamless customer journey, implementing secure payment gateways, and optimizing logistics for efficient order fulfillment. The organization should also align IT with marketing strategies to enable personalized product recommendations and targeted promotions, ultimately driving customer engagement and loyalty.
The subscription model provides continuous value through recurring subscriptions that provide customers with ongoing premium content or services. The IT strategy for this model is to develop products and/or services, such as entertainment and transportation, that customers need routinely and are willing to make recurring payments for to have continued access to the products and/or services. Amazon Prime and YouTube are subscription models.
The freemium model provides a free basic service, with the option to upgrade to a premium version for enhanced features or benefits, such as with the services offered by LinkedIn, DropBox, and MailChimp. Integrating IT should involve designing services that showcase the value of the basic offering to entice users to upgrade to premium features, such as a seamless onboarding process and data-driven user engagement tactics. Companies should also optimize the platform to manage both free and paying users effectively. Effective data analytics and user segmentation are necessary to identify potential premium users. Collaboration with marketing and sales teams can be used to design targeted conversion strategies, monitor user behavior to optimize premium feature adoption, and continuously improve the platform to increase conversion rates and drive revenue growth.
In an affiliate model, one company earns commissions by promoting and selling other companies’ products or services through websites or social media channels. They help drive traffic and sales, receiving a percentage of the revenue from the companies they promote. Amazon Associates, ClickBank, and Commission Junction use this model. These organizations should work with IT to build effective tracking and reporting systems to accurately attribute sales to affiliates by implementing affiliate tracking software, optimizing landing pages for conversion, and ensuring a seamless user journey from the affiliate’s site to the merchant’s platform. Providing real-time data and performance insights to affiliates enables them to optimize their promotional strategies.
Amazon, eBay, and Airbnb demonstrate the marketplace model, which brings buyers and sellers together on a single platform, with the enterprise acting as an intermediary that facilitates transactions between parties. This approach fosters a diverse range of goods and services offered by different sellers, making it a convenient hub for buyers. Effective IT strategy for this digital business model includes providing efficient search and filtering options for users, securing payment gateways, personalizing recommendations, and offering robust customer support systems that ensure smooth transactions and build trust between buyers and sellers. Organizations using this model should also enable a user-friendly interface, smooth transaction processes, and personalized product recommendations based on user behavior and preferences.
The advertising model generates revenue through targeted ads purchased by other businesses. Ads are presented to customers when they view content, and since the content is supported by advertising revenue paid by other businesses, customers view the content free of charge. This is the model for Facebook and PeopleFun. IT strategy for this approach includes developing content that includes space for advertisements that can be presented to users as they browse content, and selling this space to other businesses to run their ads for an allotted time, based on the fees paid for the ads. Ads should be programmed and presented to attract users’ attention while also providing minimal disruption to users’ interaction with content.
Kickstarter, Indiegogo, and GoFundMe operate through a crowdfunding model, which raises funds for a product, project, or idea through an online platform, leveraging the collective support of the public. In this scenario, contributors pledge funds to support initiatives and receive rewards or early access to products in return. Entities utilizing this model should ensure their IT strategy is designed to build secure payment gateways, provide real-time updates on fundraising progress, offer personalized backer rewards, and implement social sharing features to enhance campaign visibility and engagement. They should also ensure a user-friendly platform for both project creators and contributors, enabling easy navigation and smooth communication channels.
A sharing economy model involves individuals sharing resources or services through a peer-to-peer network, enabling efficient utilization of underused assets. This fosters collaboration and convenience among users seeking specific services or goods. Uber, Airbnb, and TaskRabbit are examples of companies using this model. In terms of IT strategy, those with a sharing economy model should build robust peer-to-peer communication systems that implement secure payment processing, real-time tracking features, and rating and review systems to build trust among users. It is also important to prioritize user safety and enable efficient communication between providers and consumers.
Finally, the digital product model offers downloadable digital assets that may include actual products, such as e-books, or may be used to provide information such as education, assembly instructions, or details about a product’s components. The offerings seen from TurboTax and Apple’s iTunes Store are digital products that are downloaded. IT strategy focuses on developing products and services that can be delivered and used in an electronic format. Companies should provide customers with a seamless process that enables them to download products, such as software or music, or access services, such as an online class, on any device, including computers, tablets, and cell phones. They should also enable real-time access, provide prompt user support, and implement security protocols that ensure user safety when users download material or interact online.
Today’s business environment has undergone significant transformations. Unlike the traditional stable and low-competition business world, the digital business realm is marked by complexity, dynamism, and high levels of uncertainty and competition. Consequently, in this intricate digital business setting, the business model must be explicit and highly flexible to adapt effectively. Embracing change is important for effectively navigating today’s business landscape.
Link to Learning
Learn about AI-generated music and how AI is disrupting the music industry as well as freemium and subscription business models.
Case Study: Transforming Health Care Through the Sharing Economy Model
The U.S. health-care industry faces a substantial inefficiency issue, with a large portion of capital expenditure going toward medical equipment that remains underutilized. Boston-based Cohealo recognized the potential of the sharing economy model to address these inefficiencies and created a platform that facilitates the seamless sharing of medical equipment across different facilities. Cohealo operates as a cloud-based platform supporting logistic capabilities and as an analytics-enabled information system that enables customers to manage medical equipment centrally and make it available on demand. Cohealo’s products include the following:
- Cohealo + C-suite: This product functions as a comprehensive customer relationship management platform, allowing hospital management to access and manage equipment-related data. The platform offers real-time data and usage analytics, centralized decision-making, and personalized dashboards, enabling clinics to optimize resource deployment effectively.
- Cohealo + Finance: Clinics can make data-driven capital decisions in real time with this tool, optimizing the utilization of their most critical technology investments. By spreading out costs and consumption, Cohealo enables new efficiencies, faster capital redeployment cycles, and improved return on investment.
- Cohealo + Clinical: This network-based application empowers clinics to locate and enlist any idle medical equipment across the network to support procedures wherever and whenever needed. This manufacturer-agnostic design puts the choice in the hands of clinics, freeing up administrative time for patient and physician care.
- Cohealo + Supply Chain: Cohealo streamlines equipment transportation, ensuring it reaches the required location optimally and returns to the original site after usage. The network effect, fostered by health-care institutions clustered in and around Boston, contributes to the success of Cohealo’s platform, enabling the emergence of disruptive business models.
Several factors influence the success of the sharing economy model in the health-care sector, as observed in Cohealo’s case12:
- Resource characteristics: Medical equipment, being valuable and commercial in nature, is considered suitable for sharing.
- Clustering of resources: The concentration of interconnected health-care companies and institutions in specific geographic locations facilitates the easy transfer of use rights.
- Use of IT: Online platforms enable easy and efficient mediation and monitoring of contract terms.
- Cost advantage: The cost of accessing shared resources through Cohealo is often significantly lower than the cost of ownership, promoting the adoption of the sharing economy model.
- Institutional support: Factors like supply chain and logistics support, as well as governance considerations, enhance the feasibility of sharing resources within the health-care industry.13
Digital Business Model Critiques
The emergence of digital business models has created the space for a workforce through online platform–based work. While this has brought about innovative solutions for economic interactions between people seeking jobs and employers, it has opened new challenges. With the sharing economy business model, algorithmic reputation features play a central role in fostering trust and accountability. These reputation systems, based on customer feedback and ratings, have been hailed as a valuable trust mechanism resulting in efficient matches for a distributed workforce. Some criticism and challenges faced by digital business models include14:
- Unequal distribution of opportunities: Research has shed light on a concerning phenomenon observed in gig work platforms—the “rich get richer” effect. Workers with higher reputation scores and greater experience tend to receive more work, as clients prefer to engage with those perceived as more reliable. Consequently, this phenomenon results in an unequal distribution of opportunities, disadvantaging workers with lower scores and less experience.
- System of control: Algorithmic systems, though designed to foster trust, inadvertently create a “system of control.” By standardizing metrics and homogenizing worker identities, platforms such as Uber or DoorDash wield significant power. Platforms can manipulate scoring and matching algorithms to influence job allocation decisions without involving the people using their platforms.
- Opacity and lack of transparency: One of the most troubling aspects of algorithmic digital systems is their opacity. Proprietary algorithms protected by trade secrecy laws prevent external scrutiny, leaving users in the dark about the factors influencing their reputation scores or how changes to algorithms may impact their job opportunities. In digital platforms such as Upwork, there is electronic monitoring of user actions that affects their perceived autonomy.15
Ethics in IS
IBM’s Artificial Intelligence Ethics Initiatives
IBM provides a notable example of IS ethics in AI decision-making. IBM has been actively working on ethical AI initiatives, emphasizing fairness, transparency, and accountability in algorithmic decision-making across various domains such as hiring, lending, and law enforcement. IBM’s approach involves developing AI systems that mitigate biases, ensuring inclusivity, and safeguarding privacy through responsible data practices. Their efforts include implementing ethical AI frameworks, promoting diverse datasets, and advocating for AI transparency and explainability to address societal concerns regarding algorithmic fairness and discrimination.16
Footnotes
- 12Ayushi Tandon, “Cohealo! Sharing Economy Determinants in Healthcare Industry,” SSRN, December 2017, http://dx.doi.org/10.2139/ssrn.3677462
- 13Vijaya Sunder M and Sowmya Shashidhara, “Next Step in Healthcare: Sharing Economy to Overcome Resource Crisis,” Forbes India, October 8, 2021, https://www.forbesindia.com/article/isbinsight/next-step-in-healthcare-sharing-economy-to-overcome-resource-crisis/70893/1
- 14Zhi Ming Tan, Nikita Aggarwal, Josh Cowls, Jessica Morley, Mariarosaria Taddeo, and Luciano Floridi, “The Ethical Debate About the Gig Economy: A Review and Critical Analysis,” Technology in Society 65 (May 2021): 101594, https://doi.org/10.1016/j.techsoc.2021.101594
- 15Kristine M. Kuhn and Amir Maleki, “Micro-Entrepreneurs, Dependent Contractors, and Instaserfs: Understanding Online Labor Platform Workforces,” Academy of Management Perspectives 31, no. 3 (2017): 183–200, https://doi.org/10.5465/amp.2015.0111
- 16“What Is AI Ethics,” IBM, September 17, 2024, https://www.ibm.com/topics/ai-ethics