Business Strategy Hub

50 Types of Business Models (2022) – The Best Examples of Companies Using It

Last updated: Jan 30, 2021

Are you looking for ideas to unlock your long-term business value? If you shook your head in yes, remember that business model is one of the ways to streamline your business process.

Precisely, a business model is a holistic framework to define, understand, and design your entire business in the industry. Often novice entrepreneurs do not understand the significance of the business models.

Check out 50 different types of business models , along with examples of companies for better insight. Try to adopt these business models in your startup.

Table of Contents

1. Franchise model

Best for the company’s expansion, franchising allows the franchisor to license its resources, brand name. Intellectual property and rights for a franchise to sell its products and services in exchange for a royalty.

McDonalds’s is the best example, which has 93% of its franchised restaurants worldwide.

McDonald’s is the leader in the global foodservice. It operates 36,059 franchised restaurants out of a total of 38,695 restaurants worldwide. Its franchise restaurants have increased year-on-year for the last 13 years.

Example: Subway , McDonald’s , Gold’s Gym

information technology business model example

2. Multi-sided platform model

Any company that offers services to both sides of business carries out a multi-sided business model. The perfect example is LinkedIn , which provides subscription services to people to find job opportunities as well as to HR managers to find candidates for their vacancies. 

  Example: LinkedIn , Freelancer.com

Linkedin - Multi-sided platform business model

3. Cash machine business model

Also known as the cash conversion cycle (CCC). It basically means how quickly a company converts cash to good and services and then again into cash. This model is used by the companies who make low-profit margin but survive in the market with a disruptive position. Like, Amazon generates a massive amount of cash from its online store before it pays to its suppliers. Another way to look is that Amazon runs its supply chain on vendor credit.

Cash Conversion Cycle : Cash ==> Product & Services ==> Cash

Example: Amazon , Alibaba , Apple

Pro tip: This type of business model is most suitable for inventory type of businesses.  

Cash machine business model

4. Freemium business model

A mix of free and paid services, the freemium model is mostly used by tech companies in the Software as a Service (SaaS) or apps business model. To grow business and acquire customers, companies offer free (lite) versions to customers but for a limited time or with limited features. To unlock the upgraded features, the customer has to opt for paid services.

Examples : Zoom , Dropbox , MailChimp , Evernote etc.

Pro tip: It’s an excellent way to encourage customers to try the software or application. 

Freemium Business model

5. Subscription business model

This model allows the customer to get services by paying a fixed amount every month or year. In this case, the company has to provide enough value to its customer, so they visit the website over and over again. 

It allows companies to segment the market and offer a specific number of items in its content under different plans and prices known as tiered offerings.

For example, Netflix offers monthly subscriptions under the Basic plan for $8.99/month, Standard plan for $12.99/month, and Premium plan for $15.99/month.  

Examples: Netflix , LinkedIn , Amazon Prime , Dollar Shave Club , are few of its examples.

Pro Tip: This model is useful for content or service-based websites. 

Subscription business model

6. Peer-to-peer business model

As per this model, a company acts as a middleman between two individual parties and create value for both demand and supply side. It’s different than a typical relationship of a business selling its services to consumers (B2B or B2C). It makes money through commissions. Airbnb is the right example that allows transactions between hosts and hostees.

Example:  Airbnb , Uber , eBay , Offerup , Freelancer.com,  

Peer-to-peer business model

7. One-for-one business model

The one-for-one business model can be referred to as a social entrepreneurship business model. It’s a hybrid solution, a combination of both profit and not-for-profit services. Although there are some debates about its long-term sustainability, many companies are pivoting their business models to cater to socially conscious millennials. The best example is TOMS Shoes that provides shoes to underprivileged children globally for every pair of shoes sold.   

Examples: TOMS Shoes , Warby Parker (donated eyeglasses), Two-degree Food , Soapbox Soaps .  

One-for-one business model

8. Hidden revenue business model

This model refers to a revenue generation system in which users don’t have to pay for the services offered, but the company still earns revenue streams from other sources. Like, Google earns from advertising money spent by businesses to bid on keywords while users don’t pay for the search engine.

Examples: Google , Facebook , Instagram , Twitter

Hidden revenue business model

9. Razor and blade business model

In this model, one item (Razor) is sold at a low price while another associated item (blade) is sold at a premium price. It is also known as a printer and cartridge business model. For example, the price of inkjet printer itself was just a one-time expense, however, getting a new ink cartridge replaced is an ongoing expense for consumers. The model is great if you have a loyal customer base and if you can create some sort of lock-in situation with customers.

Example: Xbox or PlayStation Video Games , HP Printers , Nespresso coffee machines , AT&T Mobile phones with 2-year contract .

Pro tip: Use this model, if there is a need for recurring sale of an associated item, which can generate a continuous flow of revenue.

Razor and blade business model

10. Reverse Razor and Blade business model

The business model is contrary to the razor blade model. It implies offering low priced products to encourage customers to buy high priced items as well.

This business model uses the strategy with a one-time offer for the premium product and acquires more revenue from secondary items in the long term. 

Example: Apple employs this business model perfectly. Apple’s App Store and iTunes sell apps, movies, songs, etc. at reasonable rates but charges premium prices on its devices like iPhone, iPad, and Mac. 

Reverse Razor and Blade business model

11. Direct sales business model

In this model, products are directly sold to the end customers either in a one-on-one conversation or small gathering, remember Tupperware house parties ? The salesperson gets a share of every sale. Although technology has superseded the direct sales method in many ways, still many companies prefer to give a personal touch to its customers.

Examples: Tupperware , personal care & nutrition brands ( Avon , Arbonne , and Herbalife )

Direct sales business model

12. Affiliate marketing business model

In this model, companies make money by featuring, reviewing, and recommending other company’s products or services.  Think about product review websites. These websites are paid based on sales opportunities that they bring to their vendor companies.

Examples : NerdWallet , Capterra , MoneySavingExpert.com , and thewirecutter .

13. Consulting business model

Companies that provide consulting services by hiring experienced and qualified people and having them assigned on client’s projects follow the consulting business model. These companies tend to charge on the hourly basis and/or they take a percentage share based on the successful completion of the project (cost reduction project). Mckinsey and Boston Consulting Group are multi-billion-dollar businesses that are based on this model.

Examples: Deloitte , Mckinsey , BCG, software or website development firms

Pro tip: if you are a subject matter expert (SME) in a field, and when the duration of the project is uncertain (based on the change in client’s requirements) then consulting business model is an excellent way to charge your clients.

Consulting business model

14. Agency-based business model

This is a project-based business model, where an outside firm is hired to complete a specific task. Traditionally, businesses that lack internal expertise hire agencies to get a customizable solution for their needs. Remember Mad Men ? Acclaimed Netflix series that focuses on advertising agency and their clients. Some niche agencies are digital marketing, design & architecture, survey, promotion, media, public relationship, branding, website development, social media, etc.

Example: TBWA\Media Arts lab (Apple’s go-to ad agency), Leo Burnett Company (United Airlines, McDonald’s , Kellogg’s are some of their notable clients)  

Agency-based business model

15. User-generated content business model

Allowing users to generate quality content on websites for free to answer other users’ questions and provide reviews, this business model is new yet fast-growing.

This model is driven by a wide range of digital commodities, from videos to reviews, pictures, blog posts, testimonials, and any other type of content created by users of a brand. And made accessible via social media.

User-generated content is compiled and sold to companies seeking to exploit consumers’ ideas and content to promote their brands.

Examples: The top examples are YouTube , Quora , Yelp , Yahoo Answers , Reddit .

User-generated content business model

16. Online educational business model

Targeting the educational industry, including students and teachers, this business model allows them to get access to educational resources via flat course fees or subscription. It can be said as a combination of freemium, course fees, and a subscription-based model.

Examples: Khan Academy , LinkedIn learning , Coursera , Udemy , edX , etc.

Online educational business model

17. Instant news business model

This model focuses on sharing and updating news instantly without any intermediary.

Companies that use this model provide open and reliable channels allowing trusted primary or secondary sources to communicate breaking news or urgent announcements directly to their audience.

In the past few years, some social media platforms have emerged as the go-to option for instant news from primary sources like presidents, CEOs of companies, and so on. 

Example: Twitter is the best example. Users can access the news in real-time by checking the trending hashtags.

Instant news business model

18. Multi-brand business model

This model is based on marketing more than two products, almost similar yet competing with each other and come under a single organization but having different brand names. It is done to create economies of scale and to build an empire.

Examples: Procter & Gamble , Unilever , and Nestle are a few examples.

Multi-brand business model

19. E-Commerce business model

A simple yet most promising business model, e-commerce allows buyers and sellers to connect and transact using an online platform (online shop).

There are several types of e-commerce business models, including Business to Business (B2B), Business to Customer(B2C), Customer to Customer (C2C), and Customer to Business (C2B).

Example: Amazon , Alibaba , eBay , OLX , Walmart , etc.

E-Commerce business model

20. Distribution based business model

A company that works by having one or a few key distribution channels to integrate with its final customers follows this model.

Companies that use this model provide channels for businesses to sell to customers via dealers, brokers, supermarkets, retailers, and so on.  

Example : Unilever  spends its major part of revenue in maintaining a proper distribution.

information technology business model example

21. Drop-shipping business model

A cost-effective as well as an exciting business model. In drop-shipping, a business owner contacts many different suppliers/ wholesalers to sell their product on the website. Once an order is placed on a business owner’s website, wholesaler drop-ships the products directly from the manufacturer to the customer. In this case, the business owner does not have to hold any an inventory and uses the third party to manage all the shipping and logistics needs.

Pro tip: It’s an excellent way to start a niche e-commerce business website with a limited upfront cost.

Examples: Doba , Oberlo , Dropship Direct , and Wholesale 2B are few examples.

Drop-shipping business model

22. Enterprise business model

Targeting and focusing only the large clients, enterprise business model is all based on getting big deals. It is built on complex sales with a good few potential clients. Like the clients of Fortune 500 usually have multi-billion dollars budget.

Example: Boeing , Raytheon, SpaceX , Goldman Sachs is an example of Enterprise business model because their sales motion is targeted towards very large business enterprise customers or governments .  

Enterprise business model

23. Social enterprise business model

This model is based on the fundamental that companies should make profits without causing any harm to anyone, and a part of it should be spent in humanitarian works to improve human living conditions.

Example: Brunello Cucinelli is an Italian luxury brand that donates about 20% of its profits towards a social cause.  

24. Direct-to-consumers business model

This model allows companies or brands to sell their products to final customers directly. Highly effective marketing campaigns and advertising activities are required to retain customers.

Example: Unilever is the best example while being one of the world’s largest advertisers.

25. Family-owned business model

Any business that is run by a family, and its decision-making processes are controlled by two or more family members is a family-owned business.

The leadership of the company is passed to the heir, who will hand over the reins to their children.

Examples: Ford , Walmart , Estee Lauder , Prada , Comcast are few examples.

information technology business model example

26. Blockchain-based business models

The most advanced, futuristic, and modern technology of Blockchain has changed the entire landscape of transactions, involving decentralized network system on a global scale.

Using a decentralized network enhances trust and allows consumers to transact peer-to-peer. Blockchain-based businesses make a profit using tokens and offer Blockchain as a service .

Many crypto-currencies like Bitcoin , Ethereum , and Litecoin use Blockchain technology-based business model.

Blockchain-based business models

27. Vertically integrated supply chain business model

This model is about owning and managing the supply chain activities (manufacture, distribution, and retail) for its products by the company itself. When a company has better control over how a product is produced and delivered to end users, it can provide products at lower prices (with better margin) to consumers.

On the contrary, for example, if a company only manufactures a product, and uses a distribution and retail partner. Then at every step of the supply chain, the additional cost is added (markup) by the time the product reaches the end customer.

Examples : Think about companies having both factories and retail/online stores. Amazon , Tesla , Luxottica , Apple , Walmart , and other grocery stores.

Vertically integrated supply chain business model

28. Combination of chains and franchise business model

This model is simply a mix of operated chains and licensed stores (franchising). Starbucks is the most famous example that owns both company-operated stores and licensed stores. 

In Starbucks’ model, all 15,041 stores in the U.S. are company-owned, and all international stores are franchised.

Combination of chains and franchise business model

29. Data licensing business model

A business model of ‘data’ has gained a new meaning in this modern world, especially in the technology sector. Data is a critical component in web technology where companies require critical information to carry out operations and earn revenue.

Example: Twitter sells real-time data to its partners, which is then used for advertising and customer insight.

Data licensing business model

30. Attention merchant business model

Attention merchants or influencer operate through advertising model and make money by grabbing the attention of their target audience .

Apple CEO Tim Cook once wrote , “ When an online service is free, you are not the customer. You are the product. ”

Examples : Snapchat & Instagram allows brands to market themselves through advertising on their platform.

From YouTube to Tik Tok and other social media platforms, you can watch videos for free, but you will be targeted by endless adverts . 

information technology business model example

31. Discount with high-quality business model

This kind of business model is usually practiced by supermarkets and departmental stores that get products in bulk and sell on the wholesale rate.

Examples: discounted products with high quality like ALDI , Tesco , Lidl , Ross Stores , and ASDA Stores.

32. Pyramid Scheme Business model

  A pyramid scheme is a business model often considered illegal or controversial. The model functions on the sole principal of recruiting members by promising them a reward in the shape of payments or services if they agree to enroll others into the scheme, rather than supplying investments or sale of products.

As the recruiting circle grows with infinite speed, the actual recruitment becomes quickly impossible, which leaves member without any profit.

Example: Amway is a billion-dollar company which has used these pyramid schemes.

33. Nickel and Dime business Model

This business model consists of the lowest price strategy for the basic product or service. By keeping the basic price as low as possible, an additional amount is charged for the other perks and services that are offered with the main basic service.

Example: Spirit and Frontier Airlines are a budget airline that charges the lowest possible price for the flight tickets and charges fee over additional services like printed boarding pass fees, carry-on/ check-in luggage, seat preference, priority boarding, Wi-Fi, beverage, meal/snack, phone booking fees, etc.

information technology business model example

34. Aggregator Business Model

Aggregator Business Model is a network model which provides collective information about a particular service and sell them under their brand name.  Under this business model, most companies provide information and sources on a single industry.

Example: Companies like Zillow and Oyo for Hotels, Uber for taxi service, Yodlee for financial service, all use Aggregator business model. 

35. API licensing Business Model

API stands for application programming interface (API). It is basically a set of subroutine definitions, communication setups, and tools for developing software. API licensing business model provides licensing protocols which allow developers’ community to create third-party plugin/add-on apps for well-known platforms. And developers pay a fee to get API access.

Example: Microsoft , Apple , LinkedIn , and Twitter , they all provide API license services.

36. Crowd Source Business Model

Crowdsource business Model facilitates companies with access to operational solutions like ideas and technologies, upgraded consumer interaction, opportunities for co-collaboration, operation optimization, and reduced costs.

Example: Companies like Wikipedia , YouTube , Kickstarter , LEGO ideas , Unilever , Coca Cola (new flavor of beverage) are involved in crowdsourcing.

Crowd Source Business Model

37. High Touch Business Model

In the high-touch business model, customers’ interaction and involvement are on the highest level to make the experience personalized. It is a phenomenon in which a customer gets involved in a kind of partnership with the business. High touch is needed for larger accounts because they pay more and are sticky.

Example: Buying a car at Auto dealership, house, enterprise SaaS requires multiple interactions with the salesperson.

High Touch Business Model

38. Low Touch Business Model

Low touch business model is, of course, the opposite of high touch business model where the product or service is delivered by minimum customer interaction. Low touch is good for low price software tools where acquiring customers is easier.

Example: Companies like Amazon , Zendesk , SurveyMonkey uses low touch business model.

39. Flex Pricing Business Model

Flexible pricing model operates through a business strategy in the final price of an item is negotiable. In short, buyers and sellers can bargain the price to suit their purpose the best.

Example : Letgo

40. Auction-Based Business Models

The model is based on the biding option to buy a product or service. The model is although not very common now, it is still used for industries like antiques, real estate, collectibles, and the sales of businesses.

The modern version of the auction model can be witnessed on online platforms trade’s new and used items like eBay and Amazon

41. Reverse Auction Business Model

This business model follows a strict pattern of setting the highest prices and let the buyers bid accordingly until the prices start to drop.

A reverse auction is popularly used by businesses seeking suppliers. Eligible suppliers bid lower and lower at each subsequent round to entice the business and win the contract.

Example: Bidding for government contracts

42. Brokerage Business Model

Brokerage business model provides a single platform to buyers and sellers for communicating the deals. It charges a fee for any transaction between the parties either from the buyer or the seller depending on the featured category.

Example: Expedia , Century 21

43. Bundling Business Model

Bundling is a business strategy that combines products or services to offer a package gathered as a single combined unit to sell at a comparatively low price. It is the form of convenient purchasing for several products and services from a single business unit.

Example: Microsoft Office 365 (PowerPoint, Excel, Word, OneNote, Outlook) Value meal at Burger King or McDonald’s , Printer and ink

Bundling Business Model

44. Disintermediation Model

Disintermediation Model removes the capacity of outsourcing or a third-party intermediary. In fact, the organizations following this model deal with the clients and customers directly via different channel like the internet. 

Example: Dell , Tesla are good examples of companies which follows disintermediation model.

45. Fractionalization business model

Fractionalization model is selling a product or service for partial usage or separate parts. It’s a strategy which divides products and services into further subcategories to introduce variety in the products, charging for each category separately.

Example: You can sell a pizza by the box or individual slices of different varieties( cheese/ pepperoni)

Fractionalization business model

46. Pay as Go (Utility) Business Model

The business model charges as per the usage of the product or service.

In recent years, the Pay-As-You-Go model has been adopted by governments and organizations to distribute common goods like solar panels to rural communities , which they pay for gradually over a long period. 

Example: This model includes electricity, water, and cell phone companies and Amazon Web Services

Pay as Go (Utility) Business Model

47. Product as a service

Product as a service means to sell the service of a product rather than selling the actual product.

Example: Zipcar , Fedex Printing service follows the product as a service business model.

Product as a service

48. Standardization business model

Standardization means to make a service universal, which was once a customized one. This attracts customers due to convenience and low prices.

Example: MinuteClinics (a subsidiary of CVS health) is a good example of Standardization.

49. User Base Communities

User base communities earn by developing an interactive platform where users communicate on their own with each other and can advertise at the same time. The model generates revenue with both subscription and advertising fee.

Example: Craigslist , Angie’s list

50. Leasing business model

Leasing refers to renting large or high-profile items like machines and electronic equipment instead of them selling it. 

Example: Home Depot (Tool rental) MachineryLink , Hertz , Enterprise , etc. have adopted a similar business model.

In addition to the business models mentioned above, there are many others. While these are most commonly used by companies today, you need to wisely and smartly choose one or combination for your business.

Leasing business model

Tell us what you think? Did you find this article interesting?                                                     Share your thoughts and experiences in the comments section below.

Related posts:

S.K. Gupta

Business Model of Ola (2022) | How does Ola make money?

Top 51 strategy frameworks, 18 comments.

information technology business model example

Great.. Thank you so much!

information technology business model example

Well presented in uniform format to make comparison easy. Clearly and succintly written

information technology business model example

Very useful and informative, many thanks!

information technology business model example

very informative and useful as it made it easier for me to decide what can be done next thank you very much

information technology business model example

What are some good examples of number 22 – Enterprise business model?

information technology business model example

Companies such as Boeing, Lockheed Martin (aircraft manufacturers), Goldman Sachs, BlackRock (investment firms) are good examples of the enterprise business model because their primary customers are large enterprises or governments.

information technology business model example

Good example for the enterprise business model…

information technology business model example

Life long learning

information technology business model example

Very useful

Thank you !

information technology business model example

Thank you for this summary of business models.

Glad you liked it Alex. Happy Reading !

information technology business model example

I must admit that this is quite a wonderful compilation.

I found it very useful and well summarized.

information technology business model example

Thank you for sharing the comprehensive list of 50 business models along with examples of companies implementing them. It’s a valuable resource for anyone seeking to better understand the diverse ways businesses can operate and succeed. In addition to the information you provided, I’d recommend checking out this article at https://www.cleveroad.com/blog/startup-business-model/ . It provides practical insights into selecting the most suitable business model for startups, which complements the list you shared and could guide entrepreneurs toward more informed decisions.

information technology business model example

I am from South Sudan, if I want to implement one of online business which one will suit our situation here in the country, and that will generate income for me?

information technology business model example

The Bussiness model which you mentiontioned is very useful an informative. Thank you.

Nilesh, glad you like it. Happy Reading 🙂

Leave a Reply Cancel reply

Save my name, email, and website in this browser for the next time I comment.

information technology business model example

  • Business Essentials
  • Leadership & Management
  • Credential of Leadership, Impact, and Management in Business (CLIMB)
  • Entrepreneurship & Innovation
  • *New* Digital Transformation
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Support Portal
  • Media Coverage
  • Founding Donors
  • Leadership Team

information technology business model example

  • Harvard Business School →
  • HBS Online →
  • Business Insights →

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

  • Career Development
  • Communication
  • Decision-Making
  • Earning Your MBA
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Student Profiles
  • Work-Life Balance
  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • Business and Climate Change
  • Design Thinking and Innovation
  • Digital Marketing Strategy
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Launching Tech Ventures
  • Leadership Principles
  • Leadership, Ethics, and Corporate Accountability
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
  • Winning with Digital Platforms

5 Business Models to Consider When Starting a Tech Company

Tech entrepreneurs discussing their startup's business model

  • 20 Jul 2023

What separates successful from unsuccessful startups? Is it their innovative ideas , the way their products fill a market need , or how they distribute their offerings and make money? Is it their founders and teams or the investors and partners backing them?

According to the online course Launching Tech Ventures , it’s all of the above—which also comprise a startup’s business model.

“As an entrepreneur, the onus is on you to construct each element of your startup business model through a process of search and discovery,” says Harvard Business School Senior Lecturer Jeffrey Bussgang, who teaches Launching Tech Ventures. “In parallel, you must evaluate those elements to ensure you’re building a sustainable, valuable company. To do so, each business model element must be aligned.”

To help launch your venture on the right track, here’s a breakdown of a business model’s eight components and five examples to consider.

Access your free e-book today.

The 8 Components of a Startup Business Model

A business model is a plan for how your business will succeed. You can define success in terms of finances, product-market fit , sustainable production and distribution, or reaching and converting customers.

In Launching Tech Ventures , Bussgang presents the eight components of a business model using the Diamond-Square framework, coined by HBS Professor Thomas Eisenmann.

The first four facets are internal and operational in nature, and the remaining four encompass the stakeholders involved:

  • Customer value proposition (CVP) : How will your venture deliver value?
  • Go-to-market (GTM) strategy : How will your venture reach customers?
  • Profit formula (PF): How will you make money?
  • Technology and operations management (T&O): How will you create and maintain your product?
  • Founders: Are they a strong fit for the opportunity and business model?
  • Team : Do they complement one another? Can you fill any gaps?
  • Investors : Who have you assembled to finance your business? Are you all aligned?
  • Partners: Who have you selected to aid in your execution? How will they help?

Determining your business model is critical to mapping your direction and goals before launch. All eight components work together to form yours, so it’s crucial to carefully craft each.

“Not all business models are created equal,” Bussgang says in Launching Tech Ventures . “Some business models yield companies that are valued dramatically differently than others.”

The term “business model” often refers to how you deliver your product and drive revenue, or your GTM strategy and PF from the Diamond-Square framework. To decide how to make money and reach end users, here are five business models to consider.

Related: 5 Skills Needed to Launch a Successful Tech Business

5 Examples of Tech Startup Business Models

1. freemium model.

The freemium model—a portmanteau of the words “free” and “premium”—is popular for directly distributing to your target audience. This model offers one tier of your product for free and charges users for the full or upgraded version.

One tech startup that uses a freemium model is the screen time regulation app One Sec . It pairs with other apps so that, upon opening a particular one, you’re prompted to take a deep breath and receive statistics on how many times you’ve attempted to open it that day, followed by the choice to continue or exit.

One Sec offers one free app pairing. If you’d like to use it for multiple apps, unlock more breathing exercises, and access additional features, you must pay for the premium version.

A freemium model can be effective because it gives users a taste of the product experience before purchase. If they love the free version, they may be inclined to upgrade to the premium one.

The downside is that, sometimes, users are content with the free version and never convert to paying customers. Ensure your premium version offers features your target audience is willing to pay for before committing to a freemium model.

2. Advertisement-Based Model

If you’d rather offer your product for free, an advertisement-based model may be the right fit. Like the freemium model, it delivers your product directly to your end user, but the profit formula differs. With an advertisement-based model, you sell ad space within your product to other businesses to bring in revenue.

This model is effective when your product creates enough value for users that they engage with it despite the presence of ads. Social media apps, such as Facebook and Instagram , are common examples. You can sign up and access all their features, knowing you’ll receive ads.

Another option is to combine the freemium and advertisement-based models—like some streaming platforms do—by offering your product’s free version with ads and the premium version without them.

Launching Tech Ventures | Build a viable, valuable tech venture that can profitably scale | Learn More

3. Employee Benefit Model

If your tech startup offers products focused on well-being, the most effective way to reach your end users may be through their employers or insurance providers. In the employee benefit model, your product is free to your end user and paid for by a corporation to offer as a benefit.

For example, caregiver support app ianacare partners with employee assistance programs and human resources teams. Together, they aggregate end users’ resources—including their employee benefits—into the ianacare app so they feel supported personally and professionally.

To sell to employers, ianacare cites several statistics on its website about working caregivers, including the 80 percent who report a loss of productivity at work and the 32 percent who’ve voluntarily left a job to care for a loved one. If an employee benefit model is right for your startup, ensure you communicate why your product will help boost companies’ employee productivity, retention rate, or satisfaction.

In addition to its employee benefit model, ianacare uses a direct distribution method by allowing individuals to download and sign up for the app. Certain features are “locked” and can only be accessed through a partnership with the user’s employer.

In Launching Tech Ventures , Bussgang recommends using a mix of direct and indirect methods to reach your target audience.

“Do you have the right mix of direct and indirect channels to educate, support, and distribute the product to customers in a repeatable and scalable fashion?” Bussgang prompts.

Ask yourself this question when crafting your business model.

4. Intermediation Model

Another business model to consider is intermediation, in which your business acts as the bridge between your product and end user.

For example, travel sites such as Booking.com and Expedia act as intermediaries between you and airlines, hotels, and vehicle rental agencies. You have the option to purchase tickets and book accommodations directly from each provider, but doing so through a site provides the ease of doing everything in one place. It also grants access to potentially greater deals and the convenience of comparing options.

If you can think of a way your venture would add value to the customer experience as an intermediary, consider using this model.

5. Disintermediation Model

The opposite can also make a strong business model. Disintermediation removes a step in the supply chain process to streamline product delivery.

A well-known example of disintermediation is e-commerce giant Amazon , which removes retailers’ transaction and delivery processes, simplifying the experience for the seller and end user.

A disintermediation model is a good fit for scenarios that seem cumbersome or complex. Could your product leverage innovative technology to remove one or more steps in a process? Doing so can create value for you and your end user while driving profit.

So You Want to Be an Entrepreneur: How to Get Started | Access Your Free E-Book | Download Now

Selecting the Right Business Model for Your Tech Company

Your tech startup’s business model is a critical decision that can impact whether it succeeds or fails. When thinking it through, consider how the eight elements impact each other.

“You can’t focus on individual pieces of the model in isolation,” Bussgang says in Launching Tech Ventures. “You need to think about each element—your value proposition, go-to-market strategy, profit formula, and tech and operations management—in a holistic fashion so that you can align them clearly.”

One way to gain the perspective needed to craft your business model is by learning from tech entrepreneurs who came before you.

Launching Tech Ventures features several founders, team members, and investors who offer first-hand insight into the challenges and processes of launching a tech business—from ideation to growth stage.

Are you interested in building the skills to launch a viable, valuable tech startup? Explore Launching Tech Ventures —one of our online entrepreneurship and innovation courses —and download our free guide on how to start your entrepreneurial journey.

information technology business model example

Using Business Model Canvas to Launch a Technology Startup or Improve Established Operating Model

  • 24 min read
  • Last updated: 23 Dec, 2021
  • 1 Comment Share

Not that long ago, organizations had to rely on a number of established tools to build their business models, strategize, and innovate. The business plan use as we know it today started to decline in the 1980s and 1990s due to its complexity and time-consuming research process. This decline has – not surprisingly – been in step with the high-tech boom and Silicon Valley’s startup culture. A business plan was integral to any organization that wanted to be associated with innovation. But what does it mean today? Despite – maybe due to? – their age and conventional status, business plans take time, effort, engagement of top consultancies, and financial resources to compile. Today startups, especially of the tech variety, cannot afford such luxury. To keep up with competitors, grow rapidly, and innovate, they require a truly agile technique, a mind map of sorts that’s easy to write, edit, and comprehend. Back in 2004, business theorist Alexander Osterwalder and his professor at the University of Lausanne Yves Pigneur suggested a business model design that could replace cumbersome business plans. An approach that was soon named the Business Model Canvas (BMC) has since acquired a respectable number of loyal practitioners. Not only have startups employed the approach, but also such giants as Microsoft, SAP, and General Electric. Let’s find out what the Business Model Canvas is and explore the ways a software company can leverage this method to drive success.

Business Model Canvas: How to Create your Startup Outline

BMC explained in less than 12 minutes

What is a Business Model Canvas?

The Business Model Canvas is a visual template for identifying and organizing different elements of your business model. It's divided the canvas into nine sections, each responsible for the most vital business elements of every organization.

  • Customer Segments
  • Key Partnerships
  • Key Activities
  • Revenue Streams
  • Value Propositions
  • Key Resources
  • Customer Relationships
  • Cost Structure

business model canvas template

Classic scheme of Business Model Canvas

With the abundance of methodologies for building a business model , there must be something really special about the Business Model Canvas that has earned it a place among the classic tools. To start with a BMC, you will need : a small group of people, a board or a large sheet of paper, markers and sticky notes, and up to an hour of time. When you’ve gathered everything, it’s time to map out. Let’s get down in the weeds.

1. Conduct Customer Segmentation

customer segments

Venmo’s Customer Segments

2. Choose Key Partnerships

partnerships

Venmo’s key partners

Joint-ventures are created when you need to fill the gap that only another business can fill, for instance, sell your product to a new niche. When you’re partnering with a company that has a missing element you require, it helps you grow your audience and increase sales. The affiliate plan we discussed earlier could be considered a joint-venture as well. Just like enhancing someone’s SaaS product with your API (or vice versa) or offering your customer upsells from a third-party. Coopetition is a partnership between competitors. It usually happens when both companies are struggling to launch a product and want to spread the risks to achieve common revenue. For example, when Apple launched an iPad, the tablet became the biggest competitor to Amazon’s Kindle. So, the rivals cooperated to sell Amazon books via the iOS Kindle app, which helped Amazon to extend its e-book market and established iPad as a viable reading device. Sometimes coopetition partnerships lead to mergers. PayPal, for instance, was born from the merger of two competing financial companies.

3. Sketch Out Key Activities

Key Activities are what a company should do to make its business model work. For a pizza delivery service, it would be getting the freshest ingredients for the best price, preparing meals, organizing a call-center or a website, hiring couriers, etc. But in case you’ve developed an app that just gathers and transfers pizza requests, you have another set of actions such as supporting an app, organizing fast and seamless connections with partners, automatically updating menus, etc. According to Business Model Generation , you can unite all your activities into three main categories:

  • Production.
  • Problem-solving.

activities

Venmo’s Key Activities

4. Find Relevant Revenue Streams

Depending on the product or service you are trying to sell, you need to have a clear understanding of the ways you’re going to drive revenue from each Customer Segment. A strategy that goes into identifying and managing your Revenue Streams is called a Revenue Model. Here are some of the revenue models that may work for you. See the article at the link for more information about monetizing your software business . Or check out our video on revenue models:

How to choose a revenue model for a software product

A 14-minute guide to revenue models

revenue streams

Venmo’s Revenue Streams

5. Describe Your Value Propositions

The Value Proposition is the reason for a customer to buy your product. A good Value Proposition is a unique combination of features that will either solve a customer’s problem or bring them additional value. The Value Proposition should be short. Make sure both you and your users can read it in less than 5 seconds and clearly understand what your product is all about. Drop vague descriptions and jargon. Here are a few outstanding examples of Value Propositions that work:

  • Trainer-led audio workouts for a fraction of the price of a live trainer. ( Aaptiv )
  • Free, fast, detailed and entirely offline maps with turn-by-turn navigation – trusted by over 65 million travelers worldwide. ( Maps.me )
  • Bookmate is the perfect way to enjoy books — whenever, wherever. ( Bookmate )
  • The world’s best companies use InVision to design the products you love. ( InVision )
  • We help big brands scale WordPress. ( Pagely )

value proposition canvas

This map allows to describe your Value Propositions and Customer Segments in more detail Source: Strategyzer

You start with Customer Jobs on the right side of the map and sketch all big and small tasks you’ll help your customers accomplish with the product. Then move onto the Pains and Gains sections and describe every good and bad experience a customer has before, during, and after completing the job. Next, go to the left side of the map and define your Products and Services . This is simple – just list all products and services your value proposition is built around. Finally, outline how exactly your product’s services are eliminating pains and generating gains in the Pain Relievers and Gain Creators sections. For this exercise, invite people who are in direct contact with customers or people you are targeting.

Product Discovery Process Overview

In this video, we more techniques to help you identify your customer and market

value propositions

Venmo’s Value Propositions

6. Outline Distribution Channels

Five Channel Phases - outline distribution channels

Five phases of distribution channels

channels

Venmo’s Distribution Channels

Post-purchase support. This is the phase that customers care a lot about. What is the cancellation policy? How do they contact you with a problem or a question? What is the onboarding process? Nowadays, many software providers use chatbots or a simulation as one of their post-purchase channel. (You can read our article about designing chatbots to learn more.) Also, you can send out customer surveys, track reviews and questions on social media, or create personal recommendations based on user activity.

7. Identify Key Resources

resources

Venmo’s Key Resources

When evaluating your Key Resources, ignore those that would be common for any business, but pay attention to the ones that are strategically important to you. For Amazon Prime, Key Resources would be licensed rights to stream films and TV shows. For Microsoft, Adobe, or Google, it would be numerous patents. And insurance and banking organizations can’t survive without financial resources.

8. Choose a Customer Relationships Strategy

customer relationships

Venmo’s Customer Relationships

Automated service. This is how Netflix and Spotify maintain relationships with their customers. By providing AI-powered recommendations of movies and playlists, the services imitate human interaction and keep customers engaged. Communities. To better understand customers’ struggles and facilitate connections between users, a company can create a community around a product or a brand where users can exchange knowledge. Have a look at Oracle . Their community with half a million active participants helps customers find advice among fellow users. Co-creation. User-generated content is a feature of the modern web. Anyone who’s uploaded a video to YouTube has contributed a service. The role of the company, in this case, is to precisely match content creators and content consumers. Another good example is HiNative that allows people around the world to contribute questions and answers about their languages on the same platform.

9. Classify Cost Structure

Delivering Value, maintaining Customer Relationships, and buying Resources all incur costs. For a typical product development software company, the major operational expenses usually include research and development (R&D) costs, sales and marketing activities, and support costs. Let’s break them down:

  • According to MarketRealist , only 10 to 20 percent of costs in the software industry go for research and development, only 5 percent of that sum is actually spent on innovation, and the rest goes to testing.
  • Due to the large competition in the market, marketing expenses of software companies usually surpass R&D costs, which is why about 25 percent of revenue is spent on marketing and sales. Depending on the product, this number can vary.
  • Support costs are related to handling customer requests and retaining your audience. Since it’s difficult to retain customers of a software product, a big chunk of expenses goes to Customer Success Management and churn prevention.

Apart from operational costs, your Cost Structure should include:

  • Capital costs – investments that go into acquiring or upgrading physical resources, such as buildings and computers.
  • Overhead costs – the general operational costs that have no direct impact on delivering a product, such as electricity, or a processing time for installation and testing software.
  • Staff costs – resources spent on hiring, training, and retaining employees.

cost structure

Venmo’s Cost Structure

Okay, we’ve covered the theory, but how do you map this all out in practice? We’ll give a few tips for planning your BMC session and avoiding common mistakes.

How to Coordinate a Business Model Canvas Workshop

The BMC methodology was created to be flexible, so there are no strict rules on how canvas mapping should work. There are, however, guidelines that will help you get started and not get lost. Time you will need: Up to 2.5 hours. Limit yourself for more concentrated work. Team to assemble: All concerned people should be present.

Workshop materials

The canvas was created in the pre-pandemic world, when in-person communication was preferable. But today, we know that distributed teams can be just as effective. So, we’ll describe what you’ll need in both cases. If you’re meeting in person , it’s recommended to have

  • a large poster in B0 format or a white board of a comparable size,
  • sticky notes of various colors,
  • a camera to capture the resulting canvas.

For remote groups , make sure you have

  • an online BMC template (we’ll list a few suggestions further). It doesn’t need to have collaborative features as one of the group members can be responsible for logging ideas.
  • a plan B if technology fails. You can screen-record during the call or make screenshots at specific intervals so all data isn’t lost.
  • pen and paper to capture ideas when people are waiting for their turn to speak.

How to fill the Business Model Canvas

Here are a few things that are important to make sure the Canvas works as intended. Don’t write directly on the Canvas. This concerns your BMC on paper or white board. Instead, place sticky notes. Ideas should be easy to add, move, remove, or simply change in order. One idea per note . Don’t create bullet lists on your sticky notes. If you don’t have enough space, be less expansive with your ideas or find a larger surface. Color code. If you have several very different target audiences, it will help to separate them by color and then use corresponding colors when describing their Value Propositions, Channels, Relationships, and so on. Use images . If you’re feeling creative, enrich your words with emojis, simple illustrations, or photos. We process things faster when there’s a visual attached, and it may give your teammates a better idea of what you mean. Stay minimalist . Remember, this is the place to create the strategic overview, not operational tasks. You may go into detail in one of the following workshops but start with the big picture.

Business Model Canvas in Real Life: Examples

Understanding how the approach works is one thing and following someone else’s example is entirely different. If you're still struggling to figure out what should go on your board, here are a few examples to get your wheels turning in the right direction.

A Lemonade Stand

lemonade stand bmc

Business Model Canvas for a Lemonade Stand

airbnb bmc

Business Model Canvas for Airbnb

uber bmc

Business Model Canvas for Uber

linkedin bmc

Business Model Canvas for LinkedIn

For more examples, visit business model examples on Strategyzer – a great collection of thorough models to inspire you or compare to well-known companies.

The benefits of using the Business Model Canvas

Visible connections. The design of the canvas directly illustrates the way elements are connected and provides a clear understanding of the impact the building blocks have on each other. That’s why it’s important to follow the specific order to fill in your business model. Changing and advancing. While many business strategy enthusiasts compare the BMC to a traditional business plan, these two methods have fundamentally different approaches. Business plans are heavy 100+-page documents that take time to write, read, and edit. The BMC is meant to be a living document that’s always changing and evolving. Thus, you and your team can make immediate decisions and add changes on the go. Enjoy the advantages of the BMC by trying out our convenient Business Model Canvas Tool . You can quickly fill in the boxes, create your business model canvas, and download it.

Value Propositions are always at the core. If you have another look at the canvas, you will notice that one element – Value Propositions – is placed at the very center of the canvas. It’s a backbone, a bearing wall that separates the front stage and backstage of your business theater. Speaking the same language. Eventually, the BMC makes your crew members understand each other better. By using the same definitions for reference, you provide a transparent communication between people and teams. You can take your BMC sheet to a meeting, brainstorm, use sticky notes to outline your new ideas, and later place the canvas directly on the wall, making it easier for ideas to be seen and adjusted.

What the BMC excludes and why it should not bother you

By looking at the model and even after starting to work with it, many entrepreneurs argue that it excludes a lot of key factors for creating a thriving business. Executives are bothered by the lack of external factors. What about competitors? And why not include the organization’s mission and priorities? The short answer is: Because that’s not what the BMC is for. But let’s provide a broader explanation.

  • The main purpose of the BMC is to visually represent how you intend to build or develop a successful business. It’s a simple scheme aimed at defining the pathway in the constantly changing market and providing a concise overview of how your operational processes link up with one another.
  • Just as you can’t include profit as a resource, an external impact is more of an outcome than a building block of your business. Thus, instead of trying to fit those elements into the canvas, you can adjust the internal processes when complications arise.
  • Imagination is the key. You can’t make the model work for you unless you want to work on it as well. It’s not a silver bullet and it’s not meant to apply to each individual situation. So, don’t make the approach restrictive. Stay creative and inventive when working with the canvas. Combine it with other tools, such as a Value Proposition Canvas, or use adaptations of the methodology. One of the most popular is Lean Canvas.

Lean Canvas: A Startup Business Model

The Lean Canvas was created by Ash Maurya, CEO and Founder of LEANSTACK, as a version of BMC, specifically optimized for lean startups. The idea of a lean startup was introduced by Eric Ries in his titular bestselling book, where it was constructed on the following principles:

  • handling uncertainty or venturing into marketing immediately,
  • validated learning , meaning making discoveries as you go, and
  • innovation accounting by defining and keeping in mind your success metrics.

lean canvas

Business Model Canvas evolving into Lean Canvas Source: Ash Maurya

Now, what do the updated canvas sections mean? The Problem part addresses the way startups often fail by not having the right product/market fit . So, to launch a successful business, you must start with correctly identifying and understanding what the market is lacking. After that, you can construct the Solution . Maurya wanted the small box of the canvas to “constrain entrepreneurs” and have them evaluate every idea that goes on the board, instead of sticking to the one they’re most passionate about. It’s also a great place to define your Minimum Viable Product (MVP) . To minimize the chaos of numbers, Maurya proposes focusing on a few Key Metrics , so that the startup can ignore everything else and doesn’t spend time and resources on wasteful activities.

Product Metrics: How to measure product success

We talk about all main metrics for a software product in this video

Finally, the  Unfair Advantage box must remind the startup that its success largely depends on how they’re different from similar products on the market and help preemptively plan for when followers and copycats enter the competition.

How the Business Model Canvas can help established businesses

You may now be thinking, “Okay, all this sounds great, but isn’t it another startup tool? What if I want to take a fresh look at my established company and see how I can make it better?” The tool’s versatility allows you to apply it in many different ways. You can strategize a logic behind a new initiative (like Amazon’s decision to allow its Prime users stream movies for free). Or even analyze the leaders’ success stories and learn to apply them to your business (see LEGO’s reinventing experience presented on a canvas). Osterwalder says, “Everybody needs to understand how to use this and use this as a shared language.” Here are just some of the reasons to use the Business Model Canvas for your established business.

  • Detect opportunity gaps and find new perspectives.
  • Create your competitors’ business models and compare them to yours.
  • Keep track of external changes in each building block.
  • Pitch investors using a visual representation that others can understand.
  • Test new business models.
  • Map out potential changes.
  • Align your team’s goals and actions.
  • Look at the business from a customer’s perspective.
  • Analyze new opportunities, partners, and channels.

Remember that you aren’t using the BMC to confirm what you already know about your organization, but rather to find flaws and pinpoint the ways to make your business processes more effective, and after evaluating the changes, act upon them.

What now? Life after the Business Model Canvas

The BMC is not a tool that you use once or twice and forget about it till the next evaluation of your company. It was designed and invented to become a part of every business’ day-to-day life, a map to guide your ship between rocks and shallows. So, what happens after you’ve laid out your business model? Dashboard. Use the BMC to track the changes in your building blocks and the level of satisfaction of these changes. Color-code the most complex elements to focus on them more and attract the team’s attention to the current problems. Meetings . Use the BMC as a brainstorming instrument at meetings to unify new ideas and manage them later in your work. Understanding customers. You don’t have to create the BMC for companies only. Try understanding your customer by creating their own business models. For instance, SAP, the German software giant, uses the BMC in their pre-sales process . The SAP sales teams sketch the customer’s business model to prepare for sales meetings. Onboarding. When hiring new talent, especially top management, you can use the BMC to give them an immediate understanding of where your company stands and help them join the team smoothly.

Software to create a Business Model Canvas

Even though a traditional approach is to grab a large piece of paper (or a whiteboard), a Sharpie and start filling in the canvas, there are several options to digitize this process. There are a few opportunities for Business Model Canvas software for you to use. It shouldn't be too difficult to use, but make sure to find collaboration features if you create a canvas in a team. AltexSoft’s Business Model Canvas template . When we set out to create our free BMC template, we wanted to build a minimalist experience for quick idea sketching and note-taking. The boxes have prompting questions and you can receive the finished result by email. Canvanizer. This is a free, easy-to-use business model canvas tool that allows you to share the same canvas with your teammates using links similar to Google Docs so you can brainstorm together. You can export the canvas into CSV or an image format. Besides traditional BMC, Canvanizer suggests templates for various similar and related tasks. For instance, you can do SWOT Analysis, use Lean Canvas for startup planning, feedback canvas, customer journey canvas, and more. Strategyzer . The tool is much more complex than Canvanizer. It allows for creating a Business Model Canvas and a Value Proposition Canvas with real-time collaboration support. Strategyzer comes with a built-in estimator module that can analyze revenue streams and assess whether the business idea is financially viable. Additionally, the product suggests a Testing Dashboard for Lean Startup development and has a number of other additional features that justify its price, ranging from built-in help to sticker color coding and advanced encryption. The base version costs $25 per month and supports unlimited canvases and an unlimited number of users. The enterprise package includes multi-team collaboration, portfolio management, and offers dedicated coaching. CNVS. We used CNVS to create visualizations for this article. The tool is great if you don’t need bells and whistles but you like clean and slick design with cute monsters. And it’s totally free if you don’t consider subscribing to their newsletter a payment.  You can create traditional BMC, Feature Canvas, and Lean Canvas; share them with or with no editing access using a link; and that’s basically it.

“The same products, services or technologies can fail or succeed depending on the business model you choose. Exploring the possibilities is critical to finding a successful business model. Settling on first ideas risks the possibility of missing potential that can only be discovered by prototyping and testing different alternatives,” said Alex Osterwalder, creator of the Business Model Canvas. No business plan works out the way you intend it to. The only way to be prepared and effective in the ever-changing market is to stay dynamic and ready to act. Instead of spending months or even years developing a strategy that may not even materialize in the end, you can adjust your processes on the go in the existing environment and surpass competitors while you’re still growing. Moreover, you will stay connected to your team with the power of co-creation and be sure that you’re on the same page with every party involved.

Subscribe to our newsletter

Stay tuned to the latest industry updates.

Latest Business Articles

Product management KPIs

20 Key Product Management Metrics and KPIs

product management featured

Product Management: Main Stages and Product Manager Role

New Zealand Hobbiton Movie Set

Hotelier's Guide to Google Hotels and its API: Listing, Updating, Competing

Quality Assurance Quality Control and Testing G the Basics of Software Quality Management

Quality Assurance, Quality Control, and Testing — the Basics of Software Quality Management

Join us on the techtalks.

Discover new opportunities for your travel business, ask about the integration of certain technology, and of course - help others by sharing your experience.

Write an article for our blog

Almost 50 guest articles published from such contributors as Amadeus, DataQuest, MobileMonkey, and CloudFactory.

Any Questions? Let's Discuss!

Discuss your project needs with our architects.

By clicking contact us you confirm, that you understand and agree to the Privacy Policy

Jenner and the discovery of vaccination

Is our sexual orientation determined by biology, openmind books, scientific anniversaries, edward o. wilson and island biodiversity, featured author, latest book, business models, information technology, and the company of the future, i. what is a business model.

Business models are stylized models that describe how companies create and deliver value to their customers, and how they get rewarded for doing that. The business model construct encompasses the product or service, the customer and market, the company’s role within the value chain, and the economic engine that enables it to meet its profitability and growth objectives. Business models are often used by startups as modeling tools to help them design, prototype and build their new ventures. They are also used by established companies to plan, develop and support their innovation process. In this chapter, I use the business model construct to predict how companies’ architectures and business model development processes will evolve into the future.

A business model is a structured blueprint which attempts to bring order and discipline to the chaotic process of building, growing and operating a business. Some authors define the business model concept broadly,1 which I think reduces its usability. My view of the business model concept focuses on the way the business creates value and extracts revenues and profits, which is defined by three core elements: a value-creation model , a profit model , and the logic of the business. Each of these elements is specified by answering a few basic questions:

Value-Creation Model

  • Who are the venture’s customers and what is its product or service offering?
  • How does the offering create differentiated value for these customers?
  • What are the venture’s go-to-market strategies?
  • What is the value chain for the offering, and what parts of the value chain does the venture participate in?

Profit Model

  • What are the venture’s sources of revenue?
  • What is the venture’s cost structure?
  • What are its key drivers of profitability?
  • How will the venture meet its profit and growth objectives?

Specifying a Value Creation Model

The first step in business model construction or analysis is the specification of a value-creation model. This involves first identifying the target customers and the offering that will create differentiated value for them. Differentiation is important: to attract customers and make a profit, the offering has to be better than the competition on a dimension that makes a substantive difference to customers. The dimensions of differentiation vary across companies. For example, Walmart creates differentiated value for cost-sensitive consumers by selling a large variety of products at low prices. Apple creates differentiated value for consumers who are willing to pay for well-designed, “cool,” innovative products. USAA provides financial services to US military personnel and their families at superior quality by targeting their specific needs: for example, it accepts check deposits from soldiers’ smartphone cameras,2 and it heavily discounts customers’ auto insurance premiums when they are deployed overseas.

Having a product or service that truly solves a significant problem for a well-defined customer segment is a good start, but it’s not enough. Any business needs to have effective go-to-market strategies that focus on getting the product or service to market, acquiring customers, securing revenue and market traction, and growing the market. A go-to-market strategy specifies how the business will bring customers in and how it will ultimately deliver to them the value it creates.

Finally, value creation takes place along an end-to-end value chain. However, companies have to choose which parts of the value chain they will actually participate in. For example, a company that develops new technology may choose to license its technology to an established player without being involved in either production or distribution. Or, the company may manufacture the product in-house and sell it as a component to a better-known company that embeds it in its own branded product. Another alternative is to manufacture and market the product under the company’s own brand name. As we proceed from the first option to the third, the company covers an increasing portion of the value chain for the final product.

Specifying a Profit Model

The profit model of a business starts with an identification of its revenue streams and the associated costs. Since revenue = price × quantity and price is a key dimension of the value created for customers, it links the value-creation model to the company’s profit model.

Revenue Models

The most common revenue models are transactional : customers pay a fixed price per unit of the product or service, for example, $3 for a dozen eggs at the supermarket or $3 per gallon of gasoline. Transactional revenues may also incorporate fixed fees and quantity discounts.

A different type of revenue model is a subscription model under which customers pay a fixed fee per unit of time, and they receive in return a fixed number of units of the product or service (e.g, one copy of a newspaper each weekday) or unlimited use over the subscription period (e.g., monthly membership at the gym).

Another revenue model, commonly used for intellectual property, is the licensing model whereby the customers pay a royalty or license fee which allows them to use, sell or copy the product within a given period of time (unlimited in time if the license is perpetual), subject to limits on the scope of use based on geography, nature of use, etc. For example, software is mostly sold using a perpetual license, and the owner of a patent may license its technology to other companies in return for a license fee.

Businesses often receive multiple revenue streams, where different customers pay according to different formulas or revenue models, or hybrid revenue streams, where a given customer’s payments combine different revenue models. For example, in the eBay marketplace, sellers pay a subscription fee if they “rent” an eBay online store, a fee per listing, and a fee for each transaction which is consummated on the platform.3 These fees vary based on the nature of the listing or transaction, the product category, and the pricing format, but their averages can be estimated. We can thus write the periodic revenue as the sum of subscription revenue, listing revenue, and transaction revenue, where each of these in turn has different drivers.

Cost Structure

The cost structure specifies the activities that drive the different costs of the business and how fixed and variable costs add up to total cost. For example, in a manufacturing operation, materials costs are proportional to the volume of units produced, whereas delivery costs may depend on both shipping distance and volume. Variable costs may be proportional to volume, or they may exhibit economies of scale—for example, purchased materials with a quantity discount. In some cases, they exhibit diseconomies of scale, for example, when an operation approaches its capacity limit, or when key resources are so scarce that their marginal costs are increasing. Each of these scenarios gives rise to a different cost structure.

Logic of the Business

The logic of the business explains how the business will meet its profit and growth targets. It comprises an argument showing why the business will be successful, that is, how it will attract customers, be competitive and profitable, and grow. This often takes the form of a “virtuous cycle” which shows how the basic elements of the business model reinforce one another.

There are a few recurring business model archetypes, each characterized by its own logic. I outline below the logic of three archetypes: one based on customer intimacy, where the business tailors solutions to customer demand at the front end; one based on operational excellence, which is based on superior back-end processes; and one based on value chain coordination, which creates value by coordinating front- and back-end elements of the value chain. I chose these three business model archetypes as I believe each will play an important role in structuring the company of the future.

Customer Intimacy: Tailoring Solutions at the Front End

Our first business model archetype uses customer information to tailor solutions that satisfy unique, or highly-targeted, customer needs. This logic is often called customer intimacy .4 The logic of customer intimacy is based on a continuous learning relationship with customers, which means that the business has to initiate explicit or implicit dialogues with them, capture information about their behaviors and preferences, and use that information to customize products or services to these preferences. Customer intimacy has been practiced for literally thousands of years, but as I argue below, developments in IT will make it one of the central building blocks of the company of the future.

As an example of traditional customer intimacy, consider Ritz-Carlton, the operator of five-star luxury hotels and resorts around the world.5 Ritz-Carlton is the first and only hotel company that received the prestigious Malcolm Baldrige National Quality Award twice, and is the winner of multiple awards for its high-quality customer service. Ritz-Carlton’s credo reads as follows: “The Ritz-Carlton Hotel is a place where the genuine care and comfort of our guests is our highest mission. We pledge to provide the finest personal service and facilities for our guests who will always enjoy a warm, relaxed, yet refined ambience. The Ritz-Carlton experience enlivens the senses, instills well-being, and fulfills even the unexpressed wishes and needs of our guests.”6

Developments in IT will make customer intimacy one of the central building blocks of the company of the future

To achieve its mission, the company focuses on customer loyalty via customization which relies on extensive data gathering and capitalizes on both employee attitudes and IT capabilities. Information is gathered and recorded during each customer interaction and service request. The information is systematically entered into a database which is accessible to all Ritz-Carlton hotels worldwide. Using the database, hotel staff strive to anticipate on a daily basis the needs of each guest and initiate steps that ensure a customized, high-quality service experience. Returning guests give Ritz-Carlton increasingly refined information about their preferences and needs, which enables the company to provide them with a superior experience. Because of this experience, guests are loyal to Ritz-Carlton and tend to book a Ritz-Carlton hotel whenever possible. This in turn gives Ritz-Carlton information that enables its staff to serve guests better than the competition, creating a virtuous cycle: information enables a superior experience, resulting in customer loyalty which generates yet better information.

Operational Excellence: Superior Back-End Processes

A different logic governs operationally excellent business models, which strive to minimize the delivered cost of the products or services they offer to customers by creating superior back-end processes. Having a lower cost base, they can have a price advantage over competitors. Alternatively, operationally excellent businesses may price their products or services competitively while reducing the intangible costs borne by their customers as the product and service is delivered to them. Thus, operational excellence is not about price alone—consider, for example, FedEx, which attempts to differentiate its offering on timeliness and reliability (“when it absolutely, positively, has to be there overnight”—the company’s tagline during its formative 1978-1983 years).

Walmart provides an example of operational excellence in retailing. Its tagline has evolved from “Always Low Prices” in the sixties to “Save Money. Live Better” in more recent years, but its value-creation model and logic have remained essentially the same.7 Customers consistently cite low prices as the key reason for shopping at Walmart. In the US, Walmart customers’ average income is well below the national average, and about 20% of them don’t even have a bank account (which creates an opportunity for Walmart to provide financial services to the unbanked). Walmart is positioned at the inbound logistics and retailing end of a standard product value chain (although it also designs some “white label” products and sells some services). It sells a large variety of quality merchandise at lower prices and higher availability than most competitors based on its back-end processes.8

The goal of operationally excellent business models is to minimize the delivered cost of the products or services they offer to customers

Profitability in retailing is driven by the return on inventory investment, given by the product of inventory turnover (how many times a year the retailer turns over its inventory) by the markup over the cost of goods. A small, independent merchant may mark up its products by 100% and have two inventory turns a year, leading to a return of 200% on his inventory investment. A department store that reduces its markup to say 66.7% can achieve the same return on inventory investment by turning its inventory three times a year, attracting customers through lower pricing and greater product selection and innovation.

Walmart’s superior back-end processes and lower cost structure allow the company to increase inventory turns to reach the same or greater profitability than full-price retailers in spite of its lower markup. A markup of 50% and an inventory turnover of four would be sufficient to match the return on inventory investment of the department store and the independent merchant in the above example, and doing better would make Walmart more profitable (by 2014, Walmart increased its inventory turnover to 8 with a 32% markup). Walmart achieves lower markups coupled with high availability and low inventory levels by focusing on procurement, logistics, and distribution and using IT to track and identify demand on a product-by-product basis, to increase transparency and to lower supply chain costs.9 These increased efficiencies allow Walmart to lower prices, leading to increased volume and scale, which in turn enable Walmart to invest further in technology and process improvement. This virtuous cycle, which Walmart calls “The Productivity Loop” is shown in Figure 1.

Figure 1. Walmart’s “Productivity Loop”

BBVA-OpenMind-Reinventing-the-Company-Haim-Mendelson

Value Chain Coordination

Value chain coordinators create value by coordinating the front- and back-end of the value chain. A value chain coordinator may orchestrate major activities along the entire value chain or be focused on a narrow slice of the chain. In the electronic commerce domain, value chain coordinators are often platform businesses which facilitate transactions or interactions among the users of their platforms. They relegate direct value creation to other participants in the value chain, while the platform itself coordinates activities, streamlines business processes, and reduces search and transaction costs.

eBay is a classic online platform that enables buyers and sellers to find and trade with each other. While the platform users themselves shoulder the burden of direct value creation (eBay does not hold or sell product inventories—only the sellers do), the company is focused on matching buyers and sellers and facilitating transactions among them. Value chain coordinators such as eBay continuously improve and refine their platforms to enhance the performance of the value chain. They often engage in acquiring new customers and seeding new activities to create additional sources of value for their customers.

The eBay.com marketplace is a platform business which is focused on the use of Information Technology to support and facilitate trading communities. All other activities are provided by others—merchandising and product inventories by the sellers; shipping by eBay’s logistics partners (such as national postal services or UPS); financing, insurance, and vehicle inspections in eBay’s automotive marketplace are provided by partners, etc. As a result, eBay can focus on the development of its technology platform and on creating a vibrant trading community and developing vertical marketplaces such as eBay Motors, its collectibles marketplace, and its event ticket marketplace StubHub.

In the electronic commerce domain, value chain coordinators are often platform businesses which facilitate transactions or interactions among their users. They relegate direct value creation to other participants in the value chain

eBay’s “virtuous cycle” (Figure 2) illustrates the logic of value chain coordi-nators which are characterized by two-sided network effects, in this case between buyers and sellers. First, buyers attract sellers to the platform. With more sellers, buyers are more likely to find any product they are looking for at a desirable price, which increases the number of buyers and the frequency of their visits to eBay. This, in turn, makes the platform more attractive to sellers, who are looking for buyers, so more buyers join the platform, and the cycle continues.

Figure 2. eBay’s Virtuous Cycle

BBVA-OpenMind-Reinventing-the-Company-Haim-Mendelson-Figure 2. eBay’s Virtuous Cycle

II. Business Model Development

Customer-driven innovation.

As discussed above, business models play a key role in the innovation process. There are many approaches to innovation, and I’ll focus on the customer-driven innovation approach that we teach and practice at Stanford University. This process parallels the “lean startup” approach which guides the development of startups and established-company innovations in Silicon Valley.10

Customer-driven innovation employs the business model construct in an iterative process that starts at the front end, centering on a target customer (this is sometimes called “customer development”).11 The process then proceeds to the back end and finally links them to one another. It is initiated by identifying a customer need which is not well addressed by existing marketplace solutions. It then proceeds with empathy , a deep ethnographic dive into the life and/or work experiences of the target customer. Empathy comprises three types of activity:

  • Observe – view users and their behavior in the context of their lives;
  • Engage – interact with and interview users through both scheduled and short “intercept” encounters; and
  • Immerse – experience what your user experiences.12

The empathy stage is followed by a definition stage that unpacks and synthesizes our empathy findings into compelling needs and insights which allow us to come up with an actionable problem statement.13 This is followed by an ideation stage that generates multiple potential solution ideas. The goal of the ideation stage is to explore a wide (i.e., encompassing a broad range of diverse ideas) and deep (i.e., exploring a large number of ideas) solution space. The ideas are then sorted out using the business model construct discussed above: each idea is analyzed in terms of the value it may potentially create for customers, what it takes to deliver that value, and the resulting profitability and growth potential. This means that the analy-sis starts at the front end (focusing on value creation potential) but is then filtered using a back-end perspective (focusing on feasibility, cost, and profitability).

The initial business model resulting from this process is incomplete; it is in effect a business model prototype with a given logic. To prove or disprove this logic, we need to test its central assumptions or premises. We thus identify the key premises and proceed to test them. The results of each test are used to revise the business model, modify its logic, identify the new central premises, test them in turn and continue to iterate. This iterative process ultimately results either in a business model which is believed to be viable, or in abandoning the specific innovation on the grounds that based on the tests to date, it is unlikely to lead to a viable business model. The latter outcome is often manifested in the form of running out of funding.

At the front end, the focus of the process is on customer needs and value creation. At the back end, the focus is on putting together a solution that efficiently fulfills that customer need, costing it out, and trying to make a profit. In both cases, the business model development process calls for extensive human judgment, combining experience and creativity. As a result, it takes months, quarters or years to develop a proven, viable business model.

IT Trends and Business Model Development

The business model concept has been used often in the context of electronic business. Indeed, the use of the term “business model” took off in the mid-nineties and paralleled the growth of the internet,14 and the vast majority of its definitions in the literature are related to applications of IT.15 This is not surprising, as IT has been a major force reshaping business models over the past twenty years. As Tim Berners-Lee, the inventor of the World Wide Web, put it before the turn of the century:

The next century is going to turn our world upside down. The Internet combines people and ideas faster than they have ever been combined before. And that combination changes everything. The basic social conventions of the industrial era—the stable career, the 9-to-5 job, the gradually (but steadily) increasing salary—were all built around the notion that people moved their bodies in response to information. If you wanted to buy something, you went to a store. If you wanted to build something, you worked in a factory. In the Net economy, the creation of value doesn’t require that kind of physical movement. Income accumulates not in the form of cash but in the form of clicks… The great thing about technology is that it forces us to figure out the world from scratch. In so doing, it gives us a chance to rediscover what’s really important. So maybe the 21st century won’t turn your world upside down. Maybe it will turn that world right side up.16

By changing the focus of innovation from atoms to bits and from hardware to software, IT has dramatically accelerated the process of business model development. Prototyping and testing that used to cost hundreds of thousands of dollars and took months to execute can now be effectively completed in a week at a fraction of the cost. Software is more malleable than hardware, making it possible to adapt to customer needs faster than ever before. And, the development of cloud computing has made IT infrastructure highly elastic, making it possible to test and implement new software-based business models quickly and effectively.17 The end result is that IT has greatly accelerated the business model development process and with it the pace of innovation.18

What we have seen to date is, however, only a modest beginning. Developments in IT are likely to fundamentally change the nature of the firm and with it the essence of innovation. I address three of these developments below: the convergence of virtual and physical identities, the convergence of models and reality, and the convergence of atoms and bits. All three developments are highly interrelated.

Convergence of Virtual and Physical Identities

IT can be used to create a virtual reflection of physical-world activities. For example, a consumer’s credit card account is a partial digital representation of his or her financial life. It includes (among other things) profile information such as the consumer’s name, address, and social security number; credit data; and transactional data. In essence, the real-life consumer is shadowed by a virtual identity that tracks some of his or her financial activities. Historically, the information embedded in this virtual identity was quite incomplete, as most payments were made in cash, credit card transactions were consummated with a delay of weeks, and it was hard to relate them to one another. Today, a large and increasing percentage of payments are made electronically, they are recorded and made available in real time, and it is faster, easier and less expensive to process them to obtain a more complete picture of the consumer’s finances. As a result, the consumer’s virtual identity provides a more accurate representation of his or her real financial life.

Virtual identities are converging to real identities as a result of the increased use of mobile devices and sensors and the use of cloud computing

More generally, virtual identities are converging to real identities as a result of the increased use of mobile devices and sensors as well as the use of cloud computing. Mobile devices and sensors accompany people anywhere and they touch many different aspects of everyday activities. They generate a rich digital footprint that enables the replication of an increasing number of consumer activities ranging from physical movements to transactions and communications. Cloud computing in turn enables real-time recording of the data as well as its retrieval and processing on demand.

This applies not only to consumers but also to devices and machines used by businesses. Radio Frequency Identification (RFID) chips enable product tracking throughout the supply chain, and an increasing number of connected sensors are collecting machine data in real time. The resulting digital footprints create comprehensive digital representations of the physical activities of devices and machines that comprise the “industrial internet.”

Virtual identities are thus converging towards physical identities to the point where the former can serve as effective surrogates for the latter.

Integration and the Convergence of Models and Reality

A related trend applies to the ability to create integrated, high-fidelity models of behavior based on multiple, synchronized data sources. For example, a customer’s behavioral data may be combined with social network data to infer, based on both the customer’s own past transactions and behaviors as well as those of her friends, which product configuration will likely be most attractive to her. “Quantified self” models in the fitness and healthcare field combine data from wearable sensors, electronic health records, and other sources to improve wellness and performance. Companies such as Netflix use customer ratings and past viewing habits in conjunction with other customers’ information and market-wide trends to recommend movies and TV series a customer may be interested in viewing.

By integrating data from multiple sources and developing models that can estimate prospective customers’ preferences and predict their future behaviors with increasing precision, such “Big Data”19 approaches are able to test how a customer might react to a prospective offer without actually making that offer. While the results of such estimates are always subject to error, these errors may be diversified away once such offers are made to a large number of prospective customers. And, customers’ responses to the models’ estimates provide further information that may be used to further calibrate and refine the models.

Convergence of Atoms and Bits

People spend an increasing percentage of their time in the virtual world, where customized information products and services can be produced through the use of software. Software can make “bit” products fully responsive to customer demands, albeit at a cost.

As for “atoms,” manufacturing is increasingly driven by software which makes it possible for physical products as well to be more responsive to customer demands. Robots can be programmed to support flexible and still low-cost manufacturing processes which are increasingly replacing the assembly lines of the twentieth century. Mass customization and postponement allow companies to combine the cost advantage of scale with the benefits of customization to create customer-responsive products. And, a host of new technologies enable the creation of a unique yet affordable product for each customer, ranging from custom-made T-shirts and shoes to one-of-a-kind industrial components. As a result, back-end processes are becoming increasingly responsive to front-end demands.

Additive manufacturing (also known as “3D printing”) is an emerging tech-nology that amplifies this trend. Product design is inherently an information (“bit”) activity, but converting the design into an affordable physical product (“atoms”) requires costly tooling and machinery which in turn lead to the cost structure that characterizes mass production, based on economies of scale. With 3D printing, a digital design can be converted into a physical product one unit at a time, increasing the variable unit cost but dramatically reducing the fixed cost that characterizes traditional, scale-based production. Today, 3D printing is used largely to create product prototypes, accelerating the product development process that leads to mass-produced products. However, 3D printing is increasingly being used to create custom gifts, apparel, and industrial components, not to speak of tattoos, body parts, and food. Today, expensive 3D printers are largely used to create plastics products in a matter of hours. In the future, the variety of materials that benefit from 3D printing will expand, and the cost and time per unit will shrink. As a result, low-cost manufacturing of fully customized products will likely become a norm rather than the exception. This does not mean that mass manufacturing will become extinct—rather, it will be augmented by a variety of affordable customization options.

III. Business Models in the Company of the Future

The foregoing discussion suggests that IT will not only accelerate the process of business model development—rather, it will lead over time to a substantial qualitative change. A market comprising customer intimacy agents, suppliers/producers, and value chain coordinators will be able to provide better solutions than today’s firms. The customer intimacy agents will specialize in identifying customers’ current and future preferences and in helping customers to choose among alternative solutions. Producers and suppliers will specialize in developing and selling physical or digital products. Value chain coordinators will match supply and demand, configuring solutions that use existing physical or digital products (or components), as well as mediate the creation of new products based on the information they receive on customer preferences and supplier capabilities.

Emerging seeds of this structure already exist today. Multiple marketplaces are matching supply and demand for products (eBay), business supplies (Ariba), people’s time (TaskRabbit), space (Airbnb) and transportation options (Uber), to name just a few. Some of them offer value added services and customized solutions. In most cases, however, customers have to explicitly state their preferences in crude form and they then have to spend time and effort and exercise judgment to make the final selection. And, new product development is within the domain of producers.

To explain the transformation I anticipate in concrete terms, consider for example the travel market. Today, consumers may express their preferences involving price and schedule among competing airline flights to a travel search engine, which then looks at supplier data and configures a travel solution for them. In most cases, the preferences are expressed in rudimentary form (e.g., price or schedule, with no tradeoffs between the two), the solution is not comprehensive (e.g., airlines are selected separately from hotels, although some travel providers offer a rudimentary form of bundling, based primarily on available discounts rather than on consumer preferences), and the consumer has to make the final choice because the search engine does not truly understand his or her preferences.

Future business models in the travel industry will be based on three separate functions:

  • A customer intimacy agent that tracks the consumer’s travel preferences and represents him or her in the choice process. Conceptually, the agent may support other consumer activities beyond travel, but I believe domain expertise will continue to be important, and as a result we are likely to have domain-specific agents, at least early on. Looking at the consumer’s schedule, future plans, and past experiences, the agent will continuously seek proactive travel solutions to be offered to her. In some cases, the agent will not be able to anticipate the consumer’s travel needs; in that event, the consumer will trigger a solution search which will be managed by the agent on her behalf. It is easy to imagine conceptually how the consumer might delegate her travel choices to an agent who has comprehensive data on her entire travel experience, schedule, opportunity cost of time, etc., vast information on consumers like her, and the ability to analyze the alternatives and select the best solution. The key dimensions of competition among customer agents might then be based on their analytic capabilities and on their ability to consistently find best solutions for a given customer segment. The revenue model of the customer intimacy agent will likely be subscription-based, with a component based on performance.
  • Travel suppliers, who offer pre-configured travel components (similar to today’s flight schedules and airfares, as well as available hotel rooms and their prices) as well as spare capacity which is available for future configuration.
  • As a marketplace, the value chain coordinator will configure customized solutions when prompted to do so by the consumer’s agent. It will seek the different flight segments, hotel rooms, airport transportation, etc. among the available preconfigured travel components and will offer them to the customer’s agent as fully configured solutions. The division of labor between the customer intimacy agent and the value chain coordinator will depend on the level of trust they have developed over time, as well as on the degree to which the customer’s agent wishes to protect the customer’s data.
  • As an entrepreneur, the value chain coordinator will suggest new products the supplier might want to offer (beyond its available pre-configured travel components) by matching information collected from the customer intimacy agents (i.e., their customers’ preferences and needs) and the suppliers (i.e, available capacities for different travel components). The new product may be customized or “mass produced.” For example, the value chain coordinator could suggest that a hotel might customize an available suite for a honeymoon, or it may use aggregate data from multiple customer intimacy agents to suggest a new flight route using the supplier’s available capacity.

Thus, a customer’s agent may tell the value chain coordinator it expects its client to travel to a conference in New York between April 12 and 16, possibly staying over for the weekend depending on price, and seeking a flight and a hotel room for the corresponding days. The value chain coordinator may then suggest an appropriate travel solution based on the available travel components. However, given the fine-grained information about both demand and supply which is available to the value chain coordinator, it may infer that enough people who value their time highly are taking the same route to justify the creation of a new nonstop flight. Further, the value chain coordinator will know which airline has the capacity to offer that flight and make it profitable. The value chain coordinator may then suggest that the airline offer the flight, and it will also suggest a price based on the opportunity cost of the marginal consumer. In this example, the value chain coordinator is doing more than matching demand and supply: it is commissioning the development of a new product based on the information it collected from customer agents and travel suppliers.

Similarly, in the case of industrial products, customer intimacy agents represent potential buyers’ preferences, suppliers offer products and capacities that, put together, create potential solutions, and value chain coordinators may match buyers and sellers, create value-added solutions by adding solution providers to the mix, suggest the creation of unique custom products, or commission the development of new products that may be sold to multiple buyers.

The ability to engage in more traditional customer-driven innovation for new products and service ideas that were not inferred electronically may be a strong differentiator for the most successful product developers

This structure automates key parts of the customer-driven innovation process. For preferences and needs that have already been captured by the customer intimacy agents, empathy can be performed in software.Importantly, this will not eliminate the traditional form of empathy; rather, it will raise it to a higher level. Customer intimacy agents will engage in a more traditional form of empathy to innovate their own business models —for example, to augment the data they already capture electronically and to suggest what new forms of data might be valuable to capture.

Value chain coordinators will engage in an electronic form of ideation, based on electronic enumeration of potential product concepts. They will test each candidate product configuration in software, aggregating demand and preference data from the customer intimacy agents and capacity, supply and cost data from suppliers. By comparing value and cost, they will be able to determine which of the candidate products are viable, although the ultimate tests of the resulting products will take place in the marketplace.

A simple analogy to this form of automated innovation is provided by the use of combinatorial chemistry in the pharmaceutical industry. Drug development is a long and protracted process which can take ten to twenty years using traditional techniques. With combinatorial chemistry, molecular constructions are automatically synthesized and tested for biological activity. The technique takes a few molecular building blocks and uses an automated process to create numerous combinations by mixing and matching these building blocks. Thus, rather than engage in a manual, time-consuming screening process, machines create thousands of drug leads each day by mixing the chemicals under pre-specified test conditions. This “high throughput screening” process enables parallel testing of drug leads which dramatically accelerates the drug development process. And, once the results of these screening analyses are determined, they are stored in digital libraries, replacing in vitro laboratory tests (i.e., “test tube” tests) by in silico (i.e., computer-aided) tests, using computer programs to quickly sift through digital combinatorial libraries.

Turning to the business model of suppliers/producers, they will involve three types of activities:

  • Offering pre-configured components and products as well as customization options in the marketplace, typically through value chain coordinators;
  • Engaging in electronic customer-driven innovation along with the value chain coordinators, as discussed above; and
  • Engaging in traditional customer-driven innovation for new products and service ideas that were not inferred electronically.

The latter form of innovation will continue to be important. While electronic customer-driven innovation can work well for products that are natural extensions of existing products, there will always be breakthrough products whose success cannot be inferred from the available data. In fact, the ability to engage in more traditional customer-driven innovation may be a strong differentiator for the most successful product developers.

This chapter has addressed the effects of developments in IT on future business models and their development processes. I argue that the combined effect of mobile technologies, wearable devices and sensors, cloud computing, and “Big Data” technologies will sharpen the structure of future business models. Three of them will play a particularly important role in the use of IT:

  • Customer-intimacy agents will be customers’ digital representatives in the marketplace, using data to find and solicit solutions that will make them better off.
  • Value chain coordinators will match supply and demand, assemble customized solutions, and engage in electronic customer-data-driven innovation.
  • Producers will increasingly engage in marketplace selling and data-driven innovations.

Traditional forms of innovation, however, will continue to be important and will become key differentiators. First, the underlying business models will require continuous innovation which will likely take a traditional form. Second, breakthrough products will probably continue to require traditional forms of innovation.

  • See, e.g., A. Osterwalder and Y. Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (Hoboken: Wiley, 2010). For a comparison of common definitions of the business model construct, see C. Zott, R. Amit and L. Massa, “The Business Model: Theoretical Roots, Recent Developments, and Future Research,” IESE Working Paper, September 2010.
  • USAA was the first to employ this method to support military personnel who did not have access to a physical branch. It has since been adopted by mainstream banks to facilitate the check deposit process.
  • The payments made to PayPal, which is a separate business, are not included in this analysis.
  • See M. Treacy and F. Wiersema, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market (London: HarperCollins, 1995); H. Mendelson, Value Disciplines: A Quick Overview, Graduate School of Business, Stanford University, 2011.
  • Marriott International purchased a 49% stake in Ritz-Carlton in 1995 and increased it to 99% in 1998.
  • http://www.ritzcarlton.com/en/Corporate/GoldStandards/Default.htm
  • Walmart’s attempts to extend its appeal by deviating from this logic over the mid-2000s have been largely unsuccessful.
  • This is described in more detail in the case study Walmart by H. Mendelson, Graduate School of Business, Stanford University.
  • See H. Mendelson, Walmart, op. cit.
  • See Eric Ries, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (New York: Crown Business, 2011).
  • See Steve G. Blank, The Four Steps to the Epiphany: Successful Strategies for Products that Win (Menlo Park, CA: K&S Ranch Press, 2005).
  • d.school bootcamp bootleg, Stanford University, 2013.
  • Zott, Amit and Massa, op. cit.
  • S.M. Shafer, H.J. Smith, and J. Linder, “The Power of Business Models,” Business Horizons, 48 (2005), 199-207.
  • “Next Stop—The 21st Century,” Fast Company, August 31, 1999.
  • See H. Mendelson, Cloud Computing: A Quick Introduction, Electronic Business Case Study Series Book 1 http://www.amazon.com/Cloud-Computing-Introduction-Electronic-Business-ebook/dp/B00CNBFT64
  • This trend has been recognized years ago. See H. Mendelson and J. Ziegler, Survival of the Smartest: Managing Information for Rapid Action and World-Class Performance (New York, Wiley, 1999).
  • For an overview of “Big Data,” see “Big Data: The Next Frontier for Innovation, Competition, and Productivity,” McKinsey Global Institute, May 2011.
  • Similarly, as discussed below, producers will engage in both electronic and traditional forms of innovation.

Related publications

  • From Deconstruction to Big Data: How Technology is Reshaping the Corporation
  • Distributed Innovation and Creativity, Peer Production, and Commons in Networked Economy
  • Business Models for the Companies of the Future

Download Kindle

Download epub, download pdf, more publications related to this article, more about economy, geopolitics, global economy, comments on this publication.

Morbi facilisis elit non mi lacinia lacinia. Nunc eleifend aliquet ipsum, nec blandit augue tincidunt nec. Donec scelerisque feugiat lectus nec congue. Quisque tristique tortor vitae turpis euismod, vitae aliquam dolor pretium. Donec luctus posuere ex sit amet scelerisque. Etiam sed neque magna. Mauris non scelerisque lectus. Ut rutrum ex porta, tristique mi vitae, volutpat urna.

Sed in semper tellus, eu efficitur ante. Quisque felis orci, fermentum quis arcu nec, elementum malesuada magna. Nulla vitae finibus ipsum. Aenean vel sapien a magna faucibus tristique ac et ligula. Sed auctor orci metus, vitae egestas libero lacinia quis. Nulla lacus sapien, efficitur mollis nisi tempor, gravida tincidunt sapien. In massa dui, varius vitae iaculis a, dignissim non felis. Ut sagittis pulvinar nisi, at tincidunt metus venenatis a. Ut aliquam scelerisque interdum. Mauris iaculis purus in nulla consequat, sed fermentum sapien condimentum. Aliquam rutrum erat lectus, nec placerat nisl mollis id. Lorem ipsum dolor sit amet, consectetur adipiscing elit.

Nam nisl nisi, efficitur et sem in, molestie vulputate libero. Quisque quis mattis lorem. Nunc quis convallis diam, id tincidunt risus. Donec nisl odio, convallis vel porttitor sit amet, lobortis a ante. Cras dapibus porta nulla, at laoreet quam euismod vitae. Fusce sollicitudin massa magna, eu dignissim magna cursus id. Quisque vel nisl tempus, lobortis nisl a, ornare lacus. Donec ac interdum massa. Curabitur id diam luctus, mollis augue vel, interdum risus. Nam vitae tortor erat. Proin quis tincidunt lorem.

Big Data and the Future of Business

Do you want to stay up to date with our new publications.

Receive the OpenMind newsletter with all the latest contents published on our website

OpenMind Books

  • The Search for Alternatives to Fossil Fuels
  • View all books

About OpenMind

Connect with us.

  • Keep up to date with our newsletter

Quote this content

Featured Content

" "

Cost Management

" "

Artificial Intelligence

Meet BCG X banner

BCG X Product Library

Transforming the Business Model for IT Services

Related Expertise: Technology Industry , Digital, Technology, and Data

Transforming the Business Model for IT Services

November 19, 2012  By  Holger Wenzky

Slowing growth, loss of momentum, maybe even a mid-life crisis: The IT services industry is showing all the signs of a maturing industry.

For many providers, competitive dynamics have turned for the worse, eating into profits and making it all too easy for customers to recompete existing contracts midstream—that is, put them up for competitive rebidding—or terminate them outright. Offshoring has seen its promise largely realized—and can be limited by political pressure, to boot. Many anticipated efficiencies have not fully materialized. Technology shifts—like the cloud—can make established processes seem dated. What was once a fruitful partnership between providers and customers has become, in numerous cases, a rocky one. And as in any troubled relationship, everyone involved is asking the same question, Where do we go from here?

To be sure, IT services companies can take some tried-and-true steps to alleviate the strain. They can reduce complexity, embrace automation, and ensure standardization. They can champion process excellence so that things get done right the first time. And they can adopt metric-driven operations so that results are easier to measure. All of these levers need to be pulled.

But providers shouldn’t stop there. Instead, they should build on these improvements and take their business, and their prospects, to the next level—by completely transforming their business model.

By now, the traditional “your mess for less” business models for IT services are so well established that it is rare to see a deviation. Yet the old ways are a poor fit with the new realities of the industry. Pricing based on technical drivers, such as the number of servers managed or the total terabytes of storage provided, give providers little incentive to invest in efficiency-boosting technologies such as virtualization and end-to-end provisioning systems. Traditional models also fail to provide a variable cost structure that is better suited to today’s economic climate; instead, customers pay the same whether their business is slow or booming.

Yet if pricing were based on the customer’s business drivers, these problems could be overcome. Customers would see their IT costs align with their business performance, and they’d get better processes, too—since a provider that is no longer being paid by the terabyte or the server has an incentive to do the work as efficiently as possible.

Meanwhile, pricing based on business drivers would enable providers to bundle all the services that relate to those drivers. The services would therefore become stickier because customers would no longer find it so easy to divvy them up among various vendors.

Already, we are seeing a first step toward this new business model. Cloud-based offerings like Amazon Web Services (AWS) offer utility-style pay-as-you-go pricing for storage, database hosting, and other infrastructure-centric services. Giving customers the ability to scale capacity—and costs—according to their needs has proved an attractive value proposition. AWS is estimated by some analysts to be a $1.5 billion annual business, an amount that places it within throwing distance of the top 25 data-center outsourcers.

There is a message in that success: While Amazon’s model works well for infrastructure services, it doesn’t have to end there. Providers of IT services can learn from it, build upon it, and bring a similarly attractive value proposition to customers who outsource complex business applications. The key is transforming normally fixed prices into variable ones—a process called variabilization.

Creating a new business model is never an easy task; transforming one that has been so established for so long is more challenging still. But we see a step-by-step path that can get the IT services industry well on its way. By following the recommendations below, providers not only can tackle the challenges they now face but also build a foundation for success—both for themselves and their customers.

Step 1: Understand the Customer’s Business—Especially Its Data

The first thing providers need to do is scrap all the questions they have traditionally asked at the start of an engagement and draw up a new list. Not surprisingly, IT services companies tend to ask about IT: How many data centers does a customer have? Where are they located? What are the main applications? In which environments do they run? But providers should also be asking about the business—homing in on the factors that determine success for the customer. What activities drive revenues? What processes support them? What data are used to track critical outcomes? In short, providers shouldn’t even begin an engagement before they thoroughly understand what the customer’s business is about, how that is delivered, and how it can be measured.

By asking and answering these questions, providers will be able to see how processes can be shaped to achieve the customer’s business goals, how they can be aligned with revenue, and—significantly for the provider—how they can be integrated and bundled to make them stickier. This approach enables IT services companies to home in on drivers and metrics that can link pricing to the customer’s business performance. And it leads, in the end, to more satisfied customers—and a lower likelihood that clients recompete their contracts.

Step 2: Define Relevant Business Drivers

Typically there is a direct link between an outsourced service and business performance, making it relatively easy—given knowledge of the customer’s business—to define the relevant business drivers. For managing a wireless carrier’s CRM system, the business driver could be the number of subscribers; for manufacturing systems, it could be the number of units produced. For an airline reservation system, pricing could be based on the number of reservations made, or on the number of boarded passenger miles.

Applications that enable, but don’t directly support, business processes—such as business intelligence or data warehousing—will present a bigger challenge. An approach we recommend is bundling such enabling capabilities into the prices of core business transactions; this requires factoring in business intelligence, for example, when setting the price for a service that is clearly linked to business performance. (It also assumes, of course, that the provider does not offer a deal exclusively focused on business intelligence.)

A business driver should be simple enough that the customer can see the benefit of the model. If it is too complex or nuanced, the driver can obscure the value proposition. Indeed, the best drivers not only are trackable with reasonable effort but also align with what the client is tracking in general.

Step 3: Zero In on Price

The right business driver will give providers a sound metric for aligning a customer’s IT costs with its performance. But providers will still need to put a price on that metric. How much, for example, should they charge for one completed airline reservation? Or one passenger mile? Or one wireless subscriber?

First, providers need to break down the service they are offering into layers—that is, all the individual components that make it happen. For an airline reservation system, this could be mainframe, network, storage, application maintenance, and end-user support. The costs for each component should be aggregated, then correlated to the business driver. One approach is to use historical data from the customer—for instance, the number of reservations made in previous years—to get an idea of how costs have mapped to drivers in the past.

Next, providers need to understand the value the service creates for the customer. Combined with an accurate cost picture, this insight lets the provider develop a value-based price that ensures adequate, even attractive, margins for itself—while delivering variable, on-demand-type pricing for its customers.

Step 4: Optimize the Delivery Model

While the transformed business model gives customers a variable cost structure, it also means that providers may have to contend with spikes and troughs in capacity. These can be smoothed out by building in multitenant deployments, which would help balance the load—and keep revenues flowing.

Providers will also need to manage their own supply chain, operating model, and offshoring aggressively. For example, by developing contracts based on usage or on just-in-time support with their equipment vendors and other suppliers, providers can mimic the risk profile of their revenues in their own cost structure. In this way, when business ebbs, costs decrease—just as it does for their customers.

Finally, it is important to establish a continuous improvement process to optimize the delivery model. New technologies should be leveraged whenever they can boost efficiencies or cut costs. Collaboration with customers should be encouraged, and ongoing. This will help to create faster, better ways to get the job done—and help strengthen relationships.

A Win for Everyone

Perhaps the most compelling aspect of the new business model is that it is a win for all sides. Providers wind up with stickier services, less churn among customers, and potentially higher margins. Customers get the greater efficiency in IT infrastructure that they’ve long desired, more customized services, and pricing that aligns far more closely with how their business is faring. The customer’s end-users benefit, too, as more efficient, more integrated processes should deliver better, and faster, results—and an improved overall experience.

IT services providers may be facing challenges, but a transformed business model can enable them to find opportunity and reignite sustainable growth. It’s a path providers can, and should, start down today.

wenzky-holger-tcm9-123814.jpg

ABOUT BOSTON CONSULTING GROUP

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

© Boston Consulting Group 2024. All rights reserved.

For information or permission to reprint, please contact BCG at [email protected] . To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com . Follow Boston Consulting Group on Facebook and X (formerly Twitter) .

IT Operating Models: 4 Examples for Digital Enterprises

information technology business model example

Now more than ever, CIOs must revisit their operating models and look for ways to improve IT’s impact on the enterprise organization whether through full IT integration, partial integration, vendor collaboration or a stronger focus on quality and speed.

Universal Drivers of Change in IT Operations

CIOs today face new operational challenges as the IT industry responds to the key influences driving changes in the industry. Some of these are interrelated.

Technological Disruption

In recent years, IT has seen the emergence of many disruptive technologies powered by the adoption of cloud technology. These include changes to on-demand or “as-a-service” offerings, cybersecurity considerations and the Internet of Things (IoT).

Changes in IT Integration

Enterprise demand for solution-focused, visionary it strategy.

It is critical that enterprise organizations hire people who not only possess technical expertise but who also understand how technology impacts the business. As such, IT organizations look for visionary leadership to help them focus and plan software implementations, create efficiency and improve service quality and culture.

Globalization

Technology has made it easier for people within organizations to connect with each other, vendors and clients all over the world. As enterprise IT organizations respond to a market that demands globalization, changes to IT operating models are necessary.

Four Examples for Digital Enterprises

Given the diverse needs of enterprise organizations, there are a number of ways a company could change and adapt their IT operating model.

Trend #1: Full Integration

As the name suggests, a full integration model requires that IT is present in every aspect of the business. Therefore, CIOs must respond by expanding IT resources outside of a single, back-office department and into an approach that involves seamless integration across business channels starting with operations and processes all the way up to corporate IT.

This need for organization-wide digitization is driven by customer demand for increased service delivery and desire for speedy service that is versatile. Implementing this strategy results in improved internal and external service delivery as well as value creation.

Companies that adopt this approach are often those that already place a heavy emphasis on data and analytics to monitor the needs of the customers they service. However, full integration takes things a step further, empowering employees to push their limits, set goals and anticipate customer need. Instead of only measuring results, IT will also be responsible for helping to drive them.

A culture shift is required for this approach to be most effective. Team members should be encouraged to use customer data points to create new and innovative projects. An ether of innovation and forward thinking must be present in a fully integrated IT culture.

Trend #2: Partial Integration

In a partially integrated approach, the IT organization works hand-in-hand with other departments to achieve specified business-focused results. These models are ideal for companies whose success is based on IT service delivery and outcomes. Overall, the yardstick is business transformation.

IT departments should respond to IT integration in a number of ways. These include:

  • Creating new roles such as Business Analysts, Service Specialists, Solution Specialists and Chief Innovation Officer
  • Digitizing processes where efficiency is improved
  • Implementing new performance management processes
  • Utilizing data and analytics at all levels of the organization
  • Fostering a culture of innovation and solution-focused business success
  • Investing in technology
  • Practicing professional development that helps IT professionals understand their impact on the value of the organization
  • Creating processes to support End-to-End service delivery and fulfillment of business goals

Trend #3: Vendor Collaboration

In a world powered by cloud services and IoT, enterprise organizations find increased benefit in outsourcing IT functions. The benefits include:

  • Reducing IT and labor costs
  • Ensuring that trained, certified professionals are handling your IT business
  • Introducing a renewed commitment to solution-based focus on key business principles outside of IT

This is a preferred model for many enterprise businesses that don’t offer IT services to customers. These companies appreciate that they don’t have to directly hire qualified professionals to handle IT functions. But even IT service providers benefit from outsourcing parts of their business to other vendors in a cost-effective approach for any growing business.

In the past, outsourcing has produced mixed results because organizations have struggled to manage the quality of 3rd party output. However, choosing a vendor collaboration model reduces this risk.

In a vendor collaboration model, businesses leverage technology to remain connected to vendors. Vendors produce an output to the organization, and the organization manages service levels and overall quality. The organization must ensure the final product is a success, and they do so by ensuring vendors are trained to company service levels and with a heavy emphasis on communication and collaboration .

When it comes to vendor collaboration, IT organizations respond by positioning their resources in the following ways:

  • Creating new roles including Service Managers, Supplier Relationship Managers, Vendor Management Directors, Service Integrators.
  • Engaging suppliers in the early stages of annual planning.
  • Shifting IT’s role to improving supplier service levels and managing costs.
  • Ensuring multiple vendor relationships are in place and vendor lock-in does not occur.
  • Including provisions for managing relationships and creating value in the face of incidents.
  • Ensuring that technology infrastructure is able to support multiple vendors on a service platform .

Trend #4: Focus on Quality and Speed

Organizations are turning to culture changes like implementing Agile principles and DevOps within their organization to improve service delivery, quality and speed. The principles of Agile include the following:

  • Consistently delivering incremental business value
  • Transparency
  • Reducing risk
  • Remaining adaptable until a certain point in the project

By delivering products and services in increments, enterprise organizations can save time, money and other resources by creating the minimum viable product. Agile teams work on projects, often in Sprints, maintaining constant communication with business users throughout the process. Team members are well versed in a number of coding languages and use them to program on-demand cloud services to meet enterprise needs.

In addition, there are several considerations to be implemented to ensure a focus on quality and speed:

  • Creating new roles such as adding DevOps team members, Scrum teams, Agile Coach and Business Development Manager.
  • Reinforcing knowledge of business model on development teams.
  • Understanding how IT constraints limit development.
  • Implementing processes for rapid prototyping.
  • Ensuring a stronger emphasis on security must exist in an environment where developers are assessed based on speed.

How to evolve IT to drive digital business success

When IT and the business are on the same page, digital transformation flows more easily. In this e-book, you’ll learn how IT can meet business needs more effectively while maintaining priorities for cost and security.

information technology business model example

These postings are my own and do not necessarily represent BMC's position, strategies, or opinion.

See an error or have a suggestion? Please let us know by emailing [email protected] .

BMC Brings the A-Game

BMC works with 86% of the Forbes Global 50 and customers and partners around the world to create their future. With our history of innovation, industry-leading automation, operations, and service management solutions, combined with unmatched flexibility, we help organizations free up time and space to become an Autonomous Digital Enterprise that conquers the opportunities ahead. Learn more about BMC ›

You may also like

information technology business model example

What Is an Innovation Lab?

information technology business model example

Data Center Tiers: What Are They and Why Are They Important?

information technology business model example

Change Control Board vs Change Advisory Board: What’s the Difference?

information technology business model example

The 2020 Gartner Magic Quadrant for Data Center and Cloud Networking

information technology business model example

Bridging the SaaS Consumption Gap

information technology business model example

The Organizational Death Spiral: See It, Avoid It

About the author.

' src=

Stephen Watts

Stephen Watts (Birmingham, AL) contributes to a variety of publications including, Search Engine Journal , ITSM.Tools , IT Chronicles , DZone , and CompTIA .

Rotate

Please rotate your device.

Our website uses cookies to ensure you get the best experience while you’re here.

Swirl

Four Essential Business Model Innovation Examples for the Modern Enterprise

By: sei team.

SEI_Business-Model-Innovation

In today’s business landscape, organizations must be agile and open to new ideas to keep pace with ever-changing market dynamics. Fortunately, business model innovation can be a powerful tool to help companies unlock their potential value and gain the sustainable, competitive advantage they need. While product and service innovation are necessary to remain relevant, it is the innovative restructuring of a company’s business model that can truly drive transformative growth. By reevaluating and reinventing the ways in which they create and deliver value to customers, companies can discover new opportunities, improve profitability, and — most importantly — maintain that competitive edge.

Although business model innovation offers significant potential for organizations, it can be a complex undertaking. In order to achieve a successful transformation, it is essential to adopt a strategic approach and possess a deep understanding of various methodologies to apply the right one for an organization’s unique needs.

Our goal in the following sections is to explore some of the most effective types of business models, providing valuable insights into the strategies that have transformed industries and spurred growth for companies across the globe. Alongside each approach, we’ll examine business model innovation examples that showcase the power of these strategies in action.

What is Business Model Innovation?

Business model innovation involves the evaluation of a company’s existing business model to identify opportunities for improvement. At its core, the objective is to optimize, innovate, and  implement new ways of delivering value to customers  while generating revenue for a company. This can be done using a range of practices, such as identifying new customer segments, developing new products or services, creating new channels for distribution, or leveraging new technologies to improve operational efficiency. Using this approach successfully requires a thorough understanding of customer needs, market trends, and industry dynamics.

This is where diving into different innovative strategies and techniques comes into play, providing organizations with the tools they need to kick off a business model innovation project with confidence. Let’s explore four of the most effective methodologies that companies can use to drive growth and success.

1 – Disruptive Innovation

Disruptive innovation is a well-known approach to business model innovation that has been successfully employed by major companies like Uber and Netflix. This approach involves creating a new business model that disrupts an existing market by  creating a new technology or product  that enables a company to offer customers a lower-cost or more convenient solution that may not currently exist. To achieve this, you must identify a market that is underserved or overlooked by current players and develop a new way of delivering value that meets the needs of that market.

Uber, for example, disrupted the traditional taxi industry by offering a more convenient and accessible alternative. By developing a mobile app that directly connects riders with drivers, Uber created a new business model that leveraged technology to disrupt the pre-existing market. Much in the same way, Netflix revolutionized the entertainment industry by fundamentally changing how we consume media through streaming services. By embracing the transformative potential of digital technology and delivering content in an on-demand, subscription-based model, Netflix effectively flipped the script on traditional cable and broadcast television. This paradigm shift has forced legacy players to adapt or risk becoming obsolete.

Similar companies have emerged since Netflix and Uber’s inception, underscoring the effectiveness of disruptive innovation in predicting and meeting future needs. It can serve as a powerful tool for pioneering new approaches and giving your business a competitive edge.

2 – Platform Innovation

Platform innovation is another approach to business model innovation that has become increasingly popular in recent years. With this methodology, a company creates a platform that allows third-party developers to create and offer new products and services to customers. This approach can be particularly effective in industries where network effects play a significant role, such as social media or e-commerce.

Platforms such as Amazon, Facebook, and Google are prime examples of this approach in practice. These world-renowned brands have created entire ecosystems that enable developers to build on top of their existing infrastructure, creating new products and services to deliver additional value to their customers. By providing a platform for others to innovate, these companies are able to leverage the collective creativity of a large community of developers and entrepreneurs.

The key to successful platform innovation requires more than just creating a platform and inviting developers to join. Companies must establish a solid foundation that provides a robust infrastructure for developers to build on, including access to data, tools, and resources. It’s essential to ensure the platform is user-friendly, scalable, and secure to integrate seamlessly with other systems and platforms.

3 – Revenue Model Innovation

Revenue model innovation is a methodology that focuses on identifying new ways to generate income or capture value from a company’s current products or services. This approach involves rethinking and adapting the organization’s revenue model to capitalize on untapped opportunities.

A prime example of a company that has successfully employed revenue model innovation is Adobe Systems. Adobe, traditionally known for software products like Photoshop, Illustrator, and Acrobat, initially sold these software packages as one-time purchases, with customers paying a large upfront fee to own the software. However, as the market evolved and customers began to demand more flexibility and regular updates, Adobe recognized the need for a change in its revenue model.

In 2013,  Adobe transitioned from a perpetual licensing model to a subscription-based model  with the introduction of Adobe Creative Cloud. This transition to SaaS allowed customers to access Adobe’s suite of creative software tools for a monthly or annual fee. The shift not only provided customers with greater flexibility but also led to a more predictable and recurring revenue stream for Adobe. As a result, the company has experienced significant growth, with its stock price increasing substantially since the introduction of Creative Cloud.

Adobe’s successful revenue model innovation demonstrates how businesses can strategically adapt their revenue models to better serve customer needs and secure a more sustainable financial future.

4 – Customer Engagement Innovation

Companies need to seek ways to enhance customer satisfaction and loyalty. One effective approach is to transform how a company interacts with and builds customer relationships. Commonly known as customer engagement innovation, this methodology aims to provide personalized experiences, exceptional customer service, or targeted marketing efforts to improve consumer satisfaction. The approach often leverages  digital technologies and data-driven insights  to create a more seamless, convenient, and meaningful interaction between the company and its customers.

Starbucks is a great example of a company that has successfully embraced this approach. The coffee giant has built a reputation for creating a unique and welcoming in-store experience, but recognized the need to adapt as customers began to expect more digital interactions. To address this, Starbucks innovated its customer engagement strategy, leveraging digital technologies such as a mobile app to create a more personalized and convenient experience that resonated with customers.

The company used data collected through its app to analyze customer behavior, preferences, and purchase patterns, enabling it to make more informed decisions about store locations, menu offerings, and marketing strategies. By creating a seamless digital and physical experience and utilizing data-driven insights, Starbucks elevated customer engagement to new heights.

Innovate to Succeed with SEI

The ability to pivot and respond quickly to emerging challenges and opportunities is essential for companies to survive and thrive in today’s economy. These are just four of the many approaches to business model innovation your organization could take, and deciding which one is right for you is the real challenge. That’s where we can help.

At SEI, our experienced business transformation consultants are dedicated to providing clients with the strategic guidance, innovative thinking, and practical methodologies necessary to navigate the path to successful business model innovation. By leveraging our extensive experience and industry insights, we help clients identify new opportunities to grow. Contact us today  to discover how we can help you innovate and discover new ways to drive long-term success.

no-headshot

RELATED POSTS

SEI_Rapid-Prototying

Achieving Faster, Better Product Development with Rapid Prototyping

SEI_Sunsetting-Product

Sunsetting A Product Without Alienating Your Customer Base

SE_Operational-Transformation

Turn Bottlenecks Into Benefits with Operational Transformation

SEI_Data-Visualization

How Data Visualization Helps Transform Raw Numbers to Actionable Insights

Table of Contents

Digital offerings vs. digital business model, characteristics of digital business models, 11 most popular types of digital business models, how to create a digital business strategy , power your business model with simplilearn, 11 of the most popular digital business models and strategies in 2024.

11 of the Most Popular Digital Business Models and Strategies to Create a One in 2024

Today’s most successful brands are adopting new technology, enabling them to transform the way they do business. Next-generation technology such as Artificial Intelligence (AI) can be a game-changer when it comes to the customer experience. AI powers applications like chatbots, which can help answer questions for your site visitors. AI can even recognize and answer multiple forms of the same question and can be trained to give instant responses using your preferred voice and tone.

This type of innovation may be included in what’s known as a digital business model , a form of creating value based on the development of customer benefits using digital technologies. The goal of these digital solutions is to provide significant advantages that customers are willing to pay for and to ultimately improve aspects of your organization. This could range from how your company acquires customers to what products or services you provide. 

Most importantly, digital business models employ and rely on technologies that not only deliver better products and services but also provide personalized and meaningful customer experiences. A digital strategy is critical to your brand’s success. 

Sometimes we confuse digital offerings with digital business. A digital offering is an addition to existing offerings, such as a product pp, chatbot, control interface, etc. On the other hand, digital business models create value, bring a fresh perspective, and provide USP to the customers.

Become a Business and Leadership Professional

  • Top 10 skills in demand Business Analysis As A Skill In 2020
  • 14% Growth in Jobs Of Business Analysis Profile By 2028

Business Analyst

  • In collaboration with IBM
  • IIBA Endorsed Education Provider

Post Graduate Program in Business Analysis

  • Certificate from Simplilearn in collaboration with Purdue University
  • Become eligible to be part of the Purdue University Alumni Association

Here's what learners are saying regarding our programs:

Sauvik Pal

Assistant Consultant at Tata Consultancy Services , Tata Consultancy Services

My experience with Simplilearn has been great till now. They have good materials to start with, and a wide range of courses. I have signed up for two courses with Simplilearn over the past 6 months, Data Scientist and Agile and Scrum. My experience with both is good. One unique feature I liked about Simplilearn is that they give pre-requisites that you should complete, before a live class, so that you go there fully prepared. Secondly, there support staff is superb. I believe there are two teams, to cater to the Indian and US time zones. Simplilearn gives you the most methodical and easy way to up-skill yourself. Also, when you compare the data analytics courses across the market that offer web-based tutorials, Simplilearn, scores over the rest in my opinion. Great job, Simplilearn!

Vy Tran

I was keenly looking for a change in my domain from business consultancy to IT(Business Analytics). This Post Graduate Program in Business Analysis course helped me achieve the same. I am proficient in business analysis now and am looking for job profiles that suit my skill set.

How do you recognize a digital business model? 

For starters, digital business models are known for having the following four distinguishing characteristics: 

  • The value is created using digital technologies. When a service is based on digital technologies, it’s recognized as a digital business model. Take Amazon, Google, and Facebook, for example. These giants wouldn’t exist without the internet. 
  • The digital business model is new to the market. An example of this would be when you request transportation via an app (such as Uber or Lyft) that matches your request with a driver. 
  • To become a customer, you need to use a digital channel. Digital business models often rely on digital channels (such as Amazon) that show advertisements when you search online.
  • The unique selling proposition (USP) is created digitally. This means that a customer is willing to pay for your products or services, and many times monetized online.

What type of digital business model should you employ?

The best course of action is to first consider your customer profile when selecting the technology that’s right for your brand. This may include things like pain points, interests, buying patterns, and demographic characteristics.

As per Benjamin Talin , a digital transformation expert there are 11 digital marketing models.

1. Free-Model (ad-supported)

A free business model is one that makes use of and is supported by ads from platforms like Google and Facebook. The idea behind this model is to offer a service for free, making the user the end product. The online user provides valuable information that helps the company easily display targeted ads.

2. Freemium Model

This model is commonly used and allows users to get free access to a basic version of a product. This version may be somewhat limited, but the user has the option to upgrade and pay for a premium version should they want additional features. A great example of this is Spotify — you can use it for free, but if you want higher quality and no ads, you need to pay a monthly subscription. 

3. On-Demand Model

This model refers to a virtual product or service such as online video stores like Amazon Prime Video or Apple TV where you can watch a video for a certain period of time. Another example of this model is the freelance and gig economy platform Fiverr, where you book an individual and get charged based on the project.

4. eCommerce Model

Amazon was one of the first and most successful companies to adopt this digital business model of selling physical products online. Today, eCommerce is one of the best-known business models on the web.  

5. Marketplace Model

This model refers to a two-sided marketplace where sellers and buyers use a third-party platform to trade goods and services. Examples of this business model are service-based Uber and product-based eBay and Etsy. 

6. Digital Ecosystem Model

Digital ecosystems are currently one of the most complex yet robust digital business structures. Alibaba, Amazon, Apple, Google, Tesla, and other ecosystem orchestrators exploit the customer with various services across several platforms. Due to the "vendor lock-in" impacts their ecosystems produce, they may upsell existing clients and attract new ones with their knowledge and data.

Consider what services you use from Amazon, Apple, Google, Alibaba, and other companies, and how difficult it would be to meander from their digital services and choose something else. The lock-in effect is also a significant revenue driver in the future. You don't have to be an ecosystem orchestrator; you might be an ecosystem user or a supplier of ecosystem modules. PayPal is an excellent example of a modular supplier. It allows for frictionless payment across various digital business models and ecosystems.

7. Sharing Model / Access-Over-Ownership Model

It's all about "sharing," but in a professional sense. This approach enables you to pay for a product, service, or offer for a specified time without actually owning it. Renting a car (e.g., Zipcar), an apartment (e.g., Airbnb), or even industrial gear are examples.

Due to its ramifications on ownership and the resulting revenues you may produce, this was one of the most disruptive business models. Instead of only creating costs, an automobile may become a cash source.

8. Model of Experience

Adding value to items that would not be feasible without using digital technologies. Tesla, for example, revolutionized the automobile sector by incorporating digital services and even a digital ecosystem into its vehicles, which is now a primary engine for its business model.

Another approach to the experience model is to mix several experiences to build a new customer-centric ecosystem.

9. Model of Subscription

We're all familiar with Netflix and Office 365. These are excellent instances of the traditional subscription business. On a monthly/annual basis, the user receives access, updates, services, etc. Subscriptions are particularly popular for content, software, and memberships.

10. Model of Open-Source

One of the most successful open-source examples is Firefox. The software is available for download, usage, and contribution to the global community. Because it is free and many people contribute, it spreads quickly. Usually, it attracts many (free) resources to improve the software. Firefox's business strategy relies on search engines for royalties and partnerships.

Because you might not be able to exploit the software for a sustainable business model, open source isn't necessarily a business plan. Red Hat distributes Linux for free and then makes money via training, services, and hosting.

11. Model for Generating Hidden Revenue

Customers may not always be able to see revenue generation at first glance. Other value streams may emerge as a result of data collection and analysis. We know that there may be hidden business models underlying platforms and digital services. As we saw with the Mozilla example, where the open-source browser earns money from licenses to integrate other search engines.

It's critical for businesses to understand their potential and whether there are further opportunities to combine an existing business model with another to produce additional revenue. However, concealed money production might backfire when dealing with data and unknowing customers. Cambridge Analytica is a beautiful example of a backlash like this, which resulted in serious ramifications for both organizations.

Apart from these, a few more business models exist.

  • Club Affinity- collaborations with other organizations
  • Services with Automation- automating services that humans traditionally perform
  • Digital Business Model of Bundling - related products are packaged together.
  • Crowdsourcing- making contributions rewarding and straightforward users for their contributions (usually money or a charitable goal).
  • Digital Business Model of turning Data-Into-Assets- applying cutting-edge technologies to old industries
  • Digital Business Model of Disintermediation- instead of using an intermediary to supply a service or product

The opportunities for success are abundant as digital becomes the new normal. However, knowing your destination is critical before choosing the digital business model and setting out on our entrepreneurial journey.

No matter your brand, creating a successful digital business strategy is crucial to success in 2021 and beyond. 

When you leverage the power of technology to build your business, you will undergo what’s known as a digital transformation . There are so many exciting and new technologies continuing to emerge, which makes forging a digital business model a necessity for your strategy. 

“Every industry and every organization will have to transform itself in the next few years. What is coming at us is bigger than the original internet and you need to understand it, get on board with it, and figure out how to transform your business.” – Tim O'Reilly , Founder & CEO, O'Reilly Media

4 Important Dimensions for Creating a Digital Business Model: 

  • WHO is your target customer and what are their needs? 
  • WHAT is the value proposition and which products does it generate? 
  • HOW is the value proposition delivered?
  • WHY is the business model profitable? 

5 Steps for Developing Your Strategy: 

1. prepare a detailed business plan..

Outline what your business is, your goals and visions, and how you plan to achieve them. 

2. Identify Your Target Audience.

Narrow your audience down to two or three buyer personas. Outline the solutions that your company will offer. 

3. Develop a Strong Value Proposition.

How will your company stand out among the competition? Establish what differentiates you. 

4. Determine Key Business Partners.

Select key partners and strategic alliances that can best help contribute to serving your customers. 

5. Allow Room for Innovation.

When developing your business model, leave room for future innovation. It’s important to ensure that your plan meets the needs of your customers.

Gain powerful digital leadership skills to create successful business models with Simplilearn’s Post Graduate Digital Transformation Certification Program in collaboration with Purdue University.

Our Business And Leadership Courses Duration And Fees

Business And Leadership Courses typically range from a few weeks to several months, with fees varying based on program and institution.

Get Free Certifications with free video courses

Business Analysis Basics

Business and Leadership

Business Analysis Basics

Business Intelligence Fundamentals

Data Science & Business Analytics

Business Intelligence Fundamentals

Learn from Industry Experts with free Masterclasses

Design Your UI/UX Career Success Story in 2024 with Caltech UIUX Bootcamp

Career Information Session: Find Out How to Become a Business Analyst with IIT Roorkee

Why our Indore General Management program should be the next big move for your career

Recommended Reads

Skilling 4.0: A Study on Digital Readiness

What Is Hybrid Work Model and Secrets of a Successful Hybrid Work Model

CSS Box Model

Skilling for the Digital Economy: A Role-Based Approach

What Is Statistical Modeling?

The Best Guide to Understand What Is TCP/IP Model?

Get Affiliated Certifications with Live Class programs

  • PMP, PMI, PMBOK, CAPM, PgMP, PfMP, ACP, PBA, RMP, SP, and OPM3 are registered marks of the Project Management Institute, Inc.

information technology business model example

21 Different Types of Business Models With Examples

Different Types of Business Models

Having a solid, well-thought-out business model is essential for both new and established companies. These models work to attract new customers and anticipate any upcoming trends or unseen challenges. It also can allow the company to differentiate itself from competitors. Potential investors use business models to quickly and effectively analyze a company’s plans and flesh out information such as how they plan to generate income. Even if you are a small business with no plans of taking on investment, knowing and understanding your business model is crucial to your success.

There are many different types of business models to choose from. It can become overwhelming to decide which model would work best for a company’s individual needs and preferences. This article will analyze and define 21 of the top business models currently used to better understand what each type offers your company.

What is a Business Model?

Through the years, the term business model has had several different definitions. But essentially, a business model is simply an outline of how a company plans to make money with its product or service . Peter Drucker defined the term as “assumptions about what a company gets paid for”. A t their core, they all work to identify revenue sources, the customer base for their products and services, and the expenses the company anticipates to allocate to marketing these products and services.

Understanding your business model is important for many reasons. One of those reasons is that when you understand your business model, you are also closer to answering many other important questions about your business. When your business model is clear you get a better idea of who your customers are. And once you understand that, you also can answer the question “how does our business model add value to our customer”.

Not knowing, understanding, and choosing the right business model can be detrimental to your business. Later in the article, we explain how choosing the wrong business model is costing one company hundreds of millions of dollars. But for now, all you need to know that if your business model does not match up well with your product and what the market demands, you may soon see your profits dwindle as competition increases.

 If you are not sure if you have the right business model for your business, or if your current business model is running out of gas, read our list of 21 business models to see if there is another, better, solution for you.

21 Types of Business Models

1. freemium business model.

Freemium is a combination of the words free and premium. Companies following the freemium business model offer the most basic version of their product or service for free to entice consumers to purchase the more advanced features, capabilities, or add-ons of the product or service in the future. The freemium business model works for new companies by cultivating strong relationships with customers. It also works best for internet-based service companies.

Freemium business model examples:

2. subscription-based model.

information technology business model example

Image by mjimages from Pixabay

The subscription-based model allows companies to charge consumers monthly or yearly subscription fees to access their product or service. This model depends on these consumers continuing to love and utilize the service. To keep consumers satisfied and paying monthly subscription fees, companies need to continually improve their products or services to keep up with changing trends or competitors. The subscription-based model is popular with streaming services like Hulu, Netflix, and Spotify. It is also popular among monthly subscription boxes for beauty and fashion such as Ipsy or FabFitFun. The ideal profit margin varies depending on the type of subscription.

Physical subscription based businesses should aim for 30%-40% profit margins. Streaming services do not directly report profit margins but the figures can somewhat be figured out by the average revenue per user. Although it may be hard to find those numbers for all services, most services only make between $4-$10 revenue per user.

Subscription-based model examples

  • Streaming services
  • Dollar Shave Club
  • XBox Game Pass

3. Peer-to-Peer Business Model

Peer-to-peer business mode

Image by postcardtrip

In a peer-to-peer business model, a company acts as the go-between businesses and the customers interested in purchasing their products or services. The companies using this model provide the platforms, navigate the regulations, and set pricing for the products or services. A well-known example of this business model would be ride-sharing services such as Lyft and Uber. These platforms allow people to receive rides to and from requested destinations by those who apply to be drivers for the service.

Peer-to-peer business model examples

4. franchise model.

information technology business model example

Sometimes the franchise model is referred to as a hybrid model. It provides a sense of working for oneself with the added security of having a company’s backing with familiar trademarks and products. There is a legal and commercial relationship between the franchisor, the parent company owner (usually a corporation), and the franchisee. The franchisee (or business owner) is allowed to sell the franchisor’s products or services in exchange for paying a royalty fee. Both parties sign contracts to clarify the specifics, spelling out each side’s role in the business relationship.

Franchise model examples

  • Merry Maids Residential Cleaning

5. Direct Sales Business Model

In the direct sales model, a company’s employees will be the ones who demonstrate and sell the products or services being offered directly to the intended consumers. This effectively eliminates steps within the distribution process, such as wholesalers and the regional distribution centers. Direct sales is a great way to build strong, lasting customer relationships. One common direct selling types is single-level marketing (SLM). This is when a salesperson is compensated for their sales. Another second type is called multilevel marketing (MLM). This model is when a person is compensated for sales made by salespersons recruited by them and under their authority.

Direct sales business model examples:

  • Stella & Dot

6. Affiliate Marketing Business Model

People using the affiliate marketing business model promote and sell products from other companies online to get paid a percentage of the sales they make. This business model is common with “influencers” on Instagram or other leading social media apps. They will post about a company’s product to entice their followers to buy it through them. Many of their followers will buy the product through the supplied link. It is a win-win situation for both the influencer marketing the product and the company selling it. Affiliate business models are also popular among bloggers and online publishers.

There are 4 primary ways an affiliate can earn money from an affiliate program.

  • Pay Per Sale (PPS) – Affiliate earns a commission when a sale is made.
  • Pay Per Click (PPC) – Affiliate earns a commission whenever an affiliate link is clicked.
  • Pay Per Impression (PPI) – Affiliate earns a commission when a visitor lands on the merchant’s site.
  • Pay Per Lead (PPL) – Affiliate earns a commission when someone clicks on affiliate link and then takes an action such signing up for a free trial or completing a form.

Affiliate marketing business model examples:

  • Amazon Affiliates
  • Commission Junction (CJ Affiliate)

7. E-Commerce Business Model

e-commerce

Photo by PhotoMIX Company

Electronic commerce, or “e-commerce,” is a business model in which companies and individuals buy and sell products and services online. Because the business is entirely online, the products and services offered are nearly limitless. An e-commerce business offers companies the extra convenience of not needing a physical store. This increases the selection of products available to consumers. A business might combine the e-commerce model with the drop-shipping model.

Types of E-commerce business models

  • B2B: Business to Business Ecommerce- The B2B model focuses on providing products from one business to another.
  • B2c: Business to Consumer Ecommerce- B2C model focuses on businesses providing products to the consumer base
  • C2C: Consumer to Consumer Ecommerce- C2C model focuses on consumers selling directly to other consumers. Sites like eBay and Craigslist are examples of C2C companies.
  • C2B: Consumer to Business Ecommerce- This model is when a consumer sells products or services to businesses. Those in this line of work will often times be freelancers and sole proprietors.

8. Drop-Shipping Business Model

Companies using the drop-shipping business model sell various products on their websites, but supplying and shipping these products is done by a third-party wholesaler. The significant upside to this business model is that you do not need to pay for or maintain inventory for any of the products you sell. It can be costly to store, package, and mail out orders. In the drop-shipping model, a third party (which is typically the wholesaler) will handle the logistics of shipping and making sure the customers receive the products they ordered. The individual who marketed the products gets a percentage of the sales.

9. Vertically Integrated Business Model

The vertically integrated supply chain business model is when the company controls both supply and distribution.   The company controls all costs of production, inventory stocked, marketing, and pricing. Because the company has complete control of the product from start to finish, it can decrease transportation costs and improve sales and profitability.

Vertically integrated business model examples

10. consulting business model.

information technology business model example

There are two parts to the consulting business model. First, hiring experts or developing a list of freelancing consultants, and second, charging a fee to provide access to these experts by your clients. Typically, your experts will provide a service that speaks to the consumer’s needs. Hopefully, the customer will return to you as further needs arise. Common examples of this could be online tutoring, mentoring, and freelance work in several different fields.

11. Ad-Supported Business Model

Advertising is a significant component in why some companies are incredibly profitable and why some will financially fail. Failure to advertise a product or service can lead to people not even knowing a company exists. The ad-supported business model emphasizes the importance of advertising and the sales generated from it. Popular platforms to advertise products or services include print media, online media, and television.

Ad-supported business model examples

12. enterprise business model.

In the enterprise business model, specific aspects of a business are modeled, such as infrastructures and asset groups. The company leaders will see what needs to be altered within the business to maximize profits. The enterprise model is more about evaluating how the business is functioning than it is about the overall structure of the business.

13. Lock-In Business Model or Lock-In Strategy

The lock-in business model takes customer loyalty and kicks it up a notch. This is done by essentially locking customers into a company’s product or service by making it difficult to abandon the company without dealing with negative consequences. Some of these consequences include increased costs or making it difficult to switch. For example, Apple compels customers to stick with them by making it extremely simple to sync every Apple product. But, also make it challenging to use their products alongside competitors. For example, the Apple watch is nearly impossible to use with an Android phone. A lock-in business model ideally leads to customers sticking with one company for the long haul.

Lock-in examples:

  • Apple utilizes this strategy
  • Some major banks utilize this strategy as well
  • Microsoft Office Suite

14. Multi-Brand Business Mod el

information technology business model example

Old Spice has done a brilliant job marketing their multi-brand business with clever and hilarious advertisements.

With the multi-brand business model, a parent company will offer similar products with different brand names to increase their market share. By doing this, the company effectively reduces any potential competition. A company with many similar products at different price points will appeal to a significant number of customers.

Multi-brand companies examples:

  • Procter & Gamble

15. Razor and Blade Model

The razor and blade model works by selling products or services to consumers at a lower price. Then later selling a related product or service to the consumer for increased profits. The name razor and blade comes from King Gillette. Gillette effectively worked to overtake the men’s razor market by offering a sturdy and reliable razor that required the use of blades only sold by Gillette. As a result, the company cornered the market on razors for a time and is still dominate today.

Examples of razor and blade business model:

  • Playstation
  • Computer printer manufactures

16. Distribution Based Business Model

The distribution-based business model facilitates the distribution of products or services offered from the manufacturers to the consumers. With this model, the business ensures that the mode of distribution chosen to get the product or service to the consumer is the most direct, and more importantly, the most cost-efficient manner possible. No one distribution method is universal for all companies. The chosen methods depend on such factors as your product’s perishability, target market, and geographic area covered by your company.

17. Direct-to-Consumers Business Model

information technology business model example

With the direct-to-consumer business model, consumers buy products or services directly from a company’s website, eliminating the middle-man. The model not only saves the company money but can be convenient for the customer as well. Consumers would have to physically visit a store to purchase the product they desire but know they can order the product directly from the company or manufacturer. There is no longer a need for a brick-and-mortar store, saving the company money. The company tends to have greater control over their branding and stronger relationships with their customers with this model, leading them to buy from the company again.

In recent years, however, the DTC model has struggled to scale on its own for many larger companies. One of the pioneer companies in this type of business model was the DTC mattress company Casper. This company was once seen as a unicorn startup a decade ago but has seen its market share and valuation plummet. The company’s IPO attempt in 2020 was nothing short of a disaster. At one point, Casper was valued at more than $1 billion. But, at the time of its regulatory filing, it had cut its IPO target share price to $12 to $13 from $17 to $19. That valued the company at around $500 million. A lawsuit was even filed accusing Casper of misleading investors into pouring $100 million into its IPO, knowing its financial prospects were far dimmer than it promised.

Examples of direct-to-customers business model:

  • Apple Store
  • Warby Parker
  • Casper Mattresses

18. Low-Touch Business Model

Some customers want the least amount of interaction with the company possible. Businesses that want to meet that need should adopt a low-touch business model. Products sold using this model can be consumed or used with little interference from salespersons or customer service. Due to the pandemic of 2020, many businesses learned to adapt to the threat. These businesses adopted low-touch strategies to help keep their doors open. For example, more take out restaurants began using kiosks for ordering instead of placing an order with a human team member. 

Other sectors such as hotels began using virtual check-ins through apps. This limited contact with other guests in the hotel lobby as well as employees of the hotel. As we return to normal, it is believed that many of these businesses will retain their low-touch option and many other businesses will begin using this practice also.

Low-touch business model examples:

  • Wal-mart Online
  • e-commerce sites

19. Fractionalization Business Model

In this model, companies will sell partial usage of their product or service to consumers, such as offering a timeshare deal for a condominium in a desirable location. Consumers will receive full benefits of the timeshare when they are there, but they can only be there for a pre-determined time each year.

20. Pay-As-You-Go Model

information technology business model example

Photo credit: Mike Motzart

As the name suggests, consumers will pay for the service or product as they use it.  Meaning there is no recurring bill or subscription necessary. This model should entice those who do not like to be tied down. If the product or service is of high quality and worth the price paid, they will continue using it.

Pay-as-you-go model examples:

  •  Cell phone carriers
  • Power companies
  • Internet service providers

21.User-Generated Content Business Model

User-generated content business is a type of content distribution platform where the users create the content. Social media platforms and sites like Youtube and Quora are successful due to the content that is nearly 100% user-generated. This model eliminates the need to create content as a primary way to engage visitors. This is another type of business model that is often combined with the advertising model. But unlike traditional content distribution platforms like CNN and Fox News, UGC sites typically adopt the personality of their users.

User-generated content business model:

  • Online forums

In conclusion, the different types of business models mentioned will appeal to a wide range of companies’ needs and preferences, including highly niched marketed ones. When picking a company’s business model, it is vital to consider what would be appropriate for the company as a whole and the intended consumer. Which model will entice the target market to buy (and continue to buy) from the company? Using the right business model will maximize profits and provide clear, practical ideas to sustain profitability for years to come. 

Additional photo credits: Under CC

Thomas Martin

Like this article? Get updates by email and get our eBook for FREE

GET PREMIUM CONTENT AND UPDATES FOR FREE !

information technology business model example

Tom is a member of the Editorial Team at StartUp Mindset. He has over 6 years of experience with writing on business, entrepreneurship, and other topics. He mainly focuses on online businesses, digital publishing, marketing and eCommerce startups.

Recent Posts

information technology business model example

12 Low-Cost Ways to Improve Customer Care

information technology business model example

Handling a Conflict Between Supervisors and Employees

information technology business model example

5 Target Markets for Consultants and Consulting Firms

information technology business model example

High-Touch vs Low-Touch Business Models: The Differences Between the Two Engagement Models

What aspiring entrepreneurs can learn from masterworks ceo scott lynn, related posts, popular posts.

Different Types of Business Models

100 Best Business Ideas that You Can Start this Year

Investing in 5g: 4 benefits of 5g in your business, 11 founders explain which type of data really accelerates strategic growth.

Pingback: Understanding How the Producer Enterprise Mannequin Works - The Owl Report

Pingback: Understanding How the Producer Enterprise Mannequin Works – Webbizmarket.com

Pingback: Why the Subscription Business Model Works So Well - StartUp Mindset

Pingback: Pay As You Go Enterprise Mannequin: What It Is and How It Works – Webbizmarket.com

Pingback: Pay As You Go Business Model: What It Is and How It Works – PHL Tech Magazine

Pingback: Pay As You Go Enterprise Mannequin: What It Is and How It Works - The Owl Report

Pingback: Pay As You Go Business Model: What It Is and How It Works - StartUp Mindset

Pingback: What is the Peer-To-Peer Business Model and Does it Work? - StartUp Mindset

Pingback: 5 Things to Understand About the Catering Business Model - StartUp Mindset

Pingback: 10 Things to Know Before Starting a Business – PHL Tech Magazine

Pingback: 10 Issues to Know Earlier than Beginning a Enterprise - The Owl Report

Pingback: 10 Things to Know Before Starting a Business - StartUp Mindset

Pingback: Understanding the Media Company Business Model - StartUp Mindset

Pingback: Business Model for Staffing Agency Explained - StartUp Mindset

Pingback: The Enterprise Mannequin for a Nonprofit Defined - The Owl Report

Pingback: How a Print-on-Demand Service Can Revolutionize Your Business - StartUp Mindset

Pingback: Food & Restaurant Subscription Business Models and How They Work - StartUp Mindset

Pingback: 5 Types of Consulting Business Models - StartUp Mindset

Pingback: Bricks-and-Clicks Enterprise Mannequin: Definition, Examples, Advantages, and Challenges - The Owl Report

Pingback: Bricks-and-Clicks Business Model: Definition, Examples, Benefits, and Challenges - StartUp Mindset

Pingback: The Lean Business Model Explained - StartUp Mindset

Pingback: 7 Business Models For Artists - StartUp Mindset

Pingback: The Crowd Funding Enterprise Mannequin Defined - The Owl Report

Pingback: The Crowd Funding Business Model Explained Krownjobs.com - krownjobs

Pingback: The Crowd Funding Business Model Explained - StartUp Mindset

Pingback: Ghost Kitchen Business Model Explained - StartUp Mindset

Pingback: Ventajas y desventajas del modelo comercial de ladrillo y mortero - MundoEmprendedor.Online

Pingback: 10 Types of Ecommerce Business Models and How They Work Krownjobs.com - krownjobs

Pingback: 4 Main Business Models for Coffee Shops | Biz Builder Mike

Pingback: 4 Essential Enterprise Fashions for Espresso Outlets - The Owl Report

Pingback: 7 Enterprise Fashions For Artists - The Owl Report

Pingback: 7 Business Models For Artists | Biz Builder Mike

Pingback: The SaaS Company Business Model Explained | Biz Builder Mike

Pingback: The SaaS Firm Enterprise Mannequin Defined – Consigli digitali

Pingback: Business Model for a Cleaning Service Explained - StartUp Mindset

Pingback: (Uploaded) Advertising and marketing Consulting Enterprise - StartUp Mindset - Guide Matter

Pingback: What is the Retail Business Model and How Does it Work? | Biz Builder Mike

Pingback: (Uploaded) Marketing Consulting Business | Blockchain Consultants

Pingback: (Uploaded) Marketing Consulting Business - StartUp Mindset

Pingback: (Uploaded) Marketing Consulting Business | Biz Builder Mike

Pingback: The Direct-to-Consumer Business Model Explained

Pingback: The Direct-to-Consumer Business Model Explained | Blockchain Consultants

Pingback: The Direct-to-Client Enterprise Mannequin Defined - Guide Matter

Pingback: The Direct-to-Consumer Business Model Explained | Biz Builder Mike

Pingback: 4 opciones de oportunidades comerciales para estructurar su negocio para el éxito - MundoEmprendedor.Online

Pingback: Pros y contras de un modelo de negocio de franquicia - MundoEmprendedor.Online

Pingback: Comprensión del modelo comercial de Razor and Blade - MundoEmprendedor.Online

Pingback: 5 modelos de negocios basados ​​en Internet y cómo funcionan - MundoEmprendedor.Online

Pingback: Comprender el modelo comercial de ventas directas - MundoEmprendedor.Online

Pingback: The Solopreneur Enterprise Mannequin Defined - Guide Matter

Pingback: Tips on how to Launch Your Personal Ecommerce Website - Guide Matter

Pingback: How to Launch Your Own Ecommerce Site - StartUp Mindset

Pingback: Understanding the Direct Sales Business Model | Biz Builder Mike

Pingback: Understanding the Direct Sales Business Model - All About Pakistan

Pingback: Advantages and Disadvantages of the Brick-and-Mortar Business Model - StartUp Mindset

Pingback: 5 Web-based Enterprise Fashions and How they Work - Isurance Club

Pingback: 9 Key Elements of a Subscription-Based Business Model - StartUp Mindset

Pingback: What Business Model Should I Choose? Here are 5 Ways to Decide - StartUp Mindset

Pingback: 3 Types of Vertical Integration to Understand for Business Growth - DrDons ICFO 'BOW Business' News Media

Pingback: Pros and Cons of a Franchise Business Model - StartUp Mindset

Pingback: Understanding the Razor and Blade Business Model - StartUp Mindset

Pingback: Understanding the Razor and Blade Enterprise Mannequin - Isurance Club

Pingback: 4 Enterprise Alternative Choices to Construction Your Enterprise for Success - Isurance Club

Pingback: 3 Reasons Why The Freemium Model Works - Apex Breaking News Today

Pingback: Pros and Cons of a Freemium Business Model for You and Your Customers - DrDons ICFO 'Profit Business Marketing' News Media

Pingback: Pros and Cons of a Freemium Business Model for You and Your Customers - StartUp Mindset

Pingback: Amazon's Business Model: 4 Ways Amazon Makes Money and How Much It Makes? - StartUp Mindset

Pingback: When Is It Time to Change Your Enterprise Mannequin? - Isurance Club

Pingback: 8 Key Elements Of A Business Model that You Should Understand - StartUp Mindset

Pingback: Fortnite's Dynamic Enterprise Mannequin: How Fortnite Makes Cash and How A lot It Makes. - Isurance Club

Pingback: What's the Peer-To-Peer Enterprise Mannequin and Does it Work? - isuranceclub.cc

Pingback: 8 Key Elements Of A Business Model that You Should Understand - Profiting From Business and Marketing News

Pingback: 8 Key Elements Of A Business Model that You Should Understand » AtSo

Pingback: 8 Key Elements Of A Business Model that You Should Understand - All About Pakistan

Pingback: 8 Key Elements Of A Business Model that You Should Understand - Business Huffpost

Pingback: 10 Steps to Overcome and Bounce Back from a Business Failure – Small Business

Pingback: 10 Steps to Overcome and Bounce Back from a Business Failure - StartUp Mindset

Pingback: What Business Model does Uber Use? - StartUp Mindset

Pingback: How to Ask the Right Questions that Push You Closer to Your Goals

Pingback: What Business Model Should I Choose? Here are 5 Ways to Decide – Small Business

Pingback: 45% of New Businesses Fail Within 5 Years: Here Are the 7 Reasons Why – Small Business

Pingback: 45% of New Businesses Fail Within 5 Years: Here Are the 7 Reasons Why - StartUp Mindset

Pingback: 10 Top Franchises for Under $25,000 - StartUp Mindset

Pingback: 8 Steps to Start Your In-brand Subscription Box Service - StartUp Mindset

Pingback: What Makes a Winning Team? Here are the Key Personnel Your Business Needs to Thrive - StartUp Mindset

Pingback: How to Ask the Right Questions that Push You Closer to Your Goals - StartUp Mindset

Pingback: 21 Different Types of Business Models With Examples – Entrepreneur – Start, Run and Grow Your Business

  • Grow Your Business
  • Leading Your Team
  • Find Your Way
  • Business Models
  • Social Media
  • Entrepreneurial Lifestyle
  • Your Mindset
  • Our Writing Team
  • Get “The Fast Growing Startup” Ebook Free
  • Advertise With StartUp Mindset
  • The Part-Time Entrepreneur

The future of healthcare: Value creation through next-generation business models

The healthcare industry in the United States has experienced steady growth over the past decade while simultaneously promoting quality, efficiency, and access to care. Between 2012 and 2019, profit pools (earnings before interest, taxes, depreciation, and amortization, or EBITDA) grew at a compound average growth rate of roughly 5 percent. This growth was aided in part by incremental healthcare spending that resulted from the 2010 Affordable Care Act. In 2020, subsidies for qualified individual purchasers on the marketplaces and expansion of Medicaid coverage resulted in roughly $130 billion 1 Federal Subsidies for Health Insurance Coverage for People Under Age 65: CBO and JCT’s March 2020 Projections, Congressional Budget Office, Washington, DC, September 29, 2020, cbo.gov. 2 Includes adults made eligible for Medicaid by the ACA and marketplace-related coverage and the Basic Health Program. of incremental healthcare spending by the federal government.

The next three years are expected to be less positive for the economics of the healthcare industry, as profit pools are more likely to be flat. COVID-19 has led to the potential for economic headwinds and a rebalancing of system funds. Current unemployment rates (6.9 percent as of October 2020) 3 The employment situation—October 2020 , US Department of Labor, November 6, 2020, bls.gov. indicate some individuals may move from employer-sponsored insurance to other options. It is expected that roughly between $70 billion and $100 billion in funding may leave the healthcare system by 2022, compared with the expected trajectory pre-COVID-19. The outflow is driven by coverage shifts out of employer-sponsored insurance, product buy-downs, and Medicaid rate pressures from states, partially offset by increased federal spending in the form of subsidies and cost sharing in the Individual market and in Medicaid funding.

Underlying this broader outlook are chances to innovate (Exhibit 1). 4 Smit S, Hirt M, Buehler K, Lund S, Greenberg E, and Govindarajan A, “ Safeguarding our lives and our livelihoods: The imperative of our time ,” March 23, 2020, McKinsey.com. Innovation may drive outpaced growth in three categories: segments that are anticipated to rebound from poor performance over recent years, segments that benefit from shifting care patterns that result directly from COVID-19, and segments where growth was expected pre-COVID-19 and remain largely unaffected by the pandemic. For the payer vertical, we estimate profit pools in Medicaid will likely increase by more than 10 percent per annum from 2019 to 2022 as a result of increased enrollment and normalized margins following historical lows. In the provider vertical, the rapid acceleration in the use of telehealth and other virtual care options spurred by COVID-19 could continue. 5 Bestsennyy O, Gilbert G, Harris A, and Rost J, “ Telehealth: A quarter-trillion-dollar post-COVID-19 reality? ” May 29, 2020, McKinsey.com. Growth is expected across a range of sub-segments in the services and technology vertical, as specialized players are able to provide services at scale (for example, software and platforms and data and analytics). Specialty pharmacy is another area where strong growth in profit pools is likely, with between 5 and 10 percent compound annual growth rate (CAGR) expected in infusion services and hospital-owned specialty pharmacy sub-segments.

Strategies that align to attractive and growing profit pools, while important, may be insufficient to achieve the growth that incumbents have come to expect. For example, in 2019, 34 percent of all revenue in the healthcare system was linked to a profit pool that grew at greater than 5 percent per year (from 2017 to 2019). In contrast, we estimate that only 13 percent of revenue in 2022 will be linked to profit pools growing at that rate between 2019 and 2022. This estimate reflects that profit pools are growing more slowly due to factors that include lower membership growth, margin pressure, and lower revenue growth. This relative scarcity in opportunity could lead to increased competition in attractive sub-segments with the potential for profits to be spread thinly across organizations. Developing new and innovative business models will become important to achieve the level of EBITDA growth observed in recent years and deliver better care for individuals. The good news is that there is significant opportunity, and need, for innovation in healthcare.

New and innovative business models across verticals can generate greater value and deliver better care for individuals

Glimpse into profit pool analyses and select sub-segments.

Within the context of these overarching observations, the projections for specific sub-segments are nuanced and tightly connected to the specific dynamics each sub-segment is currently facing:

  • Payer—Small Group: Small group has historically seen membership declines and we expect this trend to continue and/or accelerate in the event of an economic downturn. Membership declines will increase competition and put pressure on incumbent market leaders to both maintain share and margin as membership declines, but fixed costs remain.
  • Payer—Medicare Advantage: Historic profit pool growth in the Medicare Advantage space has been driven by enrollment gains that result from demographic trends and a long-term trend of seniors moving from traditional Medicare fee-for-service programs to Medicare Advantage plans that have increasingly offered attractive ancillary benefits (for example, dental benefits, gym memberships). Going forward, we expect Medicare members to be relatively insulated from the effects of an economic downturn that will impact employers and individuals in other payer segments.
  • Provider—General acute care hospitals: Cancelation of elective procedures due to COVID-19 is expected to lead to volume and revenue reductions in 2019 and 2020. Though volume is expected to recover partially by 2022, growth will likely be slowed due to the accelerated shift from hospitals to virtual care and other non-acute settings. Payer mix shifts from employer-sponsored to Medicaid and uninsured populations in 2020 and 2021 are also likely to exert downward pressure on hospital revenue and EBITDA, possibly driving cost-optimization measures through 2022.
  • Provider—Independent labs: COVID-19 testing is expected to drive higher than average utilization growth in independent labs through 2020 and 2021, with more typical utilization returning by 2022. However, labs may experience pressure on revenue and EBITDA growth as the payer mix shifts to lower-margin segments, offsetting some of the gains attributed to utilization.
  • Provider—Virtual office visits: Telehealth has helped expand access to care at a time when the pandemic has restricted patients’ ability to see providers in person. Consumer adoption and stickiness, along with providers’ push to scale-up telehealth offerings, are expected to lead to more than 100 percent growth per annum in the segment from 2019 to 2022, going beyond traditional “tele-urgent” to more comprehensive virtual care.
  • HST—Medical financing: The medical financing segment may be negatively impacted in 2020 due to COVID-19, as many elective services for which financing is used have been deferred. However, a quick bounce-back is expected as more patients lacking healthcare coverage may need financing in 2021, and as providers may use medical financing as a lever to improve cash reserves.
  • HST—Wearables: Looking ahead, the wearables segment is expected to see a slight dip in 2020 due to COVID-19, but is expected to rebound in 2021 and 2022 given consumer interest in personal wellness and for tracking health indicators.
  • Pharma services—Pharmacy benefit management: The growth is expected to return to baseline expectations by 2022 after an initial decline in 2020 and 2021 due to the COVID-19-driven decrease in prescription volume.

New and innovative business models are beginning to show promise in delivering better care and generating higher returns. The existence of these models and their initial successes are reflective of what we have observed in the market in recent years: leading organizations in the healthcare industry are not content to simply play in attractive segments and markets, but instead are proactively and fundamentally reshaping how the industry operates and how care is delivered. While the recipe across verticals varies, common among these new business models are greater alignment of incentives typically involving risk bearing, better integration of care, and use of data and advanced analytics.

Payers—Next-generation managed care models

For payers, the new and innovative business models that are generating superior returns are those that incorporate care delivery and advanced analytics to better serve individuals with increasingly complex healthcare needs (Exhibit 2). As chronic disease and other long-term conditions require more continuous management supported by providers (for example, behavioral health conditions), these next-generation managed care models have garnered notice. Nine of the top ten payers have made acquisitions in the care delivery space. Such models intend to reorient the traditional payer model away from an operational focus on financing healthcare and pricing risk, and toward more integrated managed care models that better align incentives and provide higher-quality, better experience, lower-cost, and more accessible care. Payers that deployed next-generation managed care models generate 0.5 percentage points of EBITDA margin above average expectations after normalizing for payer scale, geographical footprint, and segment mix, according to our research.

The evidence for the effectiveness of these next-generation care models goes beyond the financial analysis of returns. We observe that these models are being deployed in those geographies that have the greatest opportunity to positively impact individuals. Those markets with 1) a critical mass of disease burden, 2) presence of compressible costs (the opportunity for care to be redirected to lower-cost settings), and 3) a market structure conducive to shifting to higher-value sites of care, offer substantial ways to improve outcomes and reduce costs. (Exhibit 3).

Currently, a handful of payers—often large national players with access to capital and geographic breadth that enables acquisition of at-scale providers and technologies—have begun to pursue such models. Smaller payers may find it more difficult to make outright acquisitions, given capital constraints and geographic limitations. M&A activity across the care delivery landscape is leaving smaller and more localized assets available for integration and partnership. Payers may need to increasingly turn toward strategic partnerships and alliances to create value and integrate a range of offerings that address all drivers of health.

Providers—reimagining care delivery beyond the hospital

For health systems, through an investment lens, the ownership and integration of alternative sites of care beyond the hospital has demonstrated superior financial returns. Between 2013 and 2018, the number of transactions executed by health systems for outpatient assets increased by 31 percent, for physician practices by 23 percent, and for post-acute care assets by 13 percent. At the same time, the number of hospital-focused deals declined by 6 percent. In addition, private equity investors and payers are becoming more active dealmakers in these non-acute settings. 6 CapitalIQ, Dealogic, and Irving Levin Associates. 7 In 2018, around 40 percent of all post-acute and outpatient deals were completed by an acquirer other than a traditional provider.

As investment is focused on alternative sites of care, we observe that health systems pursuing diversified business models that encompass a greater range of care delivery assets (for example, physician practices, ambulatory surgery centers, and urgent care centers) are generating returns above expectations (Exhibit 4). By offering diverse settings to receive care, many of these systems have been able to lower costs, enhance coordination, and improve patient experience while maintaining or enhancing the quality of the services provided. Consistent with prior research, 8 Singhal S, Latko B, and Pardo Martin C, “ The future of healthcare: Finding the opportunities that lie beneath the uncertainty ,” January 31, 2018, McKinsey.com. systems with high market share tend to outperform peers with lower market share, potentially because systems with greater share have greater ability not only to ensure referral integrity but also to leverage economies of scale that drive efficiency.

The extent of this outperformance, however, varies by market type. For players with top quartile share, the difference in outperformance between acute-focused players and diverse players is less meaningful. Contrastingly, for bottom quartile players, the increase in value provided by presence beyond the acute setting is more significant. While there may be disadvantages for smaller and sub-scale providers, opportunities exist for these players—as well as new entrants and attackers—to succeed by integrating offerings across the care continuum.

These new models and entrants and their non-acute, technology-enabled, and multichannel offerings can offer a different vision of care delivery. Consumer adoption of telehealth has skyrocketed, from 11 percent of US consumers using telehealth in 2019 to 46 percent now using telehealth to replace canceled healthcare visits. Pre-COVID-19, the total annual revenues of US telehealth players were an estimated $3 billion; with the acceleration of consumer and provider adoption and the extension of telehealth beyond virtual urgent care, up to $250 billion of current US healthcare spend could be virtualized. 9 Bestsennyy O, Gilbert G, Harris A, and Rost J, “ Telehealth: A quarter-trillion-dollar post-COVID-19 reality? ” May 29, 2020, McKinsey.com. These early indications suggest that the market may be shifting toward a model of innovative tech-enabled care, one that unlocks value by integrating digital and non-acute settings into a comprehensive, coordinated, and lower-cost offering. While functional care coordination is currently still at the early stages, the potential of technology and other alternative settings raises the question of the role of existing acute-focused providers in a more integrated and digital world.

Would you like to learn more about our Healthcare Systems & Services Practice ?

Healthcare services and technology—innovation and integration across the value chain.

Growth in the healthcare services and technology vertical has been material, as players are bringing technology-enabled services to help improve patient care and boost efficiency. Healthcare services and technology companies are serving nearly all segments of the healthcare ecosystem. These efforts include working with payers and providers to better enable the link between actions and outcomes, to engage with consumers, and to provide real-time and convenient access to health information. Since 2014, a large number and value of deals have been completed: more than 580 deals, or $83 billion in aggregate value. 10 Includes deals over $10 million in value. 11 Analysis from PitchBook Data, Inc. and McKinsey Healthcare Services and Technology domain profit pools model. Venture capital and private equity have fueled much of the innovation in the space: more than 80 percent 12 Includes deals over $10 million in value. of deal volume has come from these institutional investors, while more traditional strategic players have focused on scaling such innovations and integrating them into their core.

Driven by this investment, multiple new models, players, and approaches are emerging across various sub-segments of the technology and services space, driving both innovation (measured by the number of venture capital deals as a percent of total deals) and integration (measured by strategic dollars invested as a percent of total dollars) with traditional payers and providers (Exhibit 5). In some sub-segments, such as data and analytics, utilization management, provider enablement, network management, and clinical information systems, there has been a high rate of both innovation and integration. For instance, in the data and analytics sub-segment, areas such as behavioral health and social determinants of health have driven innovation, while payer and provider investment in at-scale data and analytics platforms has driven deeper integration with existing core platforms. Other sub-segments, such as patient engagement and population health management, have exhibited high innovation but lower integration.

Traditional players have an opportunity to integrate innovative new technologies and offerings to transform and modernize their existing business models. Simultaneously, new (and often non-traditional) players are well positioned to continue to drive innovation across multiple sub-segments and through combinations of capabilities (roll-ups).

Pharmacy value chain—emerging shifts in delivery and management of care

The profit pools within the pharmacy services vertical are shifting from traditional dispensing to specialty pharmacy. Profits earned by retail dispensers (excluding specialty pharmacy) are expected to decline by 0.5 percent per year through 2022, in the face of intensifying competition and the maturing generic market. New modalities of care, new care settings, and new distribution systems are emerging, though many innovations remain in early stages of development.

Specialty pharmacy continues to be an area of outpaced growth. By 2023, specialty pharmacy is expected to account for 44 percent of pharmacy industry prescription revenues, up from 24 percent in 2013. 13 Fein AJ, The 2019 economic report on U.S. pharmacies and pharmacy benefit managers , Drug Channels Institute, 2019, drugchannelsinstitute.com. In response, both incumbents and non-traditional players are seeking opportunities to both capture a rapidly growing portion of the pharmacy value chain and deliver better experience to patients. Health systems, for instance, are increasingly entering the specialty space. Between 2015 and 2018 the share of provider-owned pharmacy locations with specialty pharmacy accreditation more than doubled, from 11 percent in 2015 to 27 percent in 2018, creating an opportunity to directly provide more integrated, holistic care to patients.

Challenges emerge for the US healthcare system as COVID-19 cases rise

Challenges emerge for the US healthcare system as COVID-19 cases rise

A new wave of modalities of care and pharmaceutical innovation are being driven by cell and gene therapies. Global sales are forecasted to grow at more than 40 percent per annum from 2019 to 2024. 14 Evaluate Pharma, February 2020. These new therapies can be potentially curative and often serve patients with high unmet needs, but also pose challenges: 15 Capra E, Smith J, and Yang G, “ Gene therapy coming of age: Opportunities and challenges to getting ahead ,” October 2, 2019, McKinsey.com. upfront costs are high (often in the range of $500,000 to $2,000,000 per treatment), benefits are realized over time, and treatment is complex, with unique infrastructure and supply chain requirements. In response, both traditional healthcare players (payers, manufacturers) and policy makers (for example, the Centers for Medicare & Medicaid Services) 16 Centers for Medicare & Medicaid Services, “Medicaid program; establishing minimum standards in Medicaid state drug utilization review (DUR) and supporting value-based purchasing (VBP) for drugs covered in Medicaid, revising Medicaid drug rebate and third party liability (TPL) requirements,” Federal Register , June 19, 2020, Volume 85, Number 119, p. 37286, govinfo.gov. are considering innovative models that include value-based arrangements (outcomes-based pricing, annuity pricing, subscription pricing) to support flexibility around these new modalities.

Innovations also are accelerating in pharmaceutical distribution and delivery. Non-traditional players have entered the direct-to-consumer pharmacy space to improve efficiency and reimagine customer experience, including non-healthcare players such as Amazon (through its acquisition of PillPack in 2018) and, increasingly, traditional healthcare players as well, such as UnitedHealth Group (through its acquisition of DivvyDose in September 2020). COVID-19 has further accelerated innovation in patient experience and new models of drug delivery, with growth in tele-prescribing, 17 McKinsey COVID-19 Consumer Survey conducted June 8, 2020 and July 14, 2020. a continued shift toward delivery of pharmaceutical care at home, and the emergence of digital tools to help manage pharmaceutical care. Select providers have also begun to expand in-home offerings (for example, to include oncology treatments), shifting the care delivery paradigm toward home-first models.

A range of new models to better integrate pharmaceutical and medical care and management are emerging. Payers, particularly those with in-house pharmacy benefit managers, are using access to data on both the medical and pharmacy benefit to develop distinctive insights and better coordinate across pharmacy and medical care. Technology providers, together with a range of both traditional and non-traditional healthcare players, are working to integrate medical and pharmaceutical care in more convenient settings, such as the home, through access to real-time adherence monitoring and interventions. These players have an opportunity to access a broad range of comprehensive data, and advanced analytics can be leveraged to more effectively personalize and target care. Such an approach may necessitate cross-segment partnerships, acquisitions, and/or alliances to effectively integrate the many components required to deliver integrated, personalized, and higher-value care.

Creating and capturing new value

These materials are being provided on an accelerated basis in response to the COVID-19 crisis. These materials reflect general insight based on currently available information, which has not been independently verified and is inherently uncertain. Future results may differ materially from any statements of expectation, forecasts or projections. These materials are not a guarantee of results and cannot be relied upon. These materials do not constitute legal, medical, policy, or other regulated advice and do not contain all the information needed to determine a future course of action. Given the uncertainty surrounding COVID-19, these materials are provided “as is” solely for information purposes without any representation or warranty, and all liability is expressly disclaimed. References to specific products or organizations are solely for illustration and do not constitute any endorsement or recommendation. The recipient remains solely responsible for all decisions, use of these materials, and compliance with applicable laws, rules, regulations, and standards. Consider seeking advice of legal and other relevant certified/licensed experts prior to taking any specific steps.

Before the COVID-19 pandemic, our research indicated that profits for healthcare organizations were expected to be harder to earn than they have been in the recent past, which has been made even more difficult by COVID-19. New entrants and incumbents who can reimagine their business models have a chance to find ways to innovate to improve healthcare and therefore earn superior returns. The opportunity for incumbents who can reimagine their business models and new entrants is substantial.

Institutions will be expected to do more than align with growth segments of healthcare. The ability to innovate at scale and with speed is expected to be a differentiator. Senior leaders can consider five important questions:

  • How does my business model need to change to create value in the future healthcare world? What are my endowments that will allow me to succeed?
  • How does my resource (for example, capital and talent) allocation approach need to change to ensure the future business model is resourced differentially compared with the legacy business?
  • How do I need to rewire my organization to design it for speed? 18 De Smet A, Pacthod D, Relyea C, and Sternfels B, “ Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era ,” June 26, 2020, McKinsey.com.
  • How should I construct an innovation model that rapidly accesses the broader market for innovation and adapts it to my business model? What ecosystem of partners will I need? How does my acquisition, partnership, and alliances approach need to adapt to deliver this rapid innovation?
  • How do I prepare my broader organization to adopt and scale new innovations? Are my operating processes and technology platforms able to move quickly in scaling innovations?

There is no question that the next few years in healthcare are expected to require innovation and fresh perspectives. Yet healthcare stakeholders have never hesitated to rise to the occasion in a quest to deliver innovative, quality care that benefits everyone. Rewiring organizations for speed and efficiency, adapting to an ecosystem model, and scaling innovations to deliver meaningful changes are only some of the ways that helping both healthcare players and patients is possible.

Emily Clark is an associate partner in the Stamford office. Shubham Singhal , a senior partner in McKinsey’s Detroit office, is the global leader of the Healthcare, Public Sector and Social Sector practices. Kyle Weber is a partner in the Chicago office.

The authors would like to thank Ismail Aijazuddin, Naman Bansal, Zachary Greenberg, Rob May, Neha Patel, and Alex Sozdatelev for their contributions to this article.

This article was edited by Elizabeth Newman, an executive editor in the Chicago office.

Explore a career with us

Related articles.

The great acceleration in healthcare: Six trends to heed

The great acceleration in healthcare: Six trends to heed

When will the COVID-19 pandemic end?

When will the COVID-19 pandemic end?

Healthcare innovation: Building on gains made through the crisis

Healthcare innovation: Building on gains made through the crisis

A digital transformation is an overhauled, digital-first approach to how a business is run. The digital world is evolving quickly with new products and digital technologies that require vigorous digital transformation initiatives. The main goal of a digital transformation is to use new digital technologies throughout all aspects of a business and improve business processes. By using AI, automation, and hybrid cloud, among others, organizations can drive intelligent workflows, streamline supply chain management, and speed up decision-making.

Why digital transformation?

Unlike a typical business transformation, implementing digital transformation is not a one-time fix. Rather, it’s the start of a new foundation for a business that seeks to keep up with new technology and evolve with the ever-changing outside world.

In a moment’s notice, customer expectations and market conditions can change. Your business needs to be prepared to handle such an event. Staying up to date with the digital age is among the benefits of digital transformation. By updating a legacy system your business is embracing digital innovation and new business models.

Digital transformation can be a risky move, but if done well it can streamline your business onto a path for a better, smarter future. A recent analysis from the IBM Institute for Business Value asked company executives “[…] how they use data to create performance baselines and to understand how applying technologies—for example, cloud, AI, generative AI—might materially improve performance in the parts of the business that generate income.” What they found was that 9 out of 10 organizations interviewed “[…] do not have a way to represent how they deliver their most important products and services from end to end, nor do they have the performance data necessary to create a baseline to improve that performance. (They might do so if pushed, but they are not being asked to do it).”

An example of a company that underwent a major retail transformation is Amazon, which changed the way consumers shop for everyday items. There are several examples, or case studies, of successful digital transformation across a range of different industries. These real-world examples give a glimpse into the digital transformation process for both stakeholders and business leaders.

Digital transformation technologies

Before exploring digital transformation examples, it’s important to understand the diverse digital technologies available. Companies are becoming more reliant on data analytics and automation to enable profitability and customer satisfaction. There are many different digital technologies that might play a role in an organization’s digital transformation strategy, depending on the needs of the business. Specifically, there are a few digital tools that are continuing to evolve and show that they’ll be a fixture to digital transformation into the future.

Artificial intelligence – Artificial intelligence , or AI, is a digital technology that uses computers and machines to mimic the human mind’s capabilities. The AI learns from what it sees around it and when combined with automation can infuse intelligence and real-time decision-making into any workflow. The AI technology drives innovation to smart products and a more pointed focus on customer and user experience. An example is machine learning, which enables a computer or machine to mimic the human mind. Another is augmented reality technology that uses algorithms to mimic digital information and understand a physical environment.

Hybrid cloud – The hybrid cloud environment creates a single, optimal cloud for public cloud private cloud and on-premises infrastructure. It takes an organization’s on-premises data into a private cloud infrastructure and then connects it to a public cloud environment, hosted by a public cloud provider. Examples include AWS® , Google Cloud Services® ,  IBM Cloud® , and Microsoft Azure® .

The cloud computing infrastructure bridges a gap for cloud resources, making it easier and scalable for an organization to run every workload. This operating model increases operational efficiency and can better organize big data. An organization is not locked into a single platform with hybrid cloud, which sets up an organization for a successful digital transformation.

Blockchain – A blockchain is a digitally distributed, public ledger or record of electronic transaction. The main benefit of blockchain is total transaction transparency for those employees who require it and security from others who didn’t need access. This type of trust is an example of how blockchain can foster a stronger community, internal and externally.

Other technologies include:

  • Internet of Things (IoT)
  • Microservices
  • Digitization

Examples of digital transformation  

Modernized tools example: frito-lay.

Snack food giant Frito-Lay decided to optimize its productivity across its systems and improve service to retailers with Salesforce. Frito-Lay’s digital transformation efforts enlisted the help of user-focused experts from  IBM® Consulting  and the IBM Salesforce practice . Together, they worked to expand the Frito-Lay e-commerce strategy and make a more streamlined workflow for frontline employees.

Through extensive user research done by IBM Garage™ and IBM iX® team of experts, the Frito-Lay and IBM team came to two solutions built on Salesforce platforms. These two solutions created modernized tools for both retailers and employees. ‘Snacks to You’ is an advanced e-commerce solution that helps small businesses simplify the ordering and delivery process. ‘Sales Hub’, powered by Salesforce Service Cloud, is the second solution the team came up with and works to simplify logistics on the back-end. These solutions focused on optimization for the users and required a rethinking of how processes were done in the past.

Transformed technology infrastructure example: Water Corporation

Water Corporation, a state-owned entity that is located in Western Australia, maintains pipelines that deliver water, wastewater, and drainage services to a region that spans roughly 2.6 million km. The organization relies on SAP architecture to run its critical resources and recognized its on-premises servers that were supporting the SAP infrastructure were out of date. Instead of purchasing more hardware, the organization shifted to a cloud-based strategy.

Water Corporation selected IBM Consulting to plan this extensive migration. They chose Amazon Web Services (AWS) to power its critical SAP systems and IBM watsonx™ Code Assistant technology to yield code recommendations for automation functions supporting the migration and upkeep of the SAP environment.

IBM Consulting and Water Corporation estimated the new automation strategy saves the business roughly 1,500 hours of manual labor that is associated with infrastructure support. It also cuts carbon emissions by roughly 150 metric tons per year. The shift to a new SAP environment was a digital transformation that required immense coordination between Water Corporation and its partners, but yielded a worthwhile result that will ultimately set them up for a successful digital future.

Re-imagined customer experience example: Camping World

The COVID-19 pandemic caused an unprecedented number of customers for Camping World , the leading retailer of recreational vehicles (RVs), revealing some issues with their existing infrastructure. The company, which relies on its contact centers and customer service, found holes in its agent management and response times as business grew.

Camping World sought out  IBM® Consulting  to address its concerns. The answer was a human-centered solution to allow its operation to scale. The retailer ended up settling on a cognitive AI tool that was developed by IBM to modernize Camping World call centers for a better customer journey from start to finish. The solution is powered by IBM watsonx™ Assistant and is integrated with a conversational cloud platform called LivePerson. By expanding the question and telephone capabilities Camping World is better suited to serve its customers, sending the simpler questions to the virtual agent, named Arvee rather than a live agent. Arvee frees up the live agents for more complex questions while still providing all customers with the answers that they need.

Intelligent, data integration platform example: State Bank of India

State Bank of India (SBI) saw its customer base grow their wealth and found they were looking for new opportunities. The SBI is the country’s largest public sector bank and the financial foundation of India. Therefore, it was important that the institution remains ahead of the curve and lean into the digital future.

To create a mobile financial marketplace, the bank used the IBM Garage Methodology. Bank representatives worked closely with IBM Garage designers, architects, and analysts to collaborate across all disciplines of the project and analyze metrics. The bank’s vision was a one-stop-shop that addressed all a customer’s needs in the form of a mobile app. They termed it ‘YONO,’ or ‘You Only Need One’. IBM worked with SBI to design workloads and build a security system that might support the solution and further enhance the customer experience.

Digital transformation and IBM

While digital transformations require investment and ultimately change how an organization conducts its business, there are many benefits if done correctly. Those organizations that succeed at digital transformations will stay ahead of the competition, drive better relationships with employees and customers and be better prepared for what may come.

Emerging technology and social forces are creating new customer experiences that result in changing expectations and demands and disrupt business models. IBM Consulting professional services for business help organizations navigate an increasingly dynamic, complex and competitive world. We help them align digital transformation with their business strategy to create competitive advantage and a clear focus on business impact.

More from Business transformation

Customer service vs. customer experience: key differentiators.

5 min read - In many organizations, but not all, customer service is treated as part of the customer experience. Both are interested in driving customer satisfaction, but they focus on different parts of the customer journey to achieve it. So what are the key differences in customer service vs. customer experience? And why do both matter for your business? Customer experience, or CX, is a holistic accounting of customers’ perceptions resulting from all their interactions with a business or brand, whether online or…

6 ways to elevate the Salesforce experience for your users

3 min read - Customers and partners that interact with your business, as well as the employees who engage them, all expect a modern, digital experience. According to the Salesforce Report, nearly 90% Of buyers say the experience a company provides matters as much as products or services. Whether using Experience Cloud, Sales Cloud, or Service Cloud, your Salesforce user experience should be seamless, personalized and hyper-relevant, reflecting all the right context behind every interaction. At the same time, Salesforce is a big investment,…

Retail technology and frontline workers: Delivering unforgettable customer experiences

2 min read - The retail industry employs millions of people, and next-generation retail employees will be significantly impacted by the rise of generative AI.  I'm a firm believer that exceptional brick-and-mortar retail, no matter the product category, stands on three essential pillars for success: Proud, well-trained, engaged team members with clear career paths A brand deeply rooted in strong cultural values A backbone of superior technology Missing any of these elements? The magic just doesn't happen. Enter IBM. Their approach to leveraging technology…

Power Virtual Server 2024 edition–Iterative improvements reduce total cost of ownership

4 min read - IBM® has big plans for the Power Virtual Server offering, which is IBM’s virtual machine as-a-service offering based on IBM Power® Systems for AIX®, IBM i and Linux workloads. Over the last year, there’s been a concerted effort to make the offering even more compelling to clients looking to move their Power Systems workload to the cloud. Unlike an on-premises server purchase, a cloud service improves iteratively as new features are delivered behind the scenes and the savings quickly add…

IBM Newsletters

This web app uses cookies to compile statistic information of our users visits. By continuing to browse the site you are agreeing to our use of cookies. If you wish you may change your preference or read about cookies

Or explore sectors:

Information technology.

70 matching canvas

Evernote Business Model

Oracle business model, bing business model, wipro technologies business model, cmi business model, foxconn business model.

Vizologi is a platform powered by artificial intelligence that searches, analyzes and visualizes the world’s collective business model intelligence to help answer strategic questions, it combines the simplicity of business model canvas with the innovation power of mash-up method .

See how Vizologi works View all features  

Before downloading the canvas, we would like to invite you to our newsletter, from time-to-time we will send you curated content about business strategy

  • IT (Information Technology) Business
  • Amortization & Depreciation Schedule
  • Balance Sheet
  • Bank Financial Models
  • Black-Scholes Models
  • Capital Budgeting
  • Cash Flow Statement
  • Corporate Finance
  • Cost Analysis
  • Debt Schedule
  • Discounted Cash Flow (DCF)
  • Excel Add-Ins
  • Financial Forecasting Models
  • Financial Markets
  • Financial Modeling
  • Financial Projections Models
  • Income Statement
  • Industry Specific Financial Models
  • Inventory Management
  • Investment Banking
  • Leveraged Buyout (LBO)
  • Mergers & Acquisitions (M&A)
  • ModelOff Samples
  • Monte Carlo Simulation
  • Net Present Value (NPV)
  • Options Pricing & Valuation
  • Private Equity
  • Project Finance Models
  • Real Estate Financials
  • Renewable Energy Financials
  • Restaurant Finance
  • Retail Finance
  • Return On Investment (ROI)
  • Scenario Analysis
  • Sensitivity Analysis
  • Solar Energy Project Finance
  • Stock Valuation
  • Three Statement Financial Models
  • Valuation Models
  • Venture Capital
  • Weighted Average Cost Of Capital (WACC)
  • Wind Energy Project Finance
  • 2x2 Four Quadrant Matrix
  • Ansoff Matrix
  • Asset Management
  • Balanced Scorecard
  • BCG Frameworks
  • BCG Growth-Share Matrix
  • Business Development
  • Business Model Canvas -
  • Business Plans
  • Change Management
  • Competitor Analysis
  • Consulting Interview
  • Consulting Proposals
  • Crisis Management
  • Due Diligence
  • Executive Summary
  • KPI Dashboards
  • Logistics & Supply Chain Management
  • Macroeconomics
  • Management Consulting
  • Market Analysis
  • Market Research
  • Market Sizing
  • McKinsey 7-S Framework
  • McKinsey Frameworks
  • Microeconomics Excel
  • Mission Statement
  • Nine-Box Matrix
  • Operations Management
  • Porter's Five Forces
  • Post-Merger Integration (PMI)
  • Problem Solving
  • SMART Goals
  • Strategic Analysis
  • Strategic Management
  • Strategic Partnerships
  • Strategic Planning
  • SWOT Analysis
  • Value Chain Analysis
  • Value Creation
  • Waterfall Charts
  • Cohort Analysis
  • Design Thinking Process
  • E-Commerce Financial Models
  • Entrepreneurship
  • Growth Hacking
  • Lean Startup
  • Lifetime Value (LTV)
  • Marketplaces
  • Mobile App Finance
  • Raising Capital
  • Software-as-a-Service (SaaS)
  • Startup Boards
  • Startup Business Plans
  • Startup Cap Tables
  • Startup Financial Models
  • Startup Investors
  • Startup Lifestyle
  • Startup Pitch Decks
  • Startup Studios
  • Startup Valuation
  • Advisor Agreements
  • Articles Of Incorporation
  • Code Of Conduct
  • Employee Contracts
  • Intellectual Property (IP) Agreements
  • Internal Audit
  • Non-Disclosure Agreements
  • Operating (or Founder) Agreements
  • Sales & Purchase Agreements (SPA)
  • Shareholder Agreements
  • Startup Term Sheets
  • 4Ps & 7Ps Marketing Mix
  • Advertising
  • Branding & Brand Management
  • Business Email
  • Business Networking
  • Corporate Communication
  • Customer Acquisition
  • Customer Centric Design
  • Customer Success
  • Digital Marketing
  • Growth Marketing
  • Inbound Marketing
  • Industry Landscape Analysis
  • Lead Generation
  • Marketing Plans
  • Net Promoter Score (NPS)
  • Outbound Sales
  • Personal Branding
  • Product Launch
  • Product Life Cycle
  • Public Relations
  • Public Speaking
  • Search Engine Optimization (SEO)
  • Social Media
  • Strategic Marketing
  • Career Advancement
  • Chief Of Staff
  • Corporate Event Management
  • Cross Cultural Management
  • CV (Curriculum Vitae) / Resume
  • Decision Making
  • Effective Communication
  • Gantt Charts
  • Health & Safety
  • Human Resources
  • Job Descriptions
  • Organizational Charts
  • Organizational Culture
  • Performance Reviews & Appraisals
  • Personal Development
  • Productivity
  • Project Management
  • Quality Management Plans
  • Remote Work
  • Task Management
  • Team Management
  • Training Excel
  • Artificial Intelligence (AI)
  • Blockchain Technology
  • Cryptocurrency
  • Cybersecurity
  • Data Analysis
  • Data Mining
  • Data Science
  • Digital Privacy
  • Electrical Engineering
  • Genetic Engineering
  • Google Sheets Models
  • Machine Learning
  • Mathematical
  • Neural Networks
  • NFT Investment
  • Physics Excel Models
  • Product Management
  • Python In Excel Models
  • Research And Development (R&D)
  • Statistical
  • Dissertation Writing
  • Essay Writing
  • Exam Revision
  • Primary Education
  • Student Life
  • Study Note-Taking
  • University Research
  • Coronavirus (COVID-19)
  • Dynamic Arrays
  • Eloquens Authors
  • Miscellaneous
  • Politics & Politicians

IT (Information Technology) Business models 1 comment

New Category! Thinking of a Best Practice which could fit in this category? Tell us

IT (Information Technology) Business

Information Technology

Information Technology Industry

• Computers and technology play a major role in the work place and are constantly changing. This is made more difficult by the fact that each individual company has different needs and requirements of its technology. The Information Technology (IT) Industry covers the use of computers, storage and the process of securing and exchanging electronic data. The term IT refers to the use of computer technology to manage information and is usually used when talking about enterprise operations. IT can refer to physical equipment like hardware, computer networking, data analysis, operating systems, and different applications to preform functions. The biggest problem that faces the Information Technology Industry is security. The sharing of private information over a network of people is common but there is always a risk with doing so.

• IT is a popular industry that continues to grow in these technologically advancing workplaces. The Bureau of Labor Statistics believes that there will be a 15.4% growth rate in jobs in the information technology industry from 2014 to 2024. This will produce over three hundred thousand jobs in the USA.

• Information technology is important in business because it ensures that all the departments work well together. IT plays a major role in streamlining business processes and the automation of sensitive information. In management, it helps managers adapt to new technology and computer packages. Normally, managers must undergo training for information technology. In education, information technology has allowed students to reach information faster.

Some Information Technology Sectors:

• Database Management

• HER Implementation

• Data Exchange

• Information Management in an Electronic Environment

• Systems Development

For more information, refer to these links:

What is the Future of Information Technology

Importance of Information Technology

eloqoon share idea

Have a IT (Information Technology) Business model to share?

Learn more about digital publishing

eloqoon search

Can't find what you are looking for?

Or browse through the Catalog

eloqoon search someone

Think of someone who could publish?

%product_add_cart_title%

Contribute: $USD help %product_add_cart_label%

No thanks, I just want to %product_skip_link%

eloqoon computer

View all Eloqoons

New to Eloquens? Create an Account

Create an account

eloquens mascot

Why should I sign up with LinkedIn? help

Are you using this Best Practice for...

  • Business help
  • Consulting help
  • Student / Non-Profit help

Our next-generation model: Gemini 1.5

Feb 15, 2024

The model delivers dramatically enhanced performance, with a breakthrough in long-context understanding across modalities.

SundarPichai_2x.jpg

A note from Google and Alphabet CEO Sundar Pichai:

Last week, we rolled out our most capable model, Gemini 1.0 Ultra, and took a significant step forward in making Google products more helpful, starting with Gemini Advanced . Today, developers and Cloud customers can begin building with 1.0 Ultra too — with our Gemini API in AI Studio and in Vertex AI .

Our teams continue pushing the frontiers of our latest models with safety at the core. They are making rapid progress. In fact, we’re ready to introduce the next generation: Gemini 1.5. It shows dramatic improvements across a number of dimensions and 1.5 Pro achieves comparable quality to 1.0 Ultra, while using less compute.

This new generation also delivers a breakthrough in long-context understanding. We’ve been able to significantly increase the amount of information our models can process — running up to 1 million tokens consistently, achieving the longest context window of any large-scale foundation model yet.

Longer context windows show us the promise of what is possible. They will enable entirely new capabilities and help developers build much more useful models and applications. We’re excited to offer a limited preview of this experimental feature to developers and enterprise customers. Demis shares more on capabilities, safety and availability below.

Introducing Gemini 1.5

By Demis Hassabis, CEO of Google DeepMind, on behalf of the Gemini team

This is an exciting time for AI. New advances in the field have the potential to make AI more helpful for billions of people over the coming years. Since introducing Gemini 1.0 , we’ve been testing, refining and enhancing its capabilities.

Today, we’re announcing our next-generation model: Gemini 1.5.

Gemini 1.5 delivers dramatically enhanced performance. It represents a step change in our approach, building upon research and engineering innovations across nearly every part of our foundation model development and infrastructure. This includes making Gemini 1.5 more efficient to train and serve, with a new Mixture-of-Experts (MoE) architecture.

The first Gemini 1.5 model we’re releasing for early testing is Gemini 1.5 Pro. It’s a mid-size multimodal model, optimized for scaling across a wide-range of tasks, and performs at a similar level to 1.0 Ultra , our largest model to date. It also introduces a breakthrough experimental feature in long-context understanding.

Gemini 1.5 Pro comes with a standard 128,000 token context window. But starting today, a limited group of developers and enterprise customers can try it with a context window of up to 1 million tokens via AI Studio and Vertex AI in private preview.

As we roll out the full 1 million token context window, we’re actively working on optimizations to improve latency, reduce computational requirements and enhance the user experience. We’re excited for people to try this breakthrough capability, and we share more details on future availability below.

These continued advances in our next-generation models will open up new possibilities for people, developers and enterprises to create, discover and build using AI.

Context lengths of leading foundation models

Highly efficient architecture

Gemini 1.5 is built upon our leading research on Transformer and MoE architecture. While a traditional Transformer functions as one large neural network, MoE models are divided into smaller "expert” neural networks.

Depending on the type of input given, MoE models learn to selectively activate only the most relevant expert pathways in its neural network. This specialization massively enhances the model’s efficiency. Google has been an early adopter and pioneer of the MoE technique for deep learning through research such as Sparsely-Gated MoE , GShard-Transformer , Switch-Transformer, M4 and more.

Our latest innovations in model architecture allow Gemini 1.5 to learn complex tasks more quickly and maintain quality, while being more efficient to train and serve. These efficiencies are helping our teams iterate, train and deliver more advanced versions of Gemini faster than ever before, and we’re working on further optimizations.

Greater context, more helpful capabilities

An AI model’s “context window” is made up of tokens, which are the building blocks used for processing information. Tokens can be entire parts or subsections of words, images, videos, audio or code. The bigger a model’s context window, the more information it can take in and process in a given prompt — making its output more consistent, relevant and useful.

Through a series of machine learning innovations, we’ve increased 1.5 Pro’s context window capacity far beyond the original 32,000 tokens for Gemini 1.0. We can now run up to 1 million tokens in production.

This means 1.5 Pro can process vast amounts of information in one go — including 1 hour of video, 11 hours of audio, codebases with over 30,000 lines of code or over 700,000 words. In our research, we’ve also successfully tested up to 10 million tokens.

Complex reasoning about vast amounts of information

1.5 Pro can seamlessly analyze, classify and summarize large amounts of content within a given prompt. For example, when given the 402-page transcripts from Apollo 11’s mission to the moon, it can reason about conversations, events and details found across the document.

Reasoning across a 402-page transcript: Gemini 1.5 Pro Demo

Gemini 1.5 Pro can understand, reason about and identify curious details in the 402-page transcripts from Apollo 11’s mission to the moon.

Better understanding and reasoning across modalities

1.5 Pro can perform highly-sophisticated understanding and reasoning tasks for different modalities, including video. For instance, when given a 44-minute silent Buster Keaton movie , the model can accurately analyze various plot points and events, and even reason about small details in the movie that could easily be missed.

Multimodal prompting with a 44-minute movie: Gemini 1.5 Pro Demo

Gemini 1.5 Pro can identify a scene in a 44-minute silent Buster Keaton movie when given a simple line drawing as reference material for a real-life object.

Relevant problem-solving with longer blocks of code

1.5 Pro can perform more relevant problem-solving tasks across longer blocks of code. When given a prompt with more than 100,000 lines of code, it can better reason across examples, suggest helpful modifications and give explanations about how different parts of the code works.

Problem solving across 100,633 lines of code | Gemini 1.5 Pro Demo

Gemini 1.5 Pro can reason across 100,000 lines of code giving helpful solutions, modifications and explanations.

Enhanced performance

When tested on a comprehensive panel of text, code, image, audio and video evaluations, 1.5 Pro outperforms 1.0 Pro on 87% of the benchmarks used for developing our large language models (LLMs). And when compared to 1.0 Ultra on the same benchmarks, it performs at a broadly similar level.

Gemini 1.5 Pro maintains high levels of performance even as its context window increases. In the Needle In A Haystack (NIAH) evaluation, where a small piece of text containing a particular fact or statement is purposely placed within a long block of text, 1.5 Pro found the embedded text 99% of the time, in blocks of data as long as 1 million tokens.

Gemini 1.5 Pro also shows impressive “in-context learning” skills, meaning that it can learn a new skill from information given in a long prompt, without needing additional fine-tuning. We tested this skill on the Machine Translation from One Book (MTOB) benchmark, which shows how well the model learns from information it’s never seen before. When given a grammar manual for Kalamang , a language with fewer than 200 speakers worldwide, the model learns to translate English to Kalamang at a similar level to a person learning from the same content.

As 1.5 Pro’s long context window is the first of its kind among large-scale models, we’re continuously developing new evaluations and benchmarks for testing its novel capabilities.

For more details, see our Gemini 1.5 Pro technical report .

Extensive ethics and safety testing

In line with our AI Principles and robust safety policies, we’re ensuring our models undergo extensive ethics and safety tests. We then integrate these research learnings into our governance processes and model development and evaluations to continuously improve our AI systems.

Since introducing 1.0 Ultra in December, our teams have continued refining the model, making it safer for a wider release. We’ve also conducted novel research on safety risks and developed red-teaming techniques to test for a range of potential harms.

In advance of releasing 1.5 Pro, we've taken the same approach to responsible deployment as we did for our Gemini 1.0 models, conducting extensive evaluations across areas including content safety and representational harms, and will continue to expand this testing. Beyond this, we’re developing further tests that account for the novel long-context capabilities of 1.5 Pro.

Build and experiment with Gemini models

We’re committed to bringing each new generation of Gemini models to billions of people, developers and enterprises around the world responsibly.

Starting today, we’re offering a limited preview of 1.5 Pro to developers and enterprise customers via AI Studio and Vertex AI . Read more about this on our Google for Developers blog and Google Cloud blog .

We’ll introduce 1.5 Pro with a standard 128,000 token context window when the model is ready for a wider release. Coming soon, we plan to introduce pricing tiers that start at the standard 128,000 context window and scale up to 1 million tokens, as we improve the model.

Early testers can try the 1 million token context window at no cost during the testing period, though they should expect longer latency times with this experimental feature. Significant improvements in speed are also on the horizon.

Developers interested in testing 1.5 Pro can sign up now in AI Studio, while enterprise customers can reach out to their Vertex AI account team.

Learn more about Gemini’s capabilities and see how it works .

Get more stories from Google in your inbox.

Your information will be used in accordance with Google's privacy policy.

Done. Just one step more.

Check your inbox to confirm your subscription.

You are already subscribed to our newsletter.

You can also subscribe with a different email address .

Related stories

What is a long context window.

MSC_Keyword_Cover (3)

How AI can strengthen digital security

Shield

Working together to address AI risks and opportunities at MSC

AI Evergreen 1 (1)

How we’re partnering with the industry, governments and civil society to advance AI

NWSL_Pixel_Hero

Pixel is now the Official Mobile Phone of the National Women’s Soccer League

Bard_Gemini_Hero

Bard becomes Gemini: Try Ultra 1.0 and a new mobile app today

Let’s stay in touch. Get the latest news from Google in your inbox.

  • Newsletters

Google’s Gemini is now in everything. Here’s how you can try it out.

Gmail, Docs, and more will now come with Gemini baked in. But Europeans will have to wait before they can download the app.

  • Will Douglas Heaven archive page

In the biggest mass-market AI launch yet, Google is rolling out Gemini , its family of large language models, across almost all its products, from Android to the iOS Google app to Gmail to Docs and more. You can also now get your hands on Gemini Ultra, the most powerful version of the model, for the first time.  

With this launch, Google is sunsetting Bard , the company's answer to ChatGPT. Bard, which has been powered by a version of Gemini since December, will now be known as Gemini too.  

ChatGPT , released by Microsoft-backed OpenAI just 14 months ago, changed people’s expectations of what computers could do. Google, which has been racing to catch up ever since, unveiled its Gemini family of models in December. They are multimodal large language models that can interact with you via voice, image, and text. Google claimed that its own benchmarking showed that Gemini could outperform OpenAI's multimodal model, GPT-4, on a range of standard tests. But the margins were slim. 

By baking Gemini into its ubiquitous products, Google is hoping to make up lost ground. “Every launch is big, but this one is the biggest yet,” Sissie Hsiao, Google vice president and general manager of Google Assistant and Bard (now Gemini), said in a press conference yesterday. “We think this is one of the most profound ways that we’re going to advance our company’s mission.”

But some will have to wait longer than others to play with Google’s new toys. The company has announced rollouts in the US and East Asia but said nothing about when the Android and iOS apps will come to the UK or the rest of Europe. This may be because the company is waiting for the EU’s new AI Act to be set in stone, says Dragoș Tudorache, a Romanian politician and member of the European Parliament, who was a key negotiator on the law.

“We’re working with local regulators to make sure that we’re abiding by local regime requirements before we can expand,” Hsiao said. “Rest assured, we are absolutely working on it and I hope we’ll be able to announce expansion very, very soon.”

How can you get it? Gemini Pro, Google’s middle-tier model that has been available via Bard since December, will continue to be available for free on the web at gemini.google.com (rather than bard.google.com). But now there is a mobile app as well.

If you have an Android device, you can either download the Gemini app or opt in to an upgrade in Google Assistant. This will let you call up Gemini in the same way that you use Google Assistant: by pressing the power button, swiping from the corner of the screen, or saying “Hey, Google!” iOS users can download the Google app, which will now include Gemini.

Gemini will pop up as an overlay on your screen, where you can ask it questions or give it instructions about whatever’s on your phone at the time, such as summarizing an article or generating a caption for a photo.  

Finally, Google is launching a paid-for service called Gemini Advanced. This comes bundled in a subscription costing $19.99 a month that the company is calling the Google One Premium AI Plan. It combines the perks of the existing Google One Premium Plan, such as 2TB of extra storage, with access to Google's most powerful model, Gemini Ultra, for the first time. This will compete with OpenAI’s paid-for service, ChatGPT Plus, which buys you access to the more powerful GPT-4 (rather than the default GPT-3.5) for $20 a month.

At some point soon (Google didn't say exactly when) this subscription will also unlock Gemini across Google’s Workspace apps like Docs, Sheets, and Slides, where it works as a smart assistant similar to the GPT-4-powered Copilot that Microsoft is trialing in Office 365.

When can you get it? The free Gemini app (powered by Gemini Pro) is available from today in English in the US. Starting next week, you’ll be able to access it across the Asia Pacific region in English and in Japanese and Korean. But there is no word on when the app will come to the UK, countries in the EU, or Switzerland.

Gemini Advanced (the paid-for service that gives access to Gemini Ultra) is available in English in more than 150 countries, including the UK and EU (but not France). Google says it is analyzing local requirements and fine-tuning Gemini for cultural nuance in different countries. But the company promises that more languages and regions are coming.

What can you do with it? Google says it has developed its Gemini products with the help of more than 100 testers and power users. At the press conference yesterday, Google execs outlined a handful of use cases, such as getting Gemini to help write a cover letter for a job application. “This can help you come across as more professional and increase your relevance to recruiters,” said Google’s vice president for product management, Kristina Behr.

Or you could take a picture of your flat tire and ask Gemini how to fix it. A more elaborate example involved Gemini managing a snack rota for the parents of kids on a soccer team. Gemini would come up with a schedule for who should bring snacks and when, help you email other parents, and then field their replies. In future versions, Gemini will be able to draw on data in your Google Drive that could help manage carpooling around game schedules, Behr said.   

But we should expect people to come up with a lot more uses themselves. “I’m really excited to see how people around the world are going to push the envelope on this AI,” Hsaio said.

Is it safe? Google has been working hard to make sure its products are safe to use. But no amount of testing can anticipate all the ways that tech will get used and misused once it is released. In the last few months, Meta saw people use its image-making app to produce pictures of Mickey Mouse with guns and SpongeBob SquarePants flying a jet into two towers. Others used Microsoft’s image-making software to create fake pornographic images of Taylor Swift .

The AI Act aims to mitigate some—but not all—of these problems. For example, it requires the makers of powerful AI like Gemini to build in safeguards, such as watermarking for generated images and steps to avoid reproducing copyrighted material. Google says that all images generated by its products will include its SynthID watermarks. 

Like most companies, Google was knocked onto the back foot when ChatGPT arrived. Microsoft’s partnership with OpenAI has given it a boost over its old rival. But with Gemini, Google has come back strong: this is the slickest packaging of this generation’s tech yet. 

Artificial intelligence

Ai for everything: 10 breakthrough technologies 2024.

Generative AI tools like ChatGPT reached mass adoption in record time, and reset the course of an entire industry.

What’s next for AI in 2024

Our writers look at the four hot trends to watch out for this year

  • Melissa Heikkilä archive page

OpenAI teases an amazing new generative video model called Sora

The firm is sharing Sora with a small group of safety testers but the rest of us will have to wait to learn more.

Deploying high-performance, energy-efficient AI

Investments into downsized infrastructure can help enterprises reap the benefits of AI while mitigating energy consumption, says corporate VP and GM of data center platform engineering and architecture at Intel, Zane Ball.

  • MIT Technology Review Insights archive page

Stay connected

Get the latest updates from mit technology review.

Discover special offers, top stories, upcoming events, and more.

Thank you for submitting your email!

It looks like something went wrong.

We’re having trouble saving your preferences. Try refreshing this page and updating them one more time. If you continue to get this message, reach out to us at [email protected] with a list of newsletters you’d like to receive.

IMAGES

  1. What is a Business Model & Top Examples

    information technology business model example

  2. Digital Business Models Map: The Most Popular Digital Business Model

    information technology business model example

  3. Information Technology (IT) Industry Business Excel Model

    information technology business model example

  4. Digital Business Models Map: The Most Popular Digital Business Model

    information technology business model example

  5. Business Model Canvas Examples

    information technology business model example

  6. Digital business model definition

    information technology business model example

VIDEO

  1. CCS2301 Business Analysis and Software Design S5

  2. Business Analysis Testimonial Video by Obianuju

  3. Business Process Model with Innovator for Business Analyst

  4. Technological Developments

  5. Start a career in Information Technology

  6. CCS2301 Business Analysis and Software Design S11

COMMENTS

  1. 50 Types of Business Models (2022)

    Check out 50 different types of business models, along with examples of companies for better insight. Try to adopt these business models in your startup. Table of Contents 1. Franchise model 2. Multi-sided platform model 3. Cash machine business model 4. Freemium business model 5. Subscription business model 6. Peer-to-peer business model 7.

  2. The 7 Most Successful Business Models Of The Digital Era

    Often these business models are used in combination - for example, a software provider might make a "freemium" version available, supported by advertising revenue, while also offering a...

  3. Business Models, Information Technology, and the Company of the Future

    Information technology has, of course, played a major role in reshaping business models over the past 20 years. The basic social conventions of the preceding Industrial Era were all built around ...

  4. 5 Business Models to Consider When Starting a Tech Company

    To help launch your venture on the right track, here's a breakdown of a business model's eight components and five examples to consider. Free E-Book: So You Want to Be an Entrepreneur: How to Get Started Access your free e-book today. DOWNLOAD NOW The 8 Components of a Startup Business Model

  5. Business Model Canvas for Software Company or Tech Startup

    The Business Model Canvas is a visual template for identifying and organizing different elements of your business model. It's divided the canvas into nine sections, each responsible for the most vital business elements of every organization. Customer Segments. Key Partnerships. Key Activities.

  6. Business Models, Information Technology, and the Company of ...

    Time 23 to read Professor Haim Mendelson addresses the evolution of business models while considering the huge impact of the advances in information technology. Taking a long-term view, he sees information technologies continuing to evolve along their current performance trajectory.

  7. Reimagining the technology operating model

    Changing them—for example, to accommodate a faster speed to market or the platform economy—can require intentional focus. We propose that technology leaders consider five key elements for reimagining the technology operating model.

  8. Tech trends reshaping the future of IT and business

    It is easy to become numb to the onslaught of new technologies hitting the market, each with its own promise of changing (more often "revolutionizing") the business world. But our analysis of some of the more meaningful tech trends lays out a convincing case that something significant is happening. 1 Michael Chui, Roger Roberts, and Lareina Yee, "McKinsey Technology Trends Outlook 2022 ...

  9. Seven key lessons on technology and business

    Through detailed conversations with nearly 700 chief information officers at some of the world's largest companies, as well as through our own experience helping businesses execute complex technology transformations, we've synthesized our findings into a "tech forward" model of guidelines and best practices. This model includes the following ten "plays," or domains of activity:

  10. Business Models and Technology

    Centres Business Models and Technology Our People Research About Business Models and Technology While technological advances provide opportunities to innovate and develop successful businesses, it is the managers' business model choices that are critical to realise such potential.

  11. Transforming the Business Model for IT Services

    Transforming the Business Model for IT Services. Slowing growth, loss of momentum, maybe even a mid-life crisis: The IT services industry is showing all the signs of a maturing industry. For many providers, competitive dynamics have turned for the worse, eating into profits and making it all too easy for customers to recompete existing ...

  12. IT Operating Models: 4 Examples for Digital Enterprises

    Trend #1: Full Integration As the name suggests, a full integration model requires that IT is present in every aspect of the business.

  13. Four Business Model Innovation Examples for the Modern Enterprise

    1 - Disruptive Innovation. Disruptive innovation is a well-known approach to business model innovation that has been successfully employed by major companies like Uber and Netflix. This approach involves creating a new business model that disrupts an existing market by creating a new technology or product that enables a company to offer ...

  14. 8 free IT strategic planning templates and examples for CIOs

    These free IT strategic planning templates and examples of IT strategic plans will help CIOs develop strategies that become powerful tools for the business. What goes into IT strategic planning: Free templates and in-depth guides SOURCE #1: Gartner Inc. OFFERING: Build an IT Strategic Plan That You Will Actually Use

  15. 11 of the Most Popular Digital Business Models and ...

    Take Amazon, Google, and Facebook, for example. These giants wouldn't exist without the internet. The digital business model is new to the market. An example of this would be when you request transportation via an app (such as Uber or Lyft) that matches your request with a driver. To become a customer, you need to use a digital channel.

  16. The Information Technology Business Model

    Abstract. Business models are intended to provide a framework for strategic planning, promoting the alignment of the agency's IT plans with its overall mission and encouraging clarification of ...

  17. 84 Examples of a Technology Business

    A technology business is a business that generates or captures value from technology. Historically, this was synonymous with computer hardware and software companies. With the commercialization of the internet in the 1990s, technology businesses grew to include ecommerce and a plethora of digital business models.

  18. IT Operating Model

    Digital transformation puts entirely new demands and expectations on your systems and architecture. We'll help you modernize your entire technology stack to become a true technology-enabled leader. Our Technology Operating Model helps you accelerate performance by focusing on your people, through training, organizational structure, governance ...

  19. 21 Different Types of Business Models With Examples

    1. Freemium Business Model Freemium is a combination of the words free and premium. Companies following the freemium business model offer the most basic version of their product or service for free to entice consumers to purchase the more advanced features, capabilities, or add-ons of the product or service in the future.

  20. Next-generation business models creating value

    The future of healthcare: Value creation through next-generation business models. The healthcare industry in the United States has experienced steady growth over the past decade while simultaneously promoting quality, efficiency, and access to care. Between 2012 and 2019, profit pools (earnings before interest, taxes, depreciation, and ...

  21. Mastering IT Business Cases: An In-depth Example

    IT Business case example provides an example of performing a cost-benefit analysis to support funding of IT investments. This case considers key business considerations and provides benefits, risks, and cost-based justification for the proposed solution. This example also assesses the business impact of the selected technology and creates a ...

  22. Digital transformation examples

    The AI technology drives innovation to smart products and a more pointed focus on customer and user experience. An example is machine learning, which enables a computer or machine to mimic the human mind. Another is augmented reality technology that uses algorithms to mimic digital information and understand a physical environment.

  23. 30 Emerging Technologies That Will Guide Your Business Decisions

    Private 5G is based on 3GPP technology and spectrum to provide connectivity, optimized services and security for enterprises. Scalable vector databases provide vector search capability and are used in conjunction with LLMs to apply the model's ability to respond to searches with information that is custom or specific to an enterprise or domain.

  24. Information Technology Business Models

    70 matching canvas Oracle Business Model Oracle Corporation (Oracle), incorporated on October 9, 2005, provides products and services that address all ... View Canvas program technology actualization software computer collaboration computer enterprise software information technology Bing Business Model

  25. IT (Information Technology) Business models

    • Database Management • HER Implementation • Data Exchange • Information Management in an Electronic Environment • Systems Development For more information, refer to these links: What is the Future of Information Technology Information Technology Importance of Information Technology arrow_downward Read more

  26. Introducing Gemini 1.5, Google's next-generation AI model

    A note from Google and Alphabet CEO Sundar Pichai: Last week, we rolled out our most capable model, Gemini 1.0 Ultra, and took a significant step forward in making Google products more helpful, starting with Gemini Advanced.Today, developers and Cloud customers can begin building with 1.0 Ultra too — with our Gemini API in AI Studio and in Vertex AI.

  27. Google's Gemini is now in everything. Here's how you can try it out

    A more elaborate example involved Gemini managing a snack rota for the parents of kids on a soccer team. Gemini would come up with a schedule for who should bring snacks and when, help you email ...