Emerging Business Models in the Digital Economy

BLOG 21/08/2020

The concept of business models is the architecture of a business or the way a firm finds a systematic way to unlock long-term value through monetization strategies. There are different types of economies that support business, but conversations today mainly focus on the digital economy. 

A digital economy is a range of economic activities that use digitized information and knowledge as key factors of production. The economy has introduced new and innovative business models that occasionally are parallel to traditional business models. Furthermore, these models from time to time complement and overlap, for example, payment services can be described under cloud computing or e-commerce. Reinforced by a continuously advancing information technology industry, business operations today are substantially large scale and executed over long distances. 

Recognizing the changing patterns, the adaptation of existing business architectures is key to preventing a state of obsolesce.

This article analyzes a few considerations in the adaptation of business architecture. It’s imperative to note that success is based on the relevance of the strategy to the individual business. They include;

High-Frequency Trading (HFT)

HFT uses sophisticated technology, including complex algorithms, to trade securities at high speed. It was thrust into the spotlight after the release of Michael Lewis’s book Flash Boys in 2014.

Large numbers of orders that are characteristically small are sent into the markets at high speed, with round-trip execution times measured in microseconds. Therefore, a trader holds a position open for no more than a few seconds at a time.

HFT firms make profits from small price changes exploited through the frequently executed trades, whereas traders profit based on the speed of execution. It is a system highly sensitive to latency.

Implementation and execution of successful trading strategies depend on several factors, including the development of algorithms for trading, as well as writing programs to monitor losses and performance.

Electronic Commerce (E-Commerce)

E-commerce is the conducting of commercial transactions electronically. It is used to order and deliver products and services through conventional channels (indirect or offline e-commerce) or completely electronically (direct or on-line e-commerce) over any kind of computer network. Possible networks include; the internet and an extranet (a private platform that uses internet technology), Transmission Control Protocol (TCP)/Internet Protocol (IP), and an electronic data interchange (EDI) network.

The market relies heavily on the maximizing of conversion rate to gain more revenue and profit. Therefore, understanding the various types of e-commerce helps in; selection of a suitable model for an individual business, the building of the site, selection of a Content Management System (CMS) and eventually unlocking of untapped revenue streams. They include;

Business-to-Consumer Models (B2C): An organization following a B2C business model sells services or products to end-users. Examples of B2C models are click-and-mortar businesses that supplement existing consumer-facing business with online sales, pure-play online vendors with no physical stores or offline presence, and manufacturers that use an online business to allow customers to order and customize directly.

Business-to-Business Models (B2B): The vast majority of e-commerce are transactions in which an organization sells products or services to another organization. This includes online versions of traditional transactions, such as a wholesaler purchasing a consignment of goods online and selling to clients from retail outlets.

Consumer-to-Consumer Models (C2C): Businesses involved in C2C e-commerce play the role of intermediaries, helping individual consumers to sell or rent their assets (such as residential property, cars) by publishing their information on the website and facilitating transactions. C2C commonly takes place on online marketplaces such as Craigslist, eBay, Grailed, and even parts of Amazon that allow consumers to sell to consumers.

Payment Services

Paying for online transactions traditionally required the provision of a significant amount of financial information to a seller. A high degree of trust that was not always present with an unknown seller was required, amid increased fraudulent activities using the information provided.

Today online payment service providers address this concern by providing a secure way to transact online using Artificial Intelligence (AI) and Machine Learning. The service providers act as an intermediary (typically using a software-as-a-service model) between online purchasers and sellers.

Contactless payments using credit cards or smartphones are some of the latest innovations for online payment transactions.

Application Stores

An application store is a digital distribution platform for mobile applications. Users can view and review information, browse, purchase, automatically download and install the application on their devices.

App Annie estimates that consumers will download a total of 197bn in 2020 rising to 353bn by 2021.

As stats on internet users show growth, usage of online services, and the development of applications has equally skyrocketed.  Businesses today are creating a mobile application to tap into the presented opportunities, for example, financial institutions.

Online Advertising

Advertising today is technocentric and data-driven and has given rise to new payment calculation methods. The methods include; Cost-per-Mille (CPM) - advertisers pay when views or clicks on their ad reach one thousand, Cost-per-Click (CPC) - advertisers pay when users click their ad, and Cost-per-Action (CPA) - advertisers pay when action is registered e.g. purchase.

Online advertising acts as a key driver for the digital economy, promoting business growth and paving way for digital innovativeness.

The most successful advertising firms combine a large user base with sophisticated algorithms to collect, analyze, and process user data facilitating effective targeted advertising.

Cloud Computing

It is the provision of standardized, configurable, on-demand, online computing services, which can include software, computing, data management and storage, and using shared virtual and physical resources including servers, applications, and networks.

The services are offered and used exclusively via defined interfaces and protocols and include infrastructure e.g. computing power, memory, platforms, and software.  

Customers can access cloud-computing services using various types of devices provided there is internet connectivity. Most cloud computing services fall into four broad categories: Platform as a Service (PaaS), Serverless Computing, Infrastructure as a Service (IaaS), and Software as a Service (SaaS). These are sometimes referred to as a cloud-computing stack.

PaaS: Provides a computing platform and programming tools as a service for software developers. Therefore, they create without setting up or managing the underlying infrastructure of storage, servers, network, operating systems, and databases. Software resources provided are embedded in the code of software apps meant to be used by consumers.

Serverless Computing: Overlapping with PaaS, the focus is on building application functionality without spending time managing the infrastructure and servers required. The term ‘serverless’ is somewhat misleading, as there are servers providing backend services, but the cloud provider manages capacity planning, setup, and server management for the client. The architectures are highly scalable and event-driven, and resources utilized when a specific trigger or function occurs.

IaaS: Service providers offer servers, networks, storage, operating systems, and computers - physical or more often virtual machines (VMs) to users on a pay-as-you-go basis. Infrastructure as a Service clouds offer other resources such as virtual-machine disk-image library, raw (block), firewalls, load balancers, file-based storage, Internet Protocol (IP) addresses, software bundles, and Virtual Local Area Networks (VLANs). The client does not control or manage the underlying cloud infrastructure, but has control over the deployed applications, operating system, and storage, and may enjoy limited control of a select networking component e.g. host firewalls.

SaaS: A common form of cloud computing in which the provider allows the user to connect to and use cloud-based applications from various devices over the internet. It can be provided to B2B or B2C on a pay-as-you-go basis. Common examples are office tools such as Microsoft Office 365, email, and calendaring. The service provider manages underlying middleware, infrastructure, app software, and data and the appropriate service agreement ensures security and availability of the data and application as well. SaaS supports businesses to run at minimal upfront cost.

Unlike the old software vendor models, the code is executed remotely on the servers, thereby freeing the user of the need to upgrade when a new version is available. The executed version is always the latest, meaning new features are instantaneous to the market.

Participative-Networked Platforms

They are intermediaries that enable consumers to collaborate and contribute to rating, extending, developing, commenting on, and distributing user-created content. User-Created Content (UCC) comprises various forms of media and creative works e.g. visual, audio, written created by users. Different distribution platforms have been created, including text-based collaboration formats such as group-based aggregation, social bookmarking sites, and wikis, virtual worlds, and podcasting.

In general, User-Created Content is created without the expectation of profit. The participative platform featuring the UCC, however, may monetize the UCC in a variety of ways e.g. voluntary contributions, licensing of content and technology to third parties, charging viewers for access on a per-item or subscription basis, selling products and services to the community, advertising-based models, and selling user data to market research or other businesses.

In conclusion conversations on digitization cannot be watered down, since the digital economy brings along benefits and efficiencies regarded as vital catalysts transforming businesses positively. Understanding the digital economy and positively embracing its complexities, will help businesses to adopt, adapt, and capitalize on available opportunities.

The growth of your business, and its ability to tap into opportunities available in a rapidly changing environment and demographics, is plausible when the existing architecture is flexible and parallel to current patterns or trends.  

Jeff Bezos the founder of Amazon and I quote, 'In today's era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that's it.'

 

Georgina Musembi

Kenya School of  Revenue Administration. (KESRA)

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