Data Is the New Currency

Traditionally, business models revolve around a fairly basic concept: a person or organization exchanges some form of currency for products or services. In most cases, the value placed on a transaction results from supply and demand; the scarcer or more crucial an item, the more people are willing to pay for it. Says Irene Ng, professor of marketing and service systems at the University of Warwick in the U.K., "These exchanges are rooted in the physical world."

However, digital technologies fundamentally alter the equation. The Internet, cloud computing, mobile devices, and connected systems–essentially the Internet of Things–are redefining the concept of availability and scarcity. They also are introducing new ways to track and measure things–whether the exact amount of a product or service consumed, or the number of miles a vehicle travels–which, in turn, introduces new business models around structured concepts such as free, freemium, ad-supported freemium, microtransactions, and more.

A new era is emerging. "How we think about money and things is undergoing a fundamental transformation," Ng says. "Digital technology eliminates barriers and friction that exists in the physical world. Over the coming years, it will redefine governments and industries in profound ways."

Dollars and Sense

Digital technology alters financial and monetary transactions in a couple of crucial ways, Ng says.

First, it introduces liquefaction, a process that transforms a physical thing into a virtual data point and makes it widely available. For example, Airbnb, ZipCar, Uber, and Lyft all transform empty and available space in structures or vehicles into data that helps match a product with a user at the precise moment it is needed. In the past, a service such as Airbnb, which allows individuals to rent out all or part of their homes, or the car-sharing service Zipcar, could not exist because, while the space (empty cars, empty rooms) and demand was available, the data and infrastructure to match parties and manage the transactional system was not in place.

The second concept, Ng says, is density, which concerns the accumulation of data to the point where a person or computer algorithm can make a decision and act on it, often in non-conventional ways. This might mean giving away a parking app free in order to collect user data that could be tapped by urban planners or other government agencies to build more efficient infrastructure and place facilities in optimal locations. By giving away the app for free, adoption increases and data volume grows–in the end, creating a more accurate model and rewarding consumers for their participation. This also might mean seeding physical products; for example, Amazon offers ad-supported Kindle devices at a discount–partly to obtain underlying usage data and develop a more robust platform.

Search engines such as Google and Bing use liquefaction and density to generate value within marketing and advertising. They essentially give information away for free, in order to collect data about users, which they can use to fine-tune their services, or sell the information to advertisers. Bing actually pays "members" in virtual currency to conduct searches; the currency may be exchanged for actual goods and services.

Others, such as auto insurance company Metromile, offer a pay-for-use model. In Metromile’s case, insurance fees are based on miles driven, as verified by the Metronome mileage-tracking device that plugs into the vehicle, rather than a flat monthly fee.

To be sure, with data easy to obtain, use, and scale in the digital world, alternative business models are going mainstream. The marginal cost of making an app or service available for free (or supporting it through advertising) with limited functionality makes sense. Hence, the emergence of free, freemium, and ad-supported freemium offerings; in many cases, users will eventually opt to pay for more robust features and more data.

It is also possible to break products, services, and other types of transactions down to a granular level and charge based on actual usage. While individual transactions may only cost a few cents, or even less than a penny, when millions of these tiny transactions take place, the seller can rake in huge amounts of money.

Notes Lanny Cohen, global chief technology officer at consulting firm Capgemini: "The old rules no longer apply. The marketplace is driven by a new type of customer dynamics. Data has become a currency."

New Models Emerge

Digital technologies are redefining the relationship between consumers and businesses. Today, many firms offer an introductory free version of their software–sometimes with ads or with limited features–as a way to spur adoption and build a user base, says Chris Richter, doctoral candidate at Lappeenranta University of Technology in Finland. While micro-transactions, virtual currencies, and other alternative models continue to gain traction for a variety of reasons, Richter says digital technology also creates new ways to steer around conventional business and transaction models.

A good example is the emergence of shared economies. "In a connected world, people have the opportunity to bypass companies and conventional business transactions," Richter says. For example, there is no need for everyone to have a bicycle, or a full set of tools; a group can buy and own a few of each and share them as needed–or charge for them on an "per-use" basis. Richter created an online platform based on the concept called Animus, which aims to create a connected neighborhood or community. Participants pay a small fee to join the service and connect with others to pool a wide variety of tasks, partly to save time and spend more time with family and friends.

Governments and businesses are taking notice; everything from business models to tax collection methods is under the microscope. Says Ng: "These emerging models are igniting debates that extend into politics and across society. Old boundaries no longer apply. Markets and systems are changing, and the level of disruption will only grow in the years ahead."

 

Digital Business Models at a Glance

 

Affiliate — This model allows a company to use data collected from users to provide selling opportunities to partners. For example, a person who tags a song on an app such as Shazam may be presented with an opportunity to buy the song or buy concert tickets, thus resulting in a small fee for the app company.

Free — Some businesses offer software or other products for free in order to promote adoption. Others give away a product because the data collected from users can be sold to brokers and buyers.

Freemium — In some cases, businesses offer a free version of software tools or games, while offering access to more advanced features or capabilities through an in-app purchase or a subscription.

Ad-supported freemium — This approach offers a free version with advertisements, but also a paid version free of ads.

Microtransactions — Small transactions, often measured in cents, which take place based on usage or specific purchases.

 

Subscriptions –Although this model is nothing new, it is possible to deliver a greater array of products through a subscription model via a digital platform.

Samuel Greengard is an author and journalist based in West Linn, OR.