What is the digital economy? Definition, importance, and examples
From food delivery apps to streaming services, consumers are increasingly hooked on the digital economy. Even luxury brands, long dependent on physical items as markers of exclusivity (think Tiffany’s iconic baby-blue box), are dabbling in the metaverse and partnering with video game companies to offer select players coveted avatar “skins.”
As the lines between offline and online continue to blur, it’s critical for marketers to take note and keep up. By the end of this article, you’ll have a better grip on the digital economy, its pros and cons, how others are using it to their advantage, and how your brand can embrace it to achieve your goals.
In this post, we’ll cover:
- What is the digital economy?
- Why digital is becoming core to our traditional economy
- Characteristics of the digital economy
- Advantages of the digital economy
- Disadvantages of the digital economy
- Digital economy examples
What is the digital economy?
The term “digital economy” dates back to the 1990s when the internet was still an add-on to analog products and services. The focus then was on how emerging digital channels might impact consumers and businesses in the broader economy. Today, the digital economy is essentially any economic activity that occurs online. It’s really a data-driven economy informed by the ability to collect, use, and analyze massive amounts of machine-readable information to deliver more personalized and meaningful experiences. The digital economy allows companies to create new business models and economic value in ways we couldn’t imagine 30 years ago. In fact, at least two-thirds of executives say that digital business initiatives play a significant role in achieving their top business objectives.
Why digital is becoming core to our traditional economy
A good way to think about the difference between a digital economy and a traditional economy is the rise of Netflix.
In the late ’90s, video rental giant Blockbuster reigned supreme with nearly 9,000 stores across the United States. For millions of Americans, it was the only way to watch movies after they left theaters. People would walk into a physical store, grab a hard copy of “Terminator II,” and pay with cash, check, or credit card to borrow some quality entertainment.
In 1997, Reed Hastings founded Netflix, which made movie rentals infinitely more convenient. People could create a digital account, order up to three titles at a time, have copies mailed to their homes within days, and — arguably the best part — keep those films for as long as they liked. Netflix made late fees a thing of the past. Blockbuster had a chance to buy Netflix, but it passed on that opportunity. Hasting’s innovative company soon added streaming, which forever changed the media landscape.
The differences between a traditional economy and a digital economy come down to paper and manual processes versus tech and automation, physical products versus digital products and services, brick-and-mortar versus ecommerce, and cash versus cashless payments.
Characteristics of the digital economy
The digital economy is multifaceted and always evolving. With so many opportunities to jump in, it can be challenging to find your way. If you’re not sure how to best participate, consider some of its defining characteristics.
Businesses collect data on their customers and anyone who visits their site, allowing them to personalize experiences and recommend content. For example, leading fashion and luxury companies are integrating data into their planning, merchandising, and supply-chain processes to maintain their edge. Such strategies can help unlock the insights needed to adapt and re-engage customers, especially when people are tightening their budgets.
Smartphones have changed the way we shop and live, allowing us to bring the internet wherever we go — even in our dreams. The latest Apple Watch can track individual sleep stages, including REM, sending data to your iPhone where you can view it within the Apple Health app, a giant repository for health and fitness data. It includes details not just about that night’s sleep but previous data at the weekly, monthly, and six-month levels. You can get smarter about nearly everything when you pair mobile with the “Internet of Things” (IoT). As common products like refrigerators and cars become smart, our opportunities to engage with the economy expand far beyond the devices in our hands.
Blends the best of humans and machines
From chatbots on websites to product suggestions based on previous purchases, automation saves companies time and money, and it has the possibility to deliver exceptional customer experiences. Leading fashion brands are using artificial intelligence (AI) to improve product discovery, product forecasting, trend forecasting, and virtual merchandising. AI-driven retail lets brands meet modern customer demands by personalizing the shopping experience.
Connects the world on a granular level
The digital economy is built on hyperconnectivity (the growing interconnectedness of people, organizations, and machines) that results from the internet, mobile technology, and IoT. According to Visa, by 2026, when Gen Z fully matures, nearly 60% of the global adult population will have been born in a world where the internet was an essential, constant feature of daily life.
According to Silicon Valley entrepreneur, investor, and futurologist Peter Diamandis, we’ll experience more progress in the next decade than in the past 100 years. Such rapid leaps are credited to emerging technologies, including cloud and edge computing, IoT connectivity, AI, and blockchain. Companies need to keep pace with “experience frontiers” (like those aimed at younger generations) by exploring the potential of advanced capabilities, including real-time customer data management, journey orchestration, and AI-decisioning.
Advantages of the digital economy
The digital economy offers potential for companies and consumers to connect more quickly, more efficiently, and more meaningfully to the products, services, and experiences they love. Consider the following perks and how some brands are reaping these benefits.
In a traditional economy, product choice is limited by geographic boundaries. If someone wants a certain brand of jeans and it’s not sold in their small town, they’ll have to order by catalog or wait until they visit a city where those pants are available. Online, anyone can shop at a variety of retailers and compare prices, product specifications, and reviews to get exactly what they want, when they want it.
More data for everyone
Nike is a masterclass in tapping data to power customer relationships. For example, Nike members who took exercise classes created in partnership with Megan Thee Stallion later received emails with personalized recommendations of apparel inspired by the hip-hop artist. Such mobile connections helped drive Nike’s digital revenue up 23% in the first quarter of fiscal 2023. According to the company’s most recent earnings report, digital channels and applications now account for 26% of Nike’s revenues.
Efficiency gains by leaps and bounds
Like Nike, businesses that participate in the digital economy can achieve big things with automation. By targeting marketing efforts to high-value leads, companies can spend less to reach their audience. With robotics and related technologies, businesses have the potential to boost productivity and create new and better products and services.
People power the digital economy
Many worry that automation means robots will soon replace humans in the workforce. The truth is more complicated — and offers more hope for the future. The key is a commitment to lifelong learning, which requires the public and private sectors to work together and ensure access to public education and skills retraining. Much of the automation of the future may be driven by enterprising new businesses replacing or challenging established companies that find it harder to change.
Disadvantages of the digital economy
While the digital economy creates tremendous new opportunities, its fast-changing nature prompts questions about cybersecurity, privacy, sustainability, economic disparities, and persistent digital divides.
For example, many communities worldwide face stiff hurdles to realizing the full potential of the digital economy. According to the United Nations Conference on Trade and Development, only 20% of people in the least developed countries (LDCs) use the internet — and when they do, it’s typically at relatively low download speeds and with a relatively high price tag attached.
Where the digital economy is thriving, companies are increasingly held accountable for how they collect and use consumer data. Privacy concerns prompted the impending demise of cookies from Chrome browsers, which holds massive implications for marketing and advertising. The challenge for brands is delivering personalized experiences without violating customer trust. According to the Adobe 2022 Trust Report, once trust is broken, 55% of consumers say they will never give the brand their business again.
Increased security threats
Companies need to take extra measures to protect customer data, especially as cybersecurity threats grow more complex. In August 2022, Twilio, a San Francisco-based provider of two-factor authentication and communication services, fell victim to a sophisticated social engineering attack targeting employees. The breach, which affected 209 customer accounts, was part of a wider campaign from a threat actor tracked as “0ktapus” that targeted at least 130 organizations, including Mailchimp and Cloudflare.
To avoid serious fallout from similar attacks, look for solutions that build security into their platforms — making it possible to deliver personalized experiences while also complying with global security, privacy, and governance standards.
Lack of competition
Advanced security can give companies an edge in a digital economy that is, by nature, incredibly competitive. In a traditional economy, consumer options were limited by geographic constraints. Now, people can easily comparison shop on their phones while online or in stores.
The downside to this new reality is how a select number of large enterprises can leverage their resources to dominate the market. Consider the perks of shopping on Amazon and how, while there are many different brands represented, brick-and-mortar merchants and small businesses struggle to compete with their pricing and shipping. With the right digital experience platform, you can more quickly and accurately connect with customers to earn their attention and loyalty.
While the digital economy lends itself to more sustainable practices (think fewer commuters heading to and from the office thanks to an increase in remote work), data centers and data transmission networks account for 2% of global electricity demand, and data storage is expected to produce 14% of all global emissions by 2040. Then there is the excess waste from products being shipped and discarded in a culture increasingly accustomed to instant gratification.
Digital economy examples
Many established companies are leading in the digital economy, including the above-mentioned Nike, Amazon, and Netflix. You can find additional inspiration in The Home Depot, which unified metrics in online and offline channels to improve ecommerce, and US Bank, which uses AI for automation to customize outreach for services such as retirement plans and bank loans, increasing both conversion and customer retention. Walgreens Boots Alliance also goes above and beyond by expanding its drive-thru offerings beyond prescriptions and ensuring that customers who purchase items online to pick up in store will receive their order within 30 minutes or less.
Get started with the digital economy
This is an exciting time to get involved in the digital economy. No matter how savvy you are, there’s so much potential to harness emerging technologies to push your business further ahead. As you reflect on the characteristics, advantages, and examples of the digital economy, evaluate how well your business is harnessing the digital tools available today. Perhaps there are areas like data management, security, or automation that you’re not currently using but could begin exploring with some expert guidance.
To learn more about how the digital economy is performing, check out the latest Adobe Digital Price Index, which turns data into powerful insights.