Traditional design methods for digital learning environments are based on rigid approaches, which need substantial resource investments, and do not take into account the needs of sparse learning communities. FODEM (FOrmative DEvelopment Method) is an action-research-oriented method consisting of three components: (1) needs analysis, (2) implementation, and (3) formative evaluation. First, in needs analysis both theory and practice is used to define specifications. Secondly, in implementation fast prototyping in authentic learning settings is emphasized. Thirdly, formative evaluation is used to evaluate the use of the environment. The feasibility of the method was illustrated by applying it to two digital learning environments; LEAP (LEArning Process companion) and ViSCoS (Virtual Studies of Computer Science) in sparsely populated region of Finland.