Tag Archives: marginal cost

Moving to a Digital Business Model – Opportunities and Challenges

Caution HOT! Digital Business Models

© Pitopia, Wolfgang Demmel, 2010

At the first Product Management Festival that took place in Zurich last month, I had the opportunity to speak about a topic that has been fascinating me for a long time: how cost structures for digital products are fundamentally different from those for physical products – and the implications this has for business models, and even company culture:

“On one hand, digital business models present unique opportunities: they enable new pricing and revenue models, such as Freemium, and they can generate profit margins that are simply impossible with traditional models.

On the flip side, digital business models present unique challenges, for example the need for extreme speed and agility, cultural challenges, and a higher risk due to a tendency to promote “winner-take-all” market structures.

In conclusion: even if your company’s heritage is in the world of traditional (physical) business models, with “software eating the world”, there may be attractive digital business opportunities available to you. However, do not underestimate the amount of change that this switch demands from your organization.”

The slide deck is available here (PDF) – it highlights how the unique properties of digital business models are tied back to their cost structure, which is characterized by low variable cost and therefore, low marginal cost.

Special thanks go to Dirk Haun: Dirk is the author of “Presenting for Geeks” and he kindly helped me turn the initial draft into my first slide deck in the visual presentation style, following the rule of “one idea per slide”.

The PDF (extended slide deck)  includes these core presentation slides, plus additional pages that provide part of my “voice over” from the talk and the detailed cost structure data. These additional pages (obviously) do not follow the visual presentation style.

Please use the buttons below to activate connection to social media sites. To ensure your data privacy, links to social media are disabled initially.

How Digital Business Models are Truly Special – Implications of Low Marginal Cost

In my previous blog post I highlighted that digital business models have a fundamentally different cost structure than most traditional models – with a key difference being the low cost of revenue. Low cost of revenue in turn means low marginal cost, i.e. once everything is up and running, it doesn’t cost much more to serve additional customers.

Extremely low marginal cost has very interesting implications. Continue reading

Please use the buttons below to activate connection to social media sites. To ensure your data privacy, links to social media are disabled initially.

How Digital Business Models are Truly Special – Cost Structure

Over the last couple of years, the idea of consciously designing a business model has gained a lot of traction, fueled by the groundbreaking book Business Model Generation from 2010.

However, I believe it is very important to fully understand the impact that the business model has on the cost structure in the financial model – and vice versa.

Before looking at cost structures, let’s quickly wind back to the dot-com boom around the turn of the millenium: At that time, Microsoft was the undisputed leader of the global software market, generating fantastic profits based on its digital business model. As it became clar that the next wave of digital business models was about the Internet, the assumption was that every startup that did “something with the Internet” had a fair chance of becoming the next Microsoft.

Continue reading

Please use the buttons below to activate connection to social media sites. To ensure your data privacy, links to social media are disabled initially.