As Steve Blank and Bob Dorf highlighted, this is happening in two distinct ways: by just moving to a digital sales channel (i.e. selling over the Internet), or by making the product itself digital.
In both cases, the transition is disruptive to the respective market, but I believe there’s a big, qualitative difference in the impact of the disruption – a difference that is easily overlooked but that is fundamental to company valuation.
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.
I have found that many startup founders and even some executives in larger technology companies are not familiar with the structure of the income statement, also known as profit & loss statement, or short P&L.
Why the P&L is Actually Quite Interesting
Every one who works on business model design or who is in a leadership role at a technology company should understand a few basic concepts about the P&L, because
the P&L provides information on the cost structure of a business
this helps you understand your own business, that of competitors (in case you have competitors that need to report their financials), and that of industry leaders who use a similar business model as you do (for inspiration)
the cost structure is very much intertwined with the business model of a company
and therefore, it helps you understand which freedoms you have (and don’t have) in evolving or changing your business model