In a couple previous posts I highlighted that digital business models are characterized by low cost of revenue, resulting in low marginal costs. Therefore, they can generate profit margins that are not possible with traditional business models.
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 structurein 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.