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CAUTION – HOT! Business Model Generation and the Unique Properties of Digital Business Models

Barbara Hoisl – barbara@barbarahoisl.com

Product Management Festival, Sept 2013, Zurich -‐ @ProdMgmtF, #pmf13

Even if you are in a traditional industry … © BMW Group

… a digital business model may be (part of) your future

Source: Crunchbase, August 2013

“Welcome to the new family circle -‐ Part location, part communication, all awesome. Life360 keeps millions of families connected, no matter what chaos life throws their way.“

“ChargePoint is the largest network of electric vehicle charging spots worldwide. Empowering the future one charge at a time.”

“ParkatmyHouse … is an innovative online marketplace founded to connect home and business owners who would like to earn money from renting their space with drivers in need of a convenient, safe and cost-‐effective place to park.“

“MyCityWay produces self-‐learning, highly personalized mobile interfaces and apps that guide residents and visitors through their daily experiences in cities across the world.“

Modern product strategy frameworks recognize this

You’re holding a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises. It’s a book for the…

written byAlexander Osterwalder & Yves Pigneur

co-created byAn amazing crowd of 470 practitioners from 45 countries

designed byAlan Smith, The Movement

(Re)-‐invent product strategy

… embracing traditional and digital business models

Patterns include ➞ Long Tail

➞ Multi-‐Sided Platforms

➞ FREE & Freemium

… some of them work best with a digital business model

Evolution of Business Models

Software is Eating the World Marc Andreessen, August 2011

Sometimes it‘s obvious …

Vinyl -‐> CD -‐> mp3

... sometimes it‘s harder to see

Sometimes it’s harder to see – as software creates new markets or blurs current market boundaries

Urbanization • Car is nuisance • Public transport available

Software-‐Enabled Mobility • Sharing • Multi-‐modal

Example: Mobility Market

Mobility Market ➞  Urbanization ➞  Cars ownership is a nuisance: parking, high

cost & maintenance effort, traffic jams

➞  Public transport is available

➞  Software-‐enabled, next generation mobility concepts ➞  Sharing: car sharing, ride sharing ➞  Multi-‐modal mobility services: flexibly

combining different modes of transportation

Urbanization Software-‐Enabled Mobility

Evolution of business models

product

•  Food •  Household goods •  Cars

physical

channel

It started here …

digital/virtual

•  Enterprise SW: SAP, Oracle

•  Shrink wrap SW: video games …

product

physical

channel

digital/virtual

product

•  Shoes & clothing •  CDs, DVDs, hardcopy books

•  Consumer electronics

physical

physical virtual: Internet

channel

digital/virtual

•  Google, Twitter, Zynga, Facebook

•  Music, Books, Movies •  SaaS, Cloud SW, Apps

product

physical

channel Based on Blank, Dorf: The Startup Owner’s Manual Vol. 1

What’s the impact?

digital/virtual

product

physical

Physical Product -‐ Internet Channel

Customer Value

Long Tail Location-‐independent Price

Market Impact

Disrupt traditional retail Strengthen niche vendors: on-‐/offline

Profitability Similar to physical channel before disruption

digital/virtual

product

physical

Digital Product -‐ Software, Internet, Social Media

Customer Value

Automation, global collaboration Communication, entertainment, …

Market Impact “winner-‐take-‐all”

Profitability >> physical products

Digital Product – Content

Customer Value

Instant gratification: shopping 24/7 Access everywhere: small, mobile devices

Market Structure Disrupt analog content eco-‐system

Profitability New distribution of profit pool

Digital Business Models Are HOT!Why? Unique Cost Structure

Income Statement – Cost Structure Revenue

– Cost of Revenue

= Gross Profit

– Other OPEX

= Operating Profit

– Non-‐Operating Expenses

= Net profit

Income Statement – Cost Structure

Revenue The “top line”

– Cost of Revenue Revenue-‐related costs:

parts, labor, e. g. support engineers

= Gross Profit

– Other Operating Expenses e. g. R&D, sales & marketing

= Operating Profit Profit from ongoing operations

– Non-‐Operating Expenses Interest, taxes, ….

= Net profit The “bottom line”

25% 10%

Software, Internet Physical Product

Operating Profit Other OPEX Cost of Revenue

Typical Cost Structure – Mature Business

100,0%

Adobe Microsoft SAP GE Siemens BMW Walmart

Cost Structures of Mature, Successful Businesses

Digital business model Physical business model

Adobe Microsoft SAP GE Siemens BMW Walmart

Mio $ Mio $ Mio $ Mio $ Mio € Mio € Mio $

Total Revenue 4.404 77.849 16.223 147.359 78.296 76.848 469.162

Cost of Revenue 484 20.249 5.065 77.167 56.092 61.354 352.488

Gross Profit Margin % 89,0% 74,0% 68,8% 47,6% 28,4% 20,2% 24,9%

Cost of Revenue % 11,0% 26,0% 31,2% 52,4% 71,6% 79,8% 75,1%

Other OPEX % 62,2% 39,6% 43,7% 27,3% 19,4% 9,4% 18,9%

Operating Profit Margin % 26,8% 34,4% 25,1% 20,3% 9,0% 10,8% 5,9%

Net Profit Margin (%) 18,9% 28,1% 17,4% 9,3% 5,9% 6,7% 3,6%

FY2012, ending #

Nov 30, 2012

FY2013, #ending#

June 30, #2013

FY2012, ending

Dec 31, 2012

FY2012, ending

Dec 31, 2012

FY2012, ending

Sept 30, 2012

FY2012, ending

Dec 31, 2012

FY2013, ending#Jan 31,

-‐25,0%

100,0%

Facebook LinkedIn salesforce

Digital Biz Model in Growth Phase

100,0%

Google Apple Cisco

Special Cases

w/o Motorola

Digital Biz Model – high Cost of Revenue

Physical Biz Model – very low Cost of Revenue

-‐25,0%

100,0%

125,0%

Google excl. Motorola

Apple Cisco Facebook LinkedIn salesforce

Digital Biz Model – high Cost of Revenue

Physical Biz Model – very low Cost of Revenue

Digital Biz Model – still in growth phase

Special Cases – Side-‐by-‐Side Comparison

w/o Motorola

Cost Structures – Special Situations Digital Business

Model – high Cost of Revenue

Physical business model – very low Cost of Revenue

Digital business model – still in growth phase

Google excl.

Motorola Apple Cisco Facebook LinkedIn salesforce

in Mio $ in Mio $ in Mio $ in Mio $ in Mio $ in Mio $

Total Revenue 46.039 156.508 46.061 5.089 972 3.050

Cost of Revenue 17.176 87.846 17.852 1.364 126 684

Gross Profit Margin % 62,7% 43,9% 61,2% 73,2% 87,1% 77,6%

Cost of Revenue % 37,3% 56,1% 38,8% 26,8% 12,9% 22,4%

Other OPEX % 32,6% 8,6% 39,4% 62,6% 81,2% 81,2%

Operating Profit Margin %

30,0% 35,3% 21,9% 10,6% 5,8% -3,6%

Net Profit Margin (%) n.a. 26,7% 17,5% 1,0% 2,2% -8,9%

FY2012, ending#Dec 31,#

FY2012, ending#

Sept 29,#2012

FY2012, ending#

July 28, 2012

FY2012, ending#

Dec 31,#2012

FY2012, ending#

Dec 31,#2012

FY2013, ending#Jan 31,#

Why this Unique Cost Structure? It’s all about marginal cost

Why can(successful) digital business models be so profitable?

Root Cause: Low Cost of Revenue

No huge expenses for ➞ manufacturing:

labor, parts, inventory, …

➞  labor-‐intensive services

Implication: Low Marginal Cost

“Marginal cost is the change in total cost that arises when the quantity produced changes by one unit.” Wikipedia

Marginal cost = cost to serve an additional customer

Low marginal cost ➞  taking on additional customers

comes at close to no cost

What are implications for product managers?

Software product management is special 1.  No parts and inventory

2.  Freedom in pricing & business model design

3.  Margin build-‐up after break-‐even

No manufacturing, parts & inventory ➞ NO manufacturing cost

➞ NO supply chain management

➞ NO inventory cost

… means ➞  Freedom in pricing

➞  Flexible supply can support faster growth

Unprecedented freedom -‐pricing & business model ➞  Free trials ➞  Discounts for

home/student use

➞  FREE/ Freemium business models

Adobe Creative Cloud"

Margin build-‐up after break-‐even:

“Every additional dollar of revenue drops straight to the bottom line” (mostly)

So, let’s go digital! But wait: there are huge challenges

Digital markets are different

Market Challenge – “winner-‐take-‐all” ➞  revenue leader can invest

more: R&D, sales & marketing

➞ Can spend more there than followers have revenue!

“Winner-‐take-‐all” ➞  1 gorilla & a couple chimpanzees

“Winner-‐take-‐all” ➞  Virtuous cycle for the leader – Gorilla ➞  Sustainable for a couple

followers – Chimpanzees

➞  Hard life for the rest See: “Inside the Tornado” by Geoffrey A. Moore, 1995/2004

“Winner-‐take-‐all” gets worse with ➞ Vendor lock-‐in

➞ Network effects

Everything moves very fast

Going digital accelerates processes ➞ Eliminate delays in delivery

➞ Eliminate manufacturing

… requiring speed and agility ➞ Different processes

➞ Different values / trade-‐offs

Traditional Biz Models ➞ Cannot easily fix problems

after shipment

➞  Fewer products, infrequent releases

Digital Biz Models ➞ Can fix problems

after shipment

➞  Frequent releases, e.g. several per day

… and there’s a war for talent

Few tangible assets, value creation depends entirely on employees

“Our most valuable assets drive home every day.” Bill Gates

Talent shortage ➞  Technical roles

➞  Lack of Software Product Managers addressed by ISPMA: training & certification

Top talent has choice of employer ➞ Bar set high by leaders

& startup culture

➞ Cost structure: labor cost less of an issue

Not your standard corporate environment ➞  Growth opportunities / 20% time

➞  Clusters in metropolitan areas

➞  Meritocracy

➞  Express personality

Typical Employee expectations ➞  Growth opportunities

Remember: fast-‐moving markets! ➞  Challenging work assignments

➞  Opportunity to keep up with latest developments

➞  Pursue professional interests(e.g. 20% time)

➞  Preferred location: cluster of tech companies in metropolitan areas

➞  Experience exchange

➞  Ability to switch employers

➞  Easing dual career challenge

Typical Employee expectations ➞  Leadership style ➞  Meritocracy

➞  Rewarding performance

➞  Office environment ➞  Latest IT & productivity tools

➞  Tolerance for individuality/ personal quirks

➞  Casual dress code

➞  No clocking in/out

➞  Free (gourmet) food

Culture Code

That’s why many large corporations establish incubators and separate venture capital units

Conclusion

As “Software eats the world” …

… even if your heritage is in traditional business models, …

… there may be attractive digital business opportunities available to you.

However, do not underestimate the amount of change this requires!

Q&A Does this resonate with your experience?

Stories or observations you’d like to share?

Thank you Barbara Hoisl barbara@barbarahoisl.com | www.barbarahoisl.com

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