CAUTION – HOT! Business Model Generation and the Unique Properties of Digital Business Models Barbara Hoisl – [email protected] Product Management Festival, Sept 2013, Zurich @ProdMgmtF, #pmf13 © Pitopia, Wolfgang Demmel, 2010
CAUTION – HOT! Business Model Generation and the Unique Properties of Digital Business Models
Barbara Hoisl – [email protected]
Product Management Festival, Sept 2013, Zurich -‐ @ProdMgmtF, #pmf13
© Pitopia, Wolfgang Demmel, 2010
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
Marc Andreessen ©2008 -‐ Joi / Wikimedia Commons / CC-‐BY-‐2.0
Sometimes it‘s obvious …
Vinyl -‐> CD -‐> mp3
Gramofon ©2004 -‐ Tomasz Sienicki -‐ tsca / Wikimedia Commons / CC-‐BY-‐2.5
... 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
physical
channel
It started here …
digital/virtual
• Enterprise SW: SAP, Oracle
• Shrink wrap SW: video games …
product
• Food • Household goods • Cars
physical
physical
channel
digital/virtual
• Enterprise SW: SAP, Oracle
• Shrink wrap SW: video games …
product
• Food • Household goods • Cars
• Shoes & clothing • CDs, DVDs, hardcopy books
• Consumer electronics
physical
physical virtual: Internet
channel
digital/virtual
• Enterprise SW: SAP, Oracle
• Shrink wrap SW: video games …
• Google, Twitter, Zynga, Facebook
• Music, Books, Movies • SaaS, Cloud SW, Apps
product
• Food • Household goods • Cars
• Shoes & clothing • CDs, DVDs, hardcopy books
• Consumer electronics
physical
physical virtual: Internet
channel Based on Blank, Dorf: The Startup Owner’s Manual Vol. 1
What’s the impact?
digital/virtual
• Enterprise SW: SAP, Oracle
• Shrink wrap SW: video games …
• Google, Twitter, Zynga, Facebook
• Music, Books, Movies • SaaS, Cloud SW, Apps
product
• Food • Household goods • Cars
• Shoes & clothing • CDs, DVDs, hardcopy books
• Consumer electronics
physical
physical virtual: Internet
channel Based on Blank, Dorf: The Startup Owner’s Manual Vol. 1
Physical Product -‐ Internet Channel
Who
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
• Enterprise SW: SAP, Oracle
• Shrink wrap SW: video games …
• Google, Twitter, Zynga, Facebook
• Music, Books, Movies • SaaS, Cloud SW, Apps
product
• Food • Household goods • Cars
• Shoes & clothing • CDs, DVDs, hardcopy books
• Consumer electronics
physical
physical virtual: Internet
channel Based on Blank, Dorf: The Startup Owner’s Manual Vol. 1
Digital Product -‐ Software, Internet, Social Media
Who
Customer Value
Automation, global collaboration Communication, entertainment, …
Market Impact “winner-‐take-‐all”
Profitability >> physical products
Digital Product – Content
Who
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%
50%
15%
25%
75%
Software, Internet Physical Product
Operating Profit Other OPEX Cost of Revenue
Typical Cost Structure – Mature Business
25%
0,0%
25,0%
50,0%
75,0%
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,
2013
-‐25,0%
0,0%
25,0%
50,0%
75,0%
100,0%
Facebook LinkedIn salesforce
Digital Biz Model in Growth Phase
0,0%
25,0%
50,0%
75,0%
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%
0,0%
25,0%
50,0%
75,0%
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,#
2012
FY2012, ending#
Sept 29,#2012
FY2012, ending#
July 28, 2012
FY2012, ending#
Dec 31,#2012
FY2012, ending#
Dec 31,#2012
FY2013, ending#Jan 31,#
2013
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 © Pitopia, Harald Richter, 2008
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!
© Pitopia, Heinrich Fuchs, 2012
“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 [email protected] | www.barbarahoisl.com