If markets are perfect, the marginal cost of a digital (online) product will be absolute zero. Marginal cost of a digital product comprises mainly of transaction and distribution costs. Most times, transaction costs (e.g. debit card fees) are expended whether offline or online, and consequently unavoidable. But distribution costs (e.g. the cost of serving an additional user in your blog) tend to near zero in the digital space.
It is this inherent feature of the marginal cost that makes online scaling easier. Scaling means adding more users, triggering network effects – a positive continuum where just having more users makes digital ecosystems more useful and valuable to users. The most important feature in Facebook is that it has many people therein; every other thing is sub-optimal in value. Yes, if you make a better website than Facebook but without the people, not many people will care.
As you examine this construct, it is evident that winning in the digital space will mean pricing at the lowest possible price factor. Interestingly, as the web advances, online markets will become more perfect. That means, marginal cost will tend to absolute zero; near zero marginal cost means free digital products for users.
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Platforms like Facebook and LinkedIn are already offering many services free because their distribution costs are near zero. So, already the web has attained an equilibrium point where distribution cost is moving towards absolute zero. However, the transaction cost remains stubbornly non-zero since many online transaction services like payment require fees.
In coming years, blockchain and cryptocurrency will make transaction cost to shift to near zero. When that happens, many services like banking, remittance and payment services which cannot be offered FREE today will become free. Those emerging “advanced apps” on the internet will make transaction cost disappear.
As you build, watch how this evolving paradigm will shape pricing of your digital products.
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Digital platforms have various sides of the market, from two to multi sides, the ‘free’ side is usually the users’ – the lynchpin anyway.
It’s about understanding where the money will come from, because in every free offering, someone is paying on your behalf, but the architecture is built in a way that you don’t need to bother about who pays for all the freebies you enjoy in the digital space.
A digital platform can even pay users, yet it’s all part of a grand plan for higher goals; only if you know how it works.
Business model innovation reaches its zenith in digital platform business, and sometimes it appears to be innumerable.
Certainly, someone has to give out because someone has to earn an income.