By Dries Buytaert
Society is undergoing tremendous change right now — those of us who enjoy services like Uber and Kickstarter are experiencing it firsthand. The sharing and collaboration practices of the internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, LendingClub), music services (Spotify) and even software development (Linux, Drupal).
While the consumer “sharing economy” gives us a taste of what it’s like to live in a world where we own less, perhaps there’s an equally powerful message for the business community. Using collaboration, companies are dramatically reducing the production cost of their goods or services.
Welcome to the zero-marginal-cost economy, a way of doing business where ownership of a core process is surrendered to community collaboration. In economic terms, the cost of a product – or a “good” – can be divided into two parts.
The first part is a “setup cost,” which is the cost of assembling the team and tools needed to make the first unit. The second part is called the “marginal cost,” or the cost of producing a single, additional unit.
For decades, competitive markets have focused on driving productivity up and marginal costs down, enabling businesses to reduce the price of their goods and services to compete against each other and win customers.
A good example of this approach is Toyota, which completely reinvented how cars were made through lean manufacturing, changing the entire automotive industry.
Japanese cars were produced much more quickly than their American counterparts, created via traditional assembly lines in Detroit, ultimately driving down the final cost for consumers and shrinking margins for companies like Ford. Software development methodologies like the lean startup methodology and Kanban are modeled after the Toyota production line and have made software development more efficient.
Today, the focus is changing. Within service industries like hospitality and transportation, new entrants are succeeding not by optimizing production, but by eliminating production cost altogether.