The role of the business case in digital products

Business cases are the backbone of many traditional companies’ strategies. They outline how revenues and cost occur over time and lets management prioritize initiatives after the value they create. As I discussed in post the zero marginal costs of digital products and their malleability leads to a high regard of uncertainty. One practical implication of this uncertainty is that business cases become less valuable. They are not useless, but managers need to recognize this uncertainty and use them slightly differently.

First consider a more traditional company Bottle Cap Co that are currently evaluating whether or not they should launch a new type of Bottle Cap product. They have a high fixed cost in a new cap-press, and to cover the fixed costs the company needs sell alot of caps . However at one point the press will be at full capacity and adding additional volume will require the purchase of an additional press. Their profits as a function of volume therefore looks something like this:

At a certain volume the company need to invest in another press. This means that profit optimization is not always as simple as pushing volumes. This is a situation where a business case is a very useful tool. Bottle Cap Co can model their cost structure and find our what the optimal volume is for their current production capacity. Since reality is usually much more complex than the simplified example above this is a very strong benefit of business cases in this type of business.

Contract this to a digital product. The cost component is very straight forward: a product team of 4-5 FTEs and some almost negligible cost for cloud services. On the revenue side, though some digital products have quite complicated business models most of them (advertising, subscriptions etc.) maximizes revenues with higher volumes / adoption. The business case therefore does not provide the same insights for digital products and you usually end up staring at one assumption that determines the entire case: adoption (i.e. how many will use the product).

I don’t believe that creating a business case for digital businesses is time wasted though. Going through the motion forces you to write down any assumptions you have of the product. Maybe there are other assumption in addition to adoption that is very high risk? These assumptions, written down with the levels you “need” to reach, is a good starting point for running experiments / bets.