How zero marginal cost economics will revolutionise the built world

Is zero marginal cost within reach? It certainly appears so. This edition of Aurecon’s Business Series presents a fresh view of the zero marginal cost concept, exploring how the advancement of digital technologies are giving it renewed importance, and how it will impact the built world.

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About this guide

As a manager and a leader, you already know we are living in a time of enormous economic and business change. Industries and markets across the world are no longer static: they are dynamic, at times unpredictable, and generate complex operating environments for organisations.

Looking at industries such as entertainment and retail, we see they have changed dramatically over the past decades. New winners (e.g. Spotify) and losers (e.g. CD retailers) have emerged. These shifts have been spurred on by advances in technologies, primarily digital technologies.

For many organisations, the response to this kind of disruption is operational in nature. Companies often choose to concentrate on doing what they currently do but just better, faster and more efficiently. However, such an approach fails to properly take into account the economic aspects of disruption. Economic implications are commonly underestimated, overlooked or not thoroughly understood.

In order to survive and thrive going forwards, it is critical for every organisation – regardless of industry – to turn its attention towards the economic implications of technological disruption and ensure that fundamentals are understood by senior leadership.

One of the most critical concepts to understand is zero marginal cost economics.

Using this guide

We will introduce the modern concept of zero marginal cost economics and explain how it is challenging traditional economic and business fundamentals, and discuss what that might mean for the designers, builders and operators of the built world.

That’s you.

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Key topics

Reshaping value chains

Value chains have changed shape in recent years from vertical to horizontal and centralised to distributed. For example:

Wikipedia has broken up the vertically integrated encyclopedia business into a horizonal value chain of contributors
Uber has broken up the vertically integrated taxi business into a horizontal value chain of driver-partners
Low-cost renewable technologies are breaking up the vertically integrated energy industry into a horizontal value chain of micro producers

Many other industries are on the same trajectory, as they begin to realise the value and opportunity to achieve lateral scale by using digital technologies. The new horizontal and disaggregated value chains do not suit the traditional business models of vertically integrated organisations.

From vertical to horizontal

Chains shifting vertical to horizontal

Figure 3. Many value chains are shifting vertical to horizontal in shape.

Business model innovation

With increasing digitisation of products and services, they can now be produced, replicated and sold again and again at near zero marginal cost.

Through innovation, organisations have created new business models to compete successfully in this new economic paradigm.

Many of these new models are designed so that organisations can build something once and extract value from it more than once. This maximises the value an organisation can capture from the product and reduces marginal costs over time. Such capability began with software – because of the ease by which it can be replicated – but has more recently been applied to physical products too.

Table 1. Spectrum of business from product to platform models.

Spectrum of business from product to platform models.

Source: Modern Monopolies – Alex Moazed & Nicholas L Johnson

The fourth industrial revolution

Technological trends such as the Internet of Things (IoT) and Artificial Intelligence (AI) allow zero marginal cost economics to have an increasing impact on our industry.

Technological advancements blur the lines between the digital and physical worlds with IoT, while AI is not just automating manual tasks – it’s impacting many intellectual pursuits.

Industry impact

Some industries are already experiencing significant change (eg. energy and education), while others are only starting to see the effects (eg transport, property, architecture, engineering). As zero marginal cost impacts industries at different rates, some are being completely transformed. For others the full impacts are yet to be felt, but now is the time to anticipate change and prepare.

It’s time to pay attention to zero marginal cost economics

When zero marginal cost is real, it weakens and reshuffles value chains, it forces us to rethink how we view and commercialise intellectual property, and it necessitates critical analysis of business models.

Organisations across the built world must look beyond digital innovation as a technology, efficiency or operational innovation challenge. They must understand the fundamental economic and business shifts that reshape some of the basic assumptions around how their industries work.

How Aurecon can help you navigate your digital future?

In a world that is increasingly complex, interconnected, and fast-paced, intersecting trends such as the rapid advances in technology, shifts in societal values and the growing imperative to protect our world through decarbonisation and sustainable approaches mean that organisations are operating in highly dynamic and uncertain environments. Industry boundaries are blurring, traditional definitions of organisations are changing and time-honoured theories of business are being challenged.

Aurecon’s Innovation team work to ensure that us, our clients, and our partners can better navigate uncertainty, anticipate change and take well-consider action.

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About the Authors

Stewart Bird leads Aurecon Innovation team as they actively explore emerging technologies and trends to understand how they are likely to impact our clients and the community. He is responsible for Aurecon’s innovation strategy and portfolio and utilises his experience in digital project delivery, and research and innovation management, to guide projects from innovation through to commercialisation.