The Zero Marginal Cost Company

One of the most powerful aspects of platform business models is their ability to scale without increasing costs.

Wikipedia is a perfect example. It’s a nonprofit and it’s free to use, but it still serves hundreds of millions of users every month. How did Wikipedia pull this off? By creating a platform business.

A successful platform has close to zero marginal cost, while thanks to network effects, the value it delivers continues to grow as more users join its ecosystem.

Let’s do some quick math.

From Wikipedia’s 2013-2014 Annual Plan, we can see that its estimated operating budget for the year is $42.1 million. That’s about $3.5 million per month And looking at estimated monthly traffic from the start of this year, we can see that it had about 495 million users in January.

So it’s monthly cost per user is about $.007 – that’s less than one cent per month. That’s not quite zero, but it would be hard to get much closer.

Compare this to a linear business like the Encyclopedia Britannica.

Historically, Britannica produced all the information in each edition of its encyclopedia. Its cost to acquire a new user was significant, requiring a considerable sales force to sell Britannica’s products to consumers. As a result, this model ran into serious trouble as it faced new competition from platform competitor Wikipedia.

Wikipedia’s real innovation here wasn’t just in building new technology. It was in marrying that technology to a whole new business model that was best positioned to capitalize on it.

Rather than employing professional curators and writers, Wikipedia built a platform with an ecosystem of external producers and consumers who created, policed and used its content. As Wikipedia grew, it was able to come close to Britannica in quality and breadth at only a fraction of the cost.

As this example shows, ecosystems are the new economies of scale and the new source of competitive advantage. They’re what allow platforms to scale without increasing costs.

Without its platform business model and ecosystem of users that maintain and use the site, Wikipedia wouldn’t be what it is today: a zero marginal cost company that’s one of the foremost sources of information for hundreds of millions of users all over the world.

Filed under: Platform Innovation | Topics: Linear vs Platform, platform economics, Platform Startup Advisory, platforms, Wikipedia