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Traditional business vs Digitized business

· Tech

There are 2 types of service business. The first type of service business model is the traditional service business. It can be a logistic company or a simple cafe, or ... etc. The second type is the digitized business model. It can be a software company or a network company or ... etc. I shall just focus on the profitability implication of the difference between these 2 business models.

Traditional service businesses have linear profitability over time.

Let us take a software development company as an example to better illustrate this implication. If you run a software development business and you want to generate more earnings, then you need to increase the delivery of the increasing sales order. This means that you hire more staff and rent more space. As such, the cost generally increases over increasing revenue. The rate of profit increases at a linear rate. Now let's have a look at the other type of business model.

Digitized service businesses have increasing profitability over time.

Take a software as service (SaaS) company as an example of digitized service business model. The company invest resources to build the software and host it on the cloud. The rent and support infrastructure cost increase very marginally over increasing sales order because of the recent trend in cheap computing power and storage capacity. The most important reason is the hiring cost and physical rent do not increase because you just require the same team to improve the product. As such, the cost generally flatten over increasing revenue. The rate of profit accelerates once it pass the point of habit formation. It seems that Digitized service business is profitable in the long run.

Getting started in digitization is a process.

However,a Digitized service business takes a relatively longer time to break even as compare to the Traditional service business. In addition, there is a slightly higher operational risk of executing a Digital service business model than that of executing a Traditional service business model. As such, such businesses invest considerable time and resources on evaluating the effects of building their digital products. [For more details , please visit this article: 3 effects of building a digital product.]

As Bruce Lee Quotes:

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