Classroom Companion: Business

Direct cost (m) 
In many cases, the direct cost per item is zero (also referred to as the 
zero marginal cost property) as discussed in 
7
Chap. 
6
. The cost of producing and 
sending one more bit in the telecommunications network is negligible. The cost of 
one additional passenger on an airplane is almost negligible. The cost of producing 
and delivering one copy of an electronic book is negligible. The cost of adding a new 
user to social media, such as Twitter or Facebook, is also negligible. On the other 
 
Chapter 8 · Value Creation Models and Competitive Strategy

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hand, the marginal cost of a physical book is considerable and includes paper cost, 
printing cost, storage cost, and shipment cost. In this case, the printing of the book is 
done in a value chain, and the cost is as described in 
7
Sect. 
8.2
.
Common costs (A) 
Since the direct costs are often negligible, the dominant costs of 
the value network are the common (or fixed) costs. These costs are the total cost of 
running the company and producing and marketing the services. This is contrary to 
value chains, in which the direct cost often is the dominant cost. This also indicates 
that the strategy of value networks and value chains are different.
Number of items (n) 
What is the volume of production? For a producer of digital 
books, this is obviously the number of digital books sold. For an airliner, this may be 
the average number of passengers per flight. In a communication network, it may be 
the number of subscriptions. It may also be the average traffic carried by the network 
(e.g., in terms of the average number of bits sent per unit of time or the average rela-
tive traffic load). Therefore, the number of items may not be a unique concept in 
network businesses. To make it even more complicated, the business may serve a 
multisided market in which it is difficult to define what a produced item is, for exam-
ple, what is the product produced by Facebook—the number of users; the amount of 
information stored about the users; the number of advertisers; and the number of 
advertisements? Nevertheless, the formula shows that if the direct costs are very 
small, such as for many digital goods and services, and the fixed costs can be divided 
on many items, then the marginal cost is also negligible. This shows that the zero 
marginal cost property is common in value networks.
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In several value networks, the cost of producing one item of a good or service is zero.