When margins collapse

Two of the key indicators that your business model, and industry, is being threatened are declining sales and margins.

A good example of this is the story from earlier this week that Microsoft are urging their Chinese resellers to use Office 365 as a loss leader to get their foot in the door with customers.

Not so long ago Microsoft Office was a huge cash generator for the business; now it’s a loss leader.

If anything this shows how the margins in the software business are being eroded by cloud computing. Businesses like Microsoft and its resellers that have grown fat on big margins now have to evolve to a very different marketplace.

This means a very different way of doing business, a different way of delivering products and much more streamlined operation that doesn’t need battalions of highly paid salespeople and managers. In fact those managers and salespeople become a very expensive legacy item in a cloud computing world.

Microsoft are by no means the only company to find themselves giving away once profitable products in order to maintain their market position but when that starts happening it’s clear the time has arrived to find a new line of business.

In Microsoft’s case that’s been a pivot to the cloud, however the company will never find things as lucrative as the good old days when software was sold in boxes or licensed out with impossible to read agreements.

Funnily, the same thing is happening in the telcommunications world, although the telcos are doing a good job of propping up margins for the moment.

Unlike telecommunications, most industries don’t have the privilege of government licences and most businesses don’t have the advantages of either incumbency or massive scale, which is why it’s critical to watch the bottom line and don’t assume today’s best seller will be the product funding your retirement.

Paul Wallbank is the publisher of Networked Globe, his personal blog Decoding The New Economy charts how our society is changing in the connected century.

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