Profit margin growth looks at the health of the business – as you scale, you may grow in revenues, but does that mean you grow in profits? Here, technology can be leveraged to generate zero-incremental costs, and drastically increase your profit margin growth. Process automation, for instance, results in costs that remain constant as revenues scale, thereby increasing the profit margin.
Spotify illustrates the other side of the coin: despite being a tech company, its costs are not near-zero –in fact, it has to pay music rights for every song that is listened to also for its free service. Its user base for its free service has exploded from 7.5 million to 55 million over the last 5 years. As such, Spotify relies on cross-selling its premium service at a high enough level to still make a margin, as well as on using advertisements as another source of revenue. In 2014, Spotify increased its revenue by 45% since 2013, to $1.3 billion, but also experienced a net loss of $197 million, almost tripling its 2013 losses.
That is the challenge with industries striving for zero incremental costs: they tend to also drop prices rapidly, mostly due to competitive pressure, and to dominate the market, which can later be leveraged for cross-selling.