One of the simplest and yet striking ideas that I’ve heard for thinking about case interviews has been - always start with the simple framework that you are trying to maximize profit, which is the difference between revenue and cost. Everything else should be done either to increase revenue or decrease cost. Similarly, one of the dead simple ideas I realized in the context of consumer applications on the web has been that there are really only two things that matter for a consumer application company to be successful:
- build a great product that people want
- tell the world about it
If you do the former and not the latter, you have the “tree falling in a forest” problem - no one knows you exist, so who really cares what you have built. If you do the latter without the former, people will come and will leave just
as quickly. For those who buy traffic, the former is what will ultimately get the company out of the business of buying traffic.
I didn’t mention making money in the above. My general take is that if you build something people want and you have a bunch of people using it, you’ll find a way to make money from it.
Comments 5
Great insight. It’s important to get back to basics like this. Your observation seems to be a specific instance of something Peter Drucker stated more generally:
Posted 15 Dec 2007 at 6:06 pm ¶“the business enterprise has two–and only these two–basic functions: marketing and innovation” (”The Purpose and Objectives of a Business” in The Essential Drucker).
Re “My general take is that if you build something people want and you have a bunch of people using it, you’ll find a way to make money from it.”
I’ve heard it before and said it myself but I have never seen data to support it. =)
Posted 22 Dec 2007 at 6:02 pm ¶It is a fair point that it isn’t a given that a great product and lots of people using it automatically makes money. Netscape is a terrific example of this.
The search engines are great examples too. Yahoo, Excite, Altavista, Infoseek, Microsoft, Ask.com all failed to turn web search into a huge business. Google’s game-changing idea was not PageRank. When PageRank came out it was similar or perhaps marginally better than Altavista or Excite and those other players had more users.
Google’s game-changing innovation was in their business model. Auction-based text-ads throw off gobs of money at almost no cost. That allowed them to continue to invest in their search engines at a time when everyone else had stopped investing in search and focused on other things.
This is where I separate making money from creating value. A great product with many users is valuable, but doesn’t inherently make money. Dry cleaners make money, but aren’t inherently very valuable.
Monetizing your value is indeed a third leg of the stool that can’t be ignored. However, if you want to make lots of money, you first need to build something valuable.
Posted 28 Jan 2008 at 6:13 pm ¶I’ll also comment that there is an argument that free cash flow is more important than profit margin.
Clearly, you need to be profitable, especially over a predictable amount of time, but the theory is that if you can sustain growth in free cash flow, then you have the available resources to be reactive to your customers and the market.
Every industry is going to go through cycles and every profit margin is going to get whittled away as the processes of capitalist innovation and creative destruction force business change. In fact, arguably any business that shows higher profit margins than baseline economic growth is demonstrably a market inefficiency that at some point needs to resolve down to baseline long-term economic growth (2-3%). If you have sufficient free cash flow, you can adapt to those market changes.
The advantage of focusing on free cash flow is that you’re less wedded to a particular line of business because of its margin delta. You won’t react to margin contraction by trying to preserve a business where clearly revenues are already declining. Instead you constantly optimize for how to preserve and deploy the free cash flow that you have to keep the business healthy.
At least, that’s one theory. But it all assumes you’re making more money than you’re spending over a given time period.
Posted 28 Jan 2008 at 6:21 pm ¶I like it. it is relevant to a blog post of mine
Posted 08 Feb 2008 at 3:28 pm ¶http://jobhacks.wordpress.com/2007/08/01/career-equity/
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