Fundamental Principles of Business Model
The business models of companies are over rated. Half the companies that I interact, study, observe, or analyze do not understand a fundamental principle of business model. Guy Kawasaki once gave the entire math that was required to run any company or sell any product or service. You don’t need a business or financial degree to understand this concept.
Fundamental principles of business model:
1. If the cost of your product or service is $1, sold at $5, profit will be $1. Yes, it is not $4
2. Discounts and sales & marketing costs are very high especially if you are product is not monopolistic
3. Never get into business to sell a product at $1.50 with a cost of $1, as you will not make profit, unless you sell a billion of them, and your variable cost is negligible
4. People pay for value. Not for “cost + margins”. Buyers don’t care how much does it cost to manufacture product or service. For instance, a software license that costs $15,000, on a millionth sale would have a cost of 10 cents or iPhone with plan costs $2,400 on a $40 cost.
5. It is safe to calculate the pricing based on payback of less than 12 months for industrial products or 6 months for low-end consumer goods or 2-3 years for luxury brands/ white goods
6. For instance a robot which can do a job of one person might cost $15,000, but may not sell much. However, a turn-key solution that replaces one-resource per shift might cost $75,000 and still have a payback time of 4 months when it runs 24/7. Where would you play?
7. It is easy to sell one turn-key solution than 5 robots