Do You Have Customers Who Deeply Love You? Final Part
This is the final part of this series.
In Part 1, I laid the foundation for my thesis that the smallest possible set one can condense business into contains two minimal elements.
i. Build a revenue engine.
ii. Get users to deeply love you.
In Part 2, we learned about the most essential part of a revenue engine for a new product or company (validating demand).
In Part 3, we examined why it’s so vital to get users to deeply love you and how to achieve that.
Today, we’ll discuss the problems of a blind focus on revenue maximization.
Let’s get into it.
Guided solely by revenue you’ll make two types of mistakes.
The obvious first class is ethical mistakes.
McDonald's who targets children with ads for the sole purpose of maximizing revenue at their expense.
Tobacco companies that both targeted kids and used them in ads.
Oil companies who bribed academics to lie about lead in fuel, which was known to be incredibly harmful to people (Nriagu, 1990) in order to buy a few extra years of profit before the law caught up. (They knew there were safe alternatives but they weren’t patentable.)
“This was one of the first times that the authority of science was used to cloak a threat to public health and the environment,”
‘‘America’s leading corporations–General Motors, Du Pont and Standard Oil of New Jersey (known nowadays as Exxon)–were that somebody. They got together and put lead, a known poison, into gasoline, for profit.’’
And more modern examples include companies like Facebook, Instagram etc. who started with noble ambitions but guided by growth and revenue, purposefully engineered their platforms to be as addictive as possible.
Hiring so-called ‘’attention engineers’’ which is just a euphemism for addiction specialists.
“The inventors, creators — it’s me, it’s Mark [Zuckerberg], it’s Kevin Systrom on Instagram, it’s all of these people — understood this consciously. And we did it anyway,”
This IMO is the direct and obvious outcome of the Friedman doctrine.
‘’ a company should have no “social responsibility” to the public or society because its only concern is to increase profits for itself and for its shareholders…’’
-Milton Friedman, Nobel prize winning economist
If we solely maximized for growth we quickly find ourselves running a heroin startup.
Think about it.
CAC (cost of acquisition) is incredibly low because word of mouth is so high (positive viral coefficient). Churn (customers stop using you) is near zero, once addicted you’re a customer for life which means high LTV (lifetime value).
Margins are solid because once they’re addicted, price is pretty much arbitrary*.
The only thing stopping us is that it’s illegal.
This is not good.
We should have better reasons for not starting a heroin company besides that it’s illegal.
The bar is set way too low if our best argument is ‘’Well, what we’re doing is not illegal.’’, which is exactly how most companies seem to operate.
However, perhaps more surprisingly, is that the second class of mistakes is business oriented.
Meaning, it’s bad business sense to solely maximize revenue because working off of that axiom, when presented with a choice between what’s best for the user and what’s best for profit, we pick profit.
This opens us up to disruptive innovation.
Kodak was actually the first to invent digital photography but because they had such an extraordinary business model (extremely high margins, stick rate and CLTV etc.) they sat on it and were disrupted by others. *2
It’s bad business to not act out your fiduciary duty because if you won’t someone else will.
The reason a company won’t do what’s in the best interest of the user is that they’ve got more to gain (in the short term) by maintaining the status quo, however, there are many more people who’ll financially benefit from improving that status quo.
So eventually someone will.
IBM should’ve dominated operating systems instead of Microsoft.
Microsoft should’ve dominated search instead of Google.
Google should’ve dominated social instead of Facebook.
eBay should’ve dominated payments instead of PayPal.
And Nokia should’ve dominated smartphones instead of Apple.
Boiling down this entire series gives us two questions we must ponder:
If I put a dollar in the revenue engine how much do I get out and when?
If we disappeared tomorrow, would our users be deeply sad?
*A perceptive observation here is that such a business would invite competition due to the forces of capitalism. This would drive price down and lower margins until a Nash equilibrium is reached unless we could find a way to escape the commodity market or use violence to prevent competition. This is essentially why we see violence in the drug business.. to avoid the collapse of a commodity market into a Nash equilibrium by keeping other players out.
*2 This is a bit oversimplified. I will write an essay about Kodak’s disruption in the future. But for now, the more accurate TLDR is: The saw the disruption coming (and invested in it) but didn’t shift their business model. Instead, they tried to use digital to grow their business model (print business).
Nriagu, J. (1990). The rise and fall of leaded gasoline. Science Of The Total Environment, 92, 13–28. doi: 10.1016/0048–9697(90)90318-o