38 Weeks to Get Rich
What follows is my summary & key takeaways to help you digest the 127 page document.
Week 24: Pick a Business Model With Leverage
Ideally, you should pick a business model with network effects, low marginal costs and scale economies.
Microeconomic Concepts That Help Businesses.
“Scale Economies” or “Economies of Scale” happen when a product gets cheaper to produce as you produce more of them. It’s what set Ford apart in the early 1900’s when he adopted an assembly line. Making 1 car was expensive. Making 10,000 cars was cheaper (per car).
“Marginal Cost of Reproduction” is when it costs virtually nothing to make an additional copy. Up until the 1980’s this really wasn’t a thing. All of history before us had to pay a high price to reproduce something. Now, in the digital age we can copy/paste and instantly reproduce a digital product nearly free. So whether you sell 1 ebook or 1M ebooks, it doesn’t cost you any more to produce the extra 999,999 digital copies; all the work was done to create the first original.
“Network Effects”, this is when a company or product becomes exponentially more valuable based on the number of users. Venmo is a great example. You can only send Venmo money to other people that have Venmo. If only 5 people have venmo, that’s not a very valuable service. On the other hand, if 50 million people have venmo, that business/service is incredibly more valuable because each of those 50 million people can interact with each other. The network effect grows exponentially instead of linearly.
In a network effect business, each new member adds value to the previous members.
Imagine email or telephone back in the early days of their invention. Every time someone else would sign up for an email or a phone number, the value of the service grew because now everyone who previously had signed up can communicate with one new person (value add).
Zero marginal cost businesses can pivot into network effect businesses.
A software company like facebook, which operates as a “zero-marginal cost” business–because it costs virtually nothing to create a new user profiles–becomes a top company by revenue and market cap because they pivoted into a network effect business.
Their original model was to be a sort of online year-book where you could see other people in your school. But when they gave the content creation keys to the users they became a network-effect business. Every user created content (value) that the other users wanted to see (mostly).
You should always be thinking about how your users, your customers, can add value to each other because that is the ultimate form of leverage. You’re at the beach in the Bahamas or you’re sleeping at night and your customers are adding value to each other.
So much of what Naval points to as the best businesses are code-based tech companies. And his logic is sound. But don’t get discouraged if you aren’t able to launch something in that industry. Commit some brain power to how you can apply these principles to more legacy industries to become a top competitor.
– How can I reduce my cost of production as I scale?
– How can I empower my customers to add value to each other?
– What’s something digital (zero cost of production) that I could add to my offerings.
Don’t say you “can’t” do it. Ask “How can I do it?”
Be watching for next week’s email as we analyze an example of what we’ve learned so far.