Every Very Profitable Business has three things in common.
I came to this conclusion a few days ago and think that it’s the most fundamental rules of how a Very Profitable Business works, and I wish it was taught to me in business school. I haven’t seen these principles explictly expressed anywhere, so go ahead and tell me if you have.
It’s going to get nerdy, so if you only want to learn why you’re still an employee jump down to the final section. (Where the words get really big)
Let’s get started.
There are 3 components to a Very Profitable Business:
1) Value Creation
2) Value Delivery
3) Value Capture
If you can do all three of those, you will be a Very Profitable Business.
There are no more tricks or anything left.
Business School Tuition: $250,000
Highly Decorated Jack Sheppard University: $Free.99
Let’s understand each of the three components and how they’re used to improve businesses and where people come into this.
1) Value Creation
This is a difficult concept to understand for some people, but it’s pretty simple.
You have to make something people want.
Who are the people? What do they want?
I recommend using my trademarked system of the Angry Interrogatives™
Where the hell are we going to find a CFO?
This is a problem solved (Very Profitably) by staffing companies and recruiters.
Where the hell are those curvy steel pipes we need for the exhaust on these cars?
This is a problem solved by exhaust-system companies like Faurecia, a 100,000 person company you’ve never heard of.
Why the hell doesn’t this software do what I want?
You get it.
Find someone who’s upset, and solving it = value creation.
The angrier the person asking the question, the more value you can create.
Is there ‘value created’?
Value is ONLY
chosen, evaluated, assessed by who’s receiving it.
Try to sell Joe Blow 1.7 million exhaust pipes for the 2019 Ford F150, I dare you.
Talking to Ford?
That pitch goes much better.
Try to sell me a softcore text porno of a billionaire and some mediocre girl, and we’ll never speak again.
Sell 50,000,000 to horny women and you’re Mrs ’50 Shades of Gray’.
2) Value Delivery
You actually have to come through with your delivery of the value created.
This is why ebay was able to make a huge and Very Profitable Business so successfully: the millions of people with junk couldn’t find and deliver the value they had to other junk-wanting people. Instead of 17 unemployed looky-loo’s walking through your garage sale you can sell to anyone in the world.
This is where the internet comes up, and why the internet is the best place to have a business: everyone can be delivered to on the internet, practically for free.
($4/month rent on a 24/7 store…jackpot).
This is why wholesaling is (currently) a (not-very-profitable) business. (They only do two of the three “Legs of a Profitable Business”™ – Value Delivery and Value Capture)
The manufacturers don’t want to manage all the individual stores and deliveries, they want to manufacture.
Joe Schmo rents a warehouse, forklifts, and some felons and makes a mediocre living making phone calls and deliveries. They enable the delivery of the value created by the manufacturer. Soon, I’d imagine Amazon might replace them though…
3) Value Capture.
Here’s the tricky part of business. This is where profit is made (or not).
So you’ve make a widget, costs $5 to for inputs, $5 to deliver and people won’t buy it for more than $10.
That’s a business.
Just not a profitable one.
Let’s talk about Amazon. They will do $17,092,000,000 in revenue from Oct 1-Dec 31 (2014).
On this revenue (total dollars in), they will make in profit (total dollars kept)…
They will lose $41 meeelion dollars.
This means they don’t even have a P/E right now. (Price to earnings ratio, basically means if you bought a company all-in-cash, how many years it would take you to break even).
Last time I remember looking up their P/E, they were trading at a P/E of 831: if you bought their company with all cash, you (your GreatX11 grandson…I did the math) would break even in the year 2846.
I’d recommend other investments.
(PS: my prediction…in 20 years Amazon will be the most popular business school case study in existence. “Why Did a Company with Such a Profitable Ebook Distribution System Try to Compete with the iPhone: The Zany and Wildly Unprofitable Misadventures of Jeff Bezos.”)
In the past, being an author was a terrible way to make money.
MJ Demarco wrote the book Millionaire Fastlane, and is very likely making a boat load of money.
In the past, authors would make 10-15% royalties meaning for every dollar of revenue generated, the author would only get 10-15%.
The publishers, distributors, and bookstores would be the ones who captured 90-85% of the value.
Since the internet has changed distribution to be almost free, now authors can capture 100% of the value they create. If they go on amazon.com, they can capture 70% of the value, because amazon is generating traffic and handling payment processing.
What about physical books?
MJ cut out the middlemen (publishers, distributors, bookstores) and went straight to the printer. When you capture all of the value, you can get costs down to the bare minimum and make a lot more cash.
Businesses are just groups of employees, right? So where do the different employees go in these 3 divisions?
First off, wrong. businesses aren’t groups of employees. Business are systems that do these three things, which sometime is done by people.
Can a machine weld or paint that?
That’s why internet businesses are the best ones to start: they can be automated and can run without people at all.
For you, as an employee though you’re probably doing some part of this equation. Exactly where? There’s lots of overlap, but here’s a few:
- Manufacturing processes: cutting metal, carving wood, mixing ingredients
- Product designers creating up new products
- Financial Analysts making spreadsheets
- Burger-flippers flipping burgers
- Actual Prostitutes, prostitutin’
- Software that helps track rental properties
- Shipping (duh)
- Operations handling transport and warehousing
- The internet sending information instantly, and for free.
- Salesmen connecting their company with customers
- Value Stream Management
- Stockboys putting stuff on shelves
- Websites letting customers input orders (and the people who manage them)
- Pimps introducing and protecting their prostitutes to their customers
- Purchasing, by lowering costs of inputs
- Engineers figuring out lower cost ways to build X
- Product design figuring if can we sell low-cost inputs by finding higher value uses for it (also value creation)
- Accountants optimizing capital structure (debt vs equity) and cashflow (Walmart takes so long to pay their suppliers, they have negative operating capital) for profitability
- HR hunnies making sure that the company doesn’t get sued for sexual assault
So that’s a sample of what the individual employees that go into the 3 required functions of a profitable business.
Remember, that this is a 3-legged stool: if you remove one of the three it’s not a profitable business anymore.
No value creation? No business.
No delivery? No business.
No value capture? No profit.
This goes to the big question.
Why are you still an employee?
Because you don’t do all three! (if that doesn’t make sense because you just skipped to here, maybe you’re still an employee because you’re so damn lazy you can’t read 4 pages).
If you own a profitable business, then you already get these concepts.
If you are a self-employed consultant, you have to do all three of the profitable-business-functions yourself.
You have to:
- Make something people want
- Put it in their hands
- Get paaaaaaaaaid
If you’re still an employee, it’s because you haven’t learned (or tried to learn) how to execute on all three of these functions (The Stool of Profitable Business™)
(Pictured: Apple and Samsung – copying everything Apple does)
Find out what leg of the stool you are for your business, and understand the other two legs.
Then build your own stool.
Sitting on your own stool is so much more comfortable than being used as the leg of someone else’s.
Until next time,
(PS: This is the part of a series… the next part “Why You’ve Never Actually Made Money Online” & “Why It’s So Hard to Get a Job – Beggers vs Choosers” & “Why Am I Paid So Little” are the three articles that come next. Read all three to learn more.)