What is Shopify’s business model?
When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. – Warren Buffet
As I age in the business world, I have internalized this buffet quote. I superficially understood it early on in my career, but now I understand it! With fintech as the backdrop, this post is a view of my mental model on business models and gross margins in general. What makes a good high gross margin business?
Let’s start with a 30,000 ft view of what forms a business. Businesses exist to provide value to a set of customers via the products they create. A firm solves a need and customers pay them to solve that need. At its core, a company is a machine that takes raw ingredients (physical widgets, human capital, and intellectual capital) and transforms them into products that customers pay for. Raw ingredients cost money (cost centers) and customers pay money (revenue centers) for the finished product. A good business, in the long run, generates a consistent profit i.e (revenue – cost) is a positive number. Profit takes various forms such as free cash flow, EBIT or EBITDA – but the simple model holds, value creation only happens when what you get for the product is higher than what it costs to make it.
A question I wonder a lot about is, What is the long-run curve of a direct response paid marketing channel? The intuitive theory is that in the beginning, you expect your cost to be high relative to your LTV. The starting curve looks like the below
In this post lets delve deeper into the mechanics of channels. As mentioned in my previous post, do not start this exercise before you have locked down your product value proposition and positioning.
Think deeply about LTV and set guardrails
What does the economics of your business look like? The most important thing is to align on is the value of your customer to you. What is the long term value of the customer (LTV)? Don’t be confused by the term “Long”. It’s up to you on how long you consider a customer to be using your product. Early on in a startup, it is better to have shorter periods. The more mature you are, you will have actual data on how long users use your service. You have to start by nailing down the exact equation on how you calculate LTV. This also forces you to think about the unit economics of the business. The biggest issue isn’t in creating the equation for LTV rather it’ getting a broad agreement with the team on the equation. Everybody has to believe in the assumptions and understand the specifics of how LTV is calculated. Continue reading “Shouting from the rooftops, Channels 101 for Product Managers”
“Only two ways to make money in business: One is to bundle; the other is unbundle.” – Jim Barksdale
In the last post, I talked about the history of merchant acquiring and how the industry evolved. This post talks about the natural progression of the trend and the rise of the full stack acquirer.
A quick recap
The core jobs to be done for merchant acquiring is to enable a merchant to accept credit card payments. It started with one institution, the bank, and then unbundled into a plethora of entities. We now have a complicated ecosystem consisting of the card networks, issuing banks, acquiring banks, payment processors, and the alphabet soup of PSPs and MSP’s. Merchant acquiring transitioned to being a commodity business and scale became king. The need for scale caused the companies to grow via acquisition. Continue reading “Money often costs too much – a look at Adyen (ADYEN:EN)”
Everything is fintech is the meme of 2020 in Silicon Valley and beyond. The nerds that we are :), we spend a lot of time digging deeper into this topic in the fintech pm group. The banter back and forth is the reason why I am super bullish on this small curated private community. This post is an attempt to describe my framework.
How should we think about everything is fintech meme? Continue reading “Fintech is dead, long live fintech”
A compendium of the advice that I can impart to aspiring writers. None of this is rocket science! Take what is useful to you, whatever makes you write – go for it!
Have a why that is inwards focussed
Channeling my inner Simon Sinek, the “why you want to write” is the most important thing to get right. Are you writing because you like writing? because you want to build a brand? because you want to learn something? My #1 tip is to focus on the inward reasons rather than the outward reasons. Most folks I talk to approach it as a brand- Continue reading “Writing strategies for the beginner”