Arguing Agile

AA238 - 23 Business Models Everyone Should Know, Part 2 of 2

• Brian Orlando • Season 1 • Episode 238

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Discover how the world's most profitable companies actually make money, from Tesla to Amazon to ChatGPT. 

Join Product Manager Brian Orlando and Enterprise Business Agility Consultant Om Patel as they continue to explore the 23 business models from Adrian Slywotzky's "The Art of Profitability." Part 2 continues the examination of the strengths and weaknesses of the remaining 11 business models where the hosts discuss why some companies dominate their industries while others struggle.

Business models covered are: 

  • Specialty Product model (CrowdStrike, Beyond Meat)
  • Local Leadership (Publix, Dutch Bros)
  • Transaction Scale (Visa, Stripe)
  • Value Chain Position (Amazon, TSMC)
  • Cycle timing (private equity firms)
  • After-Sale profits (Apple Care, John Deere)
  • New Product innovation (Tesla, OpenAI)
  • Relative Market Share (Walmart, Google)
  • Experience Curve (Southwest Airlines, TSMC)
  • Low-Cost Design (Dropbox, IKEA)
  • Scarcity tactics (Ferrari, Nike limited editions)


Whether you're a product manager, startup founder, or business strategist, this episode provides actionable insights on choosing and executing the right business model for your market. 

#ProductManagement #BusinessModels #Strategy

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Apple: https://podcasts.apple.com/us/podcast/agile-podcast/id1568557596
Website: https://arguingagile.com/

Brian:

We're gonna continue with podcast number two on the book, the Art of Profitability by Adrian Slywotzky. Om: Business Models galore. Oh, I thought you were gonna say Business Time. It's business. It's business time. It's business

Om:

time.

Brian:

I'm gonna start right away by asking you, do you wanna know the business model where unique products command massive margins because nobody else offers them

Om:

The specialty business model,

Brian:

that's exactly right. So if you're stuck selling commodity products where customers only care about the price. And if you're exhausted because you're stuck in a price war and whatever you say doesn't really differentiate your product with the competitor products, then let step into my office.'cause I wanna talk to you about the specialty product business model. So if I offered you something that was so unique that customers had no true alternative, now, would you be interested in talking about that as a business?

Om:

Absolutely.

Brian:

I harp on the podcast a lot of times about segmenting the market and I feel this is part. Of segmenting the market where I say like, oh, no, no, no, no. All those other products, they're not like mine. Mine is unique.'Cause some of this specialty business product is like, it may not necessarily be a true special product. It just might be a slightly different take on a normal commodity.

Om:

Yeah. Or, or just have a few extra features sprinkled in there. Right, right. And just hype up that typically I find though, here in this model, you have to be an early entrant in here. Because if you have a product already and you have competition, it becomes harder to play in this model

Brian:

The market segmentation I was talking about for example, like CrowdStrike, like who, who's out there competing with CrowdStrike, right? Deep, deep threat detection slash cybersecurity that CrowdStrike offers. not a lot of people. With the broad set of offerings, when you peel 'em back, you're like, oh, I can find a half a dozen companies that do all the same things. But they're not CrowdStrike,'cause again, they've segmented the market saying like, oh, just sign on with us with all your stuff move over from GoDaddy or whoever your domain is hosting and just move over to us.

Om:

CrowdStrike's a good example. I found another example, kind of like on a local level, might be. Some of these people that make craft products and they sell 'em at farmer's Market. So places like that, often these are premium priced. And they're local, but there's a certain allure to what they're selling, especially to the audience that covered this, right? So maybe those products the artisanal food segment.

Brian:

Oh food beyond Meat was another one. Like they were very early in the like, oh, we're special. We're not necessarily meat. We're all plant-based, everything. And they were one of the early entrants into the market to segment the market. And I'm sure they had followers, fast followers that kind of follow their business model, but I can't think of a single one by name.

Om:

Right?

Brian:

Yeah. So strengths of the specialty product. Business model. I would think they're, I mean high margin reduce, like reduced competition we already talked about. So reduced competition is when you segmented the market and you are the one that segmented the market. Like Beyond Meat, for example. You basically can charge what you want to charge for your segment of the market. Or I guess, I guess in Beyond Meat's example, they're, they're tied to meat, in and of the equivalent.

Om:

I think the other thing of it is I mean, along with charging a premium for your product is commanding an increased brand loyalty? Yeah. Because these are, these are niche products typically, right. And people who like those, really love them. And so they'll they'll talk about those products to other people that might be interested as well.

Brian:

If Beyond Meat is an example, there probably are. Competitor companies like Beyond Meat that I'm not mentioning.'cause I don't know about them. It's like your competition has big shoes to follow if they want to catch up and be seen as equals in the market. That was established by the company that established that brand.

Om:

Anybody following a leader like that? Even software, it's harder for them. It's a harder hill to climb because you are trying to now take market share away from somebody who's already established themselves. So consequently you end up having nuances to your product. So you're trying to carve out a different niche now. Maybe adjacent, but still different otherwise it's, like I said, it's a hard hill to climb. So what are some of the challenges in this model?

Brian:

So the weaknesses of this business model, and you probably could have already guessed, is limited market size. Like that, that would be the first one that I want to jump to is limited market size. If you're the Beyond meats of the world, well, cybersecurity's a great one I figure that every company that's serious about cybersecurity already has a cybersecurity provider. So like, that market is pretty small.

Om:

it's a small market in this case, in this model. However, you are charging premium prices Right. To kind of offset that a little bit so yeah, it is still a challenge. I think the natural one to, follow that up with would be, well, the market's small, so how do you grow bigger? The scaling challenges exist in this model.

Brian:

The one thing in this category that bothers me the most about this specialty product, I was at a company one time where we did a specialty product like this, and we had a constantly compete with competitors that were clones, but that were just like, AI garbage clones. And the customer couldn't tell the difference between a well crafted, well researched product and AI garbage versus well researched human written. Maybe those humans that are researching are using AI as well, of course, but they have to check their sources. They have to follow back on stuff. Like think about cybersecurity, that kind of stuff. you have to educate the market at the same time as you build products for that market, which is the same as cybersecurity. I mean, you have to constantly be educating the market about the threats that are out there. Otherwise, they have no idea oh, why do I need your solution? Well, hey, there's these new exploits and are you on these operating systems? You using these things like, there's legitimate things. You are just, it's not all scare tactics, although that is part of trying to get people to move to your solution. But educating customers why they need your product, why your product is different from all the rest of this, like AI slop on the market, that's gonna take, especially if you're the product manager. That's gonna take a big part of your time, and it's gonna be a big problem too, the more competitors that flood your market trying to make a quick buck.

Om:

Yeah, I absolutely agree. I'll give you an example of that, where it's actually happened like that. So most financial companies, advisors, brokers, et cetera, they now have these robo advisors, right, that they offer online, right? You could do it all yourself or no fee. Or you could use a RoboAdvisor for a fee, or you could go custom with a human advisor, and that charges even more, right? So these roboadvisors vary across different companies, right? And each company is touting the advantages of using theirs, trying to wedge their way into a market in which there are more and more entrants every day. So it becomes that much more difficult. Too many players in the same market.

Brian:

Yeah, I mean, that's exactly this. So the specialty product, business model, like it's all about owning a unique product category where you there's not a lot of competition because you, you truly are unique and special. The problem is like the, the perception of that uniqueness, is that a real word? Uniqueness. Mm-hmm. That like, that's something you have to constantly be crafting and moving along. And it, it's better if you're directly talking to your customers on a regular basis so that you're helping them stay educated to keep ahead of just AI slop that's out there invading like every product area. But I can only think about like your finance people being like, but what are you doing with your, when, what do you charge that time to? like if you're having those kinds of discussions this business model is not for you.

Om:

Absolutely not. Yes. And the other side of it is with the finance equation. You have to be constantly innovating. In this, if you're in this model, right. So where's that r and d money going to be asked a que Like, when, when are you gonna monetize the investment that we're making? Right?

Brian:

So if you have questions about the specialty product, business model we're all ears.

Om:

We are. And d let us know.

Brian:

So let's move on to the next business model, the local leadership business model. And I'm interested in talking about this one 'cause I feel like this kind of borders on the podcast business model here, which is, do you wanna know the business model? Where dominating your local market makes you more profitable than any national competitors that you may face. Then you're in the right place. So are you competing with national chains that have deep pockets, way deeper pockets saying you ever could have, or are you individual solopreneurs like us, like with facing off against people, blasting stuff out into the, sorry, I'm trying not to call out Lenny. Where they have like teams of people and they're just projecting stuff out on the internet. If you're frustrated and you can't compete on pricing with a broader market, then. Maybe you don't have to that's the local leadership business model. So if you become so dominant in your local market that customers choose you over any national alternatives which again, like I feel like I'm talking directly about us here. Your local relationships and expertise create an advantage for you as a business that's just untouchable. That's the local leadership business model.

Om:

I think it's a really powerful model myself, because as long as you have those relationships and you're engaged locally with your, not only your customers, but just the local market. Yeah. You're getting feedback, you're getting signals, and you are coming up with products that satisfy those needs. Yeah. You're gonna prevail. It's harder for someone else, a national brand to break in.'cause they're not even aware of the nuances of what's needed at the local level.

Brian:

I'll give you a few that like everybody that's here in the south knows Publix. Like that's yes. That's a, that's a regional brand, believe it or not. Actually it used to be a Florida brand, but not, not it's a regional brand in on the West coast in Out Burger I don't think they have any out burgers here. I haven't seen any Dutch Brothers coffee. Like chain, like those are all they started as local change. I mean, even Starbucks started as a local change. They started as local chains and everything I just listed has become a regional chain. But it doesn't even have to be that. It could be one city. You know, just like we were talking about the podcast is like, we're we on the podcast? We are more popular in Tampa, obviously, than we are anywhere else in the world. Like by a long shot, you know what I mean by like 75% or whatever. Other than Berlin, like thanks for everyone listening in Berlin yeah. Where was that going? but the strengths of this model, that's, that's where I was, I think I was going to the strengths of this model, the strength of this model is like, hey, like your community trusts you. It doesn't matter what community you have. Especially with the podcast, people bending over backwards when you run a podcast to give you advice. Sure. And it all stinks. The advice that is good is like you need to build a community. It was sort of a little bit of the last model we talked about. But on top of that is like, you need to build. Community that you're selling to, quote, selling to and if the community is here in Tampa, that should be easy for us. And then we know the businesses that are here and we know the people that run the businesses here. So you can connect and have an intimacy that there's no way that, like somebody from whatever regional, national, what it's gonna break in, in the middle of, they might replace it because they're super cheap or some other business model, they're not gonna erode that business model

Om:

used to be the mom and pop shops were like that stores, right? Yeah. On Street corner. They knew everybody who went in there. But I mean, the other one is community banks. You know, they know their customers very, very well. That's right. And they're thriving in a market where national banks may not be doing as well.

Brian:

That's right. HEB in Texas was another one that's regional that I didn't take note of. But the other thing about your mom and pop stores or companies whatever, consultants, whatever it is, is the company might pay more for that individual consultancy or that individual person than they would for a chain. I think about in software development, I think about the Accentures of the world or the TCSs of the world where like, yeah, I could get somebody for half the price to two thirds of the price, right? Or I can get somebody from my local consultancy that is here in Tampa that could occasionally come to my corporate office if I need them, and I'm willing to pay a premium for that.

Om:

That's a great example. Yeah, I agree.

Brian:

So there, I mean there's a trust factor there. That kind of goes unspoken. Because there are weaknesses of this model and exactly like the consultancies I just mentioned, the Accentures and the TCSs of the world. Like hey, the money drives everything. Absolutely. And you know, your people are good and everything, but at some point gotta get that every little last penny. Gotta scrape'em off the floorboards and look through the couch cushions.

Om:

Yeah. Kinda segueing off that. You're also more vulnerable to, fluctuations in the economy, right? That's right, that's right. If you're a local player only, I mean, you can not really weather the storm as well as the national ones game.

Brian:

I mean, it's to the dependency on the economy being fair, let's say at least fair in your area, but basically not taking downturn, I guess it at the economy took a downturn in your area. That's when the shift would happen to be like, well, maybe I will go with TCS and I know that it's less efficient and I get worse code and whatever, and I'll have some problems, but hey, I'm spending 60% of the money I was spending and I'm willing to do that for a period of time. And then I bring some people in just like everyone using AI to replace their employees who are not using AI at all,

Om:

other than just the price factor. It's also just having uncertainty that the local shop's not gonna be around

Brian:

I can see that too. This is the old nobody got fired for going with IBM type of thing. Right? That's the same one. Yes. And then , if you are the person running that local business And this is your business model, it's knowing that at some point, the local leadership business model will permeate and there is a saturation point with this business model that could scare some people.

Om:

Yeah. Growth challenges could include being able to recruit talent locally. That's true

Brian:

Talent acquisition could be a problem. Depending on what market you're in.

Om:

Depends also if you're in a small place or a town. Mm-hmm. Versus a big city. Mm-hmm.

Brian:

Oh yeah so the local leadership business model that's about dominating a geographic market through deep community relationships and local expertise. Another one we left out is like, well, it actually requires you to get out into your community. So this, this is an interesting one. I feel this one's like, the larger the company gets, the more underserved this model, the more like, I think this is the way to sneak under big companies right here, like a hundred percent of the time.

Om:

Definitely agree. So,

Brian:

If you have stories or questions about the local leadership business model, let us know in the comments.

Speaker 4:

Absolutely.

Brian:

And we're gonna move on to ask the question. Om, do you wanna know the business model where processing millions of tiny transactions makes you incredibly profitable then? Step right up. Step right up. Like where, where are you stepping up to? I don't know.

Om:

Step up to the bar.

Brian:

Oh, hey, have a drink. And I want to ask you some questions here step in my office partner. Are you focused on landing big deals while ignoring massive small transactional opportunities? Are you leaving money on the table because you think small transactions are not worth your time? Oh boy. If I had a nickel for every time that I heard, we wanna sell massive multi enterprise level, multimillion dollar boy. Volume can beat value. And that's just not a, it's like there's some people that are immune to that advice right there. So let's, let's, let's talk about. You process millions of small transactions and those tiny margins adding add up to a, a massive profit. It's the transaction scale business model.

Om:

About some examples. I mean, the one that obviously comes to mind really quickly is the payment processing using point of sale. Like each transaction is small, potentially, especially if you're, you don't have to be buying$200 items.

Brian:

Was, I was thinking anyone that takes transactions on Stripe, or I was thinking about anybody who opens the storefront in Shopify or uh, Etsy or whatever. Robinhood, Coinbase, any, any of those ones that, like each individual trade or whatever is like, it's a tiny, they're taking, like they're shaving pennies off the trade, but still they're doing millions and millions of trades every day so like those millions of, of pieces of pennies, like I think we're describing the plot of office space. Actually. Nevermind, nevermind, I take it all back.

Om:

Volume can beat value.

Brian:

Volume can beat value. The one big one we didn't talk about that they literally wrote the book on this one was Visa.

Speaker 4:

Mm.

Brian:

I mean, they visa, PayPal, stripe, like all the FinTech bros. They basically invented this bus. They didn't really invent this business model. But if we're saying Palantir invented customer solutions, we're saying, we're saying PayPal invented this one, then that's what we're saying. What a world we live in, and then of course stock exchange is stock exchanges. That's, yeah. So strengths of this business model, obviously massive volume, potential, small margins, millions of transactions. Nobody's noticing. You're cutting a penny off a, here penny off there or whatever.

Om:

The brokerage business is big on this 'cause you know, even if they don't charge you fees, let's say, 'cause that seems to be the recent trend now. They're making money on the spread. And the spread is bigger than what a lot of people think but they are making money every time. You're selling or buying.

Brian:

Right. And, and also the benefit of this one, unlike other business models, is one customer or two customers leave. Like your, your whole business is not at risk., That the diversification here will keep you afloat. And, and like, I, I would honestly be surprised if you really knew, you probably know who you're, like your biggest transactions come from, but like the rest of them the, the lower of 50% is probably so diverse

Om:

straight in the back. Yeah. I think getting to the point here where you can really start to make money, that investment is constant regardless of the size of the total addressable market. Yeah. Which is fantastic. If you think about it, there's not many models where you could state that claim. Right, right,

Brian:

The acquisition of the total addressable market. I think is lowering because you have a very low customer acquisition cost. Yeah, because there's so many, I mean, like Stripe for example. Like what is the customer acquisition cost of Stripe for people to sign up and just start taking payment? I mean, it's gotta be near zero,, and then obviously scalability you build your system, right? You're basically infinitely scalable. It cost you near zero to onboard people. Everything's profit at that point. Yeah. So well this is sounds, this sounds like we should quit our jobs and be FinTech bros. There's gotta be weaknesses in this business model. Let's talk about 'em. Obviously you're gonna scale forever and let anyone sign up immediately. There's gonna be some infrastructure investment. Yes. You're gonna need to ask your developers, Hey, don't just phone this one in. Build it in a way where it could scale infinitely forever. That's gotta cost a couple

Om:

bucks. It does. And you have, you've also, so two things, right? One is you've gotta protect your customer's data. That requires that you get your security right. That requires investment. And the flip side of not doing that is massive rep damage. you screw up once, guess what? It's gonna take you a while to get back up. Because there are other people that you're competing in the space for. Fraud goes along with that. so it's all about protecting your customer's data and there's an investment involved there. Which is big.

Brian:

Other than like outsized spending on infrastructure and actually making it like when people are crying like, oh, we'll just move fast and break the law. You can't really do that. You kind of need to be sure that it theoretically will scale because you can't be running out in the middle of the night and having a fire drill when you know a thousand people on board or whatever like that, that's not gonna work. So you have to pay more. Upfront to be ready for it to scale. The issue with this business model is it's like the scale business model, but you need a bunch of money to make a bunch of money. You need a bunch of transactions to be able to support a system like this.'cause the system itself is a little more expensive than a normal quote system that I would talk about. in software development

Om:

it's very difficult to land on a And complex. And complex. Yeah. The complexity is huge. It's very difficult to land on a, a scale that you can deliberately plan for it. It's probably more realistic to think that you can achieve managed growth. So you only know what you know, and if you don't know, you can't really scale for that I mean, 'cause it's a money drain at some point.

Brian:

Yeah. The transaction scale business model. It's about capturing tiny margins on a massive amount, a massive amount of volume. And it's, it's obviously, it's the FinTech model as we've pointed out. I, I wonder if you like the AI companies maybe are doing this with credits and tokens and whatnot. I don't know. A little less'cause it's not really their model. so if you have ideas where this model is at play let us know in the comments we will move on. We will burn on to the value chain position business model. Do you wanna know the business model? We positioning yourself at the most profitable point in the value chain makes you rich and everyone else. Sad.

Om:

I wanna know that because we're all working hard and we're not getting where we need to get to.

Brian:

Working hard and barely making ends meet? Well, you might be living in America. Sorry, that's, that was, vote, vote for Pedro. Are you stuck in the least profitable part of the value chain? While you watch others in different parts of the value chain get rich? Are you upset because your effort is not earning an outsized amount of profit? Your positioning in the value chain does well. Well then we've just identified you need to move to the most profitable position in your industry's value chain. So if you stop competing where the margins are thin and move where the money is, then you'll be in the money. The value chain. Position business model. So T-T-S-M-C dominates chip manufacturing, it's probably not a great example. Lemme see if there's a better example.

Om:

I think the distribution company example is a good one. They, they're kind of wedged themselves in between the producers and the consumers. So they're a broker. Yeah. Yeah. I mean, you can't, producers can't really get to consumers without these companies

Brian:

is that what this is? This, I think that's what this is. Did did we, did we run across the billionaire market business model right now? Because that's what it sounds like. It sounds like, like the NVIDIA of the world, Nvidia doesn't manufacture anything. Like TSMC manufactures all the chips, like they quote design them I mean, as far as you and I know they design them. Then somebody else builds them like the same like Spotify. Like Spotify doesn't create any art or music or anything.

Om:

They don't

Brian:

then they barely pay people. Yeah yeah. They barely pay anyone. Yeah. Door DoorDash, like they, they don't make any food, right? They've Amazon, I would put in this category as well 'cause they position themselves between the people looking to sell goods and the people looking to buy goods and they just kind of like wedged themselves in the middle. oh boy, we're getting very Marxist on the podcast now. They, they, so there, there are strengths of the business model of being in the middle of everything and taking control of everything. That's what I'm saying is

Om:

I think this sense of essential. Component really kind of in the chain, the essential link in the chain, that's where you need to be, right? Because the chain gets broken if you're not there, which means you have to be there, which means you, you're not really producing anything. Yes. But you are relaying from one end to the other. And collecting your cut in the middle. The funny thing

Brian:

about this is, like you, you just said exactly my feelings about this business model. you are not as the intermediary, you're not really doing anything here, but you are optimizing a potentially high profit point in the chain. So like the Amazon thing, it's like the, oh, we guarantee next day delivery. Whatever, right? Like you're optimizing a particular pain point and that's basically how you're making your whole solution is you're optimizing one thing, the shipping Right. You know and how you do that. Well, you you've got warehouse space in every major American city and blah, blah, blah, blah, blah. Automation people, automation. Yeah. All kinds of stuff. And boy, the the market power of controlling all of those all those points in the value chain, like again, with the, Amazon's a great example 'cause it's super easy for anyone who, who's not quite sure about this. T-T-S-M-C makes all the chips I mean, the value chain is like, anybody can dream up a cool chip with a bajillion transistors on it, but only TSMC can actually make the chip. Only one company, one, one facility can build it. Yikes. That's a problem., You wanna maximize value like that, that would be the way it is. Like figure out where along the chain you can insert yourself and basically take control. Or if you don't take control of it, to optimize that, that particular process I mean, other people can build chips. Sure. It just costs them 30 times the amount.

Om:

investment is a huge obstacle right there. but they've already made the investment, right? And now they're capitalizing on that investment. So not everybody can do that. A distribution company, same thing. They have a network in place.

Brian:

the strengths of this one obviously is optimizing your margin. I mean, you basically can pick your margin on this one. For TSMC, I mean, they basically could charge what they want within reasons they start breaking the making it unprofitable for the parent company or whatever. But up until that point,

Om:

which is a pretty flexible rate.

Brian:

and then you know, the market power gives them leverage mm-hmm. to basically not never be underbid. I mean, you said it in your point is like, well, who's gonna come up with the capital to build more manufacturing? Yeah. Right good luck. We'll basically need you. And the other advantage here at the point where you get enough capital sorry, where you get enough capital. You get enough strategic dominance but you can move up and down that value chain. I would expect Amazon could just start selling. Actually Amazon did.'cause they have the Amazon basics where they just manufacture their own low costs, electronics or accessories or whatever, and they just sell their own. So they have moved up and down the value chain which is scary for people that are like for people that get on board with them early and then start turning around one day and it's like, Hmm, that looks a lot like my product. Too late. You're outta business.

Om:

They've already put the batteries in place.

Brian:

Yeah. So is there weaknesses to this business model? Every business model. let's talk about this one. The one that I would think of would be the capital requirements. Necessary for this upfront investment. So like if you wanna have two day shipping anywhere you are in a world, country, whatever boy, that takes a lot of capital.

Om:

Yeah. You gotta have that infrastructure and everything else

Brian:

Right. And then you gotta upkeep

Om:

it, logistics and everything, and you gotta upkeep it.

Brian:

Yeah. I mean, those, those robots are not gonna enslave themselves.

Om:

You have to make robots to enslave robots.

Brian:

Yeah. We got robots anyway. Like and then also you're just waiting for a market disruption.

Speaker 4:

yeah,

Om:

And if you're in this model, you have to develop expertise in adjacent spaces as well. In the case of Amazon, initially it wasn't an issue for them to worry about logistics and all of that, but they had to become experts in logistics and shipping so these are adjacent to Amazons. Original book selling business.

Brian:

And also one other weakness that it's probably worth pointing out is everybody who sells on Amazon, I'm sure probably has their own store. And probably if they could easily offer a discount to be like, Hey, buy it from me. Maybe it's not two day shipping, maybe it's three day shipping, four day shipping or whatever, but like, here's whatever discount you get from buying it straight from me and cutting Amazon out of it. I would imagine that like, this is, this is the advantage that should come out of like the era of vibe coding is anyone, there should be some kind of like package or something that anyone can just copy paste to be like, here's my item on the Amazon store and here's a link in the description that goes over to my store and gives you the same thing for 10% off. Whatever, something like that

Om:

It sounds fanciful. The issue really is being able to compete at scale with a juggernaut right? Yeah. So of course Amazon's not gonna let you put your own links in their descriptions. Yeah. To start with. Best you could do, if you can leverage that with them and create the contracts, is to have your own store, but it's still an Amazon store. Mm-hmm. The fulfillment aspects of it, they will take care of that and you can't get your hands in there right. Because they've already got their pause into a clause, into the value chain at that level which is the most profitable segment Right. in the chain itself.

Brian:

Well, the value chain position, business model, like it's about finding and capturing the most profitable position in any particular industry's value chain, right? And then, and the value chain could be, it's a very mushy topic, right? Value chain. But I'm interested in this one. And there's other in industries that we probably could talk about more. We didn't even talk about regulatory being a weakness of this business model where the government just comes in and smashes you know, Hulk smash with the business model. But we're gonna move along because we have a, a ton of other ones we get to. do you wanna know about the business model where timing market cycles perfectly makes you rich while everyone else goes broke?

Speaker 4:

Ooh.

Brian:

Are you getting crushed by market downturns while competitors somehow stay profitable? Are you frustrated because you make money in good times, but lose it all in the bad times? Well, then you might be betting on meme stocks. That's what you might be doing right now. So everyone has the same cycles in business, like the ups and downs, right? But what if you understood the industry cycles and positioned yourself to profit in upturns, and keep even in downturns. Well that's what the cycle business model's all about. There are no role models in the cycle. But here, let me see if I have anything in the cycle. You're not gonna like any of my examples in the cycle business market.

Om:

can think of one.

Brian:

Okay.

Om:

So if you are a financial broker, that is not a fiduciary, by the way. You pay my fees. the market went down. I'm sorry, but you have to pay my fees. Yes, the market went out. Gotta still pay my fees.

Brian:

They do

Om:

very well

Brian:

so is this gonna be the predatory market segment business plan right now? Is this, is this the scamming old people using AI business plan?'cause that's, that's what it's gonna sound like. There's no role models here. If you were looking for a business plan that's like, Hmm, I could have a good night's sleep at the end of the day because I, because I'm gonna, I'm gonna tell you right now, the cycle business models are all of the, all of the private equity global management firms. like you were talking about, what are they called? The asset management the ones that own the big , what are they called? The mutual fund owners. Yeah. that extract a fee, whether it makes money or lose money, they're extracting that fee every month. I think about CarMax. I think about Rocket Mortgage. I think about guys like that, like big mortgage brokers. I think about insurance companies, like they're gonna take their cut. Regardless, yes. You know, hey, economy's in a downturn. Nobody's driving. It's COVID. Your rates are going up. Why are my rates going up? Like nobody's even driving on the road. The accidents are down 50% or whatever.'cause literally no one's driving rates are going up.

Om:

Same thing with the home insurance, right? I mean a great year for hurricanes. Guess what? Doesn't matter. Your rates are going now and they blame inflation or some something. That's right. The wind went the wrong way or Oh

Brian:

the strengths of this model, if you are ebony, are scrooge. Let's let me put it that way 'cause I beeped out and edited out what I said earlier in the podcast are massive. I mean, the timing advantage. Understanding the cycles and buy like the, just like, just stick with mortgage companies, for example. When rates go up and if you're a real estate investor, for example, when the rates go up and all the sales slow down when people's homes are on the market for a long time and prices start coming down, what a great time market timing. obviously the private equity firms are great at this because they have people on staff that just do risk management. Sure. So they, they're looking for acquisition opportunities to bring like, large amounts of cheap assets into the fold. Or I guess, if I'm gonna try to defend this for a second, I'm not going to, but if I'm gonna try to defend this for a second, the, the, the private equity firms of the world are going to say, Hey, we've done a review of this business. And we see the risk is low and we see what they're doing with the money they have and the people they have. If they had more money or more opportunity, or if they were joined with us or whatever, with more opportunity in the market, they could be doing a lot more business that, that's the way they'll look at it. So they'll say like, this company is basically like underutilized, understaffed, under monetized, under

Om:

company has a high upside,

Brian:

Something like that. There's a term for it, I can't remember right now. and the VC guys are the same way. this company easily could be bringing in X fold percentage over whatever profits. And that's what they'll look at. not exactly the same as the way I pitched it, of like you wanna build a company that breaks even when the market is terrible. Makes a profit while the market is good, where your competitors in the same industry are losing when the market is down and struggling even when the market's up. That's how to pull ahead of your competition, like being super shady. I don't know if that's a great way to go about it, but, I mean, listen, these people make a lot of money.

Om:

They have the luxury of being able to plan for downturns way before they happen.

Brian:

Well if we're planning for downturns, let's talk about weaknesses of this business model because you need a bunch of money to

Speaker 3:

make this happen.

Brian:

The people that are taking money every month and charging their customers more or whatever, and they don't care who cancels or who leaves or whatever. Like, well, that's great. It must be great to have so much money that you don't care about churn, you don't care about, I mean, they probably care about it, but like,

Speaker 4:

yeah,

Brian:

Oh, who was the, who was the oh, it was The Chipotle, the Chipotle, CEO recently where they, they had the chart of like how much they've raised prices over the years and like they were complaining that people can no longer afford their baratos and not burritos.'cause burritos would be ito in the, anyway, that's, that's a Spanish joke for everyone, for everyone to listen to. Podcast number one, by the way. But yeah, you need, you need capital. You need, you need a massive amount of capital to be able to keep smashing your customers down. And and also like the, the timing. I mean, you can't you can mess, you can miss with this timing. You can, you just can't miss by a lot.

Om:

Those bad events when they happen back swans, right? Yeah. If you diversify enough, you should be able to weather those storm, right? Yeah,

Brian:

yeah. You know, and then obviously you're, you're gonna get hit by market volatility just like everyone else. It's just there's like a psychological game going on which I, I say psychological or what I really mean is there's like a business risk management game and just a lot of people that I maybe I've not worked for enough(evil) private equity firms that like, have calculations and like actuaries to measure that risk. Yeah. But most businesses don't. They don't. I mean, they, they're like, they got a thumb in the air figuring out which way the wind blows measuring risk. They're not doing it with numbers, you know?

Om:

Yeah. I wanna lump in health insurance companies and pharmaceuticals. Well, oh, that's a one. Yeah, That's a good one. It doesn't matter how fit the population's getting. They're gonna continue to raise their.

Brian:

I mean, think about the cycle of car insurance. I mean, the cycle of car insurance is like you're, you're, they don't want you to stay with the same insurer. They want you to constantly be moving and churning out, and seeking better reach or whatever. They're gonna keep raising cable. Same way. They want you to keep moving, and if you stay because you're lazy, suddenly you're paying$150 while your neighbor is paying$48 or whatever. That's just the way their business model is. Again, not to go out on a high note here, but this is the worst business model in the world right here, because it's super predatory.

Om:

Unless you are the business in this business model, then you're like, well, that's what the market will bear,

Brian:

Right. So are you a trouble person? That's what I'm, do you have scruples? Do you have scruples? Maybe the cycle business model's? Not for you. It's about understanding timing. When to buy low and sell high. You know, hey, may, like you're profiting from volatility. I mean, maybe you wanna be a day trader.

Om:

Yeah.

Brian:

Tell us we're wrong. Tell, tell us how Palantir is not evil please,' Om: cause we'd love to have a chat. That's right. Let's talk about the after sale business model. And I'm not really sure this is a real business model, but,

Om:

This is a real business.

Brian:

you, if you wanna know the business model where you make more money after the sale, then. On the actual sale.

Om:

This is absolutely a real business model.

Brian:

Okay, well, if you make all your profit on the initial sale and then you forget about the customer after that, oh boy. If you make a massive amount of revenue and you have like a third party market or whatever that comes in and deals with maintenance and support and service and you're missing out on all that money and you're mad about it, step back a second. Hang on, I got more categories. If you're frustrated watching car dealerships make more through their service departments, then through their dealer sales side, then like, step into my office. If you're leaving money on the table, step into my office.'cause if I told you that you make thin margins on the initial sale. And then you have a massive amount of profit on the backend for ongoing service and maintenance and whatnot. Then you might be interested in the after sale business model.

Om:

Yeah. let's look at a couple of examples of these. We talked about a model where you could buy hardware like printer mm-hmm. For X amount of money. Yeah. Printer then keep paying over and over for That's right. Ink. that is after sales. Really? Yes. I mean, the other one that. Obviously the automotive industry, right? You're paying XV card and they lock you in, et cetera.

Brian:

Tesla also the supercharging network for Tesla let's see Peloton, which is like more like a subscription company than it is like a workout machine company, right? And also if we're talking about exploitative things that have really rankled people's feelings in the news, John Deere. Because if you remember, like you had to go back to them for parts and service, like they locked out all their stuff. Yeah. With software. So there, there are quite a few in this category that you wouldn't necessarily think of

Om:

Electronics. I mean, you buy electronics and then you buy, you know warranty. So the warranty, I mean, they get you, so things like appliances, you buy washer, dryer, whatever. And then you buy a warranty for three years.'cause this thing's only warranted for one year. They can stack'em and then at the end of the three years or before, then they'll hit you up to extend again for another three years at a higher price because now Appliances are older, right. More susceptible to breaking. So yeah, these are examples of the after sale business model.

Brian:

And also like, there's other ones that like normal folks, unless you work for a company like this, you probably would never think of like a Boeing, you think you can just go down a advanced auto and buy a new part for a jet engine. Like I mean, you probably gotta go back to Boeing or, or, or whatever company they, contract with to build those parts. But yeah, I mean there, so it's a, the maintenance contracts I would imagine, like for like a company like Boeing for example, I would imagine the maintenance contracts are probably worth, like you build your original airplane for like, whatever, a hundred million dollars or whatever it is, you build a plane,$60 million, whatever it is you build a plane for. But then the ongoing maintenance contracts to be able to get parts. New engines, stuff like that like rolls, rolls Royce, for example. Sure. The engines they built for aircraft, do you think they make the majority of their money on their cars or off of like the aircraft engine division? Right. You know, that like Rolls Royce doesn't have, they don't make airplanes, there's a lot of companies that you probably would never think of that are super profitable just because they have these contracts. They, they just do these contracts and it's a massive amount of money. And some of them are controlled by the main company. Some of them are not but yeah, high margin like I think about the US government and like fighter jets for example. Where they have to buy like a silly little part. Like there's people on YouTube all the time that you can see. But there's some of these like defense acquisition guys that I follow on LinkedIn. I'm gonna start spitting when I say LinkedIn. Terrible, but it's almost as bad as Jira. Like some of these defense acquisition guys that I follow on LinkedIn, like they're showing like this little tiny little like metal part that we can't get except for the manufacturer. It's like $5,000 that we started 3D printing it for $3

Om:

I think that model that's been there for decades is now being disrupted by technologies like 3D. So there are other countries where they couldn't find, forget about fighter jets and stuff. I mean, they couldn't find spare parts for imported cars. Right. Unless you went to the manufacturer. Now what they're doing is fashioning them and before 3D printing became a thing, they were already creating those out of bare lump, like lump of metal. They were actually fashioning parts and manufacturing them. Could be subpar, doesn't matter but way affordable than going back to the manufacturing. So now 3D printing, anyone can print out parts like that so that model's gonna be disrupted even further going forward. Maybe not quite with the Boeing scale, but On a lower level.

Brian:

The customer lock in especially with John Deere, where they're like locked out with software, their parts where you can't just change parts. Yeah. that's a strength of this model, but also like ooh, I almost want to pivot right into weaknesses, where it's like, in the weaknesses of this model, customer resentment is a big thing with this one because John Deere got in a lot of trouble in the press and got beat up pretty hard. Rightfully so, by the way with this customer resentment of like, why, like I just gotta replace some mechanical part. Then it's sort of like the part has some sort of electronic component in it that's stamped with like a VIN number or something like that. Like in the computer stamped with a VIN number. So it knows that you've changed that apart

Om:

and then it shuts down.

Brian:

then it shuts down.

Om:

Yeah. That's predatory, I feel. But I think an example of this might be if you have any extended warranties for your IPhone or , AppleCare. Yeah appleCare, yeah. Good one. that, that's an example. The risk you run here is disruption through a third party, being able to offer the same kind of service. Mm-hmm. But of course, in the case of Apple, hey, they have to play within the apple

Brian:

wall gardens. I know. Well, I mean, AppleCare is an interesting one because, there's like a organizational conflict that we haven't talked about. Like inside of the organization that sells AppleCare. Just that, maybe this is not a great example, but let's use this example for a second the, the people that sell the products have to also tack on AppleCare, which they may or may not want to do there's a whole nother team that's only incented by the service and the cost of selling AppleCare. They like, they're financed by the sales of AppleCare. Yeah. To people bringing in the store and there's tech in the back and all that kinda stuff. So I would think like the less AppleCare subscriptions, the less of those people can work at the store. That kind of thing. So it's like, there's an organizational kinda like, well, if I jack up the price of AppleCare, it's harder to sell more phones and it's hard to sell AppleCare. I don't know how they deal with that kind of thing, but it is a conflict. Anything that requires being talked about between folks in the organization is a weakness of the model because as we know on the podcast, people don't like to talk to people.

Speaker 3:

Exactly.

Brian:

But yeah, one concept, customer resentment, I mean you know, it's the, the and then the, the AppleCare one.

Om:

Services 24%.

Brian:

So it's

Om:

Okay.

Brian:

so Apple doesn't break out Apple Care specifically, but it says it's responsible for 24%. Apple Services is responsible for 24, 20 4% of the revenue check. The next bullet, AppleCare and extended warranties are 8.4 billion in 2025. So a good amount that's more than our

Om:

nation's GDP$8.4 billion.

Brian:

The services division has substantially higher gross margin around 75% compared to the hardware sales, around 39% that that comes from Rando Google AI search. So that's interesting. Like the margins are way higher. If you were a company and you wanna set up something like AppleCare for the first time, like there's a, a longer cycle to profitability. Yeah. You know, that's something to consider. it's a little less of a weakness, but it is something to consider. So the after sale business model, like it brings in a bunch of revenue obviously for Apple, 24%. Yikes that's pretty significant. Mm-hmm. It's all about capturing ongoing value through service, maintenance and support without being a predatory. what was the previous one that we just talked about the, Cycle business model. the predatory cycle business model.

Om:

I'm pretty sure you guys have other examples in mind, so please let us know. Yeah, it's below.

Brian:

Let's move on to the new product business model. And I know you wanna know about a business model or being the first to market lets you charge a premium before your competitors arrive. Well, we're gonna talk about the new product business model. So are you playing it safe with incremental improvement while your competitors are launching breakthroughs? Are you watching first movers capture massive margin while you're still competing on price? are you preaching that speed matters more than perfection? Well, your company's moving way slower than you want to. That's we're gonna talk about the new product business model. What if you continuously innovate and what if you can come up with some sort of business model where it was all about capturing first mover advantage over and over again, iterating and continually capturing first mover advantage over and over again before your competitors arrive. The speed to market is your competitive advantage. That is the new product business model.

Om:

It requires a certain DNA of a company to be there. I mean, to get there first of all, and then to remain there. For any period of time. So one company that springs to mind is Tesla. They did that. With the innovation of the ev capturing a pretty decent sized market and then defending that. Now lately, there have been some competitive pressure from foreign brands, but in the US Canada, they pretty much held their market share.

Brian:

Yeah first, first mover advantage. I mean the all the AI companies, I mean chat, GBT, anthropic, like they both have first mover advantage here. Google's trying to catch up. NVIDIA is constantly reinventing its products like every two years the H one hundreds that all the AI stuff is trained on Is like nobody else can do it. Other than those, nobody else can do the training unless they have those chips. Obviously you can charge whatever you wanna charge'cause it's brand new offering.

Om:

Yeah. For a period of time you dominate the market, right.

Brian:

And then the first movers shape the market. So like, I think of every AI token business model that's out there.

Om:

Right, right. Yeah. And that breeds some sort of customer loyalty.'cause people, a, people have seen that for the first time, like EVs, for example. And then your product becomes synonymous. Your brand name rather becomes synonymous with the product. So rather than saying ev people say Tesla. And this isn't just in this sort of market segment. In other cases, we talked the other day on the previous podcast about how tissues became synonymous, right? With Kleenex The brand. Years ago it used to be a vacuum cleaner, the brand Hoover. So it does give you that market defining brand loyalty. Because you had first mover advantage.

Brian:

Let's see, what are there weaknesses in this business? Yeah are there weaknesses here?

Om:

listen, the obvious weakness to be able to market, to do, to be able to dominate the market, you have to have a substantial r and d investment. Oh, right. Yeah. So you have the deep pockets. That's the first. Yeah. Weakness. If you don't have the money to invest, you're not able to get there.

Brian:

This, this is the opposite of what most people will say is like, oh, just put something out quick, or whatever. It's like, I dunno I like the, the, the longer I see in the field, the more that I like that we probably should do a different podcast just on the, because there, there is something to be said about the people that stay on and refine a product until it's like polished to a certain level, even if it's like ready to be shipped. Yeah. Like the old apple, like holding all your releases until a certain day in the year and only releasing twice a year or whatever other than security fixes but like holding all of your features and then releasing in a big bang, big go there's something to be said about that and the high RD cost is like the Airbnbs of the world is like, we ought have a big marketing kickoff launch. Well how much money must you have to be able to hold all of your developments? Just for marketing reasons, you must have a lot of money. And I think about a lot of money in terms of like high RD costs. Like you have the money to take this team with all their high salaries or whatever, and say, sit over there for six months. Eight months or whatever. Develop this new model and then when you're ready, big bang, whiz bang, whatever, big splash in the market. The other thing about the weaknesses of this model is somebody comes out with like, Ooh, we're coming out with the latest. You know when Claude code came out, what, what the heck is that? It's a brand new product, leverages their product, brand new product. Like now they have to teach everyone, they have to spend time teaching. Even when the GPT models came out, GPT two came out, nobody cared.

Speaker 4:

Right?

Brian:

It took them a while to teach the market., Hey, it's this machine learning and it's this token generation prediction and that kind of stuff. And then they taught the market enough to when their GT three came out, then they had a breakthrough on their hands. so there was that investment in Teaching

Om:

you're right.

Brian:

Yeah. And then if we're gonna take the top two in this category, which is anthropic and, old ChatGippity. Then we're gonna talk about the risk of fast followers. Oh yes. Oh, deep seek would be a great example. Like Open AI comes out, oh, Sam Altman over here saying like, don't call it a bubble. And then deep seeks over here is like, we train this model for three 50 and it's pretty good. Just as good as your latest flagship model that cost 500 bajillion dollars. And Sam Alman sheds a single tier,

Om:

yeah, I mean the same thing with EVs, right? Same thing. Now along comes a foreign competitor and that's right. Not only is it, is their product cheaper, but they would claim it's better.

Brian:

Right. Well claiming that you're super hot and got the greatest product and continually innovating and dropping models left and right all the time, you better keep doing that because the minute you stop someone's gonna overtake it. which is why, I mean, I would argue that's why Claude is where they're at in the market. They just came out with a better model and for a long enough time without responding that they were able to grab all that market share. So this, I mean the new product business model, like it's about capturing first mover advantage if you can, through innovation and speed to market. If you can maintain it.

Om:

You've gotta be able to withstand the pressure of continuously innovating, right?

Brian:

And also you can't be consuming your own product over here. You can't be like believing your own hype,

Om:

right?

Brian:

Which is basically, I'm just saying don't be Sam Altman. That's what I'm saying. So if you're Sam Altman, give us a comment. That's what I'm saying right now. And if you're not, we'll take your comments too. No, actually, if you're not Sam Altman, yeah. Please give us a comment. we have three business models left, so we're on the bomb run here to the end of this podcast, we're gonna talk about the relative market share business model. So you wanna know the business model where the bigger market share equals way more probability through the scale advantages that's what we're gonna talk about right now. Are you competing against market leaders who somehow charge less but make more money? Are you stuck with higher costs because you just can't scale like the big boys? The relative market share business model is about dominating market share to unlock cost advantages through scale. So it's being bigger makes you more profitable. that's the relative market share business model.

Speaker 4:

Yeah.

Om:

Yeah. And what springs to mind here is Amazon Walmart, Amazon, Google. Walmart. Absolutely. Walmart's a good one too.

Brian:

Yeah. So the look jumping straight into the strengths of this business model, because this is like, this is a, I don't wanna spend too much time on this business model'cause it is a business model. Be big so we can get better cuts. Yeah but I mean most people listen to the podcast saying, gonna be like, yeah, I'll run out there and do this right away. The cost leadership, like the scale allows you to use your leverage of just massive amounts to get discounts. Yeah. So you, you win on volume discounts to your suppliers and that improves your margin and you basically dictate the terms. That's what I'm saying.

Om:

Yeah. I mean'cause you're scaled up, so you're a front of mind for a lot of people.

Brian:

And then and then the Googles of the world will say like, the more data that people give us, the more transactions that we see, the better algorithms we can build, the better decisions we can make basically.

Om:

say more data. The data pool is bigger.

Brian:

Yeah. So and then obviously the more like the, I think about the like online processing world, the AWS only because like I'm on the AWS stack now, it's like if I pay so many dollars to keep a server running, there is some sort of balance where it's like, if I get more than X amount of concurrent users paying for the platform, there's a number that like just balances out to zero what I pay. For the platform. If I get a certain number over that, then you know, it's pure profit basically. Right, right. this number is like, there, there's a, there's a fixed cost leverage amount that you're spreading your cost over a larger amount of units. So your per unit becomes like it's tiny, minuscule, yeah, tiny. Yeah, yeah, yeah. So those are the strengths of this business model. I mean, there are weaknesses, obviously, bureaucracy, like Amazon's laying off thousands and thousands of people in manager positions right now because they want to be quote closer. I mean, they want more money. They're saying that they want less bureaucracy in the organization. But also as we know with Google, when you are the big dog in the market, you gotta go buy innovation in house. You don't build innovation, you buy it. So there's that.

Om:

You gotta be able to afford that.

Brian:

Yeah. And then, then of course that's, that's cool until the government comes in and you know, antitrust or monopoly or whatever, any kind of function. I mean, I understand American government's not, not functional right now, but maybe other governments are functional and they'll come in and just slam their fists down and be like, sorry, apple gotta put batteries in your phones. Or sorry, apple gotta add uscs in your phones or whatever. And then Apple says like, oh, okay, I guess we'll do that now. And then every, every other consumer will be like, what the, what the, how come you couldn't do that three, four years ago when I bought my phone new? And they'll say I like bread I don't know. So I dunno what they'll say. They have no excuse.'cause they always could have done it. Sure. The risks of this market is like, and beyond a certain scale like the additional once you dominate a market, like there's no deeper you can go in that market. Like there's only so much you

Om:

keep innovating.

Brian:

You can only lay off so many people until you just don't boost profits with layoffs anymore. That's what I'm saying you can only fire a hundred percent of the workers and then you can't fire more workers to make any more money. So let's take online hosting platforms anymore. Like there's only so much you can dominate that industry by competitors or whatever, and then charge until people just refuse to buy. Yeah. So like, there is a limit. just like the Chipotle CEO we were talking about earlier in the podcast. there's a limit where you make this much, you charge a dollar per burrito, you sell a hundred thousand burritos and then your margins are a hundred thousand dollars or whatever. But then you sell to less people at a higher price. You make $120,000 but you cut out 20% of the people that you're selling. That equation has a lower limit of like 50% of people are not willing to buy burritos over this price point.

Speaker 4:

Yeah.

Brian:

So now you're in a real conundrum so that there, there's a diminishing returns That can really quickly turn around and ruin your business.

Om:

And we've seen that happen over the over the years. We've seen household, we've seen greed happen. Greed and grief.

Brian:

Oh boy. So the relative market share business model, it's about dominating market share to unlock cost advantages and data benefits that competitors, they just can't match. boy, if you like burritos, like hit us up in the comments. That's what I'm saying. How much would you be willing to pay for a burrito? That's what I'm asking on the podcast. That that's not what I'm asking, but

Om:

essentially that's what you're asking,

Brian:

that's what I'm asking. So the next business model we're gonna talk about is the experience curve, business model. This is one of my personal favorites, the experience here. So you wanna know the business model where doing the same thing over and over again makes you more profitable. This is a business model for you, the experience curve, business model. So are you starting from scratch with every project? Like it's your first time. It's like we never see that in software development. Oh, no. Are you watching experienced competitors lap you and do the same work for less money and faster and more chocolatey. And more chocolatey. And, are you getting upset? Because every time you do something, you should be getting better and faster and more efficient, but you are not systematically capturing any improvement in it all. What if I told you that every time you serve the market, you could have your costs be dropping, your efficiency improving and your speed quickening.

Om:

Is gonna be very alluring, I would think, right?

Brian:

accumulation of experience that is your competitive advantage in the experience curve, business model. This is one I feel does not translate to modern business right here. Thought you were gonna say to software.

Om:

What about, what about businesses like the chip manufacturing company we talked about earlier? TSMC? TSMC? Yeah, absolutely. experience, stay focused. And they excel, they own the market.

Brian:

I would argue that any auto manufacturing has to have this. Any kind of manufacturing? T-S-M-C-I think about is manufacturing. Sure. They're manufacturing very specific niche products that require extreme skill. And I would expect you gotta have deep, deep skill and expertise to make the you can't just like, turn the machine on and hit the button. No yeah. Like that's not the way it works. Like you need some skill to, to operate and to maintain those machines and to operate them properly. Any auto manufacturer would be the same way , anything where they work on technology that goes to space. Nasa, SpaceX, any of those types of blue what? Whatever. Jeffrey Bezos company is blue Origin.. Jeff Bezos's space company is. Blue Man Group.. I can't remember. Cybersecurity and DevOps are also like on the deal, I think are in this business model in some way, shape or form. But also like Southwest Airlines started in this business model because they only ran certain routes, right. Or routes. They only ran certain routes and they only ran them with like the 737s and the, that was it. They had one plane, one route. Yeah. You know what I mean? And they just did that over and over again'cause they were very experienced at that. And that was it so that's a great

Om:

Yeah.

Brian:

If we're gonna stay on the strengths of this business model for a minute continuous improvement, which includes your margins, continuous improvement. Each iteration should be either increasing your expertise and or your cost. Ideally both. And you should be getting more profitable over time.

Om:

You're probably also increasing your brand loyalty over time as well. Keep your cost affordable for your customers.

Brian:

sure. Like you're compounding your knowledge with each iteration of continuous improvement. You're optimizing processes, which is basically the same as continuous improvement, and then you're increasing quality to everybody in that value chain of your company, the internal employees, board members, stakeholders, and of course customers. And that should be the experience curve business model, we got experts doing expert job. We all fully support them. Like that, that, that's like the opposite end of this bm like what, what corporate America is currently doing right now not hiring juniors at all. You know? So we're at the opposite end of, or maybe it isn't at the opposite end.'cause the senior jobs are kind of they're on an uptick right now in the market. Anyway. Maybe we'll have another podcast about the market. So there's a few things that are a advantageous and strengths of this business model, but it's not all strengths because every who rules this, every business model has weaknesses. Let's talk about some here. Which is obviously the technology disruption or really disruption of any kind, but technological disruption. Like you can run the best newspaper company in the world. But here comes Google's AI on every page that give you all the news, whether it's true or false, doesn't matter. People can't tell the difference.

Om:

That's right. Exactly. I agree. And that's a good example. The publishing industry is a good example. They were basically dominant at one point and they didn't really see it coming They also ignored the trend that the modern generation, they don't really Read newspapers they consume news in different ways,

Brian:

There was two things that happened in news periods. I think that technology disruption, number one, and also the market shift risk that basically like which also happened with Napster to music Yeah. Is that they decided like the cost of the cost of acquiring music is now going to drop the zero. What are you gonna do you know, record companies. Yeah. You know, charging whatever, $18 a CD or whatever, when you only wanted one track. I'm not saying the model wasn't total garbage before, but the, the market shift. Was totally ripe. Yeah. To be shifted

Om:

yeah. And they shifted it.

Brian:

And I would say also, if you have no mechanisms in your company for knowledge transfer, this is not your business model.

Om:

Yeah. You can't sustain yourself if you're gonna not have that.

Brian:

Yeah. one of the things I would ask about this one is the Toyota system will say you have continuous improvement and it just keeps going on and on forever. But at some point wouldn't you reach a pinnacle level where. I mean, it's like, how many different ways can you put in lug nuts? I'm just saying wouldn't you streamline to a point where the improvements are diminishing, you know what I mean? you have diminishing returns in your continuous improvement.

Om:

Maybe,

Brian:

not in like Southwest Airlines.

Om:

Yeah. But the diminishing returns wouldn't happen everywhere in your business. I mean, maybe in some places but in other places, you can constantly be in a pursuit of perfection. Yeah it's in the chase all the time. Mm-hmm.

Brian:

Well that's, that's the experience curve, business model. It's all about capturing learning and efficiency gains by repetition and continuously reducing costs of it. Continual learning continual improvement type of business model. this is a good one. We have, I'm sure on the fast, we've never done a Toyota specific episode, but that would be this business model. when it comes to that side of their business. So we're gonna jump to the low cost business model. You wanna know the business model where your entire business is designed to have a structural cost advantages that competitors cannot match. Are you trapped in a high cost business model? You're watching low cost competitors undercut you while they make great margins and your margins are like super slim? Are you trying to cut costs incrementally while competitors have fundamentally different cost structures? Are you frustrated because you're trapped in this high cost business model and you don't know how to get out of it? Then let's talk about the low cost design business model. So the low cost we talked a little bit about Southwest in that they only ran point to point routes

Om:

and use specific equipment.

Brian:

We wouldn't use specific equipment. There's also Ikea, like you might consider IKEA low quality. However it's a low cost. To them, right? Yeah. To produce business model. And then Dropbox is another one. And Dropbox really any online subscription kind of product where if you onboard their solution, their cost because they, they've already set up their infrastructure and everything is near zero to onboard you. Nobody talks to anyone. Nobody knows that you join the platform. I know we talked about Southwest as far as airlines, but there are other airlines like Spirit Air, Ryanair, there's other things that are, known for being low cost carriers. Low cost, yeah, yeah, yeah. They're known for being carriers. And grocery stores do this too, where they have like knockoff or generics, generic products and whatnot. Low cost cost them nearly nothing to produce. High margin! The strengths of these business model is a, it's a structural cost advantage. your business model creates structurally creates these cheap products that other competitors they'd have to invest a lot of capital to make things that cheap and they're just not going to, you know?

Om:

Yeah. And you could be profitable at a lower revenue because your cost is lower

Brian:

because it, yeah. Because your cost is lower. And in order to do that the discipline required to be able to do that like in the case of Southwest, it's like, well, how many mechanics would, like American Airlines for example, have, well, all Southwest mechanics, they're all 7 37 mechanics. A hundred percent of them. Yeah. And like, okay, well you can, it's pretty to train the new mechanics on the new fleet. Pilots would be another one. You train your new pilots and all the new pilots is a good one. Yeah, yeah, because

Om:

I mean, the, obviously it costs are higher there train pilots. I agree. I think that's true. Whereas the alternative, like another airline they could have other disadvantages like your one or two mechanics that you have specifically for an equipment, right? I don't know what that might be. 7, 7, 7. they're not available out sick right now. What do you do? Whereas here, you can bring someone in, right. The drop of a note quick notice'cause it's all 7 37 it gives you those advantages.

Brian:

You know, the strengths that I really enjoy about this business model, and you don't even need to be like low cost in my mind shares space with like, cheap, you know what I mean? like cheap meaning, like low quality. Yeah. It doesn't have to be low quality.'cause like in the case of like a Southwest Airlines for example, or like a Dropbox. we do one thing we do it well. We do file sharing, file syncing to you file, you install the thing on your computer, it syncs your files to the cloud that you put in there. You have a limited amount of space, but it syncs your files to the cloud in any other computer that you join. Like gets those files. That's it. That's the only thing we do. Now, Dropbox is a million things. That's good. Like it's, they kind of don't understand what they were good at, but that one thing if you can keep your company costs in control your scalability, if you can keep the low cost in control boy, that competitive moat that you just drew around yourself,

Om:

formidable, isn't it?

Brian:

They'll really have to sabotage themselves. I, I think about like a Google or somebody to say like, Hey, we're willing to lose money for 10 years to be able to compete with you I would expect, like why would they do that?, I, I can think of like the Amazon six pager of like, we should lose money for 10 years just because nobody else is competing. I don't think they would do that. I think, I think at an Amazon level, one of those, one of the big boys out there, I think they would just buy you and then that'd be the end of it. You know, that's, that's more likely that's what they'll do than try to roll their own solution. It is a moat. I mean, the pricing has to be right. But it is a moat.

Om:

Yeah. Yeah, I agree. And it is quite a, quite a solid proposition there, so it's a formidable moat if you get it right. So lastly on this, the four column low cost allows you to scale better than high cost alternatives because again, your costs are low, so your scaling costs are correspondingly lower as well yeah. Where your, your costs are higher. So growth is more efficient for your money, right?

Brian:

And so in the weaknesses we already talked about quality. Let's just lay that one out on the table and kinda look at what it means. So low cost. Oh boy I will tell you right now, I am not getting on a Spirit Airlines aircraft right now. I'd like oxygen mask when my plane goes over 10,000 feet and needs to send, now you're asking for too much. You know what? I don't know, man. I stick it out

Om:

the window.

Brian:

Yeah. Like I like drink service on my plane is what I'm saying. I like you know, I'm with you there. Listen, the air, air travel you like, you're already crammed in. Don't, there's only so many things you can take away from me before I start. I mean, like software I think of the same way as hey, too many hats or too much garbage or too much bloat in there. And I'm looking for alternatives like low cost should not necessarily mean reduced service. And when you're asking the customer to make sacrifices. Not just, you don't get perks to make sacrifices like for example, like you can't take anything on the plane with you Come on dude. Everyone's got a backpack or a roller bag when they're flying. Yeah. Nobody flies with a toothbrush in their pocket and that's it, you know? Right. That's ridiculous.

Om:

It is ridiculous. But that's where we are today, sadly. The perception is an issue here, right? Low cost is perceived to be inferior. Mm-hmm. So people think, oh, you pay a little bit more, you'll get more. That's not always true either.

Brian:

There's a commoditization risk here where like people don't see the advantages of your solution anymore. like air airfare, for example I have preferred airlines and I know people that have preferred hotels too, because they have Points or whatever that kinda stuff. But some people just get on whatever site they look on for airline and just take the cheapest flight. They don't care what it is. Mm. And like it's commoditized. They don't care at all. Home insurance, for example. you come at me with a cheaper rate than I'm getting now. I'm taking it. You know what I mean? That, that kind of stuff. It's commoditized, like nobody used it anyway.

Speaker 4:

Yeah.

Om:

Yeah. No, I get where you're coming from at the end of the day though. You gotta look deeper, right? Mm-hmm. As a customer,

Brian:

Yeah, maybe, some of these are like, they're just cheap. They're cheap service and not great business models. Yeah. Yeah. You know, but again, like some of these, I just would never I'm not gonna fly on an airline. It's like, sorry Brian, you can't take anything but your toothbrush and I'm gonna charge you Hey man, I don't wanna be nickel and DMed like, get outta my pocket and get outta my life. Shut the door. On your way out. What, who are you? How'd you get in my house? Remember when we talked about the pyramid business model where like your luxury brands at the top and then you like entry level brand, like the, the, the Cadillac brand is at the very top. Yeah. That's your premium product. And then the very bottom is like your Chevrolet whatever pre entry level, you know, a college kid car or whatever. This sort of has vibes of that is like, this is your low tier product. You're looking to undercut all the market, resegment all the current competitors into like a mid tier or a high tier. Right. And then come in under them where you can get away where like the majority of people just looking for a cheap ride to the airport or whatever it is, right? You're gonna come in and undercut all of them. I think about how easy it would be for someone to kick Uber out of a local market. You know, to just launch like an Uber-like app and just like have the branding of like, the driver takes 60%, we take 40%, you know, driver take like, call it like a, I'm coming in with a business right now on the spot of like kicking Uber out of a local hyperlocal market. Just one city at a time. it doesn't even have to be a whole city. You know what I mean? Just one like five mile block at a time. Yeah. Five mile area at a time. Saying like, we are the driver's app of like, when you go with us, the driver is guaranteed to get 60%. We'll show you all of the, we'll show you all of the transparency of billing. And I, I think with a product like that, I think you could kick Uber out of a mi like, it's like you could be low quality, charge less, make less money. Yeah. But you're going up like each, each like server and infrastructure, whatever you stand up would be specific to that city. They wouldn't have to scale 'em bajillion times or whatever. Yeah. So you'd have scale up costs and stuff like that, but it'd be like city by city you know? You would come in undercutting the market. I just wanted to stay on this one a little longer because we beat up the weaknesses of this one a little bit, but I wanna point out as the product manager I see a lot of potential in this, especially in the era of vibe coding.'cause that's what a lot of the Silicon Valley CEOs and those guys, that's what they're super scared of. They're super scared of people going through and getting rejected from the going through 20 going through and be like, Hmm, sorry, you're above 40. You got 20 years experience. We're looking for someone with More energy and they're worried about those people going and vibe, coding a replacement solution, dropping it in and just replacing their whole business. Yeah. It's a significant threat to them though. Yeah yes. Agreed. So the low, this is a great way to get your foot underneath almost any business. This, the low cost business design. The low cost business model. Business

Om:

Absolutely. Only good things will happen to you if you did that, I think, right? I mean, you could run into the ceiling there of scaling up but alternatively these, one of the big boys will buy out. Yeah. There you go.

Brian:

So the low cost business model it's about fundamentally redesigning your business for structural cost advantage. So good luck everyone. Let us know if you put Uber out of business in the comments.

Om:

Yes, indeed.

Brian:

the last business model that we have, you wanna know the business model, we're limiting supply lets you charge 500 to 5000% markup.

Om:

Those are absurd numbers, Brian, but I understand where this model is. I mean, I can think of products that fall under this. I absolutely want to hear about it. I'm sure our audience does too. So,

Brian:

are you maximizing volume when you should be limiting your supply? Are you watching other brands charge 10 times more for the same product that you produce? Are you frustrated because you think that your product is better and superior to other, more profitable products? Then I got a business model for you. It's called the scarcity business model.

Om:

It's about commanding a premium price for the fewer number of products that you produce in terms of what your output is

Brian:

I would also say that this is the scarcity business model. It's also not like the, Ferrari's, luxury brands that are made like Rolexes, like Rolex, Rolex that are made in limited numbers, like some trading cards and stuff do this. They're made in limited numbers to drive the price up. That is part of the strengths of this model. however this can be used with some of the other business models to lead into a real business model.

Om:

A different one.

Brian:

but it has limits. You know what I mean? It has limits. I mean, how many cars can Ferrari make? Well, they make a lot of money. Yeah. But what if they wanna make double the amount of money? they're not just gonna double the amount that their cars cost there are some limits in place. Sure. but if you think about the original Gmail when it came out, when you had to get an invite. That's right. Or like early open ai. I was part of a company that had access early. To open AI's. Chat GBT when three came out which was pretty cool. Clubhouse, the original clubhouse you had, had to have an invite. That's right. I think of like some of the I missed that product isn't the new video generation model. I think you have to have an invite or, AI for TikTok, like AI talk or whatever. anyway, you have to have an invite for that. Yeah. so on one hand it's not necessarily a full business model. It's more like a marketing tactic to. Pivot you into another. So it is a business model, but it pivots you into another business model, you know? Yeah.

Om:

I mean, for all the you know, good things that it does, right? I mean, it increases brand loyalty because if customers are now competing to buy your

Brian:

product, we're talking about strengths now. Brand prestige,

Om:

Nike limiting the number of sneakers they produce, right? For a specific brand model, right? Mm-hmm. There are other examples like that. You already talked about Ferraris and whatnot. Not only is the volume controlled, right? Yeah. They stamp each, each item with a number. So there's exclusivity. Everybody wants the top five or top two.

Brian:

You know what another one is, is, there are social media accounts, various, so I don't know, I'm not gonna name a specific platform, but like people will go and create like a social media group, like on a, a certain platform they'll go create a group get a bunch of followers or whatever, and then they'll sell the group to somebody else, the new person will change the group name and they'll immediately have a Yeah, yeah. they do that on a particular platform that may or may not own more than one social media platform. The scarcity is like you're in that group. The money they make off of the sale of that group that they've curated this audience. That's a scarcity model, I would argue Indeed. there's demand generation scarcity creating desire and urgency. Right. Yeah. the extreme pricing power. We talk about the luxury brands you have extreme pricing power. I mean, Ferrari, I guess, could double the price of their cars overnight if they wanted, and they probably would still sell cars. You know? and then there's a whole nother, like the resale market. There's a whole, like the trading cards do this exclusively, where there's a resale market, and some of the trading card companies have a share in that resale market and some don't.

Om:

Yeah. I mean, I think most people would understand the car analogy. Porsche does this very, very well because not only do they make limited numbers of their high-end models. We're talking about cars that cost over 200,000 US dollars. But they also then say, well, if you can't get one of those, how about one that we're selling for one 20 or one 40? It's only 0.3 seconds slower. it's brand prestige. People follow that.

Brian:

You're selling fomo right there. You're selling scarcity. You're selling exclusivity

Speaker 3:

exactly what you said at that point.

Brian:

You're in a club when you buy that. This is the old saying that like the, the BMW commercials are not to convince anyone they should buy a b, they're for the, they're for the current owners of BMWs to reinforce that. Like yes, you're in this exclusive brand. Is there weaknesses of this model?

Om:

Yes, there are. Just like all the other models, right? First of all,'cause you're selling your items at such a high premium price. You have revenue limitation. Total addressable market's also smaller.

Brian:

Is, this is the Ferrari example I said earlier you can't just double all.

Om:

can't. Exactly. And what happens if there's an economic downturn? People aren't buying Ferrari today. Yeah. Or not as many people are right.

Brian:

We talked about the limitations of the revenue. You can't just triple what whatever you want. So there's

Om:

also a, a very delicate balance between oversupply and undersupply right. Oversupply dilutes your scarcity. Right. And undersupply frustrates the customers because they can't get their hands on it. Yeah. To a certain degree, all of these makes and models that we've cited today do play that game. Yeah. Like they will reduce supply but there's a limit.

Brian:

Well, that's the scarcity business model. It's all about deliberately limiting supply to create an exclusivity and to command. Extreme power overpricing. I don't know how you would do this in a normal, like I would think you can do this in a software business. I'm just not sure how other than like the clubhouse example where it's limited, open beta, that kind of stuff. Yeah. Games do this at launch they, they have that kind of thing, right. But yeah, this is an interesting business model. Most people don't leverage their whole business off of this. They use it to lead into some sort of expansion and broader business.

Om:

You may start with this, right? And then the revenue you generate, you could use to segue into another model.

Brian:

So if you have questions about the scarcity business model let us know in the comments. And that will wrap up our review of business models, part one and two. Review of business models 23 business models from the book the Art of Profitability by Adrian Slywotzky.

Om:

Yeah. this is an MBA in two episodes, folks.

Brian:

If you enjoyed this one, if you have other business models that maybe we forgot. If anyone read a later version of the book and there's any business models that we missed.'cause like I said, when I read the book I think scarcity was called digital or maybe another one was called Digital. Anyway. Yeah. It wasn't in the, version that I got these examples from, but I'm interested to know, if people like this or didn't like it

Om:

I want names and numbers. That's right. That's right.

Brian:

Or if there were other things that we could have expanded on. I mean, we kind of breezed through just'cause there was so many of them. But we probably could have picked the, my favorite three or four outta here, I mean, the customer solutions one. Where we were talking about Palantir and then the pyramid and then the Lowcost model. Like those three would be a huge, just those,

Om:

so let us know down below your interest and any other topics you'd like us to delve into. That's right. I always like and subscribe 'cause every like helps a whale somewhere.

Brian:

Oh, that's, that is true. That's true.