The greatest moment in a business is when a company discovers and operates a great business model. Why? It is through a business model that companies create value. Yes, a business model encapsulates the logic of a firm, and the way it combines and uses factors of production to create value for stakeholders.
But how do you create value for a profit company? Great question. Join me tomorrow as we discuss Pricing. Do you go cost plus or value-based pricing? How is that pricing going to help you scale, looking at your marginal cost?
Good People, your pricing strategy affects value capture which can shape your unit economics. When the unit economics is bad, you are not SCALING, but growing, and will hit diminishing returns soon on making money! The greatest companies SCALE, not just grow. And that happens when revenue and profit grow faster than your cost. So, if you plot the transaction cost, distribution cost, fixed cost, revenue, and profit, against Growth, the first three will be largely flat even as the last two are shooting into space. Go exponential on PROFIT!
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Amazing People, when marginal cost continuously tends towards zero (i.e. asymptotically to the horizontal line) even as growth happens, you have a GREAT company because growth becomes unbounded and unconstrained – and alpha comes. Welcome to a successful company!
My grandmother, Lechi, in Orendu Market Ovim, on her yam and garri stores understood the shifting nature of pricing. If you cannot sell the plantain before the bulk traders from Umuahia are done buying, re-price immediately. If you do not do that, that product is possibly a waste due to lack of storage facilities.
Join me for the Physics of Pricing. This is Tekedia Institute, and we’re the #best. Pick a seat here for the next edition of Tekedia Mini-MBA here.
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