By John Beecroft
A few days ago, I read in Forbes Africa about Linda Ikeji’s latest venture – Linda Ikeji TV (LITV), a subscription video on demand (SVOD) platform. Since the launch in June 2018, 80,000 subscribers paid for a one-month subscription of N1,000 per subscriber. And bam! that gives a total of eighty million naira (N80m) monthly if she manages to keep them faithful.
What about oil? Oil sells at about $60 per barrel. Now assuming a $20 profit per barrel, that’s only N7,200. What’s special about this? Well, pump two million barrels per day, and suddenly you have a daily profit of N14,400,000,000 (N14.4 billion for those having problems processing the figure). Do this 365 days in a row, and you have N5.3 trillion to run the Nigerian economy!
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Are you getting my drift? The myriad real estate agents would have you believe that real estate is the new oil. That’s simply not true. Oil is small profits and high volumes. It’s about little products that can reach the masses.
There are two basic business models: You can either make large profits from a few sales or small profits from a lot of sales. For want of a better catch phrase, I call them BM1 and BM2. Let’s take a closer look at them.
Business Model 1 (BM1): Here, you make large profits from relatively few sales. Real estate, my own area of specialization, and automobiles for example fall into this category. We [Tetramanor] sell beautiful homes from N20m to N50m and typically make a profit of N3m to N8m per unit. However, due to the high price tag of the products, we can only sell a few units every year as the mass market simply cannot afford our products.
What about Brazilian hair for instance? Yes, you make large margins from each sale, but make no mistake, it’s BM1 you’re operating as your market is very limited – the number of slay queens that can afford N250k for common hair is just too small.
Business Model 2 (BM2): In this model, you sell low cost products to a very large market. Most of the richest people in Nigeria and the world at large operate this business model. Dangote has most of his money in cement. At N2,600 per 50kg bag of cement, he makes a paltry N640 per bag (from my calculations). Yet he was able to sell the equivalent of 470 million bags in 2018 to make N300 billion in profit (from sales) for the year! Incredible right? The same philosophy applies to his sugar business, pasta business and his new refinery. I doubt if he can get more than N20 per litre as profit. But when a nation of two hundred million people need your product, all you need is N1 profit per litre! Walmart, 50 cents here and 50 cents there, and voila, the richest family in the world. And the new Nigerian techstars? N50 per ride on this Okada and N10 per transaction on that app, and bam! we have a new generation of billionaires.
Let’s examine the differences between the business models in detail.
Target Market: For BM1 (low volumes, large profits), the target market are the elites for any specific category. For example, Mercedes Benz targets the elites for automobile buyers – perhaps those who earn above N30m per annum in Nigeria – while Brazilian Hair sellers target the elite of females – those who can spend N250k on hair without having neck pain. BM2 (high volumes, low profits) on the other hand targets the rest of the market not reached by BM1 e.g. the Hondas and Kias. In real estate, the Sujimoto’s operate BM1, while Adron Homes and co. who sell land at Ibeju Lekki operate BM2.
Volumes: For BM1, sale volumes are relatively low compared to the market at large. How many Nigerians really can afford N50m homes? If my company builds & sells about two homes a month, we would consider that a job well done. On the other hand, what population can afford to pay N1,000 monthly for LITV? Perhaps 199 million! And there’s your BM2 (large volumes).
Profit Margins: Profit margin refers to the percentage of the sale amount that’s left as profit. So if it costs me N15 to make a widget and I sell it for N20, my profit is N5 (N20-N15) and my profit margin is 25% (N5 / N20). Typically, I expect businesses operating BM2 to have smaller margins as they are very price sensitive than those operating BM1.
Profit Size: While BM1 has higher margins, the product price and profit size are also much higher. For instance, it’s easy for Sujimoto to make a profit of say N50m on a single duplex sale at Banana Island. On the other hand, Adron Homes operating BM2 and selling land at N1m might need to sell up to 100 or even 200 plots to get the same N50m.
Market Size and Competition: For BM1, because the customers are relatively few and elitist, the challenge is differentiating your product from that of the competition. As such, the war is being fought over quality and value. It’s all too easy to lose out completely in this market simply because the customers are so few. For those operating BM2 though, price is the differentiating factor. You’re selling a low-cost product to a lot of people who are very price sensitive. Competition is much fiercer in this market, but the potential rewards are also so much higher due to the almost unlimited size of the market.
Of course, you will find many businesses out there who toe the line between the two business models or who combine both models. Benefit of combining both models is that it allows you to make those large profits that come infrequently, with a constant stream of smaller inflows. Should there be a slowdown in sales of those big products, you would still be able to pay salaries using the smaller constant stream. My company for example builds & sells houses (BM1), but also rents out serviced apartments at very reasonable prices (BM2). A food seller can combine food sales (BM2) with event catering (BM1). Many other companies do the same successfully.
Finally, any business model you chose is perfectly okay. You just need to understand where you are, the limitations, and how you can take advantage of the opportunities therein. Personally though, I believe that if you want to be rich, BM1 is good. But if you’re looking for oil money, there’s no other way but BM2.
Back to Linda Ikeji; if she can scale to 200,000 subscribers monthly, that’s N200m per month. And should she be able to get to a million subscribers and maybe provide enough quality content to move the scale to N1,500 monthly, then bam! N1.5b in monthly receipts or N18b annually. Now, that’s black gold! I don’t know much about Linda Ikeji as a person nor can I be bothered. But as a business person, she has my respect and I’ll be glad to have a discussion with her over a glass of wine!
John Beecroft is the MD/CEO of Tetramanor
Comment #1: Good one there from John, it has always worked fine for any business that gets the models right. That’s why we always preach scalability, once that element is not there, your future is never assured.
I think Cowbell and its pricing regime actually forced all the big guys to have a rethink, else their struggles would have been unending.
But it does also appear that Apple scaled with its elitist model, they won in both volume and high cost; a very difficult thing to maintain for such a long time.
Of course if you sell car or homes, you need a second or third business, ordinary folks don’t buy these things; and you are likely to be accumulating debts…
Author’s Response: Thanks Francis. Your comment is particularly interesting because this article was born as I was cracking my brain on ways to scale our business. Apple indeed remains an enigma as they managed to achieve the impossible in an already crowded market. I won’t advise any other mortal to try that model – high volume, high profits – though. Simply too risky and in my opinion, not sustainable.
Comment #2: It’s really a lofty piece on business model classified into 2 categories based on the profit margins trajectories.
The BM1 consists luxurious or specialized products and services with very limited market size while the BM2 are products and services for mass market e.g sales of #Ferrari and #Bugatti with a possible profit of N50M(fifty million naira)per unit as against the sales of #Hyundai and #Kia with a profit margin of N1M. The market size for Hyundai is much more than that of Ferrari and Bugatti, but you will have to sell 50 units of the Hyundai to match the profit margin on the sales of Bugatti.
Moreso, the entrance bar in BM1 market is high only few players share the pie.
Whereas, the BM2 suffers high new entrants risk since the cost of entry is very low, many players share the pie in this space.
Meanwhile, I cannot really label the BM1 as the oil money as the BM2 markets has huge size (volumes though little profit margin ). There is as much money in the BM2 market just like in the BM1 market.
Thanks to Femi Beecroft for the write up and Prof. Ndubuisi Ekekwe for sharing it. Articulating this kind of thoughts ensures it’s conscious practical implementation, you cannot respond to or execute what you cannot remember.
Prof Ndubuisi Ekekwe, I don’t think Ms Ikeji’s business dealings are quite as simple as Femi Beecroft made it seem in that piece. She probably makes much more in endorsement income and spends a lot for content creation and workers’ wages.
However, the general principles he tried to illustrate with LITV are accurate and have been well noted. Every business model has its pros and cons, but the high-volume-low-margin model seems to be more attractive to people in general due to access to a much larger market and potentially lower startup costs.
However, many things need to work out well for both models to be successful, and that’s what’s more important in my opinion. While it’s very useful to understand your product, the frictions you want to tackle, your potential customer base, and the business model(s) you want to employ, understanding what makes either business model work and whether or not to employ a hybrid model is what separates the successful businesses from the not.
Timing, funding, decision making, and collaboration are important factors too. Unfortunately, I’m not a illustrator. It would’ve been a nice project to take on.