The core idea in building a better business
Your goal as a company is to make money. This part, that’s pretty obvious. Most people know that’s what they’re in business for. Not everyone, but that’s the topic of a different essay.
So why don’t more businesses make money and those that are, why aren’t they making more money? The reality is that the people in the businesses don’t know how to. This is a near universal truth. A founder who has led a previous company to an acquisition once they reached 100 employees is in unknown territory with his next company once it reaches 150 employees.
In fact, that founder is probably in unknown territory much earlier. Because the market changes, the people within the company changes, and the world generally moves forward. Even if they know what they’re doing most the other people within the company don’t know exactly what to do to make more money for the business.
There are absolutely foundational strategic ways to improve your business that you can apply with no experience or even with the experience of building your company multiple times that will help you move faster. So this isn’t mean to say that people within the company are in complete ignorance about how to improve the business. In fact they’re not. They have lots of ideas from seeing what works internally and from looking around at what others have suggested. Ultimately you can’t just apply what you’ve seen out there in the world and hope it works. You need to see what happens to your company within your market.
So this leads me to what is the foundational truth for building a better company. In 1966 the concept of a learning curve was developed. Bruce Henderson at Boston Consulting Group built on it, and writing in 1973 he speaks to what they called the Experience Curve.
Said simply - the more you do, the better you get at it. This is obvious when stated this way but it has a real world impact. Companies with very real costs, factories and machines, see their costs go down as their total output goes up. There are many reasons for this. You get smarter about how to build what you’re building, you find ways to specialize, and within the market and company you innovate to replace labor and work with technology so that you can bring costs down.
This is somewhat of an introductory concept but it leads directly to a conclusion that is very rarely valued. It means that the faster you grow, the faster you learn, and through that the better business you have. This is true in a software company as much as it was true for the widget manufacturers of 1973. Your costs may not be as obvious but said foundationally - the more you do the better you are at it.
Some specific examples where this applies
The more leads you have, the better you get at closing them. Lower cost. Higher close rate. Higher ACV.
The more customers the better you get at giving and getting value from them.
You’ll ship things they’re more likely to want. You’ll be more effective at getting them to pay. More of them will share.
The faster you ship the better you ship. You’ll continue to ship faster, get better signal on what is worth shipping, and be able to adjust in technical improvements to help you ship even faster.
There are business fundamentals you must listen to. This isn’t a throwback to the 2019 days of excess spending. This is actually about obsessive focus on learning. If it was true for people building widgets, it’s true for your software company. Perhaps more so. Yet because of the environment over many years we’ve often ignored this foundational truth.
What this does mean is that getting people to use your product, as many as possible, as fast as possible, will allow you to build a better business now and into the future. You’ll be able to learn what they want, to ship that, and continue to build. It also means that obtaining market share has an outsized advantage. That when you take market share from your competitor you are stealing their learnings and bringing it into your own company.
There are many ways to approach how you do this. Importantly you can do it diligently and focused on results rather than just throwing money because you’re sure it will pay off. The fundamental shift to make is a focus on the value of taking market share and growing your user base and thus your business. That means that instead of throwing away a free user as “worthless” your recognize their core value in maintaining your market share and an opportunity to learn.
It also means that anything you can do today you do, instead of doing it tomorrow. Improvements that allow you to ship faster will then generally be worth it. It also means the competitive maneuvers that allow you to grow your market share, even if profitability remains a constant, is a long-term very valuable move to make.
How does this mean I think about tactically approaching this?
Price to grow market share.
Many companies mirror the market leader. This is especially true with startups. This is almost always the wrong decision. By matching the market share you’re providing them with an advantage to maintain their profitability and market share. In the best case you’re at feature parity and you give users minimal reason to choose you over the market leader. The theory of creative disruption does not say that a full-featured higher priced competitor enters the market and disrupts the leader, but rather the lower costs competitor that sees value in the “bad” part of the market. If you’re disrupting someone, act like it.
#1 includes how you package and your paywalls.
Pretty simple - it doesn’t matter if you price lower but you’re far more restrictive than others. Package up your levels with the same mindset of stealing market share and learning.
Operational excellence matters a lot.
I’m not fully sure why but even today software companies do not focus as much on operational excellence as they could and should. Many firms today are focused on financial excellence. Ensuring they meet a profitability bar, for example. This is good but far too little. Many firms that focus on profitability are still taking 2-3x longer to ship things than they should. Decisions are dragged out. Goals are unclear. And many other things which create operational drag. If the more you do allows you to do more for cheaper, then - do more.
Consider this my first written attempt at explaining a core foundational concept I believe I’ve long failed at clearly articulating within companies. I believe this is the core foundation of how to build a better business. Increase your velocity of everything and it will all compound and improve. As an attempt to improve myself - if anything was at all unclear, please reply to this email and let me know. It’s such an important idea, I want to keep iterating until it’s articulated well!