Defenestrating Thoughts from the Bivouac

Continuing on the theme of amusing business ideas, a few friends and I have been joking about starting our own business consulting company. Our promise is that we can triple your company’s revenue in a year, guaranteed!

The strategy is to take advantage of loss leaders. Loss leaders are items sold below cost in the hope of selling a more profitable item later. A famous example, the Gillette model, is how Gillette sells their razors for cheap (or gives them out for free) and makes up the money when people buy the high-margin replacement blades.

It’s also how the Xbox and Playstation business models work. The companies lose money on the console and hope to make it up on the game sales. Nintendo, however, makes a profit on both the console and the games.

A number of companies use the loss leader to brag about “huge revenue growth” during analyst reviews, while remaining quiet about the lack of profit. This gives the impression that the company is doing great while the verdict is still out on whether they can recoup their losses. I had always found it strange that some companies always talked about revenue, but rarely talked about profit. But once I realized that it’s easy to make revenue look good, I figured out what was going on.

So back to the business consulting idea. Basically the recommendation is that you set up a loss leader situation or in other words, “Sell $100 for $20″. Revenue goes up, so the investors are happy, and the stock goes up. :-)

Once you’ve saturated the market with the loss leaders like the video game consoles, people start buying games. Eventually you reach a point, where in a fiscal quarter console sales have slowed and game sales have risen so you actually have a profit. Then you can announce “We’re profitable!”. Never mind, all the losses you took in the previously quarters, this quarter was good! So again, the investors are happy and the stock goes up.

Of course, over time you could earn back all your losses, but sometimes you don’t. Especially in fast moving markets, you may be releasing a new console while still trying to recover costs of the old one.

And yes, loss leaders are a very legitimate business strategy. But notice how similar it is to this stupid idea:

• Give people a $20 bill for 15 $1 bills - Revenue is $20 per transaction.
• Soon you can announce record high revenues and watch the stock go up. Keep going until you spend most of your venture capital funds.
• By now, you’ve cornered the market on $1 bills. And demand on $1 bills goes up since people can’t make change without them.
• Offer change with a 5% service charge - the profit is 5% per transaction.
• Announce your first quarter of profitability and watch the stock go up again.

Sure, there are a few reasons that this won’t work. But substitute “dollar bills” with disposable razors or video games, and it just might. :-)