Profit Incentive

Scott Francis
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Many of my peers in software came of age during the age of Web 1.0 – where profit was never really part of the metrics for running the business.  Even in Web 2.0 – or in the whole set of startups going on now whatever the label – there isn’t as much focus on making money as you might think. Partly, there are forces that teach us to use free products and services:
  1. Great free services:  Gmail (and others), Google Maps, freemium models for everything from dropbox to tripit.
  2. Open source:  lots of commercial products are facing real competition from open source projects focused on the same space.
But some of us were never comfortable with businesses that don’t make money (there is a difference between not making money yet and not making money at all).  If a product or service is compelling enough, customers will pay for it.  If it isn’t, they won’t.  At times, the price they’ll pay is less than the cost of providing the product or service – and then it makes sense to find other means of funding or monetizing (ads for Google’s Gmail for example).  But typically, a good product will command a price more than the cost of production. Also, making money is a good habit to get into as a company.  Companies that are profitable early in their history tend to stay that way for a long time.  Companies that lose money early tend to keep losing money. One difference between the software and hardware world is that lack of profit seems to come to light faster.  When Apple released the iPad, its claims that it was priced aggressively were scoffed by industry pundits who were used to Apple being “the most expensive car on the lot”.  But as more recent “tablet” entrants have shown, Apple really did price the iPad aggressively.  And yet, aggressively still means at a healthy profit! As HP WebOS tablets fly off the shelves at $99 a pop, some have now argued that HP should have pushed a bunch of tablets into customers hands at $99 or $199.  But that’s not aggressive pricing, that’s profit-killing pricing.  John Gruber covers this really well on Daring Fireball :
That wouldn’t fly. Selling TouchPads at a steep loss wouldn’t just burn a ton of cash “at first”. It would burn a ton of cash continuously, every time one was sold. […] Sustainable businesses are built on profit.
Amen.  And John’s point is right, in my view – without a way to make money post-sale on each of these tablets, the prospects for a loss-leader strategy are not good.  Making money is a habit, and a discipline.  In this case, HP tried to do the right thing at first – price them an aggressive, but profitable , price.  That wasn’t working.  The value proposition wasn’t good enough vis-a-vis the iPad.  But a lower priced device isn’t viable for HP’s business. When I work with vendors, I want to know they’re making money.  Otherwise their business isn’t sustainable – and how do I know I won’t be holding the bag when I needed them most?  And as our business and our needs grow, how will they continue to support our business?  They have to have profits to reinvest! If a company isn’t making money, it should still be in search of its scalable business model – it isn’t a real business yet.   If the model is set, and the company is losing money, it isn’t a business anymore, and the company should be in search of a recovery path.