Selling below cost is a race that when you win, you loose.

From the top down this is simply building a business with a negative gross margin.

From the bottoms up this is just plain suicidal to me. Like lemmings sprinting towards the cliff.

I’m simply not smart enough to understand how when you sell below cost (negative gross margin) you can get to net operating profit.

Crazy corner cases aside, this is when street math and startup math are the same.

This is becoming strangely endemic and not just in the rarified world of big players with big dollars scorching the earth to buy market share.

I see it on the shelves of Whole Foods. I see it in many pitches of startups. I see it in every company when they face the truth of building a market for their product and it just doesn’t go as planned.

First some biases:

-I don’t believe that markets can be bought. You can roll up capabilities and lock down distribution but the market is its own master. It will humiliate the most audacious and drain the bank account of the most well funded.

-I don’t ascribe to the tactic that acquiring a customer at any cost is the right action. Beware of forecasting a very long brand life and using LTV as a justification for acting crazy with your checkbook.

-I am absolutely certain that recognition built on discounts and sales is simply reflex consumer responses to a deal, not connected to building a market nor deepening brand value.

This happened a few weeks ago.

I was talking to a startup founder around his new strategy for penetrating a market segment that was drawing a lot of attention and investment.

He has a really cool brand, grounded in innovation though quite small but facing stiff growth inertia.

After a large acquisition in the space, he was embracing a Trojan horse strategy with a low cost, below cogs and entry-level product that could leverage them into broader based distribution. He had decided that it was OK to loose money on each and every sale.

This is a dangerous and desperate game to play with little odds of winning.

I seriously understand the frustration of stalled growth.

Most of the time we are stymied over not growing fast enough or nervous that our market share is being taken by someone else.

I understand the massive anxiety that comes from being out there raising capital and being told day in and day out, that you are building a business that is solid but doesn’t have escape velocity to warrant a high multiple investment.

And the then unnatural acts as you convince yourself you have to be to be that company.

As a commenter responded to me on a blog string and I paraphrase from memory—a fruit stand peddler at the dawn of civilization knows that if you sell every apple at a loss, you will run out of product before you make any money.

Seems to be a lesson that forever needs to be relearned.

It’s too easy to be a curmudgeon and talk about the impatience of both funders and entrepreneurs. I find that people are smarter than the generalizations we make of their actions.

But it’s a riddle why time and again, we are comfortable with the process of patiently building products, then completely unrealistic about the rigors of getting them to market momentum.

I think there are two truths that bear repeating.

-You are building your brand at the point of sale with each and every transaction. Be it online or across the check out counter.

Throw away your common distinctions of sales and marketing and think of yourself in the customer’s eyes.

If business were a board game Monopoly money our currency, always on sale would still be a loosing strategy.

You need to build value—build brand—before discounts and sales become a strategy. People buy cheap, then they buy something else cheap.

Communities of buyers connect to brand, then take sales and discounts as a personal gift. The stronger the attachment to the undiscounted value of what you make the more powerful a sale can be.

If you evaluate a sale by its revenue you are missing the point. If you evaluate pricing and discounts as a brand and customer acquisition tool, you look at lift post discounts as the true measure of success.

-Business models iterate, business fundamentals usually don’t

I’ve never built a budget or a plan that didn’t change.
But the fundamentals of margin, of cost with volume of the relationship of what you build and the resources to acquire customers are fundamental.

Someone said that you need to understand your brand value and your market dynamics but you don’t early on need to understand how to scale.

This captures it all for me.

This is why I keep building spreadsheets that go up and to the right for investors, but what I really care about is the dynamics of the brand and how it can capture market fit and that the business fundamentals are sane.

If you have these pieces and enough capital to be patient, you have a shot.

The tech world especially is steeped in the mythos of the unimaginable.

The Freemium model that got acquired for billions of dollars when their model was gushing cash at a loss.  The overnight success that went from zero to acquisition in a handful of years.

It happens but your plan should be that it will never happen to you. Don’t fall prey to unnatural thinking that negative gross margins somehow make sense.

Put the pieces together.

Know why people can love what you do or make.  Understand the fundamental business blocks of your vision.

Then go make it so.