Pick a Business Model With Leverage
Naval
Naval Ravikant
4.8 • 2.4K Ratings
🗓️ 22 April 2019
⏱️ 6 minutes
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Summary
Ideally, you should pick a business model with network effects, low marginal costs and scale economies.
• Scale economies: the more you produce, the cheaper it gets 0:00
• Zero marginal cost of reproduction: producing more is free 0:51
• Network effects: value grows as the square of the customers 1:34
• Network effect businesses are natural monopolies 2:26
• In a network effect, each new user adds value to the existing users 3:06
• Zero marginal cost businesses can pivot into network effect businesses 5:01
Transcript: http://nav.al/business-models
Transcript
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| 0:00.0 | One more question about leverage. Do you think a choice of business model or a choice of product |
| 0:05.7 | can also bring a kind of leverage to it? For example, pursuing a business that has network |
| 0:11.0 | effects, pursuing a business that has brand effects, or other choices of business model that people |
| 0:17.2 | could manipulate that just give you free leverage? Yeah, there's some really good micro-economic |
| 0:23.6 | concepts that are important to understand. One of those is scale economies, which is the more you |
| 0:29.0 | produce of something that cheaper it gets to make. That's something that a lot of businesses have, |
| 0:33.0 | basic economics 101, and you should try and get into a business where making widget number 12 is |
| 0:38.4 | cheaper than making widget number 5 and making widget number 10,000 is a lot cheaper than the |
| 0:42.4 | previous ones. This builds up an automatic sort of barred entry against competition and getting |
| 0:47.4 | commoditized. That's an important one. Another one, this is along the same lines, but technology |
| 0:53.3 | products, especially and media products, have this great quality where they have zero marginal cost |
| 0:58.9 | of reproduction. So creating another copy, which you just created is free. So when somebody |
| 1:03.7 | listens to this podcast or watches a YouTube video about this, it doesn't cost me anything for the |
| 1:09.2 | next person who shows up. Those zero marginal cost things, they take a while to get going because |
| 1:13.5 | you make very little money per user, but over time they can really, really add up. So Joe Rogan is |
| 1:19.1 | working no harder on his current podcast than he was on podcast number one, but on podcast number |
| 1:24.2 | 1100, he's making a million dollars for the podcast, whereas for the previous one, he probably lost |
| 1:29.2 | money for the first one. That's an example of zero marginal cost. And then the most subtle, but the |
| 1:34.7 | most important is this idea of network effects. And it comes from computer networking, Bob Medcalf, |
| 1:40.4 | who created Ethernet, famously coined Medcalf's law, which is the value of a network as a proportional |
| 1:46.3 | to the square of the number of nodes in the network. So if a network of size 10 would have a value |
| 1:52.1 | of 100 network of a size 100 would have a value of 10,000. It's not just 10x more. It's a |
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