When all businesses expect and strive for a higher gross margin, a few started with negative gross margin for years; not because of weakness in processes but with a strategy to operate with negative margins.
It is difficult to understand the thought process and the method used by many successful entrepreneurs. Their method of penetrating into a business, establishing their presence, developing it, using a different technique used for market penetration, establishing their presence, and finally making it a highly profitable business. How do they do that? A question circles around many aspirants and the most common answer is ‘risk-taking’ ability. It is a known fact that whatever we do, we have a portion of the risk associated. The risk is everywhere, whether driving on-road or traveling by flight, even in getting a job, passing exams, losing friends, and whatnot. With a mass of uncertainties around, a few have built a business empire and overcome challenges.
Their strategy is unique, which few dare to try it. And, the strategy is to operate a business with a negative margin. Now, the important point to be noted is that a negative margin strategy is useful only if someone has long-term goals. It completely negates the short-term profitability business model. Thus, there is a 'Strategy by design' to generate negative margins in the business.
The negative margin means losing money with each transaction.
The idea is to design a business model in such a way that the competition cannot follow it. Only those who have courage, a robust strategy, can operate a business at a loss. It is a hard choice, even to gain a larger market share, to convert a profit-generating into a negative margin generating model, although for a shorter span, one must have the nerves of steel. If any business dares to do it, then the competition is left with few choices. Either they need to revise the cost structure or join the race. The aim is to create a sustainable business.
The goal can be to keep the newcomers out of business and put a stop to the competition penetrating in their market share. Thus, operating a business at a lower margin and sometimes, even on a negative margin, is the only way to stay strong and maintain the market share. Instead, start penetrating in others’ market share at a loss?
The realisation comes to others when these exceptional risk-taking entrepreneurs are seen sitting on the top-hill of a business empire. There are various examples of a successful organisation where they operated with a loss for multiple years, before converting it into the most successful in their stream. The strategy is to operate at a loss for a period to gain footprints or create a customer base, which can later convert to a profitable business. The example of Amazon is quite popular, and other examples are from FedEx, Tesla Motors, ESPN, and many more.
My favorite is from Reliance Jio of India. They began with broadband services and extended into mobile products and services. Then, to create a customer base, the blueprint was to offer an ‘unlimited free data pack’ for three months. This offer had created the toughest challenge for existing competitors, i.e., for Airtel and Vodafone. The strategy was simple, to get a customer base, which is crucial for any telecom business. Therefore, even at a negative margin, short-term ploy had given the leverage.
A multi-product business unit uses this technique effectively. The business model of Gillette, which is also popularly known as the ‘razor and blade business model’, is not a secret. The business model is to sell one item at a cheap price to improve the sale of a complementary item, which eventually has a much higher profit margin. Not only Gillette but the printer manufacturing companies where the cost of ink cartridges is quite enormous.
Selling products at a negative margin can still make higher profits, increases market share, and few instances create a monopoly.
Comments