How we make money

How we make money

The objective of every business is to make money. The question is how you are going about making the money.

You could be building a business that is transaction led. This is the kind of business where every day you get new customers and you do something specific for them. We all can think of so many businesses that fall into this category.

Every restaurant that you can think of, finds a new customer each day to fill its seats. Every cab aggregator you can think of; yes, you have downloaded their app and created an account but you always have the choice of switching to another one, switching away. Every e-commerce company out there – same as above. They all need to keep discovering and investing in new customers.

The hardest businesses are ones where you need to keep finding new customers to keep the business running. It keeps you on the run all the time. Also, when something like the current pandemic does come up, you see what happens. They are left with no customers!

Such businesses also tend to be valued at multiples of their profits. If profits disappear, there is no other underlying asset to fall back upon.

Alternately, if you are in the business of building relationships you have the relationship to fall back to.

Businesses that can hold onto their customers are businesses that build a relationship and engage constantly with their customers by offering continuous value. They are therefore able to get recurring business from the same customers and this puts less pressure on them to keep discovering them. They can relax and focus.

Such businesses are valued at multiple of their revenues, not their profits. The stronger the relationship, the more the multiples.

Amazon by its nature was a transactional business. People went to them when they had a better offer, but the option of going to others has always been open. Amazon was smart enough to turn this transaction into a relationship. With the launch of Amazon Prime, the company built a relationship with its customers, a reason for the customers to keep coming back to them. Perhaps the content was a hook but it has certainly helped their e-commerce business.

Every business has this choice at hand. The question is are you going for a transaction or a relationship?

Vivek Srinivasan

Co-Founder, Startups Club Traveller, Thinker, Writer, Doer

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