Remember our base case for this business?
Like so many of the businesses we manage, this business is STUCK. It's going nowhere. Sales are generally flat (or increasing by 1% - 3% per year). It's a business that is wandering in the wilderness.
It's also a business that pockets profit (cash).
What if this business didn't pocket the profit (cash) generated by operating the business? What if the business invested the money? Even in a marketing channel with a lousy return on investment - like radio/television?
Let's do that for just one year - and then we'll go back to what this business used to do. Take a look at the example below - where I invest an additional $10,000,000 on radio/television advertising.
Look at that ... the top-line grows by 20%, profit is nuked (but the business is still profitable) ... and then something interesting happens ... the business, even after reverting back to normal, becomes MORE PROFITABLE over time.
MORE PROFITABLE!
See, those customers from the heavy investment year become good customers over time and start delivering profit.
What happens if we invest heavily in radio/television EVERY year? Maybe the business looks more like Amazon? We'll find out tomorrow.
P.S.: I talk a lot about low-cost / no-cost customer acquisition? Why? Because you are competing indirectly against people like Disney who may have to spend $150,000,000 marketing a new streaming service to customers (click here).
P.S.: I talk a lot about low-cost / no-cost customer acquisition? Why? Because you are competing indirectly against people like Disney who may have to spend $150,000,000 marketing a new streaming service to customers (click here).
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