Big profit is a theoretical miracle

If you operate in a competitive market and don’t have a CFO watching your profitability

There’s ~50/50 chance you’re losing money.

Why? Economics.

In a competitive market with limited suppliers, big profit is a theoretical miracle.

What?

Okay, hear me out:

Supplies for running a small business are increasingly becoming monopoly/scarcity markets.

(Think advertising, rent, AWS cloud storage, physical materials, labor, cash, etc).

In any market, prices trend toward what the market is willing to pay. In a highly competitive buying market with limited suppliers, prices get set at the highest price you and all your peers are willing to pay.

What’s the cap on how much you and your peers will pay?

The max is just below your collective average income per unit.

(Aka. your income per subscription, per user, per bespoke bejeweled dog collar sold, etc.)

Aka. your profit

If your per-unit income is above average (you’re doing better than your peers), you’ll make a little profit.

If your per-unit income is below your peers, you’ll lose money because all your profits will go to your expenses.

This is why -in competitive markets with limited suppliers- we hear so many grumbles from business owners

• It’s why folks who advertise online hate Google

• It’s why engineering labor costs go up when Big Tech raises its comp packages

• It’s why the rent is too damn high

Expense prices for players in competitive markets are set by the maximum of what will still be profitable for the top ~50% of market participants.

So what does this mean for you?

Ask yourself: Are you in that top 50%? Do you even know?

If you aren’t, or you don’t know if you are, do whatever you need to do to get there.

Otherwise, you’re likely working every day at losing money.

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