How to Make a Fortune by Making No Profits
Want to Grow? Invest Your Profits in Marketing Instead of Stuffing Them In Your Pocket
Amazon.com’s Business Model Is Actually a Blueprint for How to Make Your Business into A Market-Leading Giant
Intuitively, I knew I was right to buy Amazon.com stock.
I bought it a few years ago after it took a big loss in the market after another quarter of disappointing earnings were announced.
My thought process went like this: Amazon has created a behemoth online store that is always getting into new categories that delivers stuff to my house for free with astonishing speed… and that offers very reasonable pricing. I don’t know a single person who says, “I hate Amazon.com.” I don’t recall anyone ever saying they’ve even had a bad experience with the compay, which is quite a feat given the fact that the company is completely run by an army of robots, drones, and cyborgs. Seriously, when was the last time you talked to an actual PERSON at Amazon? Furthermore, they have essentially ZERO competition because, well, who else can build out their massive inventory & delivery infrastructure? Currently, nobody. That’s who.
But the rub for investors has always been the company’s perpetually inability to deliver any profits. Analysts and talking heads are always demanding to know how a company that never earns a profit can actually be worth billions of dollars.
So naturally, when it dipped below $300 a share, I picked some up.
Then for the next nine months I watched it see-saw between about $290 and $350. Any time it dipped below $300, it would sun’s-gonna-rise-in-the-east reliably pop back to $325. It was a sure bet.
So when it dropped to $286 in early January, I should have been smart enough to buy up as many shares as I could afford—which of course, stupidly, I did not.
Because when they announced their earnings report on January 29th, they caught the entire investing world off-guard by announcing a (gasp!) nice profit! Immediately following the announcement, the shares shot up by 14% and as of this writing, are up about 22% since I bought them.
Which begs the question….SO WHAT?!?
It turns out, Amazon is a lot smarter than most people think. I read this article the next morning that explains what most people don’t know about Amazon and how this all relates to your company’s marketing efforts.
Here’s the essential quote from the article:
A lot of people believe that if a company never makes money, it must, fundamentally, go bankrupt. This isn’t the case, as Amazon proves.
Here is how Amazon actually works: As long as the company can grow its revenues, it can spend any profit it makes on new lines of business that throw off more revenues. Those revenues may also be profitable, and those profits can in turn be immediately spent again on more growth. By eschewing profits, the company can also offer the lowest prices possible (which is why consumers are so loyal to it). Some parts of the company are profitable and fuel growth in others.
In case you missed it: THEY INVEST ALL THEIR (substantial) PROFITS BACK INTO THE BUSINESS SO IT CAN GROW EVEN BIGGER!
Which got me to thinking about the biggest adult companies I know—they all intuitively figured out that they could beat their competitors by investing their profits back into their businesses, especially into advertising.
I know a company that started from scratch ($0 in sales!) in 2008 (recession, anyone?) and grew it to over $100 million in sales in 2012. From zero to $100 million in five years in the middle of a recession?
Their secret was simple: they automatically budgeted a healthy percentage of the current year’s profit into the next year’s advertising budget.
Instead of stuffing the money in the owner’s pocket.
10% is automatically budgeted for marketing, which amounts to over $10 million a year. In less than five years they went from a literal nobody to one of the most well-known adult companies in the business. Their competitors who have been in business for twenty years, but hoard cash like a fat kid clinging to Halloween candy don’t stand a chance.
In 2014, they took their foot off the accelerator to give themselves a chance to get their systems in order to be able to grow even more.
But in 2016, they plan on generating $150 million in revenue, and their ad budget will reach $25 million. That’s more money spent on advertising than most of their small-thinking competitors earn in top-line revenue.
The big will get bigger. The small will stay small.
I’ve seen it way too many times to count.
What you need is a plan. Like this:
Raise your prices.
Develop a good strong identity so that prospects don’t flinch when you ask for your new, higher price.
Take the extra money and spend it on marketing.
If you’re doing $2 million in sales, that’s $200,000.
Over the next one to two years, creep the PERCENTAGE of spending on marketing up to 15%.
So if you are doing $3 million in two years, that’s a budget of $300,000 to $450,000.
Make sure you have professionals buying your media. Trust me, the money you think you’re saving by being “your own agency” or by using in house college graduates is losing you a ton of money.
Make sure you write killer, identity-oriented ads.
Rinse and repeat.
Profits will come—just be patient. Meanwhile, dump all your profits back into your company and watch it grow, grow, grow.
Or get ready to get squashed by those who do.
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