The Three Foundational Rules of Business

Over the past 5 years, I have read and talked about different business models, different businesses and different marketing tactics and strategies. Market planning, Campaign execution, Market research, Value proposition – we all heard these terms, and more often than not think they are just jargon – unnecessary to the actual business. Considering the abuse that these terms have had to go through, I wouldn’t disagree with much of your views. However, all these steps are very important if you want to be successful in a business – self-owned or employed by someone else. People don’t seem to agree – they are of the opinion that as long as money comes in, all these jazzy terms can take a rest. I would go further and say that there are three fundamental equations (and building blocks), if taken care of would encompass all the other jazzy terms. They are -

1) Demand vs Supply

2) Cost vs Benefit (or Revenue)

3) Risk vs Return

1) Supply and Demand: From a pin to a diamond, all businesses are based on this fundamental equation. Sometimes the demand exists (like groceries), sometimes the demand is made artificial (like diamonds) and sometimes demand is created (like the iPod or the erstwhile Walkman). Every successful business exploits the demand which has not been satisfied and sustains it according to changing needs.

2) Cost vs Benefit (or Revenue): Benefit and Revenue are interchangeable terms (unless you get into science and call Benefit as psychological and Revenue as material). Every business (or entrepreneur) weighs cost and revenue and as long as revenue exceeds costs, the business is profitable and sustainable. The cost and revenue per item would necessarily give a view of the business – in case of cars, the margin of profit is normal, in case of rare goods, the margin of profit is excessive and in case of some products like the Xbox, the revenue per item exceeds cost per item only after sale of x number of items (due to a concept called ‘economies of scale’).

3) Risk vs Return: The most diciest of all equations. More often than not, greater risk might imply greater return – but not necessarily so. There are some options to hedge, so that return can be disproportionate to the risk involved. However, it all depends on the business one wants to run.

As I said earlier, when we read all the marketing and salesy terms, we think it is commonsense – it is the revenue that matters, all these concepts are only for a consultant. Revenue does indeed matter – but the steps involved in say Kotler’s Marketing Management (one of the best books for Marketing, ever!) steer you in a direction where you can structure and benefit from increased revenues and reduced costs. However, the essential check is this – as long as you can break any of the management terms into these three fundamental rules, as long as you understand how those terms influence these three fundamental rules – usage/implementation of those terms are not only sufficient in today’s world but absolutely necessary.
If you can use those terms without understanding the implications to the three rules, well, you can call yourself a management consultant right there

P.S: What;s up with these terms like ‘Long Tail’ and ‘Permission Marketing’? If my memory serves me right, there was some concept called ‘Niche marketing’ (in Kotler, of course) that I read which exactly reflected ‘Long tail‘ concepts – or is it the other way round? Ditto with ‘Permission Marketing‘ – same concepts as ‘Direct Marketing’ (although Direct Mktg of late has been abused). Even more surprising, people write a whole volume on simple concepts such as these – and the blinding surprise of all, they go on to become best-sellers! Can we institute a Nobel prize for the reinvention of the wheel please??