4 ms·
This is a pretty good introduction into the nuance of COGS, but I find that it really isn't as useful of a valuation metric unless the company primarily sells i
by calderarrow 5y ago
This is a pretty good introduction into the nuance of COGS, but I find that it really isn't as useful of a valuation metric unless the company primarily sells inventory of some sort. MoviePass is an interesting example because it is sort of a mixture between a tech company and a traditional retail company with inventory, and its failure seems to be somewhat due to it trying to act like a pure tech company leveraging a deficit spending strategy.
For tech companies, the important thing is to understand the breakdown of your total costs: fixed and variable. Compare MoviePass to another tech company like Facebook. They both have similar fixed costs like rent, servers, and developers, but Facebook's variable costs per user are bytes of data which cost fractions of a penny, whereas MoviePass had larger variable costs per person because they actually had to buy the movie tickets as "inventory". You can pay a single developer a fixed salary per year whether 10 people are running their software or 10 million people, but your costs will be vastly different if your users see 10 movies per year compared to 10 million. MoviePass was gaining $10 per month per user, but since each user was costing more than $10 per month, no amount of scale would have saved them.[0] This is very different from companies who have virtually zero variable costs and actually increase in profitability (and valuation) from each additional user they recruit.
[0] Unless they pivoted, renegotiated costs, or added other sources of revenue.
- ghaff 5y agoThere's nothing inherently flawed about the product. One can imagine lots of tweaks: higher price, lower payment to theaters--which probably means they have to in turn negotiate with distributors, premium to use the pass at peak times, etc. (Of course, it's an open question whether they have a viable product at that point.)
- sumtechguy 5y agoI would add this is not a particular issue only for tech companies. All companies need to do this sort of work. If you sell hamburgers how much did it take you to sell 1 hamburger. In 'tech' what those costs and sales are, are different. But in the end total cost of sale is needed so you can figure out where MR=MC is for your business. As that tends to be the sweet spot. If marginal cost is wildly higher than marginal then you may have an unviable business. In this particular case it should have been fairly easy to tell. Total customers paying x 10 > total cost. If that is not true then you are not making money. Now there may be reasons to do that early but long term you are not going to make it. It is actually a good question to ask during an interview if you want to join a company that is doing OK. 'What sort of sales are you doing? Is your margin good or is it something else?' Basically ask around 'how are you making money'. It is important because in the end it affects your paycheck and how they will treat you.
- malshe 5y agoThe metric people use for this is operating leverage https://www.investopedia.com/terms/o/operatingleverage.asp https://www.investopedia.com/terms/o/operatingleverage.asp
- h2odragon 5y ago> as useful of a valuation metric unless the company primarily sells inventory of some sort. quibble: replace "inventory" with "quantifiable"; you might not need to put it in dollar terms but could express "COGS" in person time, for many purposes. The conform ability of the units used in those cases is a different debate