I recently finished the core courses of my MBA. In the Cornell Tech MBA program, we complete the standard MBA courses like Economics, Accounting, Statistics, Strategy, etc. in an accelerated manner at the Johnson School of Management in Ithaca, NY. Then we move down to NYC and apply entrepreneurial processes in real world scenarios with a couple different companies and then work on a startup of our own. So as I reflect on what I learned in my face-paced summer experience at Johnson, I am definitely planning on taking three lessons with me as I continue on my entrepreneurial journey.
Reducing operating costs is one way to increase your profit. So the first lesson that stuck with me was “I need to achieve economies of scale”. Economies of scale are achieved when you can save more in purchasing goods than your competitors, because you are purchasing more. This is done typically when you spread out to multiple locations. For instance Walmart spends much less on a bottle of Ketchup than a corner store because it buys in bulk. That means competing on price with big franchise companies is very hard to do since they could always go lower than the little guy. Find a niche and grow and spread out so that, as competition arises, you can fend them off with your prices.
The second lesson helps you gain customers. Build a product/service where my customers are part of a network of customers that benefit from each other. The more people that join the network, the better the network becomes. This is called network externalities or the network effect. Facebook for instance becomes better as more of your friends join it. This summer we used WhatsApp to communicate amongst our class. Even though half of us didn’t have it, we were convinced to use it in order to effectively communicate with each other. Cell phone companies use to do this very well when you could talk and text people in your network for free.
The third lesson I retained after over a hundred hours of instruction has to do with keeping your customers. Build switching costs into your service that prevents your customers from easily leaving you for a competitor. That sounds a lot more cutthroat than it actually is. A switching cost could be losing points I earned by flying Delta when I decided to fly with United. Or it could be having to import all my contacts manually from my Android phone to another phone because I can’t simply use Google Contacts to export my contacts. If you don’t make it easy for someone to leave you, they are more likely to stay with you. My brother was interested in starting a service business. I suggested that instead of charging a per service charge, he should have his customers buy credits that can be redeemed for service. That way switching costs are built in to his system and when a customer has a stockpiled amount of credits, she will have a harder time switching to another company because of the investment she has already put into his company.
So that’s what I learned. Well at least what stuck out the most. Try to achieve economies of scale quickly to ward off competition; Build a network of your customers where they find benefit in having more people in the network and do your marketing for you; Include switching costs, whether obvious or inconspicuously, into your structure that forces a customer to think twice before leaving you for a competitor.
And with that, we say bye to Ithaca and hello to Manhattan.
Leave a Comment