Jason Droege: prediction

Transcript context

…You've touched on this idea of gross margins and margins, how obsessed you are with this. I wanted to spend a little time on here. I've heard just you're obsessed with understanding gross margins before going in on anything. Most founders have no idea what they're doing here. What have you learned about just what people should be paying attention to, what they might be forgetting when they think about just the feasibility of a business? Yeah, look, it's one filter like many filters. There are certainly businesses that have low gross margins that are great businesses. Costco, Walmart, et cetera. Amazon talks about this all the time of there's companies that increase prices and there's companies at lower prices. But I would say that by and large, high gross margins combined with healthy churn curves are a very healthy sign for the business. I mean, think about it. If I were to sell you something and I can't mark it up a lot, how much value am I adding beyond what's in my hand? And if I'm not adding that much value, then what am I in the business of doing? And I'm in business of adding value. And it's not quite that simple. This is just a litmus test of when someone comes to me and they go, especially in a new business, and we deal with this. I dealt with this at Uber, I've dealt with it everywhere. Someone comes up with an idea and they go, "We can get into this business and I think we can charge this and it'll get us to a 40% gross margin." And then, my next question is start at a 60% gross margin. Why does that not work? And they go, "Oh, well, the customer..." And immediately, you short circuit to what the real problem is. Oh, the customer has an alternative. Oh, okay, well who's the alternative? Oh, it's some offshoring company. Well, what's their gross margin? Oh, we don't know. You go find out. It's like 20% and they've been around for a long time and they have scaled operations. And you're like, okay, so your gross margin is going to go from 40 to 20 quicker than you think, and you're going to be in a world of hurt unless you do something to differentiate. So I take gross margin is just a very coarse instrument, not a perfect instrument to think about, am I adding enough value? Am I differentiated? It's not perfect, but it's a very quick short circuit filter to even to see if someone's pitching you an idea, have they thought through this dynamic? Because if the response is gross margin is super low right now, but here's the dynamic I'm going after. And then you're like, "Oh, okay." And sometimes it's like, we'll just make it up with volume and then the gross margin will go negative for a while and you're like, "Wait, this doesn't work. " So what I love about this is just a lens into is my idea good enough if studying, can I keep a high gross margin? Is there a reason why people in this space haven't been able to have a higher margin?…

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