Always Be Growing

During the 1980s and 1990s resurgence of book when Barnes & Noble and Border’s would deliver record profits on behalf of shareholders, the company was successfully implementing a “high fixed cost and then everything flows to profit” business model (this is in contrast to a business model when you make roughly the same profit whether you sell 1,000 or 100,000 widgets).

This kind of business model comes with one particular risk: You must sell X number of goods to to avoid losing money. In the case of Barnes & Noble, the first $1.5 billion in 1998 went towards paying expenses–the required payments to content publishes, employees, high rents to operate the large stores, and so on. If you sell $1 billion worth of books that year, too bad–you’re going to lose $500 million. If you sell $3 billion, then great–your costs might only go up to $1.55 billion to account for the extra wages paid to employees that need to stack the unusually high book sales volume. The point is that the fixed costs can either act as a hard floor or hard ceiling, depending on what your sales figures are.

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