When most of the great companies of the industrial era were founded, even the most brilliant economists believed deeply in the law of diminishing marginal returns. At its core, the principle means that the more of something that is made, the less valuable each incremental unit of that something becomes. If there were one pound of chocolate in the entire world, only the wealthiest individuals could afford to taste its unique flavor. If our oceans suddenly turned to chocolate, the incremental value of that volume would plummet — we’d truly have more chocolate than we really needed. The law of diminishing marginal returns held firm throughout the industrial era. The more of something we made, the less valuable it was to each incremental user down the demand curve.
Why Some Digital Companies Should Delay Profitability for as Long as They Can
Network effects.
May 04, 2017
Summary.
Internet companies aren’t beholden to industrial-era rules, such as the principle that the more there is of something, the less valuable it is. Instead, with the internet, the more of something there is, the more valuable it becomes. The bigger your platform, the stickier your service, the more users you have, the more value you’ll eventually be able to harvest. But that means that strategists and executives at these companies have to resist the pressure to make money in the short term — a dollar harvested tomorrow is always going to be worth more than a dollar harvested today. Put your ideas for short-term profits in a parking lot called “next year’s strategy.” And resist tapping into them for as long as you can.