The business ecosystem is like a multi-way tug of war. On one side of the rope, people are trying to yield the highest profit, and on the other side, people want to reduce the purchase price (cost of value). This is a trade, money for value. One party receives money and the other receives value.

But even within these two different sides, there are individual parties tugging among themselves. On the money side, various parties are contesting the burden pool of the cost of goods sold (COGS). Business owners tug against vendors, employees, and customers to try to maximize their profit. And on the value side, customers tug against business owners and their COGS to get a lower purchase price.

But as in tug of war, the game no longer works when the other person stops tugging entirely. If a vendor charges $2/piece for something that a retailer can only sell for $1.50, then the business owner will not be doing business with that vendor. And if you own a department store that charges $1,000 for a standard paperclip, the customer will have zero interest and won’t even pick up the rope.

The price must be reasonable for the consumer to want to purchase. In other words, the price should somewhat reflect the value. Similarly, the amount that the business owner pays to the vendor must be reasonable for them to want to supply the owner. If the vendor isn’t making a worthwhile profit, they won’t bother touching the rope either. Another key component, employees, must be compensated reasonably for them to want to work to produce the value and contribute to the final product.

Some business owners are too lax with their ropes. These prodigal founders raise millions of dollars and spend as if their money supply is infinite. Paradoxically, there are tons of founders who credit their success to the fact that they were under-funded starting out, which forced them to use ingenuity:

• Mark Zuckerberg, Meta: “Being underfunded forced us to be creative. We had to use all the tools we could get our hands on, and we had to be really resourceful.”
• Sergey Brin, Alphabet: “Being underfunded was a blessing in disguise. It forced us to focus on the essentials and to be creative in how we solved problems.”
• Steve Jobs, Apple: “We were forced to be very creative because we didn’t have a lot of money. That forced us to think outside the box and to come up with new ways of doing things.”
• Jeff Bezos, Amazon: “When you’re starting out, you have to be resourceful. You have to figure out how to do things with limited resources. That’s how you learn to be creative.”
• Elon Musk, Tesla & Space X: “Being underfunded is a great motivator. It forces you to be creative and to find new ways to solve problems.”

Being underfunded taught these founders early on about the importance of holding a tight grip on your expenses, and finding creative alternatives to solutions that you could’ve otherwise thrown (too much) money at to solve. Remember, the less money you spend unnecessarily, the more slack in the rope there is for others (profit, employees, customers, etc).

There are also tons of examples of the opposite. Being adequately or overfunded early on isn’t inherently a curse, but it makes it very easy if you’re not careful, to overspend.

Elizabeth Holmes, founder of Theranos, spent millions on private jets, luxury homes, and expensive clothing and used company funds to pay for personal expenses—all while the company earned almost no revenue. It was said that Theranos was losing nearly $2 million per week. In this case, the owner pulled the rope too far and the investors were unfortunately still holding on the other side. Adam Neumann, co-founder of WeWork spent millions on a private jet, a $100 million estate, and a $60 million yacht. He also used company funds to pay for his own personal expenses. The owner pulled the rope too hard for too long and the balance eventually broke. Billy McFarland’s Fyre Festival, Hosain Rahman’s Jawbone, Louis Borders’s Webvan. And the list goes on and on.

An example of a successful game of tug-of-war is Costco. Their balance is very good. They pay their vendors enough for them to make a profit and be satisfied. Their employees are happy proven by their 94% retention rate, compared to the industry average of 60%. And I am yet to meet a Costco shopper who has even one bad thing to say about Costco. The prices are low, customer service is excellent, checkout lines are incredibly quick, their stores are clean and welcoming, and the overall experience is great. Despite all of this, Costco earned $27.57 billion in gross profit last year. It’s a win-win-win-win…

Sometimes the rope can be tugged harder indirectly. For example, if an owner pays carelessly for things they don’t need, the money must come from somewhere. So they pass on that cost to either the consumer, vendors, investors, etc. Another example is if a paid employee sits around all day not contributing to any of the value creation, then that cost is passed on to the paying customers, vendors, investors, or other stakeholders. In any organization, money doesn’t just appear magically. It flows; it moves around. Money comes in, and it goes out.

I have a habit of impulsively judging inefficiencies in businesses where I’m a customer. Because technically, their negligence, lack of frugality, and laziness get passed on to me indirectly as a higher purchase price and lower-quality product.

Another way to look at it is, theoretically, if the world had flawless productivity using AI, robots, and infinite computing to produce all of our goods and services in the world, we would all pay close to $0.00 for all goods and services because the COGS would be near zero.

But businesses exist to make a profit. And if a business isn’t profitable then there’s little reason for someone to take on the risk and the grueling work of building a business. In order to produce that final product, there are a bunch of costs. So, to make a profit, a business must charge enough to cover its COGS plus tack on a healthy margin.

Using this mental model of the tug-of-war business ecosystem can help show how important it is to be highly efficient and streamlined. Invest time and money in improving efficiency. As a business owner, work on tightening your ropes. Wastefulness not only corrodes the product for the customer, but potentially also takes money out of the pocket of your investors, employees, vendors, and you, the business owner.

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Caveat: There’s a fine line between wastefulness and spending large amounts of money. For example, some companies spend large amounts on employee perks such as lavish travel and lodging. And unfortunately, this is a strategic necessity at the top level of most industries. To attract the best talent, you need to offer the best. Another example is during expansion. From the outside perspective, it may sometimes seem unnecessary to build a large company headquarters building or hire lots of new employees, but if the leadership team is competent and did careful calculations and planning, this large spending may actually have a significant ROI.