Category: Finance (Page 2 of 2)

Monty Python on Statistics

I was reminded today of my favourite Monty Python sketch on statistics. I had a look for it on YouTube but sadly couldn’t find it.

The sketch was set on election night with a reporter who did a vox pop and asked a lady in the street how she was going to vote. She said “Conservative”. They then went back to the studio and extrapolated this to their swing-o-meter which predicted a 100% swing to the Conservatives and all seats in the House of Commons switching to that party.

It was very funny. But like the best comedy it was also very true. We’ve all been in situations in business were very small datasets are extrapolated.

Interpolation is of course much more accurate. But to interpolate my experience of statistics in business I can say that interpolation is something that is much less common that extrapolation.

Investment in the future

Although this is quite a heavy hitting title, many businesses say this but few actually believe it. Investment in the future sometimes is quite short term.

Building great brands takes a long time and investment sometimes takes years if not decades to recoup.

By building a balanced portfolio of brands that are at different lifecycles we can use the associated cash flows to invest in the future and for the long term. We are long term shareholders and our focus is to be measured in decades not quarters.

Marketing investment is frequently curtailed if immediate payback is not available (on your first order for example) but being able to take a longer term view allows you to really benefit from the long term value that customers see in a great product.

We see marketing as an investment – not a cost – and just like buying companies that require investment for growth – we want to ensure that marketing is measured as an investment. We are very analytical but don’t only listen to the numbers, we take multiple data points to measure our marketing investment.

A typical by-product of believing marketing is an investment is that we know that not every activity that we carry out will work, but we are relaxed as long as the majority work!

Our E-Commerce Business Model

At Diet Chef we achieved a total return on equity of 8,999,900% over a three year period. If we had the same growth over the next three years we would be ten times larger than HSBC, the biggest company in the FTSE100.

Sadly, this is an outcome that will not happen. It’s just not possible to deploy the larger capital that we have today as efficiently as we did in the old days.

However it is worth looking at the business model we used as this is still very relevant.

First off, most of the funding for Diet Chef was not provided in the form of equity. Most of the funding actually came from suppliers who initially sold to us on 30 days while we received cash from customers within one day. This negative working capital requirement then scaled up as the business grew.

For our first TV campaign we requested that suppliers increase their terms to 60 days to fund it. They agreed to this and the result was that both our business and the suppliers benefited hugely.

This is quite a well worn path in retail, however in e-commerce there is less capital expenditure required to support growth (shops, etc) so the equity requirement is substantially reduced.

It is also a poor man’s version of Warren Buffett’s strategy of investing his insurance float, where the insurance premiums are invested over the years between receipt of the premiums and payment of the claims. Thus he makes a double profit: once on the insurance business and once on the investment of the premiums.

Back to Diet Chef, the other key was that we recruited customers so that they were profitable within 60 days. Generally, in direct businesses it will take a longer period for customers to become profitable which can result in a form of overtrading. This allowed us to grow the business to market capacity pretty quickly.

It’s not realistic in all e-commerce businesses to recruit profitably, particularly those in more mature markets. However these businesses should all have databases which will provide a profitable retention business which should then fund the loss making recruitment business.

There were of course a lot of non-financial reasons for the success of the business which I will cover later. But getting the business model right did allow us to scale the business up dramatically with no external equity funding.

Kevin and I have both spent a lot of time in Silicon Valley and one of the interesting things there is the focus on business models. But it’s something that is seldom discussed in Britain.

Art v. Move Fresh

I was recently speaking to someone into art investment and was comparing it with e-commerce.

According to WikiPedia King Francis I bought the Mona Lisa for 4,000 écus in 1519.

What is that in today’s money? A tricky question but someone’s had a good go of working it out here over at Yahoo Answers.

So let’s say the King paid about $270,000. We don’t currently have a value for the Mona Lisa and as far as I’m aware nobody has taken it to the Antiques Roadshow. Let’s just give it a pretty ridiculous valuation of $1 billion.

On that basis the Mona Lisa returned the King’s investment 3703 times over 497 years. Diet Chef returned our investment 899,999 times over 3 years. Therefore Diet Chef as an investment was 24,304% better than buying the Mona Lisa.

So if you are certain that you can identify the next Leonardo da Vinci then the lesson of history would seem to show that it is not a great financial investment.

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