Notes on Chapter 2 of *How to Quickly Understand an Industry*

目录

Core Theme

This chapter revolves around “the viability of a business model.” The central argument: during an industry’s introductory phase, the focus of research is on verifying whether the business model is viable. If you can judge in advance that an industry “will fail,” then there’s no need to invest in it. The core of viability assessment is that a business must “be able to sell” and “be able to make money,” while also judging things from a dynamic perspective and factoring in external conditions.

Key Concept: The Business Model

A business model is the core logic by which a company makes a profit. There is no unified “correct answer.” Within the same industry and even within the same company, multiple viable models can coexist, and their viability directly determines the industry’s survival value (especially in industries in the introductory phase) — even secondary-market investors need to pay attention to business models, so they don’t get misled by hype and speculation.

A footnote: external factors affect how well a business model fits. For example, the SaaS model is mature overseas, but domestic business owners are more used to the buyout (perpetual license) model, which is why it “doesn’t travel well” in China.

Assessing Business Model Viability (Two Core Steps)

1. Sales Viability Assessment: Verifying Whether Demand Truly Exists

Core purpose: to determine whether the need that a product/service satisfies is a “real need” or a “fake need,” so you don’t pour money into a niche that has no actual demand.

Key methods (two benchmarking methods, to avoid falling into the trap of “plausible-sounding” demand):

1. Time benchmarking: Look back into the past to judge whether the demand has existed over the long term. The underlying logic: demand is eternal; innovation is essentially meeting an existing need in a new way, not creating a brand-new need.

   • Positive case: the need for transportation (walking → sedan chair → car), the need to transmit information (homing pigeons → telegraph → WeChat) — in each case the need stays the same while the solution iterates.

   • Negative case: shared basketballs. In essence this was basketball rental, but basketballs are cheap and easy to carry, so users had no need to rent one, and the project ultimately failed.

2. Space benchmarking: Benchmark against mature markets and borrow from successful cases. The underlying logic: humanity’s fundamental needs are common across the world, so the results verified in mature markets can serve as reference (Masayoshi Son’s “time machine theory” and the domestic “C2C” (copy-to-China) model are both examples).

   • Positive case: Tencent’s QQ borrowed from ICQ, Sohu borrowed from Yahoo, Taobao and Alipay borrowed from eBay and PayPal.

   • A caveat: you must factor in politics, economics, consumption habits, and so on, and must not copy blindly (for example, copying the Chinese model into Southeast Asia requires adapting to local conditions).

2. Profit Viability Assessment: Verifying Whether It Can Sustainably Turn a Profit

Core purpose: even if the demand is real, if revenue can’t cover costs, the business model is still not viable. You need to analyze from both qualitative and quantitative dimensions, balancing static figures against dynamic prospects.

2.1 Qualitative analysis (revenue + cost)

• Revenue assessment: prioritizing demand The core criteria: frequency and elasticity (at least one of the two, in order to earn stable revenue).

  • High frequency: boosts total sales volume, as in the restaurant industry (high-frequency consumption), where gross margins can reach 40%–60%.

  • Low elasticity: rigid demand, with users insensitive to price, so you can raise the unit price, as with products people must have.

  • Negative case: horseback riding at tourist spots — low frequency, high elasticity, high customer-acquisition cost. Not a quality business model.

• Cost assessment: degree of standardization The higher the degree of standardization, the lower the overall cost and the easier it is to scale; the lower the degree of standardization, the stronger the personalization and the higher the price you can charge (but the harder it is to scale).

  • High-standardization cases: SaaS software (standardized at the core, with a low share of customization, so it’s hard to sell at a high price), hotpot (prep and broth are standardized, easy to scale).

  • Low-standardization case: McKinsey-style consulting (deeply customized, highly personalized, priced high).

2.2 Quantitative analysis: building a UE model (unit economics)

• Core definition: taking the “smallest operating unit” as the core, analyze its revenue, cost, and profit — see the big from the small, and judge whether the business model can scale.

• The smallest operating unit (differs by industry):

  • Restaurant industry: a single store (single-store model, estimating a single store’s annual profit);

  • Ride-hailing: a single car (estimating a single car’s annual profit);

  • Beauty industry: a single SKU (e.g., a hand cream, estimating a single product’s cost and profit);

  • Food delivery: a single order (estimating a single order’s delivery cost and the platform’s earnings).

• Core logic: if the smallest operating unit isn’t profitable, the odds of profitability after scaling are extremely low; if the smallest operating unit is profitable, replicating it at scale is more reasonable.

• Dynamic perspective: an early-stage UE model running at a loss is acceptable; the key is whether there’s a possibility of improvement in the future (e.g., economies of scale spreading out fixed costs).

  • Case 1: the food-delivery industry lost money on early single orders, but as penetration rose and order density increased, delivery efficiency improved and per-order costs fell — Meituan’s per-order gross profit rose in 2021;

  • Case 2: shared bikes had a loss-making UE early on, but as technology advanced and the bike-recycling system matured, depreciation rates fell, and over the long run it has hope of turning profitable.

Special Case: Business Models That Can’t Charge Users Directly

A typical case: WeChat. Although it satisfies a “high-frequency, low-elasticity” need, it can’t make money by charging users a monthly/annual fee. Its business model has to earn money indirectly through advertising, value-added services, and so on. This shows that a business model needs to flexibly adapt to a product’s characteristics.

Core Summary

1. The core research focus for industries in the introductory phase: business model viability, the crux being “real demand + profitability”;

2. Sales viability: through time and space benchmarking, verify that the demand isn’t a fake one;

3. Profit viability: qualitative (frequency, elasticity, degree of standardization) + quantitative (UE model), balancing static figures against dynamic prospects;

4. There is no standard answer for a business model — you must judge flexibly in light of external factors and product characteristics, and track and adjust dynamically.

中英对照

文章作者：阿文

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