What Building a High-Margin Product Really Takes
At its core, a company's revenue and profit come from its product. The marketing, sales and other operations built around the product then grow that revenue. At the most general level, I think two things are enough to explain the size of a company: profit margin and scale.
Throughout my career, I've worked in organizations built around very different products. The largest of them were companies that had both high profit margins and had managed to scale their products. I've also worked at places with low margins that had reached scale. The products in this second group were usually consumer products. Consumer products generally can't generate large revenues unless they scale. A consumer app used by three people is very unlikely to bring in large revenues. But a cybersecurity solution used by three companies can generate meaningful revenue, and can even create jobs.
The real difference between these two worlds shows up in the barriers to entry. Developing a consumer product usually comes with low barriers. Solutions built for companies, on the other hand, face serious obstacles before they're even built. In my view, the two most critical are these. First, having the experience to correctly define the problem solved by a product that sells for $50–100K. Second, having a sales channel, in other words a network, that can turn that product into revenue.
Consumer products, by contrast, are usually products anyone can understand and that can reach people even on small budgets. Their challenge is different: making these products work for millions, not for a few people. To me, that is exactly the core problem on the consumer side. So both worlds have barriers; they just sit in different places. On the enterprise side, the barrier appears right at the start: without deep experience and a network, finding the right problem and commercializing the product is much harder. On the consumer side, building the product is easy; the real barrier is scaling it.
Both worlds have barriers; they just sit in different places.
Naturally, what matters on the consumer side isn't building the product but distributing it, and being able to carry the operational load that distribution brings. That, of course, takes a large budget and the ability to build a well-run operation. To understand what serving millions of customers means, it's enough to think about the customer service of a company like Vodafone. Forget resolving customer complaints; just being able to listen to them requires a serious budget. That's why, even though consumer markets are easy to enter, staying in them is capital-intensive. If you have enough capital, you can operate in these markets.
Another point is that because these markets are easy to enter, there's always a crowded field of competitors. Over the long run, the crowd is usually taken over by a few dominant players, but until that point, many players keep fighting. This is one of the main factors that pushes profits down. The second is that the work doesn't create much value per transaction. A simple example is the market known as “10-minute grocery delivery.” Someone bringing your groceries home creates limited value when you think about a single order. The chance to make a profit from this business belongs only to the organizations that can do it for millions. Once we set consumer products aside, what's left are businesses with more depth. Unfortunately, businesses with depth rarely come from ideas that appear overnight. Most people don't even see these opportunities. That's why these markets aren't very crowded; but doing business in them isn't easy either.
After returning to Turkey, I worked for about a year at one of the country's big cybersecurity companies. It took me almost three months to understand the product; as someone with no background in cybersecurity, I'll admit I struggled. The contracts were very large, and sales cycles were very long. The founders, on the other hand, came straight from cybersecurity, and both had PhDs. Both were thought leaders in the field; every security professional who knew them looked up to them, with a touch of envy. They had launched a commercial venture in the field they'd given years to.
Back then I respected them, but I didn't fully grasp how all that accumulated knowledge showed up in the business. From the outside, it looked as if they had been late to commercialize. With the experience I have today, I think this is exactly the core ingredient of businesses designed for high profit margins. I now look at these people, who do work most people wouldn't even think of, with far greater respect. It isn't always easy to count the years spent mastering a field as part of the profit equation. But when I look at the impact the company's solution creates for its customers, the way I see the product and the business changes. After leaving that company, I started a side business. It was something anyone could do, but I was the one who had the courage to actually launch it; it didn't require any domain expertise. I started it to try my hand at commerce, and once it reached a certain stage, I felt I needed to scale it up. But when I thought about the operation that growth would create and its effect on my life, it scared me. It wasn't only the operational load I'd be taking on. Even at a bigger scale, I might not earn large returns, and I could end up a slave to the business.
It isn't always easy to count the years spent mastering a field as part of the profit equation.
Before shutting the business down, I asked myself why I couldn't design a high-margin business. The answer hit me as a truth much bigger than the realities of the consumer market I described above: I wasn't someone who had spent many years in a field with depth and become a recognized authority in it. I could solve certain problems, but being an authority means going beyond that: being able to define and solve new problems in a field. Benoit Dageville, one of Snowflake's co-founders, is a good example. He did a PhD on parallel database systems, joined Oracle in the mid-1990s, and spent about 15 years there leading work on parallel execution architecture. When he founded Snowflake, he probably understood the problem he was solving as deeply as very few people in the world could. Of course, not everyone with a background like that goes on to build big, different things; many continue their careers in various roles at companies. But not having built that kind of depth is something I still think about today.
People who chase starting a business or making money without that kind of depth usually think in terms of opportunities, and end up on a hamster wheel, always chasing the next one. Some of them succeed. Arbitrage isn't a bad thing; but making money from existing inefficiencies in the market is not the same as creating a new competitive advantage. If we want a high degree of control over our margins, a long-term plan feels like it could be the healthy path; but I'd say positioning yourself according to your own circumstances is far more reasonable. Since long-term businesses demand resources and patience above all, players under survival pressure, who first need to make ends meet, should actually keep a bit of distance from them. Because when survival needs come first, thinking long-term and building a strategy around it can make you lose some hair… In general, high-margin design rarely emerges in environments where survival is a problem. We could say that people living in emerging markets are at a bit of a disadvantage here. Developed markets, where people face fewer survival problems and ideas rather than money can take center stage, are inevitably better suited to designing high margins, both culturally and in terms of resources. Turkey is a very good example. Many consumer apps and game ideas come out of Turkey, but fewer deep tech products like Snowflake. As a result, there are few organizations built around B2B products, and jobs in this market are limited. Games and mobile apps, on the other hand, have plenty of products. These products have low profit margins and high scale. In the US, there are products like Salesforce, Snowflake and Databricks that have depth, high profit margins, and high scale on top of that. In environments with higher survival pressure, it becomes more understandable that people turn to short-term opportunities. I think this shows up in economic activity as well.
High margin first requires the time and money to design expertise. That expertise then defines the right problems and produces a defensible product, and from there, the path to margin simply comes down to telling the right audience about that product.
While I was developing this perspective, I had a conversation with an investor. “We're looking for things that will grow 10x, 100x, and we look at deep tech products rather than consumer ones,” the investor said, and then told me that the product from the side business I mentioned above was less of a 10x–100x opportunity and more of a $10–20 million company. Because investors meet so many people building businesses, they develop strong hypotheses about who can build what. If your daily life doesn't revolve around the kind of deep experience I described above, I think it's really hard to build profitable businesses that reach truly massive volumes. What you build, however, often resembles what you deal with in your daily life. Someone who has worked in HR for 10 years either becomes a breathwork coach or does corporate coaching. Do you know why? Because it's the first thing that comes to mind and the easiest business to get into, and because they haven't developed a different expertise. That's actually why I'm adding this paragraph. Whatever you do today is what shapes your tomorrow. Thinking about it this way makes me more careful about how I spend my time, and I think it should.