Here’s Why Jeff Bezos Was the Ultimate Visionary for the E-Commerce Business Model

 
 
 

In a blog post, SV Angel Managing Partner David Lee explains the concept of ‘operating leverage,’ which Lee says is a metric that indicates “your marginal profit – is your revenue leading to growth or are you just running standing still?” So, a company with high fixed costs and low variable costs will have higher operating leverage.

He says that industries like hotels, restaurants and airlines traditionally have high upfront costs, usually taking out loans to build structures and purchase equipment. The challenge lies in recouping those costs – hence the higher risk.

Lee explains that Jeff Bezos of Amazon was a true visionary for seeing the importance of keeping variable costs low in a tech company. In his shareholder letters from up to ten years ago, Bezos discusses “eliminating mistakes and errors at their root.” Bezos focused on automating the human factor of customer service, helping him to recoup his upfront investment and making him a saint on Wall Street.

In short, to reduce your variable costs — especially if you are a tech startup with low fixed costs, like many app and websites are these days — focus on how to obtain users in a scalabe way.