Profit, not revenue is the gap that matters, after all.

It was Year 1999.?

Dell surpassed Compaq to become the largest PC manufacturer in the world.?

Five years previous, Michael Dell was a struggling founder in his off-campus dormitory at the University of Texas, Austin. His startup was selling? IBM-compatible computers built from stock components. Michael believed that by selling directly to customers, PC manufacturing companies could understand the needs of customers and hence create effective solutions that matched them in spades.?

Michael’s belief would later form the scaffolding upon which Dell’s built-to-order business model would be constructed. Needless to say, that the built-to-order business model nailed the coffins of far bigger competitors and positioned Dell on top of the PC industry's totem pole in 1999.

The model crashed the operating cost of Dell’s $35 billion to just 10% of revenue, compared with 21 % at HP, 25% at Gateway, and 46% at Cisco. What Dell did is no rocket science, he simply removed everything that stood between the customers and his company, which invariably plunged cost structure as well as allowed the company to know the exact preferences of customers. This was 'mass personalization' at work?

And as I wrote yesterday, cash flow is the lifeblood of business, Dell’s cash flow kept swelling while that of its competitors shrank, hence Dell created the platform that allowed it to be profitable..

But the crux of the model is that every PC sold was made to the specification of the customers. So, inventory cost was extremely low, and don’t forget, the company was not spending money on expensive advertising campaigns. This is in contrast to what obtained at HP, Gateway or Cisco, production was based on market projection not on actual demand of customers. They were relying on big-ticket advertising to drive consumer demand. Perhaps, ?Dell's model mirrors the on-demand business model of on-demand economy brands, Uber, Lyft, Bolt, and the like.

Needless to say, Dell knew the gap, it knew that the precursor for crashing the cost of production and becoming profitable was the dismantling of the ‘Berlin Wall’ that stood between his company and customers. This model and its variants has been replicated across industries, especially in startup-led organizations which are up against far bigger competitors. And truth be told, Dell figured out from Day One how he would create and protect his profit sanctuary, he didn’t get to the business arena and then hazard a guess - how.?

Dell was possibly alluding to Sun Tzu’s saying, ‘Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win”. This is one of the sins of Jumia (recall, I mentioned this in passing yesterday), the company was perhaps carried away with the deception of Gross Merchandise Volume, the total value of merchandise sold over a given period of time through a customer-to-customer platform such as an ecommerce site. Leadership thinking was probably that profit would sort itself out at some point as long as the GMV is on the high.

African startups need to take some lessons from Dell, by figuring how to make money before ever jumping into the arena to compete. Without saying too much, they need to be clear on how they would capture value, not just create value. They must not be like the five foolish virgins that didn’t envisage the groom and his bride might delay and hence didn’t fill their lamps with enough oil. Rather, they should be like the five wise virgins who anticipated that the couple might not arrive on time and therefore fill their lamps to the brim with enough oil able to absorb the delay. In the end, it was the 'wise five' that made the wedding while 'foolish five' were turned back when the couple eventually emerged.?

Meanwhile, ecommerce may be nothing like making and selling PCs. But in the final analysis, it still boils down to how the company makes money.? Adam Grant in his book, Contemporary Strategy Analysis averred that the value of a good and effective strategy is its ability to create profit, else it is nothing but a hogwash that should be replaced without fail. Much like saying, a tree is known by the kind of fruits it bears. Winston Churchill seems to sum it up this way , “However beautiful the strategy, you should occasionally look at the results".

Now let me circle back to Jumia, needless to say, I began using them as my ‘subject’ in this matter of minding profit as you "mind the business".

Let’s take a look at Jumia's Q4 2020 (from its earnings report),? the company racked up revenue in excess of €41 million while surpassing the previous quarter revenue of €33.7 million. However, it ended the quarter with operational losses of €40 million which was up from €28.7 million in Q3.?

Despite the loss in revenue, Jumia’s GMV increased from €187 million in Q3 2020 to €231.1 million in Q4 2020. It is needful to note that though there has been an increase in GMV Quarter-on-Quarter, there was a reduction of 21% between Q3 and Q4 within the same period in 2019 when the company strategically tweaked its ‘stores’ by selling everyday goods such as groceries and household effects instead of big-ticket products like electronic devices and appliances such as laptops and phones, which in many cases raise the operational cost.

Results from its 2022 annual report shows the strategy is yielding positive results. Compared to 2021, orders grew 40%, from 6.6 million to 9.3 million while GMV jumped 27% from $198.9 million to $252.7 million. And Jumia’s revenue reached $47.6 million, a 44% rise from Q1 2021’s revenue of $33 million.

The improvement in result, notwithstanding, it is not yet uhuru for Jumia, while it is still the largest e-commerce site on the continent with a market capitalization in excess of $3billion. And yes, things are looking prettier for the company especially since it tweaked its stores - concentrating more on everyday products rather than large ticket products such as electronic products. But it can't afford to rest on its laurels, it must work assiduously to knead down an effective strategy and business model that would help in capturing more value and firm up its profit sanctuary.

This is because I foresee a scenario in the ecommerce space in Nigeria and Africa similar to the revolution that hit the banking sector in the early 90’s led by the likes of GTB, Standard Trust Bank (before merging with UBA), and more recently the emergence of fintech operators like Flutterwave, Paystack and the like, who are disrupting even the GTBs of this world.?

The bottomline is this, startup companies must mind the gap, what it takes to create positive cash flows and construct their profit sanctuaries right from the start. It is not something they should be figuring out in the battle arena, as Sun Tzu counselled, it is what they should have determined before they enter into the marketplace.

Finally, if Michael Dell could build a company that disrupted heavy-duty PC makers like HP, Compaq and IBM with $1000, who says money is the only thing you need to succeed as a startup founder.?

You need more than money, you need the wisdom to know the difference between revenue and profit. Because it is the gap between startups that flourish and those that flounder.?

I’ll see you next week. BGG.

Until then, keep winning.