Zhang Ye of Tsingshan Capital: Consumer startups should not pursue profits excessively

Ye Zhang, Tsingshan Capital

This article is from the sharing of Zhang Ye, founder of Tsingshan Capital, at the Tsingshan portfolio company exchange event earlier this year. The text has been abridged.

• Do consumer startups want to pursue profits? Of course, but they can't.
• Startups need to survive and grow first, and only when the time is right can they increase profits.

• When resources are relatively scarce, profits should give way appropriately to cultivating long-term competitiveness, and investment in product research and development, brand building and channel management is a game with profits in the short term, and a win-win situation can be achieved in the long run.

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The markup rate should not be too high

It is an eternal truth to give profits to consumers

The markup rate is always our number one concern. But is it true that the higher the markup rate, the better? It is an eternal truth to give profits to consumers. "Water can carry the boat, but also can overturn the boat", the ultimate decision on how far the enterprise can go is up to the consumer, do not try to rely on excessive price increases and profits, standing on the opposite side of the consumer.

There is no standard markup rate, 5 times for clothing, 4 times for food, 3 times for electronics, and the so-called consensus can only be used as a reference in the markup rate. The most basic economic principle is that "commodity prices are determined by value and fluctuate up and down due to supply and demand". The markup rate is only related to the relationship between supply and demand, and will eventually return to the value itself in the market competition. How much your product is worth, how much consumers are willing to buy, how much consumers are gritting their teeth to buy, and how much consumers are happy to buy, will be fed back to you by the market.

In addition to talented entrepreneurs who make products far ahead of the times and have relatively free pricing power, most entrepreneurs should provide high-quality and inexpensive products to consumers. If you don't, then sorry, there may not be a place for you in the market.

The high quality and low price correspond to the limited markup rate and limited gross profit. The Māori space is a stage, and the essence is that everyone shows their talents on this stage. Some are good at cross talk, some are good at dancing, and the limited stage is at your disposal. If you have to go beyond the boundaries of this stage, then the result may be that you don't get the opportunity to show your eighteen martial arts at all.

You say that people can sell things made for 2 yuan for 100 yuan, and I don't debate with you. However, the general trend is that consumers are getting smarter, information is becoming more transparent, and the market is more competitive.

Today's consumers are more rational and receive more external information during the decision-making cycle. In the past, you may only be able to shop around in a limited time, but now you can open the Internet platform and search for dozens or even more professional evaluations of the same category. In the past, I looked at the ingredient list and ingredient list, but now there are many professional software and experts who do ingredient analysis. "It's not that so-and-so can't afford it, but so-and-so is more cost-effective" The logic behind the popular joke on the Internet may not be consumption downgrade, but consumption rationalization. It is no longer advisable to rely on the logic that consumers are fools to increase the price of products.

Now we see shopping around, pulling weeds and professional evaluations, but what about the future? In the unpredictable future, consumers will have more helpers, more professional tools, more comprehensive information, and more convenient services, and consumers who are fully armed will definitely tear off the fig leaf of fake products, so that they will eventually be ashamed of themselves in the market.

Therefore, a reasonable markup rate and a gross profit space that can be accepted by both enterprises and consumers are the basic criteria for doing business today.

It is necessary to invest profits in the construction of complex channels

Channels are the bridge connecting producers and consumers, and are responsible for expanding consumption scenarios and optimizing consumer services and experiences.

In today's rapidly changing market and increasingly diversified channels, channel construction is no longer as easy as waiting for a department store to collect money. The customer base has long been differentiated by different channels, especially in the market environment of stock game, the construction of diversified channels is more important and very complex.

Take online platforms as an example, Tmall, Taobao, JD.com, Pinduoduo and Douyin each have their own ways of playing, as well as new players who are constantly entering the market. The construction of each online channel is a large investment, from registration and opening of stores, store decoration, advertising, daily operation, logistics and transportation to after-sales service, all of which require professional talents and continuous investment.

The same is true for offline channels, such as mom-and-pop stores, convenience stores, KA, and new retail, each type and each region has differences, which requires specialization and localization. From store selection, customer expansion, product selection, display to service, the process is becoming increasingly complex and specialized. Take Sam's as an example, if a start-up brand wants to enter Sam's, it has to go through docking, review and negotiation in many aspects such as product pricing, distribution plan and supply capacity.

The complexity of channel construction will be directly reflected in the cost of channel construction, and the explicit cost and implicit cost are very high. Explicit costs such as channel cooperation costs, advertising and marketing costs, labor costs, and logistics and warehousing costs naturally do not need to be repeated. The hidden costs such as the time cost of communication, negotiation and coordination in channel construction, the risk cost brought about by cooperation and market changes, and the opportunity cost in channel selection cannot be ignored.

Doing channels is a thing that needs to be done solidly, and the smooth flow of information can support more long-term marketing and brand building.

Channel construction is not a one-time thing, modern channel construction is more professional, in addition to the early stage of channel expansion, follow-up channel maintenance and channel management also need a lot of investment. The core of channel building is to get traffic and find low-cost and effective channels. If there will always be low-cost channels, it means that companies need to be ready to open up new battlefields.

It is necessary to invest profits in tedious brand building

Brand is the business card of a product in the minds of consumers, and building a brand is an important means to win the trust of consumers and obtain a premium for products.

In today's complex products and diversified media, brand investment is not as simple as buying an advertisement. In the past, you could become famous by buying a CCTV advertisement, but now advertising and marketing are pervasive, and it is even more difficult for brands to get out of the circle.

Nowadays, it is impossible not to build brand self-media, Weibo, Douyin, Xiaohongshu and public accounts, which one you do or which one you don't do, and each one is a cost. The traffic dividend gradually disappears, and the corresponding investment cost is higher; Nowadays, it is said that the content should be done by yourself, but the word content does not correspond to one thing, it is a series of jobs including copywriting, editing, design, shooting and even live broadcasting.

Industry media, consumer media, and official media are indispensable, industry media to B, can improve the visibility in the supply chain, partners, capital market, consumer media to C, can improve consumer awareness and brand trust, not to mention official media, the importance of an endorsement is self-evident.

Brand building involves brand positioning, brand visual image design, brand story and value building, marketing and publicity, as well as continuous adjustment to respond to market changes.

Doing a brand is a long-term thing, and it is to achieve qualitative change in quantitative change. If you don't invest enough in the early stage or give up halfway, you are likely to fall on the eve of dawn.

Brand building is not achieved overnight, it is a matter of continuous optimization and continuous development. In the face of the ever-changing market environment and increasingly diversified consumer demand, enterprises need to continuously optimize and adjust their brand strategies to ensure that their brands remain dynamic and competitive.

Startups are overly profit-seeking

It is not conducive to the healthy development of enterprises

Consumer goods brands that affect people's lives around the world are all early and continuous profits invested in product development and marketing, whether it is Nestle, Coca-Cola or Tesla.

In 1938 the Brazilian government wanted to find a way to solve the problem of a surplus of coffee beans and maintain the long-term storage of coffee. Nestlé's chemist in Switzerland, Max Morgenthaler, was assigned the task, and he led the research team to conduct a lot of experiments and explorations, experimenting with a variety of processes and recipes, including freeze-drying, spray drying, etc., for up to seven years, and finally launched an instant coffee in 1938, named Nescafé. The success of Nescafé is a milestone in Nestlé's development. What seems like a mediocre product today cost Nestlé a lot of resources at the time.

Starting a consumer business has never been easy, at least much harder than it seems. On the one hand, the Chinese market is friendly to consumer entrepreneurship, because there are opportunities everywhere, and the entry threshold is not high. On the other hand, it is very demanding, because the competition is extremely fierce, and if you are not careful, you will be out.

In such an environment, consumer startups should invest most of their gross profits in benign sustainable development, strengthen R&D capabilities, expand high-quality channels, and accumulate brand equity. The premature pursuit of high profits is tantamount to giving up on the future. Of course, the exception is that the IQ tax type of profiteering products.

Finally, I would like to say one more thing. The value of an enterprise is reflected in the pursuit of profits.