Posted by: robbryan | June 13, 2012

Putting profit in its place.

Who needs profit?

I’m guessing that this might offend a lot of people. If you’re feeling a kneejerk sort of reaction to the idea, take some time and look for the source of it.

Business does not need profit. “Profit” is an incentive system, and like many of our systems is poorly designed and wreaking havoc to our environment and economy. Profit incentivizes the taker, usually the outside and uninvolved investor, to pressure a business to reduce costs and increase prices.

The easiest way to reduce costs is usually to reduce the workforce (fire a bunch of workers) or reduce quality. Usually layoffs will reduce quality automatically, as the best of the workforce will polish their resumes and go elsewhere, because they can. The net effect is a reduction in workforce quality and moral.

Increasing prices will reduce sales (look up price elasticity). Reduced sales often leads to seeking a larger market. To do that the product is redesigned to appeal to a wider market, usually becoming bland and tasteless in the process (see Purple Cow).

No, I’m not a socialist or a communist, but I’m not sure I’m a capitalist either, at least the way it’s being practiced today. Doing almost anything takes capital though. You and I, and anyone but philanthropists need a financial return on our investments (ROI).

“Profit” is only one of many forms of ROI. Two others are capital gains and revenue shares. Once you banish short term thinking, capital gains make a lot of sense, especially for PRI makers, since capital gains on PRIs are not subject to the excise tax.

Revenue shares make a lot of sense for market tranche (outside) investors. ROI based on profit doesn’t make much sense for an investment in an L3C, a low-profit limited liability company (duh) that is mission first to boot. Seems like a non-starter to me. A company like WHLS will take a very long time to get to profitability, focused instead on the mission, growth, and quality (safety).  Instead of pressuring the company to reduce costs, investors with a revenue share are incentivized  to help you get to market sooner.

All that said, profit does have a place in Windhorse Lightships, and that’s at the employee/owner level. They are the ones who can make sensible decisions about product quality and cost reduction with a view to the long term success of the mission, the company, and their careers. I think having ALL your stakeholders working towards the same objectives is a pretty cool idea.

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