Cost Of Goods Sold | Hacker News Reader

Cost Of Goods Sold

every.to

101 pointslaurex35 comments

"MoviePass is my favorite business because I, the consumer, happily took the clueless executives’ money for my own personal benefit. It was awesome for me, but it sucked for them."

It wasn't the money of the executives, it was investor money, and none of these people were clueless. Building market share by massive "deficit spending" is how many companies became huge in the past decades. Of course most of those who attempt it fall by the wayside, but money is cheap these days and those who do not take advantage of that fact will have trouble competing.

There are other complications with a business like MoviePass which probably become clearer if you assume it's a theater chain itself offering the pass:

- Their contracts with the distributor (how much do they pay for a butt in a seat?)

- Whether a butt in a seat costs them anything (because they're displacing a full-boat customer) or is even net profitable because

- Theaters make a lot of money by selling expensive popcorn and soda that cost them almost nothing

- Also, the gym membership factor. i.e. people buy subscriptions and then don't really use them.

Regarding the gym membership comparison, one distinction is that many people get gym memberships for aspirational reasons, but don't actually like going to the gym. MoviePass demonstrated that people don't have the same aversion to going to the movies.

I don't disagree although people may find they don't actually have the time to go out 2 nights a week.

I think the reply was trying to point out that if someone finds out they don't have time to go to the movies two nights a week they will cancel their movie pass. Because the gym is aspirational even if people don't have time one week they are more likely to tell themselves they will have time next week so they keep the gym membership.

> Building market share by massive "deficit spending" is how many companies became huge in the past decades.

Sure, but that's got limits. If you need to sell a product for less than COGS when you start a company, no worries, but you need a plan to flip that ratio around eventually before investors get fed up and stop handing you capital. Maybe when you scale up to mass-production, your production cost per unit drops. Or you steadily creep the price up over time, or push features into a higher paying tier. Or maybe the product is a loss leader, and you make the money up elsewhere (eg: sell hardware at a loss, recoup it in subscriptions).

The point is MoviePass did not appear to ever have a hope of succeeding other than "maybe in the future, we can negotiate enough deals with cinemas to drive the cost down." They had other levers that I'm sure they were considering too: limit MoviePass to empty seats/certain showings on quiet nights, increase the price of MoviePass, limit the number of views per month, etc. The trouble is, they sold MoviePass at such a ridiculously low price point ($10/mo) that even if they did all of those things, there's no guarantee they would have been able to boil the frog slowly enough to reach profitability.

As the article points out, MoviePass was cheaper than buying just one ticket when it first launched. Somebody who only saw two movies per month already cost the company more than double what they brought in, and there were plenty of people using it weekly. You're creating a huge customer expectation with that - it's going to be a very tough sell to trim that offering to the point where it's profitable and you retain enough customers at the end of the day.

The article doesn't appear to know much about the real MoviePass story.

In fact, the thing that the author suggests that they should have done was their actual business strategy: ramp up customer growth using other people's money, and then bully movie theaters into a revenue sharing arrangement.

The real problem with Movie Pass wasn't that they grew too fast, it was that the the movie industry refused to make the deal. Don't forget that while MoviePass was losing money hand over first, it wasn't just the consumers that were cashing in. The theaters were getting paid for all those seats too.

In response to MoviePass, rather than breaking rank and being used as leverage against the other theaters... most chains just invented their own in-house version that would keep you locked into their brand.

There are lots of deeper analyses about there. I don't think the execs were clueless. The investors, though. Those people might have been clueless. The theaters were forced to innovate, and did it easier and cheaper than MoviePass could.

Early history of PayPal is my favourite example of this. They literally gave people $10 for signing up, and a further $10 per referral (who then got $10 each as well). This was an expensive, but effective, way of achieving exponential growth in the early stages - enough to build a "critical mass" of users.

That is a little different though. That's just like paying your customers directly instead of an advertising agency.

PayPal certainly wasn't paying customers for each transaction or anything crazy like that.

I agree with you. I remember the early days of Paypal. It was back when buying something online often meant using a website you'd never heard of and weren't sure you trusted with your credit card number. Getting a few bucks from Paypal helped convince people they weren't a scam and could be your internet payment method.

> It was back when buying something online often meant using a website you'd never heard of and weren't sure you trusted with your credit card number.

Unless you do 100% of your online shopping on Amazon, I don't see how this is supposed to be different today.

> Getting a few bucks from Paypal helped convince people they weren't a scam

Funny. "Get free money" is pretty much a dead giveaway that something is a scam.

> Building market share by massive "deficit spending" is how many companies became huge in the past decades.

The author goes on to make exactly this point a handful of paragraphs later. The MoviePass bit is a fun story to suck you in, not the meat of the piece.

> The MoviePass bit is a fun story to suck you in, not the meat of the piece.

Seems like the author damaged their own credibility with this ruse.

Agree. If anything, it made it seem like they don't really understand anything about MoviePass, or why it failed, or even what they were trying to do.

It's like opening your example with saying you're going to talk about why this professional sports team lost the big game, and then your article is all about how you need to kick the ball into the goal to score points.

It makes it seem like they really don't have a clue what they are talking about.

Worth noting that the executive get paid at least a comfortable base salary for as long as the cash-burning business keeps its doors open, and if hype creates a pop in the equity price their stock options can be worth a lot, even if the business doesn't turn out.

Regardless of whether MoviePass really had a chance at being profitable, or whether the people running it believed it could be profitable, there was money to be made in making it look viable and getting investors. That's a pretty important point that the author needs to understand before calling the execs "clueless."

Worse than that, there are rumors that he is relaunching a new company using the infamy he earned from crashing MoviePass into the ground.

https://www.mediaplaynews.com/moviepass-founder-seeks-to-cre...

A lot of the later investors were clueless retail investors who didn't understand/notice dilution and reverse splits when they invested in Moviepass's parent Helios and Matheson ($HMNY).

> money is cheap these days

For whom?

People who are already capital-rich, they can get loans at the drop of a hat. Meanwhile people with low-paying jobs are stuck being priced out of the housing market.

Anyone with a good investor storytime and the right faces.

Rich people

It's useful to be able to talk about COGS, even in general terms, with a business. The first example given in this post, the two businesses with the same revenue/loss but different COGS is a great example of why.

I think another example of why is the move towards subscription pricing. Hear me out...

In my experience (as a consumer), subscription pricing makes the most sense when there's a direct correspondence to COGS. Example: Dropbox, they're storing stuff for me over time, no one ever suggests Dropbox should be a one off purchase. Conversely, it always seems to be controversial when there isn't a direct correspondence to COGS, for example a piece of desktop software.

Developers would likely say that support is classed as COGS, but I think that's quite debatable, most companies wouldn't class it as such. Then they might claim that upgrades to support new OSes are COGS, but that's not really true, you can sell upgrades. Maybe these are true, but they are certainly less convincing to consumers than times when there's an obvious ongoing cost.

I wonder if developers looking at subscription pricing should be looking at how they can frame the pricing as clearly corresponding to a cost incurred?

This is a pretty good introduction into the nuance of COGS, but I find that it really isn't as useful of a valuation metric unless the company primarily sells inventory of some sort. MoviePass is an interesting example because it is sort of a mixture between a tech company and a traditional retail company with inventory, and its failure seems to be somewhat due to it trying to act like a pure tech company leveraging a deficit spending strategy.

For tech companies, the important thing is to understand the breakdown of your total costs: fixed and variable. Compare MoviePass to another tech company like Facebook. They both have similar fixed costs like rent, servers, and developers, but Facebook's variable costs per user are bytes of data which cost fractions of a penny, whereas MoviePass had larger variable costs per person because they actually had to buy the movie tickets as "inventory". You can pay a single developer a fixed salary per year whether 10 people are running their software or 10 million people, but your costs will be vastly different if your users see 10 movies per year compared to 10 million. MoviePass was gaining $10 per month per user, but since each user was costing more than $10 per month, no amount of scale would have saved them.[0] This is very different from companies who have virtually zero variable costs and actually increase in profitability (and valuation) from each additional user they recruit.

[0] Unless they pivoted, renegotiated costs, or added other sources of revenue.

I would add this is not a particular issue only for tech companies. All companies need to do this sort of work. If you sell hamburgers how much did it take you to sell 1 hamburger. In 'tech' what those costs and sales are, are different. But in the end total cost of sale is needed so you can figure out where MR=MC is for your business. As that tends to be the sweet spot. If marginal cost is wildly higher than marginal then you may have an unviable business. In this particular case it should have been fairly easy to tell. Total customers paying x 10 > total cost. If that is not true then you are not making money. Now there may be reasons to do that early but long term you are not going to make it.

It is actually a good question to ask during an interview if you want to join a company that is doing OK. 'What sort of sales are you doing? Is your margin good or is it something else?' Basically ask around 'how are you making money'. It is important because in the end it affects your paycheck and how they will treat you.

> as useful of a valuation metric unless the company primarily sells inventory of some sort.

quibble: replace "inventory" with "quantifiable"; you might not need to put it in dollar terms but could express "COGS" in person time, for many purposes. The conform ability of the units used in those cases is a different debate

There's nothing inherently flawed about the product.

One can imagine lots of tweaks: higher price, lower payment to theaters--which probably means they have to in turn negotiate with distributors, premium to use the pass at peak times, etc. (Of course, it's an open question whether they have a viable product at that point.)

The metric people use for this is operating leverage https://www.investopedia.com/terms/o/operatingleverage.asp

I wonder if moviepass somehow survived if it would have been able to negotiate with theaters.

The writers assumption that the executives were "clueless" almost made me stop reading the article, as they clearly don't understand the long game, and as such why should I read about their take on economics?

Seems pretty clear the investors money (not the executives, really writer??) was being put to use to eventually strongarm the theaters into more of a revenue share.

This is actually really great material. One of the things that I hate about the financial press is that they obfuscate this heavily with really bad journalism. They love to take Net Income, divide it by "widgets sold" (whatever that might be for a particular business), and proudly proclaim that this business is literally losing money on every sale!

That's not true, and an analysis of COGS data is the key that you need to understand the difference. It can be murky, just as this article makes clear, but there are often opportunities to find profitable businesses in this data. The more negative press during the "pre-profit" days, the better.

The corollary is that this can also find the really bad companies, like MoviePass.

Having good COGS data is also helpful within a business to measure the profitability of different products: e.g. one brand vs another, or shirts vs pants. But it's one of the hardest things to measure. Partly that's from the imprecision around the concept, partly from the complexity of the calculation (FIFO vs LIFO etc---the stuff the article said it was going to skip), and partly because it's not clear how to allocate some costs between products. And it can take a lot of manual data input work to track it all.

There is a funny section of The Data Warehouse Toolkit by Ralph Kimball (the leading person behind the data warehouse consulting industry) where he says you should make sure to build the COGS data mart last, after you've already finished some easier projects and won the trust of the client, because it is the messiest and hardest, and also the most political. And when you do finally build it, v1 should be based on "rules of thumb". (Technically he advises building the profitability data mart last, but I think it's clear he's attributing the difficulties to the cost side, not the revenue side.)

I once had a customer ask me to add COGS to their in-house ERP system, and I never even got started because they just couldn't answer simple questions about how they wanted it calculated.

I am surprised that this article doesn't mention SG&A (Selling and general administrative expenses). For many companies SG&A are much larger than COGS and comprise all the costs that are not included in COGS. So if companies have some discretion to include an expense item in COGS, they also have some discretion to include other expense items in SG&A.

"The more indirect things would be purchasing ads or bribing the city counselors for beverage permits."

Living in Cincinnati right now this little joke hit me like a certified letter from the IRS. Normally I would have chuckled. Four of seven city council members are going to the kilnker for soliciting bribes.

Great explainer. Really a nit but this is micro economics he’s examining not finance.

Well academically yes, but from the company pov there is no microeconomics responsible - it's the Chief Financial Officer. And their responsibilities are either finance or accounting.

Now let's add ROI measurements on those plots :-)

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