What blockchain investors can learn from Costco
Some businesses run on low margins by choice. Others do it because they have no choice.
Artwork by Crystal Le
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“It’s like heroin: You do a little and you want a little bit more.”
— Jim Sinegal on the danger of raising prices
The Monday after meeting Jim Sinegal for coffee in 2001, Jeff Bezos informed his top executives that, going forward, Amazon would model itself on the price-obsessed retailer that Sinegal had built: Costco.
Like Costco, Amazon had always promised low prices, but unlike Costco, it hadn’t always delivered. There were plenty of deals to be had at Amazon.com, but they weren’t always the best deals.
After meeting Sinegal, Bezos made it his mission to change that.
“There are two kinds of companies,” he told his executive team, “those that work to try to charge more and those that work to charge less. We will be the second.”
Bezos found Sinegal inspirational because keeping prices low at Costco had become, in Charlie Munger’s words, “almost a religious duty.”
“When other companies find ways to save money, they turn it into profit,” Munger explained. But when Costco finds ways to save money, they pass it on to customers.
Another prominent Costco investor, Nick Sleep, described this as “scale efficiencies shared.”
“Savings achieved through purchasing or scale are returned to the customer in the form of lower prices, which in turn encourages growth and extends scale advantages.”
Or, as Sam Walton put it, “keep costs low and pass the savings on to customers.”
It’s not charity, of course. “You can generate far more [profit] at a cheaper retail price than you would have by attempting to sell the item at a higher price,” Walton explained.
This philosophy of passing all savings on to customers is what turned Costco and Walmart into what Nick Sleep called “retail’s version of a perpetual motion machine.”
It takes a near obsession with low prices to become that.
Sinegal was so committed to keeping prices low that when a new CEO suggested raising the $1.50 price of Costco’s hot dog and soda combo (which was being sold at a loss), Sinegal shot back: “If you raise the effing hot dog, I will kill you. Figure it out.”
They did figure it out — by building a factory to make the hot dogs themselves.
As a result, the price of a hot dog and soda at Costco hasn’t changed since 1984.
Bezos was similarly obsessed with prices.
Soon after his meeting with Sinegal, Amazon began scraping competitors’ websites in search of any product offered anywhere for less than it was on Amazon.com.
When it found one, Amazon’s website automatically matched it.
If that meant selling something for less than it cost them to procure it, so be it.
Amazon not only passed efficiency gains and cost savings on to customers, it sold products at a loss to force itself to get more efficient and find more cost savings.
It’s not the only way to run a business, of course.
Luxury goods makers like Hermès keep prices artificially high to create a sense of exclusivity, for example, and Nvidia prioritizes sky-high profit margins so it can plow the profits back into R&D.
It isn’t always a good way to run a business, either.
Companies like WebVan and MoviePass prioritized low prices, but failed because they couldn’t find enough efficiencies or cost savings to make the prices sustainable.
(MoviePass is now trying again with higher prices.)
Even McDonald’s, famous for its meal deals, has recently struggled to keep prices low enough to maintain its reputation for value.
One way to frame this dynamic is that some companies choose to have low margins (as part of a business strategy), while others are forced to have low margins (because they’re in a bad business).
As a rule of thumb, you want to invest in companies that have low margins by choice and not by necessity.
That might be a good way to think about layer-one blockchains, as well.
If you raise the effing MEV…
It’s not particularly expensive to create blockspace, so there’s no obvious reason why blockchains should have pricing power.
Kyle Samani, for example, thinks blockchain fees will ultimately be close enough to zero that maximal extractable value (MEV) will become the sole reason layer-1 blockchain tokens have value.
MEV is the profit earned by validators who have the right to order the transactions in any given block, and on Solana, virtually all MEV is captured with software that’s created by Jito Labs.
Validators run Jito’s software to optimize MEV extraction and to share those profits with the SOL holders who’ve staked their tokens with them.
Now, however, a new Jito processing system — the Block Assembly Marketplace (or BAM) — will shift some MEV capture from the Solana blockchain to the applications running on top of it.
To me, this sounds a lot like Costco choosing to forgo profits in order to pass efficiency gains through to customers.
“BAM could lead to a reduction in topline revenue for the Jito DAO and SOL token holders,” Carlos Gonzalez Campo wrote in a recent report for Blockworks Research.
Even in an asset class that doesn’t worry much about revenue, this should probably give token holders pause: “The shift to app-specific sequencing,” the report continues, “raises questions about the economics of the network.”
But Campo believes this is ultimately for the best: “By enabling apps to internalize transaction sequencing, Jito is acting as a good steward for the [Solana] network, despite forgoing meaningful incremental revenue in the short- to medium-term.”
He still expects Solana’s revenue to rise over the next year because “the increase in aggregate demand” should offset lower fees per transaction.
But this appears to be a defensive measure: “A significant motivator behind BAM is that Solana is losing the perps race to Hyperliquid.”
Sinegal might not be impressed. Adopting the Costco model would mean relentlessly pursuing efficiencies and then passing the savings through to customers as a matter of course, not just in response to a new competitive threat.
Sam Walton preached “everyday low prices,” regardless of what the competition was doing.
But if lowering fees at the expense of short-term profits becomes part of Solana’s culture, it could work out well for token holders. An investment portfolio of just Walmart, Costco and Amazon would have outperformed just about everything over the past 30 years or so.
Their “shared efficiencies” business model is not for everyone, however, because selling hot dog combos for $1.50 is a tough business.
And what’s made Costco great isn’t just that it’s managed it — it’s that it chose to.
If Solana is also a business, is it the kind that can choose to sacrifice profitability?
Or is it the kind that has to?
We might soon find out.
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