The best businesses are “stars”: that is, they hold the number-one position in a market or niche that is growing fast (by at least 10 percent a year over several years). Stars are incredibly valuable because they can grow exponentially, while also being very profitable and cash positive. Stars comprise only about one or two out of every hundred businesses, yet they account for more than 100 percent of cash generated over the lifetime of the product (because some non-star businesses absorb more cash than they generate). Hence stars are the businesses where entrepreneurs, venture capitalists, and other investors make all their money. It is possible to create a new star business by overtaking the early leader in your market, by inventing a whole new business category from scratch, or by re-segmenting into a new business category that is a subset of the original market.1 By applying the Star Principle to my investments I have built up my personal wealth.2 Over the past twenty-three years I have invested in 16 startups or young companies, of which eight have returned at least five times my original capital. This has created returns of about 20 percent a year compounded — far above the average attained by professional venture capitalists. (Location 201)
The first we call price-simplifying. This requires cutting the price of a product or service in half, or more. (Location 330)
In a nutshell, price-simplifying works because markets usually respond to dramatic price cuts by multiplying their size exponentially. If the price is halved, demand does not double. It increases fivefold, tenfold, a hundredfold, a thousandfold or more. If prices are reduced to a fifth or a tenth of what they were originally, demand may multiply by ten thousand or a hundred thousand times. (Location 337)
multiples may be measured in the millions — look at what McDonald’s did to the hamburger market. Yet price-simplifying makes financial sense only if you are able to make the product simpler to make and thereby cut costs by at least half. (Location 340)
Our term for the second strategy, which is very different but equally effective, is proposition-simplifying. This involves creating a product that is useful, appealing, and very easy to use, such as the iPad (or any other Apple device of the last decade), the Vespa scooter, the Google search engine or the Uber taxi app. Proposition-simplified products are also usually aesthetically pleasing. Proposition-simplifying creates a large market that did not previously exist in the same form, or at all. For instance, there was no market for tablet computers before the iPad. Unlike price-simplifying, products that proposition-simplify do not involve a radical reduction in price; they may even command a price premium. Yet proposition-simplifying also multiplies value for money and therefore market size by making the product or service so much easier to use as well as more practical and/or beautiful. Proposition-simplifying works when the product becomes a joy to use. (Location 349)
Henry Ford is our first price-simplifier. His overriding objective was to cut the price of his cars dramatically — to well below a half of the previous level. (Location 465)
Many “information” products — such as Dropbox, Google, and Spotify — have used the internet to become universal products with remarkable speed by focusing on a single element of utility: I want to broadcast or narrow-cast a headline (Twitter); I want to text messages (Location 2243)