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The Virtuous Cycle: How to Build a Lasting Business
Lob Culture
April 29, 2014

The Virtuous Cycle: How to Build a Lasting Business

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Dan Zhao
"If you are building a company, it is important that you architect your business by following the principles of a virtuous cycle. Or else, you may be unintentionally working yourself into a vicious cycle that will slowly but surely lead to your downfall."

At Lob, we are extremely focused on the business and operational side of things. We built our technical infrastructure internally and externally to make it easy for our engineers to push code and customers to integrate our API. Our goal is to build a company that is not only sophisticated technically, but also operationally. Today, we're sharing how we operate our business with an eye on long-term sustainability.

The Motto

We’ve drawn inspiration from Amazon and Jeff Bezos’ Virtuous Cycle philosophy, which dictates many of our most important core values. Amazon’s virtuous cycle involves sacrificing short term profits to enhance the customer experience and maximize long-term gain. Bezos has famously explained that the metric he pays the most attention to is absolute dollar free cash flow. If you can cut prices to get more dollars through the door, a virtuous cycle will create increased customer loyalty. You then reinvest that cash to lower prices further and improve your product. Over the years, Amazon has intentionally kept their bottom line metrics thin to reinvest more into their business. Consequently they can drive prices down further so that their customers have the best possible experience. Amazon’s virtuous cycle is what makes it insanely difficult to compete with them on anything.

Our Execution

Our company is building vertically integrated APIs that virtualize infrastructure so developers can programmatically access it on-demand. It is important for us to operate on a clearly defined virtuous cycle of great customer support and competitive prices. We are optimizing our vertical chain in ways that allow us to cut down on our cost structure. We can pass those savings directly to our customers in the form of lower pricing. As more people adopt our API, the experience and pricing become more attractive, which in turn leads to further growth.

There are many levers involved in this process and we will use our Print & Mail API to illustrate an example of our virtuous cycle:

The Virtuous Cycle: How to Build a Lasting Business image 2

The factors that allow us to keep our prices low and on-demand are volume and automation.

We purposely did not exit Beta until we built automation on the backend that allowed us to print & mail with a cost structure that made sense. We needed to ensure that the first unit that we processed could be produced at a very low cost. Therefore we could offer very low prices to our first customers. We achieved this by implementing processes on the backend with our print machinery that automates our printing and fulfillment workflows by eliminating redundant human labor. This involved things such as smart queuing, batching, order processing, standardization of data transfer, etc. We continue to iterate and improve on said processes to lower our cost structure further. By doing so, we will be able to attract more volume, which in turn allows us to manage capacity even better.

With optimization of machine usage also comes faster production times, leading to faster turnaround times, which all adds up to a much improved customer experience. As we master management of existing products and workflows, we are also able to explore new ones so that the API becomes even more powerful and versatile. This is one example of the Lob Virtuous Cycle, a perpetual logistics flow that seeks to improve the customer experience and drive growth.

The Results

By spending a lot of time paying close attention to the levers in our virtuous cycle, we have been able to operate profitably on a transactional basis from day one. We remain extremely diligent when it comes to cash-flow management, making sure that every dollar spent contributes directly to growth and product enhancements.

Lob, like Amazon, is very willing to cut prices in order to increase volume and absolute dollars through the door. We then use this working capital to drive growth by pulling more levers in our Virtuous Cycle. The resulting improvement in customer experience strengthens of barriers to entry in our market. There’s no reason to operate at a 50% profit margin if competitors can step in and price you out. Whether it’s lower pricing, wider selection or other differentiators, it is important to identify and closely monitor these levers early.

If you want to build a successful company, it is important that follow the principles of a virtuous cycle. Or else, you may be unintentionally working yourself into a vicious cycle that slowly but surely leads to your downfall. This is a philosophy that extends to anyone in any industry. It might be easy to win today, but it is more important to win in the long-term.

For our readers, we hope that this little bit of insight into our business has been helpful or interesting. If you have any comments and/or suggestions, we would love to hear from you. What does your company’s virtuous cycle look like? In the meantime, we will keep grinding to lower prices and build out products that make our users happy.

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