I was living in fiction right until now or I hoped for a fantasy. But with some realizations, I see how it is actually. What I’m talking about applies equally for both physical or digital products, shoe laces and softwares both.
I thought out there would be a business model where investment would be low, chances of loss would be low, and profit can be high. I saw it through the lens of leverage at some business models. Some business models where inherently you just have to make something once and you can sell it a lot of times. (software or defined manufaturing)
But we can look at the commercial world through two Factions. The makers and the sellers. Sometimes one entity can be both.
Makers are the manufacturers. You can think of them as the tech factories in China, or software consultancies in India, or textile factories in Bangladesh.
Sellers are the brand makers. Their job is customer acquisition. In capitalism, we accepted that whoever makes the sale happens to keep the receipts regardless of whether it makes profit or not. The maker may not necessarily be that person. So, sellers are the actors that take things from manufacturers and venture out into the world to sell it to someone else.
In this setup, we have seen that manufacturers accept low margins in exchange for handing over the goods to the seller, but they have reasonable assurance of sales. That’s because, Seller is sitting in line to collect products from manufacturers so that they can sell it to customers. The seller assumes the whole risk of customer acquisition. The risk here is that for whatever amount the seller acquired the product and the customer acquisition cost will be far greater than what they can sell it for.
Some companies have full vertical integration and they do both the making and the selling.
Making is capital-intensive because they need to establish manufacturing capacity. While seller has a bit lighter balance sheet compared to the Makers. But still, whatever capital sellers do have is highly tied up to whatever inventory they have. They also have to deal with Customer Acquisition Costs, which is the actual pain because without it, selling would have been a really lucrative thing.
Essentially, the maker has accepted to make a huge investment, accept mediocre profit, and the risk of high loss in case of manufacturing capacity is not utilized. On the other hand, the seller is committed to lower investment and chances of higher ruin because the customer acquisition cost is the most elusive part of this whole operation.
A manufacturer knows that out there, there will be a seller who will get his goods for this fixed price. It’s all baked in way more firmly. But on the other hand, the seller is completely ignorant to the customer acquisition cost that might be needed to get goods sold.
So essentially, both have high chances of loss in case things go south because:
- In case of underutilized capacity of a manufacturer, ruin is near.
- In case of seller, if the customer acquisition cost goes too high because their balance sheet is so light, they won’t survive it.
With just one saving grace for each of these factions:
- For manufacturing, a bit firm prospect of profit even though thin.
- For sellers, it is that they can get away with lower investment, but they have to pay with higher chance of ruin.
So, high chance of ruin is the reality for both. But investment requirement and more certainty of profit are the two things between which they have trade-offs.
| Activity | Investment | Profit | Loss |
|---|---|---|---|
| Making (Manufacturing) | High upfront, fixed, irreversible | Low to moderate, thin but steady | High if capacity is underutilized |
| Selling (Brand / Distribution) | Low upfront, flexible, reversible | Potentially high, but uncertain | High if customer acquisition cost explodes |
Of course, in case of service business, you can think of the uncharged hours vs salary of your employees as a cost of underutilization. The analogy fits really well.
And with this, I think my naivety is gone, high chance of ruin is the reality. If you want a bit more certainty over profit, bring up high investment. If you are bringing in a lower amount of investment, be ready for a higher chance of ruin, but profit can be potentially high, just to set it off. Whenever you are trying to make it such that you want low investment but steady profits, you are definitely piping some dream!
Very casino-like, but hey, business is a risk, life is a risk, and we are here to walk through it.
| Dimension | Makers (Manufacturers) | Sellers (Brands / Distributors) |
|---|---|---|
| Core trade | High capital investment → thin, predictable margins | Low capital investment → uncertain, potentially high margins |
| Primary risk | Underutilized capacity → death spiral | CAC explosion → death spiral |
| Safety valve | Demand relatively known if price is right | Ability to pivot, shut down, or redirect |
| Capital at risk | Large, fixed, sunk | Small, flexible, staged |
| Margin profile | Low multiplier | High multiplier |
| Outcome predictability | Semi-predictable | Highly uncertain |
| Speed of feedback | Slow | Fast |
| Reversibility | Low | High |
| Failure shape | Gradual erosion → collapse | Sudden blow-up |
| Stress source | Idle assets | Invisible costs such as CAC. |
| Casino analogy | High-stakes bet, low payout multiple | Low-stakes bet, high payout multiple |
| Survival strategy | Keep machines running | Keep CAC below margin |
This also means you have to optimize for your own character and the way you can handle risk better. If you can bring a lot of capital and have the patience to wait it out till it pays off, then go and become a maker. But if you are someone who can deal with customer acquisition costs better, then I think it is better to make calculated bets using a reasonable amount of capital and be a seller.
Because, as I can see, nothing is actually safer than others. It’s all about if you can deal with it till it works out. It’s just like the stock market – there are so many strategies that there’s no guarantee that one strategy might work over another, but the chances of something working out are hire if you stick to one of them, and the courage to do that comes from your own context and compatibility with it.
But as a man with fever, I would rather take my chances with selling because you are making a huge capital commitment when you opt to be a manufacturer. That’s crazy, and even after all that commitment, the certainty is not actually that high. You are not TSMC or ASML. You’re most probably going to make shoelaces. So the marginal benefit of each dollar committed does not seem to be doing that much both in terms of providing certainty and establishing some differentiation, either in terms of reach, capacity/capability. Just throw your chips. Let’s go into branding. Let’s be a seller.
from claude
Maker personality:
-Comfortable with illiquidity (capital locked up for years)
-Patient, process-oriented, incremental improvement mindset
-Can handle boredom and repetition
-Doesn't need quick wins or validation
-Good at operations, efficiency, relationship management with buyers
Seller personality:
-Comfortable with uncertainty and month-to-month volatility
-Creative, experimental, willing to kill ideas quickly
-Can handle rejection and failed campaigns
-Needs variety and creative expression
-Good at storytelling, persuasion, understanding psychology
The trap most people fall into:
They choose based on what sounds better or what they think they should do, not what actually matches their wiring.
Creative person starts manufacturing → feels trapped, loses motivation
Operations-minded person starts a brand → burns out from constant marketing pivots
Your self-awareness question should be:
"Which type of suffering am I more equipped to handle?"
The suffering of waiting (manufacturing)
The suffering of uncertainty (selling)
Because both paths involve suffering - that's the cost of the potential reward. The question is which suffering you can endure long enough to see it through.In case of software companies which technically do both the manufacturing and the selling part they are primarily selling companies because once you have product market fit you are supposed to sell . A lot of listed software companies spend more on advertising and selling cost than RND and software engineers.
On median, R&D is 26% of revenue, sales and marketing is 48%, 21% is G&A, and COGS are 28%. So we believe “30/50/20/30” on R&D/S&M/G&A/COGS may be more accurate. – Sammy Abdullah on SaaS
unironically more than normal “seller’ businesses lol
Marketing/Sales Cost as % of Revenue – By Business Type
| Business Type | Marketing / Sales Spend as % of Revenue |
|---|---|
| Manufacturing (B2B) | 6% – 10% (marketing only; sales often separate) |
| Wholesale Distributors | 2% – 5% (marketing only; relationship-driven sales) |
| B2C Products (Traditional Retail) | 8% – 15% |
| E-commerce / Retail (General) | 10% – 20% |
| D2C E-commerce | 15% – 25% |
| High-Growth / VC-Backed SaaS | 30% – 50%+ (intentional growth burn) |
^from gpt. yeah checks out.
Also, in e-commerce and D2C, the rule of thumb has been to have a price that is like 5x the CAC.
In D2C, CAC is not a fixed input. It’s a stochastic variable with fat tails. Channels saturate, CPMs spike, attribution lies, platforms change rules. If your price is only 2×–3× CAC on paper, one bad quarter wipes you out. The 5× rule is a buffer against CAC volatility, not just average CAC^from gpt
Crazy how I left the trading thing, I left the derivatives market just to end up in another casino. But this one is a lot slower, has a lot more safe cards and interventions so that you don’t act like a complete idiot. I mean, I guess the world is the casino. There’s no escape. You just move from one table to another. The gambling is going to be there anyways. Business punishes impulsivity less than markets do. It’s like moving from Russian roulette to poker.
This fat tail phrase used by ChatGPT about CAC, really interesting.