Why Some Digital Companies Should Delay Profitability for as Long as They Can

In the early 1980’s, Brian Arthur began speculating that in an increasingly tech-enabled world, the  law of diminishing marginal returns failed to capture something. He speculated that some industries actually demonstrated increasing returns. The more of something you distributed, the more valuable each incremental piece became. Arthur’s thinking ultimately led to our understanding of network effects and feedback loops. In the world of technology: the more of something you make, the more valuable it can become. Facebook becomes more valuable as more people in your network join. Messaging apps become more valuable as more people sign up. Marketplaces like eBay or Etsy become more valuable to each new member every time a new seller signs up and lists their wares.

When Patrick Collison, CEO of electronic payments company Stripe, helped kick off our second-year strategy course at the Stanford Graduate School of Business this year, he observed that this has created one of the most profound differences in decision criteria between leaders in industrial-era and internet-era companies. When your product can become more valuable to your customers over time, the way you prioritize building features and harvesting profits within a business needs to change.
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