ShmoopTube

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Accounting Allah shmoop white noise More talking pillow We've covered

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the meteoric rise from a humble farm to the acquisition

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by ex Apple execs to the injection of custom pillow

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iPhone APS and now a global behemoth in pillows where

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the big profits to the company come not from the

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actual pillows which ended up being more of a Trojan

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horse but rather coming from apse which have almost no

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marginal cost And while at least early on deliver a

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regular flow of customer upgrades at five bucks each where

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ninety percent of the money that comes to the company

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is pretax profit contribution Let's drill down on the trade

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offs in your APS menu As the apse business comprises

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most of the value of pillow talk and optimizing its

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menu of offerings is arguably the most important strategic set

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of business decisions you will make Other than not hiring

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Kevin Hart as one of your audio book readers Well

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the first thing to note is that white noise is

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free and no white noise is not the sound of

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the crowd at a NASCAR or water polo event Nope

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it's just background noise that drowns out other more jarring

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background noise which in many cases helps people to get

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to sleep more easily Think of it Is Thea Analog

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to a golf announcer whispering and the most incredibly boring

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insights ever given on Earth He has very few pars

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when recording three pot she rolled into the sand That

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was not what she was trying to dio There are

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four hundred thirty nine trees on this hole We see

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them one two three four and so on Yes well

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the white noise here is created by the wake up

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Wake up is created by the founders of the company

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who simply don't charge anything for their efforts in while

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breathing and making other strange calming noises into the microphone

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there Well then as we get more specific and hopefully

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more interesting the pricing and cost structure gets more complex

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Note that as users begin to be able to go

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to sleep with copy written licensed music the pricing gets

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more expensive culminating in a twelve hundred dollars died and

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Gone to Heaven package which includes a few Beatles songs

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Yeah well the profits of the company for selling the

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Beatles package is about the same as it is for

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the greatest hits of the Mars Rover package So why

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would a company go through all the effort to sell

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a twelve hundred dollars package and reap the same profit

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that they would in selling a ten dollar package Well

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in real life they wouldn't most companies optimize their sales

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effort so that the contribution margin is maximized So contribution

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margin is essentially the gross margin of the product for

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the N plus one products sold that if you could

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sell four hundred units while the contribution of that final

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units sold is what is calculated in the profit contribution

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or contribution margin here or set another way companies simply

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optimized for profits not revenues As you'd guess many times

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there are problems with APS and the technology behind them

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like what happens when a twelve hundred dollars Beatles package

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breaks Well it's a major problem and if company suffered

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will say a few thousand of these breakages and had

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to rebate the customers the money behind them well it

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could seriously damage the finances and reputation and trust and

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everything else of that company read another way The very

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expensive and extremely low margin business ends up being simply

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too risky for most companies to undertake Well companies must

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have incremental profit margin to make up for the very

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likely scenario in which the product fails The company has

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blamed in the company must then make good financially on

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its business promises Well in the case of the cheaper

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APS the margin structure's very different for the nine dollars

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ninety nine cent Mars Rover business while the unit profit

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margin is about twenty percent which interestingly is meaningfully higher

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margin than the five dollars package which carries only about

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it ten percent margin and so on So how do

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you account for the free app then which comes with

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the pillows that air sold Is there really no margin

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in the apse business for those units sold The company's

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getting no revenue so well How could there be any

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margin Well if you step back and think about the

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business of selling pillows the incremental value of these APS

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becomes much clearer That is the company would probably not

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even exist if it didn't have the positive gimmick oven

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app and sound system neatly embedded into a hello So

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the manner in which you'd attributes value to the APS

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in this arena depends directly on the way you value

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The apse is being the key part of success in

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the creation and continuance of this company We'll think about

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the last time you downloaded a game app on your

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phone a lollypop Lollapalooza or whatever it was free to

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download right And that's how they get you because after

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playing the free version for a while you kind of

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want to buy one hundred magic suckers And then you

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desperately need to purchase Candy Cane Bonus And then it's

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a matter of life and death that you invest in

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the gummy bear upgrade and all those add ons we'll

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add on Suddenly a game that was free to play

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initially is showing up as a roughly fifty dollars charge

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on your monthly bill Which is exactly why a company

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can give you a tiny part of their product for

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free They know that once you've dipped your toe in

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the water it's a lot easier to grab you by 00:05:00.117 --> [endTime] the ankles Ah

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