Part of Bob’s continued ramblings.
I’ve gone down the rabbit hole of the Acquired podcast over the holidays. This started on our drive up to Maine listening to the VISA podcast, where I learned almost as much about the payments business as I have in the past 14 years at RunSignup. I had no idea the podcast is structured as a 3 hour deep dive into different businesses, and they’ve done almost 200 episodes. I went on to the 3 podcasts of 3 hours each on Berkshire Hathaway (I’m a long time fan having read every Berkshire Annual Report multiple times) followed by the interview with Charlie Munger from only a month before he passed away. Then I went to the Costco episode mostly because Charlie was such a fan and I wanted to learn more.
I was amazed at how many parallels there are between Costco and RunSignup.
Mature Markets
Retail is mature, and it turns out the event market is mature, and the use of online tickets is pretty mature. Costco has grown 10% per year for the past 30 years. RunSignup grew about 15% this year and the plan for the next 5 years (our planning horizon) is around 10-15%. The mature market means that customers already have their habits and they do not shift quickly – so both businesses are slow growth. The other thing that constrains both companies growth is that neither wants to grow too fast. We don’t want to screw up a good thing. We tried to ramp up sales and marketing spending with GiveSignup back in 2020-2021 and found that it did not work – we can’t push on a string. We’ve also looked at various acquisitions to speed up our growth over time, but were never able to get over the overhead it would create from supporting multiple platforms or forcing customers to move. Maybe this will change for us in the future as we are smaller and it might be easier than opening too many super centers in a single year.
The lesson I learned from this is that it might be OK to grow “only” 10% a year for the next 30 years. We would be 20X our current size if we do.
“Work Hard to Charge Customers Less”
This is one of Costco’s core mottos. They actually cap their gross margins at 14% – most retailers have 50% gross margins (sell a product that costs the retailer $10 for $20 – Costco charges about $12). They’ve also had innovations like the Kirkland brand to lower costs (which does $52 Billion per year in revenue making it one of the largest consumer brands in the US).
RunSignup strives for a similar strategy. We talk a lot about efficiency which allows us to keep costs low. We also do something similar to Kirkland with our free Email and Website capability that helps customers save money by not having to pay for their own website or email marketing.
I learned a long time ago about “pricing umbrellas” and how startups can live under a price umbrella from an incumbent. Our pricing was designed to be lower and fairer than Active in the endurance market and we are significantly under Eventbrite as we enter the ticket market. The lesson is not to get bloated and increase price just because we are now the market leader in endurance because it does not keep the three leg stool balance of treating customers well, while still earning a decent profit to operate the business and compensate employees and owners well.
Pay People More
Costco pays their employees 30% more than the rest of the retail industry. And they provide healthcare and 401K programs. This results in having less turnover and longer term employees. This actually costs their business less because employees are more productive, and they avoid the high replacement costs. There is a Harvard Business Review article that talks about how the total cost of Costco labor is lower than Walmart.
Of course this resonates as I just wrote a blog about this and recorded a video on RunSignup employee benefits, review and compensation. And of course every employee at RunSignup is a co-owner of the company, which hopefully makes employees care more and gives customers more confidence they are working with the owners of the company when they use the product and talk with our team. So the benefits are more than just lower cost, but higher productivity and better customer retention.
Code of Ethics
Costco has 4 basic points in their Code of Ethics that resonate with our business:
- Obey the Law – For RunSignup, this has come into play in a couple of ways. First is the hard work we have done to become a Payment Facilitator. When we first started we did not understand that it is actually not permitted to be a “Payment Aggregator” – meaning we originally put all the money from transactions into our own bank account and then sent out payments to races. We took this hard step in 2015 where we were formally approved by the card brands like VISA and Mastercard and set up separate virtual bank accounts for each of our customers. The second major investment we made was when Marketplace laws came into existence and we implemented a full sales tax system to collect and remit sales tax on behalf of our customers. Doing the right thing is a cultural ethos for us.
- Take care of Members – The term “member” is interesting as we feel we are part of the endurance and event community. We really do think we are all in this together. Our fundamental business model is that we only make money when our customers make money, so we have very aligned goals. That is why we build so much technology and offer it for free.
- Take care of Employees – As discussed above.
- Respect Suppliers – We have a different angle on this, but there is a similarity. First, we have always had an Open API for our system. This allows other software vendors as well as customers to integrate our system and data with other systems our customers use. Second, we try to take a “Swiss” type of an approach and not offer other things that distract us from our core focus of building software – like offering shirts or including timing and event management services. Building great technology takes focus, and we want to have a rich software and service ecosystem that leverages our technology.
It is also interesting that Costco explicitly states that if they do the above 4 things, then their owners and shareholders will be taken care of.
Intelligent Loss of Sales
Costco keeps their product SKU count low. They are OK if customers go elsewhere for certain products and services. We are similar. In addition to not getting into event management and shirts, we also have a non-exclusive contract (here is a video where I explain the logic of non-exclusive contracts). Unlike many other vendors who have 3 year lock-in contracts, our customers can leave at any time. We simply do not want unhappy customers. And if we are not doing a good job, maybe we should not be in business.
Costco only opens up a certain number of centers each year – they are OK with not growing too fast and not doing things well. RunSignup is taking a similar approach to going International. We are likely to eventually get there, but it will still be there in future years when we are really ready.
We are also not afraid to say “no, we don’t do that” to prospects. We would much prefer to under promise and over deliver. One example that comes to mind was back around 2015 when a large race organization was insisting that we run a dedicated set of servers and database just for them. We said no. It would cause us excess overhead and would actually lead to more risk because we would have more things to manage and update. It certainly would have complicated and slowed our ability to have 2,000 releases a year.
Of Course We Are Different
Costco moves merchandise. RunSignup moves bits. Costco has a stable product mix. RunSignup has continuous change. Costco is a huge publicly traded company. RunSignup is a tiny employee owned company.
However, there is commonality with both companies being built as “durable” businesses. Both businesses have long term employees and long term customers who really care about and are grateful each other.