Your Competition is Your Costs

What It Covers

Jason Fried and David Heinemeier Hansson explain why controlling internal costs matters more than obsessing over competitors, using Basecamp and Hey as examples of profitable businesses built through disciplined spending and healthy margins.

Key Questions Answered

• •Cost structure flexibility: Basecamp operates profitably with tens of thousands of paying customers while Gmail needs billions because their cost structures differ. Match your expenses to your market segment, not your competitor's scale or business model requirements.
• •Support cost ratio: Hey reduced customer support costs from six percent to three percent of revenue after realizing an eight-dollar monthly product cannot sustain seven dollars in support expenses. Calculate support costs as percentage of price to maintain healthy margins per product.
• •Cloud computing expenses: Thirty Seven Signals identified AWS as their second-largest expense after salaries, with Hey initially spending thirty dollars of every hundred in revenue on cloud costs. They reduced this to ten dollars through infrastructure changes, demonstrating computing costs warrant regular scrutiny.
• •Portfolio approach: Use cash cow products like Basecamp to fund shooting stars like Hey and tolerate dogs like heritage applications. This Michael Porter framework allows patient investment in new ideas without quarterly pressure, enabled only by controlling overall company margins and expenses.