How to analyze the essence of business models using first principles: What value do companies truly create?

Good question. This issue isn't as complex as it sounds; let's break it down thoroughly.

"First Principles" might sound profound, but simply put, it's like peeling an onion: stripping away all the fancy layers (like "ecosystem synergy," "empowerment," "closed-loop," "track") to get to the core. You just need to keep asking "why" until you reach a self-evident truth that can no longer be broken down further.

When analyzing business models using this approach, you're essentially asking: "Why would a customer take money out of their pocket for you? What monumental problem are you truly solving for them?"

All business models, no matter how elaborately packaged, ultimately create one or a combination of the following fundamental values. See which one(s) your business falls into:

1. Improve Efficiency, Save Time

This is the most common type of value. The development of human society is essentially a history of efficiency improvement.

• Before: If you wanted a meal, you had to buy groceries, wash, chop, cook, and then wash dishes, taking 2 hours.
• Now: You open a food delivery app, and a hot meal arrives in 30 minutes. The money you pay is essentially for the 1.5 hours saved and the hassle avoided.
• For example: Washing machines save you time from hand-washing clothes; spreadsheet software (Excel) saves you time from calculating with an abacus and ledgers; various errand services save you time from going out to run errands yourself.

First Principles Thinking: Does my product/service make it faster and easier for users to accomplish something?

2. Reduce Costs, Direct Savings

This is easy to understand: making the same things cheaper.

• For example: Pinduoduo, Costco, outlet malls. Their core model is to help you buy desired items for less money through centralized purchasing, reducing intermediaries, and operating on thin margins with high sales volume. You pay them because they save you money, and you share a portion of those savings with them as compensation.
• Another example: Energy-efficient appliances might cost more upfront, but they save on electricity bills in the long run. This is also a form of cost reduction.

First Principles Thinking: Does my product/service reduce the total expenditure for users to acquire a certain product or achieve a certain goal?

3. Lower Barriers, Provide "Possibility"

Many great companies don't just make things "better"; they make things possible "from scratch."

• Before: Only professional photographers could take great photos because equipment was expensive and techniques were complex.
• Now: Smartphones + photo editing apps allow ordinary people to take and share "masterpiece" photos anytime, anywhere. Phone manufacturers and app developers provide you with "creative possibilities" that didn't exist before.
• For example: Online education platforms allow you to access lectures from prestigious university professors without having to get into those schools; cloud computing (AWS, Alibaba Cloud) enables small companies to have powerful computing capabilities without buying their own servers.

First Principles Thinking: Does my product/service enable ordinary people to do things that were previously only accessible to a select few?

4. Provide Emotional Value and Spiritual Sustenance

This is a higher level in Maslow's hierarchy of needs, but it's still a tangible value.

• For example: Why are you willing to spend thousands on a trendy brand T-shirt instead of dozens on a plain one? Because beyond covering your body, it provides social identity and recognition like "I'm cool" or "I belong to this group."
• Another example: Games, movies, and novels offer immersive experiences and emotional release; luxury goods provide a sense of prestige and status; a fantastic concert offers collective euphoria and cherished memories. Starbucks doesn't just sell coffee; it sells the experience and atmosphere of what's called the "third place."

First Principles Thinking: Does my product/service make users feel happier, more respected, more distinguished, more satisfied, or help them escape from real-world pain?

5. Reduce Risk, Provide Certainty

The future is uncertain, and people are risk-averse. Paying for this "certainty" is a human instinct.

• The most typical example: Insurance companies. You pay for insurance not to make money, but to hedge against the risk of significant future losses. You're buying peace of mind, knowing "if something goes wrong, I can handle it."
• Another example: When buying a car, choosing a reliable, established brand over a new one is also paying for the certainty that "this car won't break down easily." Professional consulting services and legal services help you mitigate potential risks in decisions or actions.

First Principles Thinking: Does my product/service help users eliminate certain future uncertainties or give them a "peace of mind"?

In summary:

Forget about complex business jargon. When you analyze a company, measure it against these five criteria:

• Does it help users save time? (Efficiency)
• Does it help users save money? (Cost)
• Does it enable users to do things they couldn't do before? (Possibility)
• Does it make users feel better/happier? (Emotional Experience)
• Does it make users feel more secure/at ease? (Certainty)

A business model might fulfill just one of these, or several. For instance, a good restaurant offers delicious food (emotional experience) and saves you cooking time (efficiency).

By understanding these points, you grasp the essence of business. The rest are merely execution details: "how to communicate this value to your customers (marketing)," "how to deliver the value to your customers (channels)," and "how to ensure you make money doing it (costs and revenue)."