How to analyze business model sustainability using first principles?

Good question, this is a very interesting angle. Let's talk about how to peel back a business model, layer by layer, like an onion, to see its innermost core and determine whether it can truly last.

The so-called "First Principles," in a nutshell, means this: Don't believe in "everyone does it this way" or "industry conventions," and don't be misled by various flashy concepts. What you need to do is break a matter down to its most basic, irreducible "facts" and "axioms," and then, starting from these fundamental points, reason back upwards.

It's like Elon Musk building rockets. He didn't think, "Rockets have always been expensive." Instead, he asked, "What are the most basic materials needed to build a rocket? Aluminum, titanium, copper, carbon fiber... how much do these things cost per ton on the market?" He calculated that the material cost accounted for less than 2% of the rocket's total price. He then concluded: rockets are expensive mainly due to intermediaries and inefficient production methods, not the materials themselves. So, if I figure out how to assemble the materials myself, couldn't I significantly reduce the cost? This is first principles thinking.

Now, let's apply this thinking to analyzing business models. Regardless of how complex a business model sounds (platform model, SaaS, B2C, O2O...), when you break it down to its roots, it can't escape these three fundamental questions:

1. What "indispensable" value do you create for your customers? (Value Proposition)
2. How do you deliver this value to customers and get them to pay for it? (Revenue Model)
3. What costs do you incur in this process? (Cost Structure)

Sustainability is hidden within the answers to these three questions.

Step One: First Principles at the Value Level – What "Meta-Problem" Does It Solve?

Don't look at the company's PPT talking about "empowering XX industry" or "building XX ecosystem"; these are just packaging. You need to ask:

"If your company didn't exist, how would your customers solve their problem? Is that problem a fundamental, long-term need?"

Here are a few examples:

• Catering Industry: Its first principle is to solve people's needs for "hunger" and "socializing." These two needs will never disappear. So, the catering industry itself is sustainable, but specifically for your restaurant, do the food, environment, and service you provide offer higher value (better taste, more convenience, more prestige) than customers cooking at home or going to another restaurant?
• Social Software: Its first principle is to solve people's needs for "communication" and "belonging." These are also eternal. So, for products like WeChat, as long as they are the most efficient and offer the best experience in solving this fundamental problem of "communication," their position will be hard to shake.
• A Failed Example: Some trendy products that merely chase fads, like certain "shared XX" services a few years ago. Did they solve a real problem? Perhaps. But how urgent was this problem? Were customers willing to pay for it consistently? If it only solved a "pseudo-need" or a "nice-to-have" need, then when capital recedes and the novelty wears off, it becomes unsustainable.

Analysis Method: Just imagine: if this product were removed from the world, would users feel immense pain and inconvenience, and be willing to pay a high cost to find alternatives? If the answer is "yes," then its value foundation is relatively stable.

Step Two: First Principles at the Profit Level – Is This "Value Exchange" Fair and Efficient?

Customers are willing to pay for value, but is the exchange process itself sustainable? You need to ask:

"Is the cost customers pay (money, time, effort) a worthwhile deal compared to the value they receive? And, can your method of collecting money become increasingly effortless as you scale?"

• Software/SaaS Services: For example, you pay for Office 365. You pay once, and Microsoft incurs almost no additional "production cost"; it just activates an account for you. This "near-zero marginal cost" model is a highly efficient profit model. As long as users feel that the value you provide (convenient office work, cloud sync) far outweighs your subscription fee, this transaction can continue.
• Selling Physical Goods: For example, selling a cup of coffee. Every extra cup you sell requires more coffee beans, a cup, and labor. Its "marginal cost" is fixed. The sustainability of this model depends on whether you can find a balance between "profit per cup" and "total sales volume," and whether you can make customers feel that your coffee is "worth the price" through branding, experience, etc.

Analysis Method: Focus on two key points:

1. Customer's "Sense of Gain": Do customers feel, "This money was well spent!" If customers feel a bit shortchanged every time they pay, they will eventually leave.
2. Your "Earning Efficiency": Is your business "hard-earned money, one deal at a time," or "build a system, then passively collect money"? The latter is clearly more sustainable and scalable.

Step Three: First Principles at the Cost Level – What is the "Physical Limit" of Your Cost Structure?

This is the most hardcore layer, and the closest to how Musk thought about rocket costs. You need to ask:

"What are the most basic, unavoidable costs to sustain my business? Can these costs be drastically reduced through technology, scale, or model innovation?"

• Labor-Intensive Industries: Such as consulting or home services. The core cost is "human time." An expert has only 24 hours a day, and a cleaning lady can only serve one household at a time. This cost structure is difficult to compress, and its scale and profit have "physical limits." To make it sustainable, you need to find ways to increase the value of "unit time" (e.g., offering higher-end consulting) or reduce "transaction costs" through a platform model (e.g., a home services app).
• Technology/Capital-Intensive Industries: Such as chip manufacturing or cloud computing. The initial investment is huge (building factories, buying servers), but once built, the cost of serving individual customers is very low. Its sustainability depends on whether you have enough capital to last until you achieve scaled profitability, and whether your technology can maintain its lead.

Analysis Method: List the biggest expenses of the business, then consider each one:

• Is this cost "fixed" (e.g., rent, R&D investment) or "variable" (e.g., raw materials)?
• Can this cost be diluted through economies of scale? (e.g., the per-customer cost of servers for 1 million users versus 10 users is vastly different).
• Will this cost become more expensive in the future (e.g., reliance on a scarce resource) or cheaper (e.g., computing power costs decreasing with technological advancement)?

In Summary

Analyzing the sustainability of a business model using first principles is like a three-step health check:

1. Examine the "Soul": Is it solving a real, persistent, fundamental human need? (Determines its necessity)
2. Examine the "Cycle": Is its value exchange process perceived as worthwhile by customers, and does it allow the company to earn efficiently? (Determines if its blood circulation is healthy)
3. Examine the "Skeleton": Is its cost structure optimized enough, or does it have significant room for optimization? (Determines how fast and how far it can run)

A truly sustainable business model must stand up to scrutiny on all three levels. It is not a castle in the air built on information asymmetry, short-term dividends, or marketing bubbles, but rather deeply rooted in the solid ground of value creation and efficiency improvement.