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Sunday, 11 September 2022

Scalability of the Business Model - Asset Turnover

Brace yourselves, some business theory here:

The summary of all the below is that any new Trade Locations that i open need to be better than Tash-Murkon to be viable given todays price of Plex.

Currently, i make around 20-35bn ISK profit per month after plex costs to fund 3 Omega accounts.  I should always be aiming to grow the absolute monthly profit such that i can say i make 25-40bn per month and then 30-45bn and so on.  Sticking at 20-35bn ISK profit per month is not the aim.

The question is how to take the business to the next level.

Thinking about the current Business Model

The current business model is Regional Trading.  I buy from Sell Orders in Jita, courier these items to my Trade Locations and put them up to Sell there.

There is still plenty of runway to build on my current business model.  I can put more items for sale in the existing markets and also Plex more alpha accounts to omega open new markets.

When thinking about how far to take my current business model before branching into other areas i need to consider three things:

1) Does time allow given my 45 minutes per day allowance
2) Can my business even scale (i.e. will sales rise as i put more on the market to sell)
3) Is this still better than the alternatives

Lets put (1) and (3) aside for now and focus on (2) - the business model scalability question.

What i am really asking is that as i put new items on the market to sell - will they sell or just sit there forever?  If i open two new Trade locations and so invest 70bn into Sell Orders in each - will those items actually sell or sit there stale?

And the way to measure this is to look at the Asset Turnover.

The Theory

The theory behind this is that my monthly profit Assets x Asset Turnover x profit margin (before plex costs).

Assets grow with my monthly profit.  I reinvest all the current 20-35bn monthly profit back into my business.  So this is a growth lever - though slow.

The profit margin i know is 16% (currently doing better at around 20% but i know it will revert back to 16%.  So, no growth from this lever.

Asset Turnover is a measure of what proportion of my Sell Orders are sold each month.  Asset Turnover = Revenues / Assets.

And therefore measures the efficiency of my sales process.  If all my Sell Orders were sold in a month then the Asset Turnover would be 1x.  If 20% of all my Sell Orders were sold my Asset Turnover would be 0.2x.

The Numbers

So, in August 2022 my wealth was 481bn and my revenues were 218bn.  Therefore my Asset Turnover was 218 / 481 = 0.45 times.(Asset Turnover = Revenues / Assets).  Put simply, i sold 45% of my assets in August,  (or perhaps i sold the same 22% twice over).

A growth driver or growth headwind?

The question is, how is this trending?  Is it a growth driver or a drag on growth?

I have been tracking my Asset Turnover since i started, as shown in the chart below:

And clearly, ignoring the starting months, it peaked in December 2021 at 1.2x driven by the mining changes and then fell to 0.4x before rising more recently.

Something is dragging the Asset Turnover down.  It will likely be a mix of market slowing down and new Trading Locations having a naturally lower Asset Turnover.

If i look into each trading location, as shown below, then i can see that Dodixie and Amarr typically run around 0.6x whilst Rens, Hek and Sobaski run at around 0.3x and Tash-Murkon bring up the rear at 0.1x.

There is clear evidence that each Trade location has different Asset Turnovers.

In other words, each new trade location i open has a lower asset turnover indicating that whilst my business model may be scalable the incremental growth from each new trading location is lower.

Lets therefore assume any new Trading Location has an Asset Turnover of 0.1x.

And therefore, if i do decide to open two more new trading locations (say in Arnon and Alentene) which typically take 70bn Sell Orders each (so 140bn invested into the two markets combined) then i should only expect combined monthly profits of 140 x 16% x 0.1x = 2.24bn ISK which is not, today, enough to upgrade the account to Omega.

However, the Asset Turnover of all other Trade Locations remains good and therefore it still makes sense to keep on expanding the number of Sell Orders in each of those Locations until we see clear evidence that this is dragging down the Asset Turnover.


In other words, to make this work i need to ensure that the new Trade Locations are better than Tash-Murkon.

But expanding into existing Trade Locations is still viable.

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