“Rap game, crack game ain’t that different ya know?
-Drake, Come Thru
It’s 2016 and unless you live under a rock, you’ve probably heard of brands like Vizio, H&M, Zara, and Xiaomi. They’re very successful companies that make billions of dollars every year.
What about Blue Magic — does that ring a bell? It’s a brand of heroin created and sold by drug kingpin Frank Lucas, who amassed a fortune in the 70s selling heroin to all of New York City. His prosperous career and eventual demise was chronicled in the 2007 blockbuster film American Gangster.
These brands may seem incredibly disconnected, but there’s no doubt that they all share one characteristic — massive success. So how did they do it? And what can we learn from them?
If you look a bit closer, you’ll find that they’re actually all employing the same core business tactic adapted to their own markets. Frank Lucas explains this plain and simple strategy in American Gangster:
“My company sells a product that’s better than the competition at a price that’s lower than the competition.”
It seems so obvious, yet there are very few companies that successfully pull this strategy off in a massive scale. And the ones who do experience explosive growth and revenue.
The Business Model
The most prominent examples of this business model hail from China, where companies like Xiaomi and LeEco have gone from being nonexistent to dominating the consumer electronics market in 3–5 years. They employ the almost stupidly simple business model of selling high-quality products at low cost, with a trustable brand and great customer support. It comes at the sacrifice of extremely thin profit margins, but the sheer volume of sales and revenue (and sometimes huge outside funding) that they’re able to generate make up for it.
Now armed with billions of dollars in cash, they then quickly expand into new products and markets — prioritizing breadth over depth. While traditional, slow-moving competitors are busy squeezing every cent of profit from their supply chain, these bullish companies work with dozens of suppliers to stay lean and focus on product expansion. All of this happens really fucking quickly, and the next thing they know, they’ve become a massively adopted brand.
With all that said, this business model has its limitations: it only works in highly commoditized markets, where the price and quality of goods are all relatively the same. This allows any slight deviation (like prettier packaging, lower price) to get the product noticed and picked up. Companies like Apple can pull off extremely high prices because their products are simply above the standard deviation in terms of quality.
Now let’s turn to Frank Lucas and his heroin empire, which oddly serves as one of the most effective examples of this classic business model. As heroin is as pure of an example of a commoditized good as can get (where there are very few established “brands” or variations such as flavors or strains), it happened to be an extremely effective market for the tactic. Although the fortune Frank Lucas amassed was nothing close to what Pablo Escobar or George Jung had, he was able to employ this model to go from being a local drug dealer’s driver to ruling New York’s heroin market for nearly a decade. And who knows what he would’ve been able to pull off if his career wasn’t cut short (in part due to his $50,000 chinchilla coat).
Blue Magic was introduced into the streets of Harlem in the late 60s, and quickly spread throughout the city through tightly controlled distribution outposts that Lucas employed his brothers to operate. Lucas wanted to make sure everyone could access his product, both in terms of availability and price. He’s most known for cutting out all middlemen in the supply chain and buying straight from the source (opium plantations in Southeast Asia). This move not only allowed him to severely undercut competitors, but also allowed his supply to be extremely pure in quality (traditionally, drugs get diluted as it passes through multiple parties in the supply chain from source to customer). Lucas also understood the power of consistent brand experience, making sure each packet labeled with a Blue Magic stamp stayed consistent in quality and form before it reached anyone.
So what can we learn from all this? I’ve tried boiling everything down to the 5 pillars that form the American Gangster Business Model: Low Cost, High Quality, Strong Branding, High Consistency, and Prevalent Marketing.
“Your price is way too high, you need to cut it!”
-O.T. Genesis, Cut It (ft. Yung Dolph)
- The price tag is what grabs the attention first, but only within the context/presence of other products of similar quality.
- Example: Blue Magic sold for a fraction of the cost of its competition.
- Example: Xiaomi’s feature phone Mi 5 shares the same specs as Samsung Galaxy 7, for a fraction of the price ($450 vs. $680).
- Quality actually doesn’t need to be incredible, but good enough to pleasantly surprise customers.
- Quality can be perceived (through effective marketing) or genuine.
- Example: Blue Magic heroin was 98–100% pure when it arrived from Southeast Asia (Lucas had to cut it down to keep his customers alive, but it was still double the purity of his competitors’ when it hit the streets).
- Example: Xiaomi’s devices feature extremely high quality design, and are manufactured at Foxconn, the same factory that produces Apple products.
- A product’s branding is the only thing that customers will remember it by (and share with others). Having a memorable, relatable, localized brand and name is very important.
- The product needs to have at least one main visual/aesthetic for people to recognize it by. Often times this is the logo, sometimes it’s the packaging (i.e. Coca-Cola and its red cans).
- Example: Blue Magic was sold in small blue packets with a signature stamp on them.
- Example: Anyone can recognize a McDonald’s from a mile away by its signature yellow double arches.
- The product experience (quality, price, aesthetic) should be incredibly consistent. Big franchises like McDonald’s and Starbucks do this very well, even down to the exact furniture and height of the payment counter within each of their thousands of stores.
- Example: A prominent scene in American Gangster depicts Frank Lucas confronting and threatening one of his distributors for diluting his supply while still selling under the Blue Magic brand. Lucas insists that he can still sell his diluted supply, but strictly under a different brand to avoid tainting the Blue Magic name.
- Example: Apple’s product design is so consistent that anyone can instantly identify it just from glancing at a product (or packaging).
- In a highly commoditized market, the only differentiator a product can have is its brand, look, and price. (If a product is so drastically different than its competitors, it has enough leverage to be more expensive and still sell).
- At this point, the product just needs to get in front of as many eyeballs as possible (via marketing, advertising, partnerships, etc).
- Example: Although Frank Lucas couldn’t blatantly go around advertising his drug everywhere (due to obvious reasons), everyone knew of Blue Magic and it was frequently seen/used at celebrity parties.
- Example: Nike spends billions of dollars on brand awareness advertising, plastering its swoosh logo onto every imaginable form of media.
- Example: Initially, Xiaomi actually did not believe in spending a lot of money on advertising & marketing, instead relying on word of mouth via loyal customers. However, this has recently been backfiring, as competitors such as Oppo and Vivo are spending millions of dollars on offline advertising and stealing Xiaomi’s dominant market share.
And there you have it, the 5 pillars behind the American Gangster Business Model. It’s only one of so many different successful models that exist today, but one I consider to be the most powerful. Successful execution is a whole another story, but like, it’s not like selling drugs is any different than selling consumer products, right?