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\n\t\tOpinions expressed by Entrepreneur contributors are their own.\t<\/p>\n
A lot of leaders talk about economies of scale and network effects. It\u2019s a clean story: more people means better unit economics, you amortize fixed costs and the system feels stronger. But there\u2019s a version of that story that people avoid.<\/p>\n
The same advantages that make a business model favorable can also flip when people start leaving<\/a>. And if you don\u2019t plan for that, you can wake up in a situation where the math that used to protect you is now what\u2019s hurting you. The \u201coff-grid problem\u201d is a good way to see this dynamic in the real world. It\u2019s not about ideology. It\u2019s about the mechanics of who pays for fixed costs when the customer base changes.<\/p>\n Here\u2019s the intuition.<\/p>\n In power, there\u2019s a grid with fixed costs. Wires, maintenance, capacity planning, all the stuff that has to exist even if demand is a little lower this month. Retail electricity bills typically include some mix of a fixed charge and a usage-based charge, but either way, the system is trying to recover those costs across the customer base<\/a>.<\/p>\n When more people stay on the grid, those fixed costs get spread across more people, and it\u2019s easier for the system to work.<\/p>\n Now introduce solar and batteries. The customers who can afford solar and batteries can reduce their reliance on the grid or leave it more aggressively. The fixed costs do not disappear. They get spread across fewer people, and everyone else\u2019s bills go up. You can see this in the NEM revisit, where regulators are explicitly debating how rooftop solar customers<\/a> should pay their share of the grid\u2019s fixed costs.<\/p>\n That\u2019s the off-grid problem: the system gets worse for the people who stay because the people who leave were helping amortize the fixed costs. Once you see that, you start seeing it as a structure that can unwind.<\/p>\n And that\u2019s the business lesson. This isn\u2019t unique to power. It can happen any time your model depends on amortizing fixed costs, economies of scale or network effects.<\/p>\n This dynamic is simple.<\/p>\n If your business works because fixed costs are spread across a lot of users, then the risk is that the economics change for everyone else when enough people leave.<\/p>\n The product can get worse for the people who stay, or the cost can go up for the people who stay, and then churn is not just churn. It becomes a spiral.<\/p>\n DOE has described the \u2018death spiral\u2019 scenario in basically this exact form<\/a>: customers defect, rates rise for those left and that drives more defection.<\/p>\n This is why I think leaders should pay attention to cost-sharing systems inside companies and industries.<\/p>\n It\u2019s easy to build the growth story. It\u2019s harder to build the unwind story. But if there\u2019s a chance of market turmoil or just a shift in customer behavior, it\u2019s worth thinking through whether it becomes rational to subsidize people to stay, just so it doesn\u2019t allow the network effect or the economy of scale to unravel.<\/p>\n That word \u201csubsidize\u201d makes people uncomfortable because it sounds like charity, and by that I mean a rational decision to pay for stability when stability is the thing that keeps your model coherent.<\/p>\n I recommend a simple framework. You do not need to overcomplicate it.<\/p>\n 1. Identify what advantage is actually doing the work.<\/b> Is the business model favorable because you\u2019re amortizing fixed costs? Is it a network effect? Is it both?<\/p>\n 2. Identify who is holding the system together.<\/b> Who is producing positive externalities? Who makes the platform feel stable? Who makes the unit economics work? In power, it\u2019s \u201cmore people on the grid\u201d spreading fixed costs. In a business, it might be your highest-retention cohort, your best customers or the users who attract other users.<\/p>\n 3. Ask what happens if those people leave.<\/b> Does the product get worse for the people who stay? Does the cost go up for the people who stay? Do fixed costs get spread across fewer users in a way that makes the system feel worse?<\/p>\n 4. Decide the conditions where you would pay for stability.<\/b> This is the part most leaders avoid. But it\u2019s the whole point. If you wait until the system is already unraveling, you\u2019re negotiating from weakness. If you plan for it, you can make an explicit choice about what stability is worth to you.<\/p>\n The point is to be deliberate. Subsidizing can be rational when it prevents a spiral. It can also be irrational if you\u2019re just delaying the inevitable. The way you avoid the wrong version is by being specific about the trigger: what would have to happen for you to step in, and what would have to happen for you to stop?<\/p>\n The same advantages that make a business model work can also lead to the inverse when people start leaving.<\/p>\n The off-grid problem makes it easy to see. Fixed costs do not disappear. They get spread across fewer people. The system gets worse for the people who stay. And once that dynamic starts, it can feed on itself.<\/p>\n So if your business benefits from economies of scale, amortizing fixed costs, or network effects, don\u2019t just build the growth story. Build the unwind story too. Decide ahead of time what circumstances would make it rational to subsidize people to stay, so you do not allow the economies of scale to unravel by accident.<\/p>\n<\/p><\/div>\n A lot of leaders talk about economies of scale and network effects. It\u2019s a clean story: more people means better unit economics, you amortize fixed costs and the system feels stronger. But there\u2019s a version of that story that people avoid.<\/p>\n The same advantages that make a business model favorable can also flip when people start leaving<\/a>. And if you don\u2019t plan for that, you can wake up in a situation where the math that used to protect you is now what\u2019s hurting you. The \u201coff-grid problem\u201d is a good way to see this dynamic in the real world. It\u2019s not about ideology. It\u2019s about the mechanics of who pays for fixed costs when the customer base changes.<\/p>\n Here\u2019s the intuition.<\/p>\n<\/p><\/div>\nWhat \u201coff-grid\u201d really means, and why it matters<\/h2>\n
The same advantage can turn into the inverse<\/h2>\n
When does it become rational to subsidize people to stay?<\/h2>\n
Don\u2019t let a good model unwind by accident<\/h2>\n
Key Takeaways<\/h2>\n
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What \u201coff-grid\u201d really means, and why it matters<\/h2>\n