Masquerading Business Models

Weekly updates on the innovation economy.


Today’s newsletter discusses the concept of masquerading business models and how several companies can generate a significant amount of operating cash flows from seemingly unrelated avenues from public perception. We define a masquerading business model as “a corporate strategy where the primary revenues or profits from a company may be counterintuitive from popular public perception”. 

Examples of Masquerading Business Models


Many consumers think of Costco as a high-value, reasonably-priced physical wholesale retailer for a variety of products. Meanwhile, the a significant portion of Costco’s profits actually are derived from the selling of their annual memberships. Therefore, is Costco a wholesale retailer or a membership subscription service?

Looking at the above snapshot from Costco’s SEC financial filing, revenues from membership club fees were $3.877 billion (and there is little cost associated with administering the membership club), while the net income from Costco’s entire business in fiscal year 2021 was $5.007 billion. Additionally, the membership renewal rate for Costco in America in fiscal year 2021 was 91%, demonstrating very high retention and consumer satisfaction. As a result, Costco can maintain continued consumer satisfaction via maintaining competitive consumer prices for their products and services while simultaneously earning sizable free cash flow from both its retail and wholesale operations and its membership club business unit. 


Most consumers are familiar with Starbucks as a “coffee company”. However and within the coffee community, it’s well-known that there are significantly higher quality coffee beans that can be acquired and tasted beyond the standard brews at Starbucks. Perhaps, the power of Starbucks is in its capabilities in marketing, data analytics, and in creating positive community experiences in their stores:

  • Marketing: The Starbucks brand is incredibly valuable and noticeable worldwide.

  • Creating Positive Experiences in Stores: It’s very popular for many friends and informal business meetings to choose Starbucks as a meeting place, and many people frequently work inside Starbucks stores. In cultivating a positive experience inside Starbucks stores, many Starbucks locations have the following free amenities: restrooms, water, WiFi, music, and seating with tables.

  • Data Analytics: The Starbucks mobile app for users enables better consumer functionality and experiences, such as mobile ordering, curbside pick-up, trending beverages within the standard menu, cashless payments, and the accumulation of rewards programs, points, and other perks (such as free coffee beverages). The data science teams at Starbucks can analyze this data to understand consumer behavior, track personalized Starbucks coffee consumption patterns with specific users, and enable a financial return on investment from the over $1 billion in Starbucks gift card balances that generate $0 in recurring interest to Starbucks mobile app consumers. 


Tesla is not just a car company: Tesla’s goal from its early beginnings has been to electrify transport and increase sustainable energy for the future. Therefore, Tesla’s total addressable market and opportunity set are significantly higher than a traditional car manufacturer. 

Tesla cleverly utilized the business strategy of “concentric circles with excellence and expansion”: start with 1 product to assess and gain product market fit, redefine the category of electric vehicles, expand the product suite of electric vehicle offerings, and then earn the right to “land and expand” into other business segments, such as solar, battery storage, vertical supply chain & production, decentralized power utility grids, autonomous driving technology, Tesla Tequila, and more. 


Facebook’s sources of corporate profits and public perception about how users use Facebook diverge, which demonstrates another example of a masquerading business model. Said differently, it is free to join Facebook, and it is not free to advertise on Facebook, implying that advertisers (not free Facebook users) are Facebook’s primary customer. 

From the user perspective, Facebook and its family of products (such as, Messenger, Instagram, Oculus, and WhatsApp) provide users with various methods of sharing photos, videos, and messages, enable users to use Facebook platforms as broadcast platforms, and allow users to connect with each other via a social network. 

Financially, Facebook has a large market share that generates significant revenues, operating margins, and corporate cash flows. 

From a business perspective that focuses on corporate strategy and financial outcomes, Facebook is a premier digital platform company for digital advertising. More and more digital advertising dollars from major corporations are increasingly being allocated to Facebook. Interestingly and similar to Tesla, Facebook also cleverly utilized the business strategy of “concentric circles with excellence and expansion”: focus on gaining large market share in the initial launch phase at Harvard University, generate positive network effects and viral growth by expanding into student lives of other top-tier universities, then allow the world to experience Facebook, and after achieving significant market share in social networking, then earn the right to expand into photo & video sharing with Instagram, messaging with Facebook Messenger & WhatsApp, gaming with partnerships with Zynga, AR/VR initiatives with Oculus, CTRL-Labs, and Facebook’s smart glasses. 

Domino’s Pizza

Many consumers think of Domino's Pizza as a large pizza chain. Behind the scenes, Dominos is financially a dividend recap machine and logistically a significant developer of supply chain management, efficient logistics, food delivery, and mobile app ordering features. Interestingly, the stock price of Domino’s Pizza has performed better than the majority of Big Tech companies over the past decade, as seen by the Koyfin chart below:

Key Takeaways 

  • Companies with sustainable masquerading business models often have significant competitive advantages that are difficult to disrupt. 

  • Correct contrarian thinking that diverges from conventional narratives is a source of considerable competitive advantages in rigorous thinking and in investing. Additionally, a key generalized takeaway is that when popular opinion deviates from business reality, this presents an investment opportunity. 

  • Investors that understand business models of specific companies can potentially earn significant returns from knowledgeable research associated with knowing the key drivers of revenues, margins, and cash flows for a company. 


  1. Costco Wholesale Corporation. “10-K Annual Report for Costco Wholesale Corporation.” SEC EDGAR Database, 6 Oct. 2021, Accessed 18 Oct. 2021.

  2. "Koyfin | Advanced graphing and analytical tools for investors." Accessed 17 October 2021.

This letter is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. An investment in any strategy, including the strategy described herein, involves a high degree of risk. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal.  

Any projections, forecasts and estimates contained in this document are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond Drawing Capital’s control. No representations or warranties are made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results.  Drawing Capital has no obligation to update, modify or amend this letter or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

This letter may not be reproduced in whole or in part without the express consent of Drawing Capital Group, LLC (“Drawing Capital”). The information in this letter was prepared by Drawing Capital and is believed by the Drawing Capital to be reliable and has been obtained from sources believed to be reliable. Drawing Capital makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this letter constitute the current judgment of Drawing Capital and are subject to change without notice.