Are you familiar with moats?
No, not the ancient castles that you learned about in elementary school.
At least, not literally. This is a business and marketing blog, after all.
I’m talking about economic moats.
Warren Buffett, the world’s best investor and top business mind, coined the term while describing why he likes to invest in businesses with sustainable competitive advantages. In this video, he describes the moat analogy and the importance of building a moat:
Understanding these economic moats is crucial not just for investors evaluating potential business investments, but for entrepreneurs building businesses themselves.
Think about this: Why do customers pay for your product or service? What makes it unique and better than that of your competitors? And would a simple change from a competitor make it easy for a customer to leave you for them?
If a prospective customer approached you and asked:
Why should I choose you over your competitor(s)?
Would you be able to give them a good answer, or would you struggle?
In the book, Good Strategy Bad Strategy, author Richard Rumelt states that one of the pillars of good strategy is making sure your competitive advantage is difficult for competitors to copy.
That’s what we’ll be discussing in this post – the differentiating quality that sets your business apart. This differentiator is also known as the unique value proposition (UVP).
If you want to get money from an investor, you’ll need to have a UVP that can’t be replicated. Indeed, on the Y Combinator application for seed money, advice, and networking connections for startups, one of the questions is:
Why would it be hard for someone else to duplicate?
We are going to talk about your UVP and why having a great competitive advantage will make your product much easier to sell.
Making Your Business Unique – Some Examples
Many of today’s top companies started with a product that, by its nature, made it difficult for anyone to replicate. Here are six examples of these companies and their respective products and/or processes:
One of the major disadvantages of movie rental stores was their offering of only new releases. A customer would be hard pressed to find a movie that was released 10 years earlier. So it was a nice surprise when people were first hearing about Netflix. A huge movie library was one of the biggest benefits. It also made it difficult for a competitor to enter the market if they didn’t have significant capital resources. Not just that; for a few years, it would be unlawful to copy Netflix’s system, as it was patented.
As of today, the Netflix DVD-by-mail system has no real competitors, has 8,470,000 subscribers, made about $271 million in 2012 Quarter 3, and the Netflix company is worth nearly $4 billion. Things have worked out well for them.
The iPod was the product that helped lead Apple’s turnaround. The evolution of the iPod led it to being the best-selling portable music player on the market. Ever since the first launch, Apple has made it difficult for any competitor to match them. Here were a few of its distinguishing features:
- Bigger storage size – In 2001, the first iPod came with 5GB of storage space. The cost was $399, far cheaper than any other MP3 player that competed with its storage. This gave Apple an edge over its competitors. It gave people a good reason to purchase a portable music player, and Apple was the first choice because of 5GB of storage. It became a real benefit over carrying a CD case and player around.
- Best design – Before I bought an iPod, I owned a Creative Zen. The Zen had more features, but anytime I saw an iPod, it made my Zen look inferior. The beautiful casing, the intuitive design, the simplicity. It all made me say “wow” every time I held one. So as soon as I had too many problems with the Zen, I bought an iPod and never looked back. The iPod design set the design standard for Apple that we still see today.
- iTunes – Many companies missed the other part of the product, the companion software. Apple didn’t; the iPod was paired with great software. Although iTunes was a bit of a resource hog in Windows, it was still better than most of the alternatives. Users could sync, buy songs, and download podcasts from the iTunes store. With this, they also became locked into the Apple ecosystem and kept paying Apple with each purchase of a song.
Sam Walton changed the conventional wisdom about a store. Previously, people thought a store stood on its own. Walton changed all that and introduced what we today call supply-chain management.
Under Walton’s system, stores could profitably operate in small towns. This was due to Wal-Mart’s ability to order and store goods at a centrally located place. From there, stores could order their necessary merchandise. With this, customers knew what products would be at Wal-Mart stores.
While Wal-Mart was expanding, K-Mart let their corporate inertia take control and allowed Wal-Mart to pass them. It’s Walton’s innovative system that made it tough for his competitors. Years later, companies finally caught on and adopted Walton’s system. By then, Wal-Mart had established itself as a legitimate retail store.
For more information, read Rumelt’s book.
When Dropbox launched, it was one of the early cloud consumer storage solutions. From its beginning, it was simple to use and available on multiple platforms. To this day, Dropbox supports Linux. Many companies see running on a smaller platform like Linux as a poor investment.
Throughout the years, it has faced a number of competitors, but none have been able to compete with its simplicity and availability on multiple platforms.
No competitor has been able to make a case for why people should switch away from Dropbox. Why? Because Dropbox really has no weaknesses. There are some businesses that offer bigger storage, but it ultimately turns out that people value product over storage.
It’s the simplicity and lack of over-the-top features that allow Dropbox to focus on the core and eliminate any user-side weakness.
Simplicity is a competitive advantage. Don’t let the term deceive you; making a simple product is difficult. It’s easy to put more things in, thinking that the consumer will intuitively understand. But it’s not the best route. The best technologies and products keep the unnecessary out and leave only the necessary in. Dropbox does this; competitors don’t. Which is how they make it difficult for anyone to beat their product.
Google was not the first search engine when it launched as a research project in 1996. There were some others being used then. Today, however, there are very few others outside of Google being used, with an estimated 70% of all searches going through Google.
Why is Google so successful? Because their search engine gives the most accurate results. It’s the job of a search engine to deliver relevant sets of answers. Not only does Google do the best job of this, but it also delivers these sets of answers in a clean layout. This eliminates the clutter for users and helps them get the answer quicker.
So what makes Google so difficult to defeat (at least on search)? Why can’t other search engines match their quality?
In my opinion, it’s because of the people at Google. Matt Cutts, Amit Singhal, and many others are top-notch engineers. Google’s rigorous hiring process makes it difficult for even talented people to get a job. The best, most passionate people make the best technology. And it appears Google has the market cornered when it comes to talented search engineers.
Beyond the people, it’s also their very efficient algorithm, which, of course, was made by their employees. We know a few things about the algorithm; but other than that, it’s unclear how Google manages to deliver the best results. Google owns nearly 2000 patents that keep competitors from copying.
Elon Musk and Tesla Motors have broken the myth that electric vehicles need to be ugly, slow cars.
In the electric sports car market, they don’t have any viable competitors yet. Fisker Automotive has been shown to not have the best track record when it comes to vehicle quality.
But Tesla is setting itself up to be a real player in the automobile market. Their cars are currently marketed to the affluent; but if they step up production and make cars a little less expensive and available for lease, they can broaden their customer base quickly.
So what makes Tesla a tough competitor to replicate, and what are they doing to keep it this way?
- Their early electric cars are the future, and they’re the only thing that Tesla does. While there is a lot to learn about and improve with electric vehicles, Tesla is already years ahead of any competitor. They don’t have the financial resources of BMW, but they have the knowledge acquired from going through a couple of product R&D’s and launches. They’re making a name for themselves while the electric vehicle market is still young.
- Tesla charging stations – Don’t underestimate this. With Tesla building these charging stations, they’ll be a step ahead of any competitor and will provide a big benefit for anyone looking to buy an electric vehicle.
- Their focused electric cars are the only thing that Tesla works on. Other auto companies primarily offer gas-powered vehicles. Because of this focus on only one category, all Tesla employees are becoming experts in the electric vehicle market.
Tips for Differentiating Your Business
Now that we’ve gone through examples of how successful companies have differentiated themselves, let’s turn our attention to you and your company. How can you set up a differentiating quality that will make it hard for any competitor to replicate?
Here are a few ideas:
If someone in early 2009 came up to you and said:
We’re going to build an image hosting service.
What would your response have been? You would have been like most people if you had said something like:
That’s insane. There are literally thousands of image hosting solutions out there. There’s no way you could possibly offer something unique. The market is crowded and there’s no room for entrants.
Now, say those people ignored you and decided to build it. They come back to you three and one-half years later and say:
We get 60 million image uploads monthly, use over 5 petabytes of data every month, and we’re profitable.
You’d probably be shocked and ask:
How did you do it?
We partnered with and became the image hosting provider for Reddit.
That’s the story of Imgur.
With Imgur and Reddit as a case study, it’s clear that partnerships can be very beneficial.
Don’t take it too far and think that partnerships alone will make your business successful. Your product has to be great. If Imgur was filled with ads, was slow, and faced a lot of outages, they wouldn’t be where they are today.
So Imgur and other companies in partnerships have qualities that their competitors cannot take away from them. They expose your brand to people who might not even hear about it if not for your partner. They also allow people to demo your product without ever leaving your partner’s product.
Are there any companies that would benefit from your service? Keep in mind that partnerships work best when all parties involved benefit. And don’t forget that partnerships can end up being disastrous.
Make sure the differentiating quality is something people want
So let’s say you don’t like the Facebook product. You think it’s poorly designed and has major privacy problems.
Three months later, you get 2 more members and your friends haven’t returned to your product in weeks. Clearly, things aren’t working out.
You ask yourself:
Why? I made this layout much better than Facebook’s and we don’t track anyone like Facebook does. I love this product, why would anyone not want it?
The differentiating feature was something nobody cared about or wanted.
When you build your business and have your differentiating feature, you have to make sure it’s something people want. Too many businesses have failed because they built something for their needs but forgot to check if other people were having the same problems.
How do you make sure you’re building something people want? Here are a few ideas:
- Ask people who could potentially be your customers/users.
- Set up a launch page explaining your UVP. Ask for an email address for an early invite. If you don’t get a lot of responses, don’t build it.
- See if there have been any previous attempts to build what you’re proposing.
- Learn about the problems people have with current offerings and determine if your solution is compatible.
Once you build something that people want, you’ll see that your product becomes much easier to sell.
Focus is difficult. It can be easy for a company to diverge from its main product and go off and make other products. Google is one company that seemed to have lost its focus:
Especially for a startup, focus is key. As we’ve seen with Apple, it can produce great products. Their focus has led to a limited number of products that are top quality.
It seems that Ford’s new CEO, Alan Mulally, also believes in focus. When he became CEO, he noted that there wasn’t enough focus at Ford:
You just can’t be world class on 97 different things.
So he sold off many of their assets and even shut down the Mercury brand. Today, Ford is turning around from where they were just 5 years ago.
Focus can be even more critical at a startup. It can be really tempting to say:
Why not create another product to compliment our current offering? It will provide another revenue stream, and we can always shut it down if it proves unsuccessful.
The trouble is that there are limited resources in a startup. Any time and money you spend working on another product will take away from focusing on your main offering.
But it’s often not enough to just “focus on the product” in general. You’ll want to focus on one specific thing in your product, get the team on board, get input from customers, and go from there. By working on small pieces one at a time, the collage of your product will end up being better.
So how does focus set you apart? Because you’re focusing on one thing, you’re working on your unique business, and you’re becoming the best in the world at it. You’re learning every day and becoming experts at what you do best. There can be no replacement for that expertise.
Any comments, questions, criticism, or just want to say hi? Share them in the comments!
I’ll leave you with these parting words:
If you don’t have a competitive advantage, don’t compete. — Jack Welch
About the Author: Zach Bulygo is a blogger for Kissmetrics, you can follow him on Twitter @zachcb1.