Let’s Play Monopoly
It is at the heart of every entrepreneur’s dream. To do something no one else is doing but lots of potential customers desperately want someone to do. Peter Thiel, founder of Paypal, phrases the key question as, “What valuable company is nobody building?” Obviously answering this question fits into the category “easier said than done?” In his book, Zero to One, Thiel provides insights that help us approach this question.
It is certainly not a new revelation that bringing something new to the market and avoiding competition is a pathway to big profits. In Blue Ocean Strategy, authors Kim and Mauborgne provide the research numbers that show starting businesses that compete head on with the existing players (red ocean) results in much less profit than creating something new (blue ocean.) However, their research shows that only about 14% of companies come to the market with a new solution. Thiel makes the economic argument that competition destroys profits. Over time more companies enter the competitive market until the product becomes a commodity. In commodity markets, everyone competes on price forcing margins down until there is practically zero return.
Thiel makes the argument that entrepreneurs need to consider how to create monopolies. This echoes the advice from Blue Ocean Strategy that you want to make the competition irrelevant. The best way to do that is to offer a product or service that no one is currently offering and preferably one that is very difficult to imitate in the short run.
To start building a monopoly company, Thiel suggest solving a unique problem. Understanding why no one has solved the problem is a insightful place to start. In some cases it may be because no has really identified they have a problem. For example, Steve Jobs said there was no need to engage in a lot of market research since customers often don’t know that they want until you show them. This is particularly true for technology solutions. Problems may also remain waiting to solve due to resource shortages, technology limitations, or even attitudes and beliefs.
For some of the most successful entrepreneurs, what problem to work derived from their personal needs. It all started with, “wouldn’t it be great if I could… rather than the way I have to do it now.” Others may simply see gaps in the product features or distribution networks and say, “I could make a lot of money if I fix their problem.”
Among the characteristics of monopoly companies, Thiel mentions proprietary technology. He says a good rule of thumb is that your technology should be at least 10 times better than its closest substitute in some important dimension. While 10X sounds like a very high standard, Thiel argues that anything less will be perceived as only a marginal improvement. Also such a dramatic increase may discourage immediate competition. The obvious way to make such a dramatic improvement is to invent something completely new. Or at least reconfigure the offering so the customer will experience the product in a new way. Providing new benefits by creating a new value curve for the customer brings a whole new set of customers into your market. Many of these new customers may have been sitting on the sidelines waiting for a product that really meets their needs.
Blue Ocean Strategy’s“4 Action Framework” provides one approach to identifying new product offerings. As you consider your target customers, how do you want your offering to diverge from what is already in the market? Consider what features or components should be eliminated or reducedand what features or components should be enhancedor created. Answering these simple questions can lead to some dramatic results both in terms of customer satisfaction and cost efficiencies. Spending resources to provide customers benefits they don’t value can be a big drag to the bottom line. It is when you invest in providing the optimal experience based on what customers really want you begin to build your monopoly.
Once you have selected your unique problem to solve, Thiel says you should start with a very small market. To make the point more clear, he says, “Always err on the side of starting too small.” His logic is that it is much easier to reach a few thousand people who you know need your product and you can directly reach than fight for the attention of millions of scattered individuals. This contradicts the logic that says there is a large market so I only need 1% to be successful. According to Thiel, the problem is that with a huge market there is no good starting point or it is already overrun with competition. The ideal starting spot is a concentrated group of buyers that are not being served.
So you want to first dominate a specific niche and then scale to adjacent markets. It is important to note that Thiel is not advocating scaling up so you can disrupt or overpower existing players. He still warns to avoid competition as much as possible which is the whole point of being a monopoly – not having to compete. Though to maintain a monopoly requires competing with yourself to continue to stay ahead of the technology curve and keep creating more value for your customers.
Thiel’s final warning is don’t get caught up in being first to market. We can think of a number of examples of companies that seemed to be first to the market and they have remained the leader. Although a closer look will show in most cases they were not actually the first to market but rather the first to offer a real solution and in doing so became the standard.
Most businesses shy away from using the word “monopoly” so they don’t attract the attention of governing authorities who tend to frown on monopolies because they hold too much pricing power over consumers. But the principles presented in Zero to One speak to what every entrepreneur desires. To create a great product solving a unique problem that scales to meet a significant market and allows a valuable company to be built. So, what unique problem is waiting to be solved by you?