Your Competitive Advantage

The most fundamental element of any business plan is to first identify the competitive advantage of your business versus current and expected future competition. Some argue that a business plan starts with defining the "market need" that your business shall be fulfilling. I disagree except in the case of the truly new product or service (and very little offered for sale by the hand of man is truly new). A business can prosper merely by providing a better and/or cheaper service or product to the target market than the existing competition. Was there a need in the market for a new competitor? Not really. But every market rewards those competitors who deliver functional equivalents that are better or cheaper. Even in the case of the truly new product, the question of competitive advantage must be answered. For example, the originator of the automatic car wash in the 1950s still had to plan against the existing business model, i.e., the hand car wash. What was the competitive advantage of the automatic car wash over the hand wash? Faster and cheaper!

The crux of whether a business succeeds or fails boils down to one fundamental question: why will the target customer choose our product or service over the competition? If your business plan does not answer this question in convincing fashion, all the fancy charts and graphs with sales projections are meaningless. The marketing plan, likewise, becomes meaningless because it is fatally impossible to market a product or service that has no competitive edge motivating the customer to purchase.

I further submit that all competitive advantage strategies fall into two categories: better or cheaper. Cheaper is fairly straight forward on its face; however, it does come with other shades than the Walmart variety (best price period). For instance, one view of the cost of owning a luxury auto may include the resale value and maintenance costs over time. The upfront cost of a domestic luxury auto may be substantially lower; however, a foreign competitor may persuasively demonstrate that the overall three year cost of owning it's brand is lower when also considering resale price and maintenance. Another variation on the price strategy is to compare a combined price and quality metric of your product with the competition. For instance, in the internet service provider wars of phone companies with DSL versus cable companies offering faster cable internet, the phone companies typically offer the lowest high speed internet price. The cable companies counter by advertising a modestly more expensive service but with much better performance speeds. For customers downloading videos and music, speed is prized but the price point must stay within a narrow range above the DSL rate to successfully compete in the market. One quibble on the above point is the case of the old axiom about retail marketing--location, location, location. One never wins arguing against old sayings.

Quality constitutes a broad battle front in any market. Rarely are there performance metrics to directly compare. Many avenues exist for a competitor to approach in the establishing that his product / service is better than the competition. Examples: speed of delivery, warranty, durability, easy of maintenance, ease of integration with customer's business, history of reliability, and degree of product (service) customization to the consumer's needs. But, again, it all boils down to my product is better than yours.

Before embarking on writing your business plan, spend ample time articulating in convincing fashion the competitive advantage of your business.

P.S. My wife works in the fashion industry for which all the rules in this article about price and quality go out the window. In the fashion world, your product automatically becomes "better" when celebrities wear it and outdated when celebrities stop wearing your stuff. I have no idea how the fashion industry works and, therefore, consign it to its own business universe that I refuse to comment upon.

Business Method Patents?

Does your business plan rely on a business method patent? In simple layman's terms, a business method patent is one for a process of doing business as opposed to the more standard mechanical process. A prime example us Priceline's patent for an online reverse auction of services. See article. In case you have not heard, the Court of Appeals for the Federal Circuit just cast a shadow over all business method patents. See In re Bilski. Opinions range on the effect of Bilski from a minor opinion which places some needed limits on business method patents to a definitive invalidation of all business method patents. Blog post on legal debate. From the prospect of the entrepreneur, it almost doesn't matter which group of patent lawyers is correct in interpreting Bilski. It will be fought out in the court for years to come and anyone's guess what existing business method patents shall be invalidated or if the USPTO will issue any new BMPs. Investors shy away from uncertainty. Lack of capital kills early stage ventures.

The gravest business planning mistake I made in life was founding a company whose success hinged heavily on a business method patent application. The patent process itself sucks resources and attention from the business venture. I am not advocating wholesale abandonment of filing for business method patents. The point is that the thrust of the business plan has to be your competitive advantage in the market place, not a magic bullet from the USPTO. In my opinion, the patent process is a crap shoot. Be prepared to succeed in the marketplace or don't enter the field of battle.

Twitter for Business?

I've been reading posts on various business blogs exhorting readers to get smart about utilizing micro-blogs like twitter for business. Great thought ... but what the hell are these people talking about? How does one communicate anything meaningful about one's business in 140 characters? Am I supposed to cyberstalk potential customers? This article lays out the case for Twitter as a business tool. One paragraph in this article is entitled "Twitter Replaces Email". Don't be absurd! Let's put down the double espresso and be rational about this.

What makes Twitter cool to a certain segment of our society? 24/7 communication. Twits can even be made on a cellphone. Are there business applications for this mode of mobile and quick communication technology? Yeah but I think they are rather limited based upon the availability of other options. Rather than Twitter as a technology tool of business, I see it potentially as a marketing / customer relations tool of business. One interesting facet of Twitter is the ability to see in near real time the flow of twits across the Twitter universe using a keyword search--twitter search (note: if your search term is more than one word, put it in quotation-marks). Type something in there like 'iPhone' or 'Heath Ledger' and you'll get the picture. A nice market research tool or, even better, an instant business feedback tool. According to this article, major companies such as Comcast and Dell Computer have employees assigned to monitor Twitter activity regarding their company! Charter Communications, you need to get on that train as well. I'm sure other uses for micro-blogs will come along with new technology but, at present, the pickings appear slim. Anybody with a different take on the business applications for micro-blogs, feel free to drop a comment (please give specific examples if at all possible).

Web 2.0, What's It Really About?

Here is a common definition of "Web 2.0" one finds on the web: "a trend in the use of World Wide Web technology and web design that aims to facilitate creativity, information sharing, and, most notably, collaboration among users." Link. Yadda, yadda, yadda. That's background noise. The important point is how and why are Web 2.0 companies hot traffic generators? And can this traffic be monetized? One can pontificate until blue in the face about solving the world's problems with Web 2.0 (I'm a big fan of the micro loan site kiva BTW) but business has one and only one raison d'etre--make the green stuff.

Below is a partial screen shot from a 2005 article by Tim O'Reilly.


From the list, let's focus in on Flickr, Wikipedia, and blogging sites plus (since 2005) facebook, myspace, digg.com, twitter, youtube and reddit.com. What's the salient difference between the companies on the left of the list and those we have highlighted? To my mind the absolute key to the success of what we now call Web 2.0 companies is user created content. Web 2.0 companies are essentially web based utility programs allowing users to post content. The users are donating free work product to these companies. Why are they successful? Because the sites generate million of free pages of content each year with very little effort per page on the part of the owner. What goes on all those user created content pages? Mostly Google ads. How do these sites get traffic? Google and Yahoo plow through the user created pages indexing them for inclusion into their search engine. Just as cool, the users who create the content often promote it to their circle of friends and family.

IMHO, the gold-plated question for web 2.0 planning is determining a strategy for encouraging users to post content. Why will users specifically wish to post information (photos, videos, articles, short posts, et alia) on your web site? What do the users get out of posting on your site that they can't get somewhere else? Answer that question correctly and you're on to something special.

Google Adwords, Marketing Tool To Nowhere

Competition in the world of pay-per-click keyword advertising is over. Google completely owns it. Microsoft had a shot at becoming a player by purchasing Yahoo to combine it with MSN.com but Monkeyboy Balmer punted that opportunity in frustration that his initial offer was not lapped up like mother's milk by Jerry Yang. Upon receiving the universal Sicilian sign of greeting from Balmer, Yang ran into the arms of Google as part of a quixotic attempt to keep Yahoo an independent company. Best of luck Yangster. Yahoo is toast.

But what about all of us small business owners who market on the internet? My suggestion is NOT to plan on Adwords being a long-term marketing tool for small business. Why? In an efficient auction market for ads dominated by one player, it's clear what will happen (if we are not already there): i.e., competing ad buyers will bid up the price of the keywords until there is zero profit margin left to the seller. Translation: only Google wins. The sellers / marketers get sucked dry of profit margin. Why keep advertising on Google if there is zero profit margin in Adwords? For many businesses, acquiring a new customer at zero profit margin helps given the potential for repeat business and to cross sell other products. For instances, say you are an online seller of womens leather goods. You bring in a customer through Google Adwords for a purse sold at zero profit margin. However, if you can sell this customer a clutch or other leather goods item, then you have profit. Further, this customer now is aware of your web site and may come back as a repeat customer without going through the medium of paid advertisement. Still, what percentage of customers will be repeat or cross buyers? 25% is a good repeat / cross sell percentage for any business. A seller who only generates gross profit on 25% of its sales is not one I expect to be in business long term.

In the days of multiple pay-per-click competitors, a regular cottage industry revolved around sifting through the various keyword sellers searching for cheap keywords. With just one keyword seller dominating the market, it's nearly impossible to find cheap keywords. Oh, it's not just that more eyes are now focused on the Google Adwords market. The "do no evil" boys have pretty much declared the cheap keyword to be illegal under Google law. How? Their system searches for popular keywords and slaps high minimum bids on said keywords. This means, should you be lucky enough to find a valuable keyword that your competitors have overlooked (and therefore underbid), it's impossible to scoop up the overlooked keyword cheap. The Adwords minimums on popular keywords are now stiff. Further, Adwords does not allow advertisers to differentiate in price between keywords within an ad campaign as was the initial standard set by goto.com (later Overture, later purchased by Yahoo). One bid price is set for all keywords in a campaign making it very difficult to cherry pick undervalued keywords for a low ball bid.

The Upshot. Google Adwords cannot be the central marketing strategy for any business. This is a problem for online businesses. How else does one market online? Well, I submit the SEO game is your main option. And that makes me uneasy. Google has a built-in incentive to frequently shuffle rankings and its search algorithm in order to insert uncertainty into the search optimization game. Why? It pushes sellers to Adwords. I wish Monkeyboy had swallowed his pride and stayed after the Yahoo deal. The Yahoo shareholders would have eventually put a gun to Yang's head giving us a true pay-per-click competitor for Google.