If you want to start an extremely profitable company today, it needs to be built around patents, trademarks, or customer loyalty to particular lifestyle.
This is one of the points Martin Lowy makes in his excellent Seeking Alpha piece, The 2-Track Economy: Employers Versus Moat Builders.
The “moat” he mentions in the title of the article borrows Warren Buffet’s phrase to describe companies that are protected by huge barriers against entry from upstart rivals. These companies sell information, proprietary products, or are extremely popular with a certain segment of buyers.
While it is possible for average entrepreneurs or small business owners to come up with a patent or trademark that keeps competitors at a distance and allows them to enjoy ungodly profit margins, building extreme customer loyalty with a group of consumers that enjoy a particular lifestyle is an easier road to hoe.
I should mention the other side of the coin of Lowy’s article: Today, the companies that have huge personnel rolls aren’t leading the way in profitability. The lesson here is that if you think your path to world domination relies on hiring more people, you’re probably headed in the wrong direction.
Adding more people to expand into a less profitable line or locale merely reduces your overall rate of profit. General Electric is currently seeing this problem come home to roost. It expanded into all kinds of marginal businesses over the years. It became a HUGE employer, but its profitability tanked. It has lost about half its market value in one year’s time.
If you’ve picked the low-hanging fruit, the higher up fruit may be too costly to pick.
Given that you probably aren’t going to patent the next miracle drug any time soon, you need to find a profitable consumer or B2B niche—I like the way Lowy called it a particular lifestyle—and redouble your efforts to create to-die-for customer loyalty.
Can you describe the lifestyle of your ideal customer? Often founders start a business based on their own likes and dislikes. That’s a good thing; it’s usually how we discover unmet needs. How would you define your lifestyle, your position in life? How would you market to yourself?
Think beyond the need that you are fulfilling and capture the general likes and dislikes of your target audience. What else are they buying, and why?
- Which would they prefer? Buying a pre-designed and sourced meal from a company like Blue Apron or going to their local farmer’s market, walking the aisles, and picking out the items that want to serve at home?
- What kind of vehicle do they use? Are they SUV drivers, bike riders, sports car enthusiasts, electric car owners, used car buyers?
- What does their family life look like? Are they young parents, older adults, committed singles?
- What is their relationship to work? Are they workaholics, gig-economy workers, retired, testing the waters at different jobs to find out where they fit?
These are just some of the questions you need to examine in order to define the particular lifestyle of your target customers. The powerful part of this is that when you get an adequate picture of these people, you can start looking at:
- How other brands market to them, and
- The customer experience other brands are providing them.
Finally, you should constantly track your profit per employee. This puts you in a position to be evaluating your company from the perspective that today’s economy demands. You don’t want to be the next General Motors, you want to be the next Alphabet.