Monopolies are illegal in most countries and in most scenarios. This article is not about illegal monopolies.
When your business is operating as a monopoly, your business flourishes. Margins soar and profits rise. Monopoly implies that there is no competition. It also means that your business has an exclusive control of the supply of the product to your customers. If your customers need your product, you can charge a higher price than you would have been able to if you had competitors.
We already established that monopolies are illegal. But a monopoly business is lucrative. So how a business can reap its benefits without committing a crime.
Though there are no ways to achieve a perfect monopoly, there are methods that can mimic a short term monopoly.
Here are some ways. Keep in mind that not all methods are equally potent. Not every method lasts for the same duration.
Your product feature that your customer needs and no other competitor offers is a competitive advantage. It acts a natural barrier for your competitors and creates a transient monopoly until the competition catches up.
You don’t need to have a patent on your innovation, you just need be first to the market.
Business and entrepreneurial companies take pride in their innovation and the investment they pour into research. It is not just to please the market and impress their customers with buzzwords.
In fact, being novel and first-to-market is a carefully thought out business strategy. It protects your price margin since there is no other business in the market that can offer the same features and charge a lower price. It is also a competitive advantage since you are the only go-to supplier from which your potential customer can buy from.
A mom-and-pop retail store is contemplating on the neighborhoods for a second store. A large business is brainstorming the growth strategy and has come up with 3 new growing countries for expansion.
You can create a temporary monopoly for your business by creating a presence in a region with no other “shops”. In the example of mom and pop store, the owners choose a neighborhood where the streets are narrow, blocks are small and the largest chain store in outside the 7-mile radius. Granted their total market is small but they will have all to themselves. It is physically impossible and economically unjustified for a large franchise chain to consider that space.
In the example of large business expanding into another region (or country), instead of competing with an existing competitor, they form a partnership. Yes, the profits will be shared but this option not only gives them immediate access to the market, it also relieves them from having to compete on price with an incumbent. It creates a temporary monopoly until another competitor enters.
The network effect is created when the value of a product is directly proportional to the number of people using it. Think Facebook. Larger the number of friends you have on Facebook, more likely you are going to join and least likely to exit Facebook to join another group (think now-defunct MySpace).
This pattern creates a monopoly and makes it extremely challenging for competitors to sell a similar product once the network grows beyond a threshold.
You may be wondering how such an example if applicable to your business or your new venture. It is possible to take advantage of network-effect strategy by replicating it at a micro level.
If you are selling your product to other businesses with a large number of employees, introduce a feature that increases interaction and exchange of information among employees. Introduce a “broker or exchange” element into your product. Have your users realize the benefit of interaction with other users by the virtue of your product. It is not necessary for your business to be in technology or Internet space.
A patent is an authorization from the government to exclude others from consuming or selling your invention without your permission. But a patent is only valuable when someone, other than you, wants to use the innovation the patent is protecting.
So what’s the connection between patents and monopoly? When your product or its feature is built on a patent-protected invention, your are legally preventing your competition from selling that product or including that feature in their product.
Essential-Patents are a type of patents that must be used to comply with government mandated or nationally recognized technical standards. If having a patent is gold, owning an essential-patent is gold-mine. Why so? Every manufacturer, who builds and sell a product complying with the technical standard, must use the essential-patent. If you own the essential-patent, you can collect fair and reasonable royalties from each such manufacturer. It automatically creates barriers to entry for other businesses, protecting your monopoly-profits.
However, keep in mind that creating an essential-patents is not within the reach of every entrepreneur and ordinary business. It requires significant upfront investment and is not without legal risks.
Stickiness means that your product is so tightly coupled with your customers’ business systems that it’s extremely difficult for them to replace your product with your competitors’ products.
Let’s say you build and sell personal finance and money management app on an app store. Your target customers are the individuals who care about managing their money.
Once such individuals start using the app, it going to be a nuisance but still feasible to replace your product with another one. Let’s say your product 2.0 comes with a feature to connect with banks and financial institution and download years of customer’s transactions. You now have control of customer’s data. To replace your product, in such a situation, with your competitor’s will not only require changing the software but migrating data, reports, custom alerts, and every dependency that your product has created. Your product has become sticky.
Now extrapolate this simple scenario to an enterprise or commercial world. You are selling your accounting software to a large corporation, or selling an important timing component to an auto manufacturer. Stickiness suddenly becomes multi-dimensional. In the complex enterprise environment, your product now interacts with other products in HR, Marketing and Legal systems. In the world of automotives, the timing component needs to interact with rest of auto systems.
The interaction between your product and rest of the system happens based on well coordinately data exchange rules.
To substitute your product with a competitor’s, your customer not only has to worry about migrating data but also has worry about the ability of the substitutes to “fit and play” in their environment, be it a car, factory or enterprise IT.
Higher the level of non-standardization in your product, difficult it will be to replace it with another. So the buzz words that we hear today “ plug-and-play”, “standard interfaces”, and “open systems” are all antithesis to monopoly benefits.
Everything else not being equal
Your product’s gross margin depends on two factors
- Your customer’s dependency on your product
- Ability of your competition to offer a replacement product
It is not just enough to build a better product with a laundry list of features. Instead start treating each of your product features as a shield, a shield that guards the access to your customer from competitors. Not every shield is impenetrable, at least not all the time. Smart businesses build a portfolio of shields that are acting at the same time. It is not possible to achieve monopoly benefits. But it is possible to build a business game plan that takes you closer to that goal, without committing a crime.