Starting a business online has never been easier. For the same reason, there has never been more competition. The best way to stay profitable in the long run is to invest in moats using the 7 Powers Framework.
Being a seller on Amazon is terrifying. What if Big Bezos decides to create an AmazonBasics version of your best seller? Or what if your supplier decides they want to go up against you?
Affiliate marketers have to deal with people who are spying on and ripping down their campaigns. Facebook costs keep rising. The margins continue to shrink.
I learned a concept called a moat over a decade ago. Centuries ago, castles protected themselves from enemies by building moats. These were deep trenches that surrounded the castle and were filled with water.
Photo of Francesco Ungaro of Pexels.
Warren Buffett refuses to invest in a company unless he feels it has strong enough moats. Moats are the competitive advantages that protect your profit margins despite competition.
This topic fascinates me because so much of the e-commerce world is based on private labeling. Everyone sells privately labeled goods at a substantial premium. What's stopping others from coming in and copying you?
Supplement companies like Bulletproof and Onnit have annual sales of approximately $ 30 million. Anyone can easily start a supplement business through private labeling. Even so, despite the competition, these companies thrive because of the moats they build.
As much as I understood the concept of moats, I've always wondered if there is a framework that breaks down what types of moats there are.
My research led me to a book called 7 Powers: The Foundations of Business Strategy by Hamilton Helmer.
This book is recommended by some super smart people like Daniel Ek (founder of Spotify), Reed Hastings (founder of Netflix), and Peter Thiel (Facebook's first outside investor).
This is a simple and straightforward framework to help you understand the business strategy. By successfully implementing these concepts, you can build a lasting and profitable business. Despite increasing competition.
Some useful terms
Before we begin, I want us all to be on the same page when it comes to definitions. We will use these terms frequently.
Strategy: examining the fundamental determinants of potential business value.
Power: the conditions that create the potential for sustained differential returns.
Every power must have one advantage for you as barrier to your competition.
Benefit: How performance improves cash flow, e.g. B. through lower costs or the ability to charge higher prices. AKA the size of power.
Barrier: The way in which competitors are prevented from questioning the usefulness of power. AKA the duration of power.
I will quickly define the 7 forces and then we will go into more detail.
The 7 powers
- Economies of scale: A business in which unit costs decrease with increasing volume.
- Network economies: A business in which the customer gains value as the user base grows.
- Counter positioning: A company adopts a new, superior business model that incumbents cannot copy as it can cannibalize parts of its existing business.
- Conversion costs: A company where customers expect more loss than the value they get by switching to an alternative.
- Branding: A company that based on historical information has a higher perceived value for an objectively identical offer.
- Cornered Resource: A company that has priority access to a treasured resource that independently increases in value.
- Process performance: A company whose organization and activity enables lower costs and / or superior products that can only be achieved through increased commitment.
Service 1: economies of scale
The unit costs decrease with increasing volume.
We all understand this. The more widgets you can buy from a supplier, the greater the discount you will get. Your local restaurant cannot get a discount on potatoes like McDonald's.
The author demonstrates economies of scale through Netflix.
In the early days, Netflix was negotiating contracts with various content providers. You've been able to get fantastic deals because the content providers didn't understand the value of streaming.
Eventually the content providers started to wake up. Their streaming rights were worth more than they realized. That is why they have further increased the cost of streaming rights to their content. Some of the content would be permanently unavailable as Disney, Starz and NBC started their own services.
Netflix realized early that the differentiator would be in the streaming wars Original content.
In 2011, they spent $ 100 million on two seasons of House of Cards. This is where scale economies come into play.
Netflix had the benefit of a first mover which resulted in them acquiring a massive user base. Because of their economies of scale, they were able to purchase original content at a much lower relative cost than newcomers like Hulu.
D&D (D. B. Weiss & David Benioff) were the showrunners for the hugely successful Game of Thrones show. After the series was over, they looked for a new streaming service to develop movies and shows for.
This led to a bidding war between Disney, Apple, Amazon, Netflix and others. In the end, Netflix won by paying $ 200 million for the rights. While the other companies had a bigger war chest, it made more financial sense for Netflix to pay that much.
Economies of scale are the reason some companies are willing to operate evenly or unprofitable for a few years. They know that once they have economies of scale they can cut costs. To the point where they are profitable and their competition can no longer keep up.
Power 2: network economies
The customer experience improves as more people join.
Technology can be a first asset. However, it can become a commodity over time and can be easily replicated.
You can make an app like Tinder for around $ 50,000. What you can't copy is the users and the community.
How useful would a dating app be if there weren't any new games after the first day? How useful is a job exchange if nobody actively publishes jobs there?
The service becomes more useful the more people join. Sometimes it can be a winner who takes every situation. Because of this, these companies will raise massive amounts of money and focus on growth.
Some examples are Facebook, Linkedin, eBay, and Tinder.
Power 3: opposing positioning
A company adopts a new, superior business model that incumbents cannot copy as it can cannibalize parts of its existing business.
Small businesses fear that if they achieve a product / market customization, a bigger and better financed competitor can copy their idea.
Opposite positioning is when you have a business model that does this harm them when they try to copy it.
Think Kodak film cameras versus digital cameras. In hindsight, it's easy to say, "Wow, how didn't Kodak see digital cameras coming to destroy them?"
They saw it, but there was nothing they could do about it. Her biggest cash cow sold reels of film. Betting on and investing in digital cameras would ruin your existing business.
Next, digital cameras were a different industry. Developing technology was not their forte.
It's easy to see what was the right step in retrospect. If you've been the CEO of Kodak during that time, it's easier to keep your job doing what works.
The opposite position is not the same as disruptive technology. McDonald & # 39; s is the largest hamburger seller in the world. Shake Shack has taken an opposing stance by selling gourmet hamburgers that cost twice as much.
McDonald & # 39; s cannot copy the same strategy without violating the brand.
When there is a leader in a market, you find that their strength is also a weakness. There is always room for the "opposite".
- High-priced hedge funds: Vanguard index funds
- Cheap McDonald & # 39; s burgers: ShakeShack
- Instagram shows how perfect your life is: TikTok, where people can be stupid
Power 4: switching costs
The loss in value expected by a customer that would result from switching to an alternative supplier for additional purchases.
I have used deponphotos.com for years to provide photos for my blog posts. I decided to switch to Pexels.com for my photos instead. This way I save $ 300 a month. There were no "consequences" for my move.
Let's look at a situation where I have high conversion costs. I use Keap.com (the CRM formerly known as Infusionsoft) as my CRM for this blog. So I send an email to everyone every week.
You haven't received the weekly email yet? Sign up here.
I chose Keap because it was the best CRM provider when I signed up around 2015. Now there are many more viable CRM alternatives that I could try like ConvertKit or Drip.
I would like to test it, but I can't. The conversion costs would be too high.
- I have invested so many years learning how to use Keap.
- My automation company specializes only in Keap. I'd have to find someone to replace them.
- You may have problems with the deliverability of emails.
- All of the funnels I've built are in Keap. Rebuilding on a different platform takes a lot of work.
I'm not thrilled with Keap, but the conversion costs are too high to use another product. I'm staying with them for the foreseeable future.
Another example for affiliate marketers is the Voluum.com tracker. They were one of the first big trackers in the industry. Since then there have been countless competitors such as RedTrack and Adsbridge.
However, many affiliate marketers chose Voluum because of the cost of switching.
- They invested the time to learn how to use the software.
- You don't want to lose your historical data.
- And it might be difficult to switch the links in your active campaigns.
I am currently using WPEngine to host this blog. A few years ago I was with another provider. It would be a nuisance to me to change the server host. WPEngine offered to switch my service painlessly as a free service.
Some companies are increasing the conversion costs as part of their strategy.
I can never remove my Gmail account. This is because I have at least 50 websites that I signed in to using the "Sign in with Google" feature.
If I get rid of my Gmail account, I'll have to sign into all of these websites.
I've been using Apple Macbooks for a decade. I have to admit, these Microsoft Surface laptops look sexy as hell. But I've invested so many resources in the Apple ecosystem.
If you're trying to get customers to try your product, Think about how you can make the switch easier for your customers.
Power 5: branding
The permanent assignment of a higher value to an objectively identical offer, which results from historical information about the seller.
Branding is such an overused expression. Just because you have a cute logo and packaging doesn't mean you've built a brand.
What is a brand?
The branding consists of two parts.
1. Affective valence: The connection with the brand gives the customer good feelings. It could have arisen from nostalgia or associations with positive moments in their life.
I have positive feelings about brands like Disney, Apple, Ben & Jerry and Adidas. I am willing to pay more money because these brands make me happy.
2. Reducing uncertainty: You take a risk every time you buy a product. Brands offer peace of mind that the product will work as intended.
I don't mind buying generic versions of food. I can't tell the difference between generic foods and branded foods most of the time.
There are a few categories that people don't want to take risks in.
Diamond ring. A diamond at Tiffany's can cost three times as much as an equivalent diamond. People are willing to spend this knowing that Tiffanys has a certain standard of quality. You don't want to take the risk with your local jewelry store.
Baby products. Most parents don't want to take chances with their children. I am willing to pay more money for Graco or Fisher-Price products as these are the brands I grew up with. I'm not interested in getting a stroller seat from AliExpress.
The book, 7 Powers, limited branding to affective value and reduced uncertainty. I'll add a third aspect of branding based on my experience.
Signaling means that you are trying to send someone who is characteristic of you to people.
If I want people to think I am a selfless, caring person, I can record and upload a video of myself volunteering at a homeless shelter. If I want people to think I'm staying fit, I'll post a photo of myself working out in the gym.
Social media has increased the number of signals from everyone. There is pressure to look special. There is pressure to signal to everyone how well we are in life.
This is where certain brands come into play. By buying certain brands, we signal what the brand represents.
Because of this, some women do an awkward pose to show that they have "red bottoms". (Christian Louboutin is known for having the color red below on his shoes. The average pair costs around $ 600.)
Because of this, some men pose an awkward pose in front of a supercar on their Facebook profile picture. They try to signal to others that they have money.
That is the power of the brand. Some brands have developed such positive reputations that people buy them simply to “signal” the properties.
However, the strength of branding has decreased over the past decade. This is because part of branding is to reduce uncertainty for the customer.
One big mistake people make is believing that brands take a long time to develop. A few years ago I had to buy rechargeable batteries.
Who are the top names in batteries? Duracell and Energizer. They built their brands over decades.
Nevertheless, I went with Anker, who was only 5 years old at the time. Why did i go with them?
The first is influencer. I've seen some reviews on YouTube and most of the technical reviewers preferred Anker's battery.
Second, reviews. I compared the reviews on Amazon. Anker's ratings were far superior to Duracell and Energizers.
Brands are still important, but consumers have alternative ways to help choose quality.
Power 6: Cornered Resource
A company that has priority access to a treasured resource that independently increases in value.
Every industry has certain resources that offer benefits when you can get them.
- DeBeers has the exclusive rights to so many diamond mines in the world.
- Nintendo has created so many iconic video game characters like Mario, Pokemon, and Link.
- You're a meth dealer in the Southwest and the exclusive seller of Heisenberg's blue skies.
If you've developed a particular technology, you can patent so that other people cannot access it.
I mentioned earlier that Netflix signed D&D to develop a show. They signed a ten-year contract.
Power 7: process forces
Sometimes a company's processes are so valuable that they lower the cost of the product or improve the experience. And it's not easy to replicate.
The author uses the example of Toyota, which are known for their Toyota production system. What is interesting is that at one point Toyota entered into a partnership with General Motors.
Toyota gave General Motors 100% access to learn their systems. But General Motors couldn't replicate it under any circumstances.
Another example is Pixar.
Reading the book Creativity, Inc. gave me a glimpse into the secret sauce of how Pixar built their films. In fact, it was one of the reasons that Disney did Bought Pixar. The talent and process skills would lead a Disney animation revival.
Finally, a modern example is the Tik Tok social app. Everyone assumes TikTok is an app for Gen Z to dance and be goofy. What most people don't realize is how advanced Tik Tok's algorithm is. So many traditional social media feeds are based on who you follow.
TikTok's algorithm can predict what you're interested in based on a few behaviors. At the moment Instagram is trying to lure the audience away with its "roles" function. But TikTok has created a process performance with its "For You" algorithm that keeps pulling audiences back.
Affiliate Marketing and the 7 Forces
Let's do an exercise.
I introduced you to the 7 powers. Which of these powers would apply to running affiliate marketing campaigns?
Take a few minutes and do this exercise instead of scrolling down to get the answers.
Let's first remove some of the powers that do not apply. In affiliate marketing there is no network effect, no opposing position, no branding or no switching costs.
1. Scaling the economy:
What are the advantages of a Super Affiliate if they send more volume?
With smaller traffic sources, more volume means you can negotiate discounts and flat rates on traffic. I've had situations where I've bought up the entire month of impressions from a publisher. With larger traffic sources like Facebook, volume means you're feeding data to the Pixel.
In addition, by scaling it, you gain access to information. Each partner asks his partner manager in a network: "What's hot?" Trust me, there will be a huge difference between a man who makes $ 10,000 a day in sales and a man who makes $ 100,000 a day.
After that, scaling economies can lead to cornered resources. If you can generate a large amount of traffic, you can get an exclusive offer.
2. Cornered Resource:
When I think about affiliate marketing, curve resources are the biggest benefit that super affiliates have.
- Signing an exclusive media purchase agreement on a hot property.
- Get the exclusive offer.
- Work with the advertiser to create a unique landing page that drives higher conversions.
Designing a great landing page isn't a moat.
Writing great headlines and angles is not a moat.
Why? Because they can easily be replicated by your competition.
3. Process performance:
Finally, we end up with process performance.
How does one partner bring one campaign to profitability over another?
How do you optimize the campaign?
What's your formula for creating successful video ads?
All of these contribute to process performance.
Process performance will become less important with media purchases over time. We're seeing it on Facebook right now. You can set up the right pixel, fill in enough data and Facebook will optimize the campaign for you.
In a few years it will be A.I. Copywriting Tools That Can Outperform Your Average Marketer.
I urge you to think about what cannot be replaced.
I am grateful to be able to live in this time.
We would all be forced to climb the corporate ladder if we were born a few decades earlier.
Instead, we are in one of the greatest entrepreneurial eras of all time. You don't need anyone's permission to make money from your music. You don't need to understand the coding to set up your own ecommerce store.
However, less friction means more competition.
It has never been easier for us to copy each other.
When you find a business model that works, think about strategy and performance. The allocation of capital is one of the most important decisions you will make.
You don't have to pay yourself $ 200,000 a year to improve your lifestyle. Live on less. Invest in Difference in creating moats for your business.
If you're making money, expect the wolves to come. Invest in your defense.