Build Value in Your Business by Creating Market Differentiation

When it comes to people who value businesses, arguably there is no better evaluator than Warren Buffett (who happens to be a client of mine). As the most famous investor of all time, there are things he looks for when he makes an investment. When he decides to buy a company, he is looking for companies with what he calls a “deep and wide competitive moat” around them. Why does Warren Buffett care about how deep and wide the competitive moat is? What it comes down to is market differentiation – where customers believe what you have is truly differentiated. The reason? It gives you pricing authority. When you have pricing authority, it means you can set the price for what it is that you sell, and when you have control over your pricing it gives you better margins. With better margins you have more marketing dollars, and more marketing dollars allows you to invest more in sales and marketing, which then allows you to differentiate your product or service even further. This triggers the whole domino affect which gives you more pricing authority, and it starts to build upon itself.

 Back to Warren Buffett talking about having a deep and wide competitive moat. It  is exceedingly difficult for a competitor to compete with you when you have remarkable differentiation. We see that play out in terms of the value of the businesses we work with through the Value Builders program. When we look at the average multiple offered to our clients, it is 3.76 times their pretax profit, yet when we isolate just those business owners who say they have a virtual monopoly on the product they sell, they get a much higher multiple. The reason for that is a buyer cannot easily replicate the product or service. Buyers will look at your business and say there is some secret sauce that has created a competitive moat that they need to cross to compete with your company. That is when they get extremely interested in acquiring your business, because you have something that they cannot easily replicate

OK, so you know the value of your company is going to be impacted by how well differentiated your business is in the marketplace. Acquirers do not buy things they could easily replicate; they buy things that are truly differentiated in the marketplace

The next question you might be asking is how do I go about differentiating my company and making it as valuable as possible? In my experience there are two ways to differentiate your business product or service. Number one, you can produce a better mousetrap through technology so that you truly have something that is a differentiator that sets you apart from the competitors. Now, not everybody has a better mousetrap, but you can still differentiate your company.

Number two is to have better marketing, and for a marketing strategy to have teeth to truly differentiate your product or service, it needs to have two factors. Number one it must be something that makes you unique. Number two it must be something customers care about. This way of thinking is about a marketing point of differentiation containing something that has the potential to give you that monopoly control.

An example of a company that has gone through this process is Tesla. Tesla brought out the S Model – the four-door sedan that would compete with all the big car companies from Europe and Japan. Now they are competing with brands like Mercedes and BMW, and if you look at the sedans those companies create, they have incredible performance. They knew they would be competing head-to-head with these expensive, very established brands where the customers care about high-performance. Tesla chose to make their marketing approach as something customers care about, but it certainly would not have made them unique when you compare the Tesla model S with the BMW M5 or Mercedes AMG. You could argue that the performance of those is on par, but still something customers care about.

With performance not making Tesla different, you could say that Tesla’s are made in California, they are designed in California. That could be an interesting point of differentiation because Mercedes and BMW are made in Germany. You could argue that that would make them different, and I think it does make Tesla different to those customers who care where the cars are designed. And then you stumble on zero emissions, and you realize that zero emissions are something that makes them totally unique, and there are customers who truly care about zero emissions. If Tesla had just gone with just the high-performance message or just zero emissions, that would not have differentiated themselves from others. But it was the fact they had the combination of zero emissions, zero compromises were their one point of differentiation in the marketplace. You do not have to be Tesla to come up with something that truly makes you unique.  

A related exercise for you to conduct within your business is to determine your USP or unique selling proposition. Create a matrix including yourself and all your competitors. In each box list all the services or unique characteristics of each company. The goal is to find up to three areas which make you different. With the list of three, no other company can claim the same three. This will make up your USP.

So, you know having a differentiated product or service is going to drive up the value of your company and you know the differentiation can be either a better mousetrap or a better marketing strategy, and for a marketing strategy to have teeth you know that it’s got to differentiate you as well as be something the customers care about.

Here is another component when it comes to monopoly control. Customer service is a tremendous point of differentiation for many smaller companies. The problem with using it as a marketing strategy, is for one, the customer must actually experience your customer service in order to deem it to be superior. This could be a great way to keep customers, but not a great way to win new customers. There is a second, arguably bigger reason that customer service is not a good point of differentiation for your business, and that is that tremendous customer service is usually driven by the owner.

The owner is the front-line person that is setting a culture ensuring that employees deliver tremendous customer experience. The problem is that once the owner leaves or takes a vacation or does not show up for work one day, that culture may lack the inspiration to deliver that tremendous customer service and it goes away. This may lead to a point where the company is too dependent on the owner who created that sense of culture. If you want to create a truly unique and truly differentiated company that’s not dependent on you, the owner, in other words a valuable company, you’ve got a find something that makes your business unique beyond just offering great customer service.      

Here’s to a successful 2022, and until next time, enjoy building value.

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