Secrets of The Unusually Profitable

From the worlds best investors

Market leadership is the number one predictor of a business becoming unusually profitable for a long period of time.

You know Richard Koch? The guy who wrote the 80/20 principle? Did you know that he is also one of the most consistently successful VC investors in the world?

By his own reporting, his average return is 16x on investment.

How does he do this? Well, he says it’s simple. Simple enough that you too can make your business what he calls a “Star Business.”

In essence, a star business meets 2 criteria:

  1. They are the leader in their market

  2. Their market is growing by 10% per year or more

What are the advantages of being a star business?

  • You will almost always have a higher profit margin than your competitors

  • You will have higher absolute profit than your competitors

  • The cost of difficulty of acquiring new customers is far less than your competitors

  • These businesses are generally much easier to run and have much larger margins of safety

  • All of the items above create a positive feedback loop that allows you to gather even more market share and widen your moat against competitors.

In this article, we are going to cover how to become a star business using one of the two strategies for getting market leadership.

One strategy is to beat your competitors for leadership.

The other, the one we are going to cover, is creating a new market altogether. This is often referred to as “becoming a category of one.”

What makes a market different?

Before we know how we can create a new market for the purpose of becoming a leader in that market, we need to know what makes a market different from another.

In short, it needs to be a sufficiently different customer segment and a sufficiently different product.

As you can probably already tell, this is more art than science.

Take Apple for example. Many people often push the wrong idea that Steve Jobs didn’t pay attention to competitors. Instead, he just focused on creating the most beautiful products he could.

They couldn’t be farther from the truth. Jobs was an expert at what’s called positioning. Essentially the practice of looking for and filling gaps in the market. He understood that if he focused on great positioning everything else would fall in his favor.

When he came back to Apple in 1997 his first resolution was to get rid of every product he thought Apple would not be able to be a market leader in.

In every product launch after that, he didn’t create products that competed with others, he created entirely new categories.

The iPod, then the iPhone, then the iPad. Apple is the leader of all those markets because it created the market.

What’s important for you to understand is that Jobs saw the market in segments. He was not trying to sell everyone his products. Instead, he focused exclusively on a customer segment that was willing to pay more for a more elegant and simple product.

Meanwhile, in 1996, Alienware was founded. You would expect in the reign of Intel, Microsoft, Dell, and Apple there was no way an upstart computer hardware company would succeed.

However, the founders of Alienware discovered a market segment that none of their competitors prioritized: computer gamers.

This market had different needs than the general market. So Alienware created high-performance products with computer gamers in mind. Even designing their products with vibrant lights and colors that attracted specifically gamers.

The lesson? Look for a niche (small portion of the larger market), that has different needs than the broader market, and is not being served effectively.

That is the key to creating a category of one.

Conclusion

To create a new category and have no competitors you need to:

  1. Identify a segment of a bigger market

  2. Understand their unique needs

  3. Redesign your product for their use case

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