Sustaining the flush times

From What's the Mortality Rate for Unicorns? by Megan McArdle.

I use a version of this S-curve to discuss with clients where they are in their company or industry life-cycle. If you are bringing a new product or concept to market, you are down at the bottom left of the S-curve. If you are in a highly competitive market with low barriers to entry where your offering has become commoditized then you are up in the top right hand corner.

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It is important to know where you are for many reasons, but one of them is financial. The ideal position is to buy in sometime after the first inflection point upwards and to exit sometime before the last inflection point downwards. You can make decent money in a highly competitive commoditized market but it is very hard work.

The flush times are in between those two inflection points. For some period of time you have the market to yourself, you have a monopoly or, later, an oligopoly. This usually arises owing to barriers to entry, intellectual property protection, powerful early branding, etc. With a monopoly you can earn monopoly profits.

McArdle has a good run-down on the normal economic circumstance which create or sustain monopolistic conditions. As a business owner, having taken all the risks and made all the investments at the innovation and incubation stages, you want to sustain that period of near-monopoly for as long as feasible. Here are McArdle's descriptions of those sustaining strategies.

1. Barriers to entry. It costs a lot to enter the market (think auto manufacturers) or you have some sort of government-granted protection from competition (patents, copyrights, local telecoms or cable monopolies, professional licensing rules).

2. Switching costs. How expensive is it for me to switch to your competitor? For restaurants, the answer is “zero”; I can try another restaurant, for about what it would have cost me to eat at yours, and if I like that place better, I can keep going there. The only cost is the risk of a less-than-tasty meal. On the other hand, if I want to switch cell phone providers, I need to pay AT&T a lot of money to break my contract. And if I wanted to switch from Betamax to VHS, I had to buy all new videotapes to go with my whizzy new player. The higher the switching costs, the more likely customers are to stay put.

3. Network effects. It wouldn’t cost me much money to switch from Facebook to another social media site. But Facebook is where all my friends are. I don’t just want to sit around and “like” my own posts; I want to interact! That means that the network with more users will tend to keep them -- at least until young people decide that your site has too many users to be cool, and your network starts catastrophically shrinking.

4. Economies of scale. When industries are characterized by large economies of scale, it’s hard for upstarts to compete, because they can’t make the product as cheaply as the incumbents.