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Hey guys, welcome back to the game where we get things done and make money and so today

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we're going to be talking about something near and near to my heart which is monopolies and there are

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13 ways that I know of that you can integrate monopoly style strategies into your business to make

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your business more competitive as it grows rather than less which the vast majority of businesses

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degrade with scale rather than compound with it and so this matters because if you think about

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this strategy day one and you weave it into your DNA as a company you only need one of these to

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become a billion dollar plus business and if you do it right it can happen fast. The first

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way to legally destroy your competition is network effects so you can have different types of network

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effects the first type is a customer base so that's having a large very established user base

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that by the nature of it being large attracts even more people to the network so if it's just you

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that's not a network if it's you and two other people all of a sudden people are like I want to

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join that group but when you have that fourth really good person now a fifth wants to come in and

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as every additional person gets added that network becomes more valuable and so if you're like how

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does this actually work in the real world will give you two very different examples so one is you

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can think of Facebook right social platforms so a platform isn't valuable until lots of people are

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on it but once lots of people are on it well no one wants to join the small platform because there's

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no one's on it but if everyone's on this one then they can instantly connect with more people

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now in a very different version of that in the hardware world is telecommunications companies

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you look at Verizon you look at AT&T as they were racing to create their monopolies which they

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more or less have and I'll explain what that word means in a second they were offering all these

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benefits for people joining in in families and free texting between people who are on the same

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network as them so that they could encourage more people to be on those networks and then there

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were advantages of being inside of it now customer base is the first type of network effect a

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different type of network effect is a product ecosystem so think of something like Apple right they

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have all these unique plugs and all these unique software is an operating systems that only work

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on Apple products and once you buy one Apple product or two Apple products all of a sudden you

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don't want to mix and match PC and Android and all this stuff into your world of technology and so

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they create a closed loop system where everything works with itself and if your product is good

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enough that you can get people iPhones then you can get millions and millions of users to then just

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buy all these other core products that they have less affinity to awards and then force them to

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use all of your products because of one champion product that everyone has and so sometimes if you're

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thinking about this for your own business it's like okay one is there a way that I can structure

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what I have so if more people enter my network from a customer base it adds value to every other

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business every other customer so the opposite of this is a traditional service business usually if

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you're one on one with a client you provide value as soon as you're one on two then it provides less

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value and some most businesses are structured to deteriorate as more customers come in versus

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things like a buyers group so if you have 20 dentists to get together and say hey we're going to

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all buy together because we're going to get cheaper prices then as more dentists come into that

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association you get more and more buying power and then you become a greater and greater monopoly

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and have more leverage over your potential vendors right and so you can think about incorporating

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these elements into your business to make the business more competitive and harder for anybody

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else to disrupt you and this competitive advantage is so valuable that tech companies these massive

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behemoths are willing to lose billions of dollars to establish this network because they know that

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once they've mapped an ecosystem then they can profit in all sorts of ways the second way to

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destroy your competition is exclusive control over a resource or technology so we have an example

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of resource so possessing exclusive rights to essential resources or materials that are crucial

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for production for some goods right so like the debures group which is a big diamond group

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historically is controlled a huge portion of the diamond market and by doing that they made

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able control supply and demand and since they own most of the mines and the distribution

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they can basically set the prices because supply and demand exist and so believe it or not

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there's more diamonds there are dishwashers in the United States but they're valued more because

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they control supply to keep the prices high and this is a huge advantage to them imagine if all

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those diamonds got released and they were what they really are which is not nearly as rare as

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sapphires emeralds and rubies are but how amazing would it be to have this big stock pile of stuff

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that you got for almost nothing that you can sell for exorbitants amounts of money

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that's a competitive advantage so you've got the natural world where you've got like diamonds or

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there's resources right but in the technological world you've got data and proprietary tech so

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that would be patents or a huge amount of data that other people don't have access to it cannot

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replicate legally which creates a huge barrier to entry so i'll give you an example that's really

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easy to understand so google search will literally never be beaten at the keyboard inserted search

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i want to be clear because there's other things that can happen later right but search itself

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google will always have more data because they started first and so if somebody starts today

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and can collect lots and lots of search data google still has 20 years of experience and data

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on all of these users across the world and they can use all those algorithm refinements that they

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have that no one else has to continually make better models which is why even the open AI and

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chat GPT have become a huge source of search in the world google still very much a threat even

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though they're caught behind on AI in that race they're still ahead on the data and if slash when

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google makes its bigger play into AI they already have everywhere you've ever searched on google maps

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every email you've ever sent they have the stuff that you buy on the android store and everything

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you search on your phone they have all of that data and so they're going to be able to personalize

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their AI better because i will make one bet which is it's the best AI that will win not necessarily

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the first one because as soon as you use a better one you'll immediately switch so i don't think

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that they're in some crazy rush i think what they want is better and in fact google dominated

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search for so long that it became so apparent that they were something that the government calls a

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monopoly and so the government has tried for many years to try and break apart google's monopoly

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for search and google is very good at defending itself with all the lawyers in the world and they've

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pretty much been able to just keep that monopoly in place and so these competitive traits that i'm

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talking about for businesses you don't need to have all 13 that i'm gonna talk about i want you

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to go through and be like is there one of these that i can more directly weave in to the fabric of

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my business so that i develop a stronger and stronger competitive position over time rather than

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in a voting one so speaking of the government the third way to crush your competition is government

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regulations and licensing so there's two types that matter most right now one is government grants

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the other is licensing requirements so government grants have usually exclusive rights from the

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government to operate in some sort of particular market so that's like utilities or public transportation

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and so things like amtrak so amtrak operates as a government granted monopoly in the united

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stage for rail service so they have exclusive rights to operate certain routes that literally

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knowns else is allowed to operate so talk about being able to like set your own prices now there's

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things that come with that but talk about like going out of business it's like well literally

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known else is allowed to do business and as long as people want the transport method they're gonna

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stay in business so the second is strict licensing requirements so basically you can operate so amtrak

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has this type of service between states or you could do one service in a specific area territory

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and so like utilities like con Edison which is in New York has a strict mandate from the government

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to operate that area and so they have so anybody who wants to get in there has super high barriers

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to entry and just to give you context how valuable this is con Edison's revenue last year is about

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16 billion so that's more than a billion a month and since we're in the great city of Las Vegas

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I think one of the big obvious ones is once you go through the regulatory process of getting a casino

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license it's basically a license to print money because they say that people can literally just

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hand you money with a low chance of winning the same thing for lotteries because they're so lucrative

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because you guarantee the odds that you win and the only thing you have to do is market the lottery

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and when people have a chance to win for money for no work guess what people do it and so the

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government has to grant that and have big taxes on those corporations because they know that

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they're going to make money and so I'll tell you fun Hormosi family story but one of my relatives

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in Iran owned the national lottery and so he did very well until obviously the revolution

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overthrew and then everything was confiscated for his family and many others like mine

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but he owned the lottery and so he was allowed to come up with all sorts of promotions as long as

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he wrote a check to the government and so these things have occurred across different countries

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across borders and so sometimes simply having the knowledge of navigating the government regulations

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to get a grant or permission to do business in a certain way gives you a competitive advantage

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even something on a smaller scale is simple in some of the hard states as getting a liquor license

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right if you have a liquor license you're able to sell liquor at huge margins right and so it becomes

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a huge profit center in the business and so that's a small example but they all fundamentally are

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around the same effect now you might be like well how am I going to use the government stuff well

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some massive companies like Oracle they've been able to get that and I'll talk about there

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just way of destroying competition in a second but the fourth way you can destroy one that anyone

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can use is economies of scale and so there's two different ways that you can attack this one is cost

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advantages and so basically you achieve a lower cost basis per unit sold through larger scale production

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and so that allows you to undercut prices and to turn smaller competitors it means other people

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who are smaller can't find the volume that you can and so as a result can't price as low as you can

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and so this is a price based strategy as in you can still make a profit at a lower price

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than all of your competition and so this is a low cost leader strategy which typically is paired

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with economies of scale where you don't want to get into and this I want to make this a clear

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cautionary tale is that if you're getting into one of these markets there's no advantage this is

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Dan Cunningham there's no advantage to being the second cheapest player in a marketplace the

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cool thing with this strategy is that it gets better with time and so that's what you'll notice

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is a common thing which each of these points is that as you have a greater network or as you have

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a more robust ecosystem of products or you have larger economies of scale most businesses like I

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said degrade with scale they get worse and harder with scale whereas if you have one of these

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strategic advantages woven into the fabric of your business as you get bigger and the business

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becomes more complex you have another force that's driving your competitors away so you have

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something that's very strong and working in your favor as you scale which is one of the key traits

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of becoming a very large businesses having one of these thoughts into your DNA woven day one so for

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example my software company Alan we started scheduling appointments 100 appointments a day a thousand

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appointments a day we got up to four five thousand appointments a day and we still continue to do that

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in that company and so as we acquire more data and we send more messages we get economies of

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scale on literally messaging itself and so if somebody else wants to come in and we're sending

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millions of messages a day they're going to have to pay more per message than we do and so with

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that we know that we actually have increasing margins as we have more messages that go out in

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addition to the data that we have that no one else has and so that is a compounding advantage that

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makes it harder to compete if someone starts two years later than us and again any one of these

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competitive modes will be enough to build you a massive multi-billion dollar company and so you

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don't need more than one of these you just need to do one right all the way the fifth way to destroy

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competition is vertical integration now this is one of the sweet hearts of private equity because

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it's something that usually capital can come in to do and this is something that we've done in

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multi-var portfolio companies which we'll talk about in a second so there's two kind of common

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ones that people have one is control over supply and the others distribution networks so control over

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supply means that you own everything that is required from kind of click to close and so in the

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debars example I gave earlier they own the mines all the way to owning the front store right or

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Tesla right when Elon is building the cars he wants to get as close to the supply chain of like where

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do I get steel from all the way to the actual retailers which are just Tesla retailers that sell

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online to the customer so you vertically integrated the entire chain end to end and he was able to

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capture margin at every step and by doing that you can have a more profitable business and or

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sell products that are better than other people at lower prices because you can eat into your own

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margin and they put everyone else out of business and so there are multiple advantages to controlling

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your supply one is that you can control quality all the way through and everyone is aligned with

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the end user and the ultimate business at large the other pieces that you control disruption because

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if you have vendors that you rely on for key components of your products if those just those

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vendors got a business then it threatens your business and so by controlling all these things like

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controls kind of the opposite of risk in a lot of businesses if you control those elements then they

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are things that you can manipulate and adjust more proactively than being reliant on third parties

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so you not only capture the profit and high of higher quality you also decrease the risk of the

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business so let me give you a 1.0 example of how this would work so by being a self publisher which

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I am instead of hiring a publisher to publish my books I take over a second portion of the business

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and so rather than relying on publishers to print and distribute the stuff that I have

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I print and distribute the books that I sell because I have the relationship with the customer

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you guys and I'm the one who wrote the book I didn't go straight it out and I now can make sure

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that the the size of the book which is a little bit unique which I did on purpose because I wanted

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to be like a kid's book and very approachable those are all things that somebody else might not

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be willing to do now if I wanted to keep eating up the supply chain I would then go to buying

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the warehouses that do it rather than just simply using the warehouses that do the distribution

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and if I want to take another one I would buy the printing presses and if I would take another chunk

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up the ladder it would be I would buy paper mills right and so you can keep vertically integrating

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until it's I own forests that I take to my paper mills to make paper and then they go to my warehouses

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where I distribute the books that go to my retail which is me fundamentally as the storefront

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that actually get the customers to purchase and so that would be a completely vertically integrated

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product line and if you think about they if you think about your products in that way then you

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think wow think about all the margins that's included in a book right so ghost room literally water

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and sunlight which is what it takes to grow trees and time all the way to a quote influencer who has

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lots of impressions and free media that can drive sales so you're you're basically selling free media

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with sunshine and water and that's where you have and everything in between is where all the

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middlemen take a slice and if you can eat all of that up you have all the control the sixth way to

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destroy your competition and my personal favorite is a strong brand identity and customer loyalty

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and the reason I like this one so much is that some of the other ones I mentioned sometimes

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they require a huge amount of time or a lot of complexity like government regulations and some

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of the mergers require a ton of capital right which if you're starting a business or you have a small

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business it might be harder to develop over time but this one is one that you can make with skill

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which is why I love it so much which with brand power you can build powerful associations and then

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your brand becomes synonymous with the product itself so for example Google is synonymous with

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search engines Kleenex for tissues band aids for I don't even know the actual name for band aids is

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because it's so synonymous like tissue based I who even knows right and so the advantage when

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you have a strong brand like Nike is that you can simply take your logo put it on a commoditized

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product and get higher conversion rates lower cost you car customers at premium prices

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and so you get massive improvements to the business because fundamentally if you can price

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above your competition and increase the demand for what you have what a competitive advantage

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and the thing is is that you can simply build it with time and skill which is why I love it and

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anyone can build a brand if they know how to keep their promises and make associations

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clearly and deliberately over a long period of time with what their customers value and then

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strongly disassociate with the things and the people that their customers don't value until over time

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people just stab associate that value intrinsically with the brand itself and so me personally

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I've tried very hard to teach lots of business stuff to business owners because I believe that

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private enterprises the only way that we can save the world and so I want as many entrepreneurs

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getting as big a business as they possibly can to help the most customers and do it the right way

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so they can build businesses that last so that capitalism has a fucking chance if you're a business

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owner and want to figure out which of these strategies is right for your business come out to a

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workshop we just started running these at our headquarters here in Vegas at acquisition.com

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and so if that's you go to acquisition.com click scale and if you qualify maybe we'll see here

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weighted destroyer competitors number seven is strategic pricing and so you can think about this

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from a price discrimination perspective and from a predatory pricing perspective and I'm using

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the literal terms don't read into it so predatory pricing is basically temporarily lowing prices

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where your profits can outlast selling at a loss so that no one else can enter the marketplace

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and the most classic example of this was Microsoft is any person who wanted to add a new feature

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to the Microsoft to complete with Microsoft suite they would immediately copy that put it into

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their bundle not raise the price and then that person fundamentally everybody who already had

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Microsoft just kept paying Microsoft and got that feature for free this is very very common in

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software where everyone's in a features war where they try and copy everyone else's stuff

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and give it away for the same price or free so for example a simple version of that is

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Instagram copied snapchats stories made at Instagram stories and basically stalled

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snapchats grow as soon as they're able to do that right and so that's a version of it which

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is predatory pricing the other is price discrimination which is founded on selling

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different prices to different people so this is maximizing profits so someone walks in the door

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and you say hey how much money you got and they say a lot you say okay well these pairs of shoes

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are two hundred dollars and somebody else walks in the door and they say you say how much

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money you got and they're like less than that guy and you're like all right well these shoes

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are a hundred dollars you saw the same product at two different prices two different people

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based on their spending power and so one of the classic examples of this is airlines so they

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collect tons and tons of data on all their users and so by the way if you have credit card points

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with an airline they know all you're spending by the way and by the way most airlines make the

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majority of their money on the credit card systems and just use all of the airline stuff as the

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coolest benefits program to get people to use their cards if you didn't know that fun fact

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they get three percent of all of what you spend on your credit card that's their income and so

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if you barely ever use your you know southwest points but you spend twenty thousand dollars

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a year on your credit card they make six hundred dollars a year on you no matter what and so if you

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and somebody else are looking at the same flight with the same seat you might get displayed two

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very different prices based on what they know your spending power is and your need is and if you

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have that kind of competitive data compared to your competition then you can make more profit than

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they can and so regressing this down to a small business the way I think about this is being very

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clear on the one or two customer segments or avatars that you really serve and being able to

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segment those people so that you can sell to the right wallet right now so discriminatory pricing

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is literally selling the same thing at two different prices for different people I don't personally

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like this and so the way that I feel ethically okay about it is I like to tweak my offer just a

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little bit so that when I have the rich person I can add one thing like a free cocktail with their

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thing and charge a lot more for it but I can still ethically say these two things were different so

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they ever do meet on the plane and say how much did you pay for your ticket how much did you pay

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for your ticket I can at least they came to the owner be like hey why did I pay 200 this guy paid

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160 and we bought in the same hour be like well you got a cocktail now the person might be like well

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if I had known I'd be like well they still were different right and so that at least gives me a

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little bit of you know stress fee sleep I'll put it that way and so having a couple tiny things

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that you can change about your offer this especially works well with services allows you to price

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more aggressively to someone spending power or need while ethically being able to sleep at night

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without saying that you sold the same thing for different prices and as a fun bonus for this one

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is that pricing compared to all of the other things that I've talked about so far is one of the

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easiest levers to build and manipulate compared to government regulation or massive economies of scale

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like you can do this one much faster and you can do it on a smaller scale so number eight is

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exclusive contracts with three different parties so you can either have exclusive contracts that

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control supply so no one else can get supply so if I am Hershey's and I have a contract with the

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farmers group in Africa that gets the cocoa nibs that are required for chocolate then I make it

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very difficult for anybody else to get into the chocolate business unless they resell

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from me which means I'm still going to make a profit on their business the second way you can think

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about that is customers so government contracts is a classic example where if you get a contract like

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Lockheed Martin does for making fighter jets or whatever they make for the government for defense

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then the government is known to be able to keep that contract and they're only going to have one

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for a specific need at a time and so once you lock that contract in no one else can really compete

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for that core service for years and then imagine five years later well you've already done this

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for five years is someone going to spin up a company that didn't make all that money in that

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meantime doesn't have all the relationships and then get the next contract probably not that's

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why companies like Oracle Lockheed Martin are good zillion dollar companies because they basically

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just siphoned off taxpayer dollars and have locked those contracts in the third is contracts over

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distribution and so you've got the supply side you've got the customer side and then you've got

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reaching the customers which is basically the middle between the two and so if I have an exclusive

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contract to sell video games and the only retail distribution is game stonk right then I can

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unless there's other marketplaces for distribution I can have a huge monopoly over everybody who walks

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into those stores and so having exclusive contracts with distribution are ways of locking down markets

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well I mean I'll tell you an obvious one one of the classic examples of having massive distribution

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as a monopoly is Coca-Cola and Pepsi and so they're the primary two players in the drink game

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and the reason is as soon as they can buy a company that gets some sort of market share because

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they actually have a good product they can immediately drop it into their distribution base of

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every single restaurant every single seven eleven every single Walmart every single Walgreens every

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single retail store they already have the existing relationship they already have the distribution

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and so by having that locked in they don't even have to really innovate they just wait for the

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market to say oh this is a winner they overpay the founder so that they get FU money but they pay

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that guy five hundred million bucks and they immediately take that thing and make it worth five

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billion and if somewhere to try and compete with Coca-Cola they'd have to have a hundred years

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of sales and outbound teams establishing all of these connections and the thing is that especially

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because Coca-Cola is in the physical world like there's not a huge like you have to get the product

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to physical human beings so having a physical distribution network gives them a huge competitive

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advantage and this is just through contracts they have these relationships they have these agreements

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and they're just already in place and to the flip side the people who are on the other end of

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the distribution agreements if you don't carry Coca-Cola and Pepsi people are like what kind of

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Mickey Mouse thing you got going on here because they own the vast majority of the beverages that most

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people consume and so when you're thinking about building your business having these agreements where

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you can get access to distribution increases the value of the company and secures revenue because

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you get to rely on all the marketing each of these individual retailers do to get customers in to

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buy your product and fundamentally this is a B2B or B2B2C strategy and if you don't know what that

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means it's business to business or business to business to consumer and so if you want to lock in

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one of these things and you're a smaller business you have to make it worth it for the distributor

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and so if they're picking between you and someone else then you can say hey I will help you I will

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sell you my product at a lower cost than other people or I'll add in a whole retail kit that

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will move more product for you or I'll come out to your site and train your staff for free you

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have to add other perks and incentives that more established players probably aren't willing to

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do or don't need to do so that you can get a foot in to the door so number nine huge capital

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requirements meaning it takes a ton of money to just get into the business and so that automatically

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knocks out 99.9 percent of business owners who aren't going to be able to raise a billion dollars

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on their first go now Elon for example was able to do this with SpaceX because he's Elon and

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by the way casually shot up hundreds of satellites in a space so that he could create Starlink

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right and you have global coverage for internet and there's other obvious examples of this you got

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Exxon mobile who has a huge capital to go find search and then drill oil or like underwater oil

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drilling like these crazy things that cost gazillions of dollars that you're not like hey you

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know I'm thinking about opening a dry cleaning store or an underwater oil rig right like

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it's it's it's a huge amount of capital or even simply as simple to understand as developing a new

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drug like a pharmaceutical it takes a ton of time a ton of money a ton of regulation so there's

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multiple big things and a ton of money because you have to run the whole thing for years at a loss

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not being able to make a penny and then the day that it gets legalized then you print money for

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like 30 years but it takes time and money and regulation and knowledge of regulation in order to

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even get to that point and many failed drugs that don't work which a lot of people don't talk about

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and so if you don't have a huge stockpile of cash you either got to raise it or you got to not play

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which means once you do win it's harder for people to enter because even if you do figure out

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the you know hair loss fixing drug you're gonna have a huge years and years of profits and

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advantage over somebody else who's gonna what be the second player in that market years later right

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and I'll say like and let's scale this down to small business so it's easier to start a social

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media agency because it just requires skill then starting a manufacturing plant or starting a

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business where you have to buy capital equipment so equipment in order to make the business work

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and so basically the amount of capital that's required in order to start the business

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becomes a competitive advantage in and of itself and so if you have the ability to raise capital

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or even saving lots of money for yourself you can automatically pick vehicles to start a business

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in that have fewer people competing against you so you automatically shrink the pool number 10

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is IP intellectual property now this is one that I think is wildly understood but you've got kind

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of two basic camps here so you got patterns copyright trademarks which is basically like I own

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this information and no one else can use it so simple example of that is this book like someone

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else can't copy the contents of this book and then republish it and just put their name on it

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it's illegal it's good that it's illegal because then people wouldn't spend the time to write a

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book if they knew that the moment it does well some a hundred other people can publish the same book

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right and same thing with like a cartoon character like Mickey Mouse which by the way is expiring

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kind of soon so it's kind of frightening for Disney uh but they you can own these patterns for

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70 or 100 years or whatever it is and so you basically have an entire lifetime and sometimes two

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lifetimes they're able to create wealth with this one thing that obviously lots of people like

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if it's good and after that point it becomes common it means everybody can use it and so we might

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find some very interesting Mickey Mouse apparel and cartoons that start appearing after Disney's

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big ownership over that IP expires now the other version of this is trade secrets and this one's

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really tough because it's really hard to enforce it's really hard to keep secret because you have

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employees who learn trade secrets and then they can leave and then just becomes competitive practice

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and so the thing is is like the classic one is Coca-Cola secret recipe for their drinks and this is

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actually really common in flavoring because there's really unique recipes for like Red Bull and Monster

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and I think Monster famously didn't own its own recipe from the person that was actually doing

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the manufacturing and had to pay like $500 million to just buy the rights to its own recipe from

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the people who made it in the beginning some crazy amount of money somebody can fact check me

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all right and so the thing is is that but if you're like man someone's using my offer someone's

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using my ad someone copied my content that's not considered intellectual property believe it or not

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and so there's very strict guidelines which I won't get into about it but if you do have a copy

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right right if you do have a trademark which is like you can't use acquisition.com right you can't

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pretend it's your business and the key word I think for knowing whether it's right or wrong is

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pretending like it's yours right like you can't pretend that you wrote this book you can't pretend

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that you and acquisition.com you can't pretend to represent something that you're not which is

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what this protects and so this gives you the business owner the opportunity to spend more resources

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more time building things of value because you know they're going to be protected and if I ever wanted

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to sell the rights to my book I would be able to sell it for probably close to a hundred million

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dollars based on the revenue that this book prints in and it just continues to make money and

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these types of businesses set themselves up for things called royalties and so Oreo for example

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and Nabisco set up lots of different royalties with like supplement sellers you want to say this

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is Oreo flavored or ice cream dealers you want to have Oreo real Oreo flavoring so if you want to

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use the Oreo recipe and the Oreo logo on your products they say sure you can use it you just have

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to give us 8% of revenue of whatever you do and so there's also a really strong strategy of saying hey

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I'm gonna just lean into this I'm gonna go get 10 different big brands to license me their brands

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I'm gonna pay them the royalty but I'm gonna piggyback on 20 years of branding and marketing that they

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spent gazillions of dollars on so you can start small businesses a mutual acquaintance of mine

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started his supplement company just taking all these premium brands like Swedish fish and

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sour patch kids and making them in a supplement line that people immediately recognize so you

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got to benefit from that brand recognition and already a flavor that people loved and knew

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even though he was a small business number 11 is acquisitions and mergers and you're like

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how do you destroy your competition through acquisition mergers well you kind of don't you kind

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of just assimilate your competition and so this one is a a darling of the private equity world

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basically the world that I live in as an investor which is hey we've got three companies that

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are all competing for the same market well what if we just buy them all and put them under one well

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now we control the entire marketplace and so the government seeks to break these things up once

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they get really really big but the problem is it gets really hard when a company is really big

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because they know how to defend themselves and so Facebook for example meta has acquired

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number of companies like Instagram and WhatsApp to consolidate position they added messenger in

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and so they have all these things and they've been prevented at this point from buying anymore

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because they don't want one company owning all of the digital media and I think rightfully so

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but that is a way that you can develop a monopoly and so when you're thinking about acquisitions and

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mergers you really just think about market segments or like I was saying earlier so this one basically

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umbrellas on top of any of the other so you can do private equity so you can do acquisitions for

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example and acquire all of the things in the supply chain so you basically use outside capital

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to acquire the entire supply chain and vertically integrate or you acquire all of your competitors

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and you achieve economies of scale or you acquire the distribution and the exclusive contracts

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and then you create a closed loop and so you basically use capital and taking existing

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resources and assets and so I had a company yesterday was talking me about this and they're like

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hey I'm having this problem because this company is doing about $60 million a year it's a roofing

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business he was like I buy all my leads from this online lead source and they're the biggest lead

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source in the US and I'm their biggest buyer I was like okay cool so what's the problem

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it's like well I'm having trouble scaling beyond them I was like okay well there's two ways

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you can do it you can either buy it or you build it and my recommendation him was hey go find

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five small agencies that sell to roofers exclusively and sell paper lead and rather than buy the

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leads buy the company because he had the capital to do it and so if he buys one two or three

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the businesses he can then own another chunk of the supply chain so he owns all of the media assets

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that create the leads and he owns the roofing company that can create the roofs and then what

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would the next thing you would buy he probably buy the financing company that finances the roofs

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then he'd make points on that and so the more you eat up of this which you can do through acquisitions

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and mergers the more competitive advantage you have the more valuable the company and so what's

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interesting is that small businesses get small and stay small through competition but big businesses

399
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think about consolidation and so you can see five business owners who are all neck and neck

400
00:33:35.520 --> 00:33:39.040
in a local market but the funny thing is is that one guy sells private equity and then private equity

401
00:33:39.040 --> 00:33:44.080
buys the other five and just owns them all and it just seems like this silly squabble and so if you

402
00:33:44.080 --> 00:33:49.840
can work together to create a much bigger enterprise the sum of the whole is greater than the individual

403
00:33:49.840 --> 00:33:55.440
parts and this is very true when it comes to equity value and a business and so if you seek to

404
00:33:55.440 --> 00:34:00.160
create a more valuable enterprise don't think from the competitive lens think like how do I

405
00:34:00.160 --> 00:34:04.880
eat up things that would cause risk to my business and so that's looking at distribution looking

406
00:34:04.880 --> 00:34:09.280
at customer bases looking at looking at media assets looking at all the different components so

407
00:34:09.280 --> 00:34:12.400
you can say hey it's their way that we can work together rather than compete so that we can just

408
00:34:12.400 --> 00:34:16.160
become a much bigger thing and then own a stronger position in the market which then gives us some

409
00:34:16.160 --> 00:34:20.560
of these downstream things we've economies of scale we've a stronger brand all of these competitive

410
00:34:20.560 --> 00:34:25.040
modes that you then position yourself to destroy competition and so me personally and this is

411
00:34:25.040 --> 00:34:29.760
something that took me way too long to learn about business is I'd rather own 20% of a billion

412
00:34:29.760 --> 00:34:34.480
dollar company than 100% of a million dollar company and one of the classic examples you probably

413
00:34:34.480 --> 00:34:38.240
have heard of because you've probably seen their big green trash bins is waste management which you

414
00:34:38.240 --> 00:34:44.160
may or not know this but the owner of the founder of waste management didn't even like start a

415
00:34:44.160 --> 00:34:50.240
business he just bought waste management routes and he kept buying them over and over and over again

416
00:34:50.240 --> 00:34:55.840
and so he saw was a very fragmented market of mom and pop shops that he saw wait if I added all of

417
00:34:55.840 --> 00:35:00.320
these routes together I would have huge economies of scale and then I would own the entire network

418
00:35:00.320 --> 00:35:06.080
of waste which is more or less what he did and so he grew the entire company through acquisitions

419
00:35:06.080 --> 00:35:11.040
until he became a multi billionaire and had a big public company which we now know as waste management

420
00:35:11.760 --> 00:35:15.920
and so and so if you're a small business owner you can just think about that exact strategy that

421
00:35:15.920 --> 00:35:21.920
waste management did which is if you are let's say a pool cleaner or you own lawn care company then

422
00:35:21.920 --> 00:35:25.520
you can look at all the other lawn cares in your local marketplace and say okay well what if I

423
00:35:25.520 --> 00:35:29.200
owned all of these and you just focus on your local city and if you own them you're going to have

424
00:35:29.200 --> 00:35:32.720
huge advantages it's me harder for people to come in and compete against you you have the

425
00:35:32.720 --> 00:35:36.560
relationships you have economies of scale you have more efficient routes because you have your

426
00:35:36.640 --> 00:35:40.640
houses are closer together and this happens with lots of home maintenance type of businesses

427
00:35:40.640 --> 00:35:44.560
and the thing is that right now this is a huge private equity interest so there's tons of

428
00:35:44.560 --> 00:35:47.920
M&A activity that's happening here because they're seeing the same thing that's right there which

429
00:35:47.920 --> 00:35:52.400
is wow these guys are all really fragmented instead of competing if we consolidate it we make a

430
00:35:52.400 --> 00:35:59.040
much more valuable thing so number 12 is one of my favorite personally and so one of my big sayings

431
00:35:59.040 --> 00:36:05.120
is find what everyone wants make it better and give it away for free and step four monetize another

432
00:36:05.120 --> 00:36:08.560
way so it's having an innovative business model and so a lot of people talk about this in

433
00:36:08.560 --> 00:36:14.320
disrupting marketplaces so you take stuff that other people are currently selling at a profit

434
00:36:14.320 --> 00:36:20.560
and you just give it away for free and so Google for example with Google Docs Google Sheets Google Slides

435
00:36:20.560 --> 00:36:25.600
to try and disrupt Microsoft or eat up some of its market share they offered essentially the

436
00:36:25.600 --> 00:36:30.160
same software for free and added some features that made it even easier for people to work together

437
00:36:30.160 --> 00:36:35.200
if they were already on Google so fundamentally many of these models exist on freemium concepts

438
00:36:35.200 --> 00:36:40.640
which is I give something for free that you continue to use and I put all of my effort on ascending

439
00:36:40.640 --> 00:36:47.040
people from free to paid and so it's actually a marketing strategy and so your cost to acquire

440
00:36:47.040 --> 00:36:54.480
a customer is the cost to deliver a customer divided by your conversion rate so if it cost me a penny

441
00:36:54.480 --> 00:37:00.160
to service a free customer and I convert one out of a hundred free customers into paid customers

442
00:37:00.160 --> 00:37:04.320
then my cost to acquire customer is a dollar and so you would actually take all of what would

443
00:37:04.320 --> 00:37:08.800
normally be a marketing budget and you put it into delivering the free thing and make sure that

444
00:37:08.800 --> 00:37:13.840
that free thing is so good that the word of mouth marketing on its own because it's free then

445
00:37:13.840 --> 00:37:18.080
generates more demand that you then just take the cost basis of delivering the free thing and

446
00:37:18.080 --> 00:37:23.280
that becomes your marketing spend and this is really common in disruptive businesses because that

447
00:37:23.280 --> 00:37:26.560
is their competitive advantage that's what makes them difficult to compete with because other people

448
00:37:26.560 --> 00:37:30.560
in their marketplace that's their core business and then you're just giving it away for free because

449
00:37:30.560 --> 00:37:35.440
you found out another way to monetize so Spotify for example did a great job with this where they made

450
00:37:35.440 --> 00:37:40.480
free music for everybody because they licensed they made all these agreements and so you can listen

451
00:37:40.480 --> 00:37:43.760
to whatever songs you want on demand as long as you're willing to listen to listen to listen to

452
00:37:43.760 --> 00:37:47.680
Jesus as long as you're willing to listen to ads and if you don't want to listen to ads you can

453
00:37:47.680 --> 00:37:52.240
pay them to that and they do a ref sure with the musicians we can get into whether it's ethical how

454
00:37:52.240 --> 00:37:55.360
much they pay them or not but that's not the point of this video the point is that they had an

455
00:37:55.360 --> 00:38:00.080
innovative model that disrupted that industry but you're like okay these are some massive things but

456
00:38:00.080 --> 00:38:04.800
is there something that I can do on a smaller scale well the answer is yes you just have to do

457
00:38:04.800 --> 00:38:10.960
the math and so for example I had a concept that I that we tested out at a gym it didn't work but

458
00:38:10.960 --> 00:38:15.920
I can still explain it to you is that I had a meals company called prestige meals and I also had

459
00:38:15.920 --> 00:38:21.760
a sub-company prestige labs and I knew gyms and so in one of our test kitchens I said hey what if

460
00:38:21.760 --> 00:38:28.160
we told people that if they were on our meals they could get the gym membership for free and so

461
00:38:28.160 --> 00:38:34.560
we marketed free gym forever because the whole stick was if you eat the right foods when you're

462
00:38:34.560 --> 00:38:39.520
not here the results are going to get in here are going to be massively amplified now the difficulty

463
00:38:39.520 --> 00:38:42.880
that we had and I think if I worked at it a little bit longer I then was like this is a little

464
00:38:42.880 --> 00:38:46.480
bit of distraction because I was getting way too into like trying to innovate this business model

465
00:38:46.480 --> 00:38:51.040
but fundamentally that's how it worked is just okay well I have a capital cost for the gym but once

466
00:38:51.040 --> 00:38:56.880
I incur that the additional users isn't that much to take on in terms of price and so we're

467
00:38:56.880 --> 00:39:01.200
going to give this thing away for free that other people charge for as long as they buy this other

468
00:39:01.200 --> 00:39:06.000
revenue stream that has more profit or has more income and so that's how I think about pairing

469
00:39:06.000 --> 00:39:10.640
different services together where you just take the a very cheap service that a lot of people want

470
00:39:10.640 --> 00:39:16.880
even if you go from $20 to zero it's still free and free gets 10 times the interest of not free

471
00:39:16.880 --> 00:39:20.800
and so that then allows you to generate the demand for your much more valuable service that you can

472
00:39:20.800 --> 00:39:25.360
sell it a higher I'll do it I'll give you another version of this if I that I would test out so if

473
00:39:25.360 --> 00:39:32.240
I had a large facility right I might say you have to you can come to my facility and you can use

474
00:39:32.240 --> 00:39:36.000
it free you have to do these rules and I can kick you out so that would control some of the riffraff

475
00:39:36.000 --> 00:39:40.800
for example but by doing that I would use my gym as my free lead magnet to get people in the door

476
00:39:40.800 --> 00:39:43.760
and then what would I do when they're in the door well they got to sit down with us to do an

477
00:39:43.760 --> 00:39:48.240
onboarding consultation which we would sell personal training at and so it's like I can give the whole

478
00:39:48.240 --> 00:39:52.240
gym membership away for free if you just buy personal training knowing that only one out of five

479
00:39:52.240 --> 00:39:56.000
people are going to buy it and that's fine because I didn't pay for the customers and I'm making

480
00:39:56.000 --> 00:40:01.200
all my profit here so as long as my profit and my personal training covers the cost of maintaining

481
00:40:01.200 --> 00:40:06.000
the facility and I can still not a profit then I have a good and very innovative business model number

482
00:40:06.000 --> 00:40:10.240
13 is controller redistribution channels now you might be like this is really similar to contracts with

483
00:40:10.240 --> 00:40:16.800
distribution and it is kind of accepted way more valuable because contracts at some point they can

484
00:40:16.800 --> 00:40:20.000
break them like all of the vendors overnight could say you know how cool cool we don't want you

485
00:40:20.000 --> 00:40:25.520
know is that likely no but if you have absolute control and ownership over distribution you also

486
00:40:25.520 --> 00:40:32.240
can profit from everyone else's business too and so Amazon for example owns a distribution monopoly

487
00:40:32.240 --> 00:40:36.320
right they have access to everybody in the United States they're the most widely adopted product

488
00:40:36.320 --> 00:40:41.520
which is Amazon Prime in the United States in total and that's how they can get you things in two

489
00:40:41.520 --> 00:40:48.000
hours right which is crazy and they had the warehouse network built out first and they're putting so

490
00:40:48.000 --> 00:40:53.280
much strain on the US Postal Service and UPS that they're like well we're just going to start

491
00:40:53.280 --> 00:40:57.440
Amazon delivery and now Amazon's delivery you see the Amazon trucks everywhere where they just

492
00:40:57.440 --> 00:41:02.480
have their own people that and their own vans that do all the deliveries for them and so Amazon

493
00:41:02.480 --> 00:41:07.040
because they have access to everyone's front doorstep if you want to sell a product in the Amazon

494
00:41:07.120 --> 00:41:13.040
you pay Amazon two thirds or half of the revenue which is absurd but it's also why Amazon's revenue

495
00:41:13.040 --> 00:41:17.120
is like a good union dollars a year how do you chunk this down so you're not Amazon you're like how

496
00:41:17.120 --> 00:41:22.800
do I make this work for me so I would say on a smaller scale you have local distribution so you

497
00:41:22.800 --> 00:41:27.120
can create distribution centers in a local area and you just slowly expand outwards because in that

498
00:41:27.120 --> 00:41:33.280
city in that tiny area you're the best now the other version of this is that you get really good

499
00:41:33.280 --> 00:41:40.400
distribution on a specific market segment so if I have every single CEO in America and I know

500
00:41:40.400 --> 00:41:46.560
them all first name basis then if I want to sell private jets I probably will have a good job

501
00:41:46.560 --> 00:41:51.680
doing it and so just think about it as means of communicating or means of delivering messages or

502
00:41:51.680 --> 00:41:56.800
products two customers that you have complete control over now I don't own those CEOs but somebody

503
00:41:56.800 --> 00:42:02.000
might own those relationships right and so the idea is as much of that as that you can have complete

504
00:42:02.000 --> 00:42:08.160
control over creates a competitive mode now I want to zoom out we talk about 13 different things

505
00:42:08.160 --> 00:42:15.840
here that chunked up version of this is the actual word monopoly and it comes from the Greek

506
00:42:15.840 --> 00:42:23.360
mono meaning one and police meaning to sell meaning only one person can sell and so there are

507
00:42:23.360 --> 00:42:28.000
13 ways that I just outlined were only one competitor can sell and that could be because they control

508
00:42:28.080 --> 00:42:32.880
the supply they control the demand they control the media that talks to those people they control

509
00:42:32.880 --> 00:42:36.080
the technology that prevents other people from getting into it it just costs a ton of money get

510
00:42:36.080 --> 00:42:41.040
into the business they have some sort of grant or license that says that only they can do it so

511
00:42:41.040 --> 00:42:45.200
there's all these different ways but fundamentally it's finding a way that no one else can enter

512
00:42:46.080 --> 00:42:51.200
and as much as monopolies are quote frowned upon in the government they don't do very much to break

513
00:42:51.200 --> 00:42:57.680
them up and this is how Bill Gates and John D Rockefeller created life changing wealth but you

514
00:42:57.680 --> 00:43:01.040
can create life changing wealth and not necessarily become a billionaire you just create a small

515
00:43:01.040 --> 00:43:06.080
network of a very small niche that you own and by doing that you can take steps and weave one of

516
00:43:06.080 --> 00:43:10.880
these 13 strategies into the DNA of your company to make it more competitive and ultimately make more

517
00:43:10.880 --> 00:43:11.200
money