If I asked you “what do you think makes the biggest impact to a company’s valuation?” What would be your response?
If you were selling your company you’d probably list Revenue, Growth, and/or Profit as the top value creator. On the flipside if you were buying a business would these three still be on your list? Probably, but you may want to pick something else. Why?
Sellers focus on Growth, Profit and Revenue because they think about maximizing their company’s value based on their perspective. Meaning, how can I increase what my company is worth for me. And this makes a lot of sense when you’re still trying to grow and scale because all three of these work together to build a cash machine.
Even though they do create real value for a buyer, it’s only sharing part of the story and why many owners focus on the wrong things when it comes to maximizing the value of their business and seeking an exit or liquidity opportunity.
Buyers need to see revenues growing and the bottom line healthy, for sure. But this is merely a check box to take the next step in the process and uncover what matters most. The one key factor that will allow the company to create even more revenues into the future and well after they buy it from you. What would that factor be…you ask?
Savvy buyers know Competitive Advantage drives the growth of companies. It is the cause in the cause/effect relationship to drive sales demand and pricing power over an extended period of time, not months, but years.
Get clear on your advantages first.
A high return on invested capital (ROIC) indicates a business model powered by a Competitive Advantage. Companies that generate stronger returns attract more investors and buyers that need to deploy their capital, creating a virtuous cycle that enables the business to grow faster and maintain higher returns. While some companies choose to forgo their profit for a time to pursue growth (Amazon being the best known), the far more typical and practical approach is to create a business that has clear set of advantages that is hard, difficult or too expensive to reproduce by someone else.
So how do you establish your own Competitive Advantage?
First, let’s define what it is and how to identify the advantages in your business.
What is Competitive Advantage?
The first step is knowing what it is. To distill down in simple terms, it comes down to delivering greater value to your customer (product or service) than what they used to get from your competitors.
The mistake most Entrepreneurs make is they think of it as ONE thing or factor that is going to tip the scales in their favor. No, Competitive Advantage goes deeper than that.
It needs to be stacked with multiple value added blocks. Like a game of Janga. You have to go in, one piece at a time, otherwise the whole thing comes crashing down. It’s the ability to move those key pieces at the right time, into the right spots, but you can never get too comfortable.
The moment you’ve moved that key piece into place and the stack is still whole, the player on the other side starts to spot the weaknesses in the stack and moves their own piece into a better spot than the one you just placed in the pile.
And herein lies an important lesson. Competitive Advantage is only temporary.
This is especially apparent right now where companies now need to compete on digital delivery and connect this to the customer experience. Digital has to be part of the product.
The companies that have invested in digital are truly getting all the spoils. And there’s the usual bell-shaped curve at play where 80% sit in the middle, struggling to implement, 10% will never make any changes and get pushed out of the market and the top 10% (or I would even argue the top 1-2%) are disproportionately winning because they invested at the right time.
In digital if you’re not first, you’re last.
This new competitive landscape requires owners to take a different view of the world and start to get really good at ONE thing, and multiple value from there.
Very few owners ever take the time to do this. However it could be the difference between creating a company that is a highly attractive acquisition opportunity, or just another business for sale.
Worth investing some time here.
How to Identify your Competitive Advantage
Discovering what makes you different is half the battle. Especially in a highly commoditized landscape, it’s a challenge to figure out where it is you can actually win market share.
The best place to start is to ask your current and past customers.
Look for patterns. Your Competitive Advantage might be hiding in your customer’s opinion about what you do and how you make them feel.
Then, you can think about taking up a level into market research to examine :
Once who’ve mapped the market you then have to connect this back to your customers.
By doing customer segmentation analysis, you can see which ones are driving value through revenue. Whether its a percentage of total customers, close rate of sale opportunities, upsell or cross sell opportunities or whatever you need to pinpoint where you’re winning and what areas need to be improved or scraped.
Evaluating the market and your customer base is a powerful process as you draw out your advantages based on facts and data. This is a super useful framework to stay ahead of the curve in your marketing and sales efforts.
How to Build Competitive Advantage
Here are some other initiatives you can run to build Competitive Advantage if you can’t find an existing one from your analysis of your customers.
1. Make a Culture Shift
Finding good people is not easy. But retaining them is proving to be an even greater challenge for most companies right now.
Whilst you have to remain on task and productive, what’s even more important is that you have a happy and harmonious work place where your people have better experiences. I always enjoy walking into a business with a bubbly receptionist, friendly staff and a welcoming owner. It just feels better.
Customers know when somethings up, and can spot the difference between buying from a business where workers aren’t happy. They know when the people inside the business are supported, the quality and care is better and the products or services have fewer issues.
If you can demonstrate that you take care of your people the customer will in turn interrupt this for themselves as someone they can do business with.
This provides you with a Competitive Advantage.
2. Find Profitable Niches that are Under-Serviced
Business is a lot like fishing. Some fish you find in the ocean, some in rivers and lakes. Fish that swim in the ocean are bigger, but they take more effort to catch. Fish that swim in rivers or lakes are easier to catch but tend to be smaller.
It’s the same with customers. When looking to gain Competitive Advantage it is easier to go for the niches where customers can be found. That’s why looking for niches where customers are under-serviced can provide a market advantage.
There are fewer competitors plus you can elevate brand recognition faster.
This gives you a Competitive Advantage over those who don’t go after these consumer segments.
3. Established a Unique Value Proposition
Most companies use common language to describe their product or service. Phrases such as “quality customer service” and claims “we are number one” don’t go far enough.
In the eyes of the consumer it all looks and feels the same. And there is no real differentiation.
You need to drill down further as to what attributes make your service or product better. How is it more valuable to the consumer?
Ben Horowitz, renowned venture capitalist at Andreesen Horowits puts it like this:
“The primary thing that any technology startup must do is build a product that’s at least 10 times better at doing something than the current prevailing way of doing that thing. Two or three times better will not be good enough to get people to switch to the new thing fast enough or in large enough volume to matter”.
Whilst you may not be a technology startup this is still relevant to help you identify your unique value proposition.
Are your customers switching to your product from their current solution? Or are they looking at several offerings?
You need to examine all of your deals and the reasons why customers are buying or seeking an alternative.
Interviewing buyers after the decision within 10-15 days is an incredibly effective strategy. Looking 3 layers down into why you won or lost.
These are all incredibly valuable insights that take time to uncover, but provide the key insights needed to reposition your offers in the right way.
If your conversion rates start improving as a result of looking into this, it proves my point.
Because if your solution offers great value, and is hard for competitors to duplicate – you always have an advantage.
4. Sell them a painkiller not a vitamin
Lastly when prospects become interested, is the focus on the outcomes and value you create or do they immediately revert to price? What is the core pain that you’re solving? Are you able to articulate this well enough that the price is secondary to the value exchange.
For example, with our M&A services, the pain that’s being solved is many people try to sell their business, but few succeed.
They often don’t have the time, patience or motivation to see it through so they engage us to help them through it.
The person selling their business isn’t paying me for the time we spend together, they’re seeking an outcome.
The price is higher than they would usually pay another service professional, but that’s okay, because the way we structure the fees connects to the outcome, not time spent.
The value is known, then received, and on settlement it’s distributed.
Can you quantify the advantages your product provides so when they measure the impact of it it’s a no brainer?
The focus should always be on buying the pain relief (critical business outcome) not the features of the pill (demo requests to take a look at it).
You have to single out your Competitive Advantage. It’s a critical component in company value creation and one you really need to spend time on if you want to make your business stand out from the crowd.
Because the people who will ultimately buy your business know that if your company can solve a real pain and have Competitive Advantage it will be valuable to them as well.
And here’s the critical point.
If advantages can be identified and built, they then need to be properly packaged as well. That way they can be transferred to someone else.
Showing how the company will continue to generate revenues and profits from its advantages is how you win.
And the proof needed to transact your business for maximum value.
Thinking of selling your business in the new year? Inflow is your first stop.
Reach out to us today and get a complimentary business valuation and exit option evaluation session.
We invite you to book a Value Creation Roadmap Session below.