A prison

By Jason Cohen via blog.asmartbear.com   Article

Why it’s nice to compete against a large, profitable company

“A big, profitable company seems like the hardest thing for a small company to compete against. They have everything: money, brand, momentum, existing customers, press, product teams, distribution channels, expertise, market insight, analysts, sales offices, product features, and, by definition, a working business model.

All a little startup has is a decent idea and extremely greasy elbows.

But David has a clear path to slaying Goliath. The insight is: The profitable revenue stream is a prison. It’s the Achilles heel that allows the little guy to win.

A company with a large, profitable, growing revenue stream betrays facts useful to a startup: There’s a huge market to be had (else it wouldn’t be large and growing). This market is willing to pay far more than cost for this product (else profits wouldn’t be generated). This abundance will last for a while (large, profitable businesses typically die a slow, sagging death rather than disappearing in a flash).

This means the market is ripe for an Innovator’s Dilemma-style disruption. A startup with new cost structures, new technology, and new ideas can compete with a good-enough product at 1/2, 1/4, or possibly even 1/10th the price, and start cleaning up.

But wait! The big profitable company can just lower prices, thereby removing the main competitive advantage from the upstart, right? Wrong. The big profitable revenue stream is the goose that’s laying the golden eggs. The goal of a large company is to protect the profit stream at all costs, even if that means giving up on innovation. The current valuation of the company is based on continued growth in revenue and earnings, not erosion due to ankle-biters. Watch how fast your stock plummets when Wall Street thinks your future earnings are in jeopardy.

Don’t forget: Small changes in top-line revenue create massive changes in profitability. A business with a 20% profit margin is very healthy. If you lower top-line prices by 20%, your costs don’t magically decrease 20%, so now your profits are 0%.”

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