May 2023

How to create a monopoly?

How to create a monopoly?

In fifth grade, we got an Apple computer at school. The computer was carted around from class to class in a wooden credenza with wheels. I was a nerd (which I always saw as a positive thing -- I'm glad other people are starting to see it that way, too) so I was put in charge of it. Out of the few games on the computer, the most popular one was Lemonade Stand. Lemonade Stand was a simple business simulation game. You bought cups, lemons, sugar, and ice cubes, and tried to determine your ideal recipe. In order to maximize your profits, you'd have to adjust for weather and other variables. I spent hours on the game, trying to run the best lemonade stand Lemonsville had ever seen.

Many entrepreneurs view an IPO as the height of success. My version of ultimate success would be the Department of Justice showing up and saying they need to break up my company because we're a monopoly. #goals.

All startups should have a vision of becoming a monopoly. How do you create a monopoly when you're bootstrapping? Well, I've never done it, so take this with a grain of salt. But I think we can use the example of a lemonade stand to see how it's done.

Own your house:

Your first lemonade stand should be in your living room. Rent is free, and your materials are free too (borrow them from your mom's pantry). Sell every friend and family member that comes to your house. Unless your siblings are going to compete with you, you'll be the #1 lemonade stand in your house within no time. It's a small market, but it's also a 100% gross margin business. If cash is the lifeblood of a business, gross margin is the heart. Iterate your recipe, iterate your process, and learn about your cost variables. Hoard your cash.

Own your street:

Now that you own your house, it's time to own your street. Take that cash, build a stand, and maybe print some flyers. Hopefully, there will be limited competition. I doubt your mom will let you raid her kitchen anymore, so you'll likely have some COGS (Cost of Goods Sold). Printing those flyers costs money, and you may need some contract labor (your siblings) to pass them out. First lesson on staff: do you pay them by the hour, a fixed fee, per flyer, or per glass of lemonade sold?

Run your street until you understand the cost variables and revenue variables. Predictability reduces risk. Consider seasonality, correlation of demand to weather, and customer preferences. If your street is health-oriented, maybe you need to offer an organic version. Be careful, though -- you can't afford to support too many SKUs. You're still not paying rent and you don't have any real overhead. And now you have a pile of cash. But you want a bigger pile.

Own your block:

Moving from your street to your block means you need to optimize marketing and determine your service area. You'll be tracking costs and examining the efficacy of your marketing strategies. People may love your lemonade; however, they're not driving across town for a glass. Track customer activities (maybe using a simple CRM) and engage with customers to ask where they live and how you can improve.

It may also be time to get help in your operation. If customers are tired of waiting for you to serve and collect money, maybe your kid sister can run the cash register for you. That pile of cash has grown, and now it's been a year. You've done a good job of tracking your finances and metrics. You've built a brand, people on the block know about you, and you have a regular customer base. For every invested dollar, you're getting two dollars back. Not too shabby.

Own the neighborhood:

Here we grow again… Owning the neighborhood brings new costs and competitive forces. It's time to pay rent (no more working out of the house), it's time to go full time (not a side hustle anymore), and it turns out that people may want a smoothie instead of lemonade. The business just became real. You have a great handle on marketing and creating demand. The next marketing activity is to start understanding your competitive positioning.

The real focus will be on costs. With all the additional costs, watching every penny matters. Now is also a good time to seek out mentors: people who have been in the business and provide specific functional skill sets. As a rule of thumb, don't make this move until you have one year of expenses in the bank, including enough cash to pay yourself a reasonable salary. And guess what? A year or two later, you have a new pile of cash. It's the biggest you've seen in your life. Your business is real. Now can it be big? This is one of the most critical strategic decisions that needs to be made.

Next moves:

Once you own the neighborhood, where do you go from there? You follow the Theory of Adjacencies (not sure if I made this up or read it somewhere) to determine how to grow. The basis of the theory is to only make one-degree market moves. A two-degree market move is too much risk and generally fails.

First, plot your market on two axes (in this case, products versus geographic markets). A natural one-degree move would be to open a location in a neighborhood 5 miles away. An unnatural move would be to open a store an hour away. Another natural one-degree move is to start selling potato chips. An unnatural move would be to add a deli counter and make sandwiches. A third-degree move would be to add a deli counter to your store an hour away. You're bankrupt if you make that move.

Are you tired of talking about lemonade? I use this example because applies to almost all businesses. In tech companies, geography may not matter, but your segmented markets will matter. You may not sell potato chips, but you are continually adding features.