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Think you can’t compete with a big company? Think again.
Many small companies fear the thought of competing with a company that is big. A large firm has everything in place. They have a brand name, money, existing customers, momentum, a sales office, a product team, press, market insight, product features, distribution channels, and so forth. In a nutshell, you can simply state that it has a perfect working model in place. In contrast, a startup only has a vision and a desire to work hard.
But don’t forget that the David and Goliath story is perennial. It is essential for you to understand that a revenue stream that is profitable is going to be a prison. Undoubtedly, it is the Achilles heel that is going to assist the tiny guy in succeeding in competition with a giant.
A company that has a perfect business model will not consider those facts that a startup can use to succeed. There is a massive market in place; if not, the company would not be that big. There is a particular market that is willing to pay a lot more than the cost of a product; if not, they cannot generate a lot of profits. But all this abundance that a big company enjoys will last for some time. Vast and profitable businesses die very slowly. They never disappear in a flash.
Now, this indicates that the market is always ripe for a disruption that comes from innovation. A startup that is going to use new technology, cost structure and ideas will fair well. They are capable of competing with a product for almost half, a quarter or even one-tenth of its price.
You might be thinking that a large company can easily counter your move by reducing their product price. If they do this, as an upstart, you are going to suffer. But, in reality, companies of that size focus more on making revenue or protecting their profits and ensure that it is streaming in all the time. They are even ready to give up on the innovation if they think it is going to become an obstacle. Valuation on companies like this is based purely on earnings and revenue. They do not go through erosion because of ankle-biters. Stocks will plummet swiftly when Wall Street presumes that your future earnings are in great jeopardy.
Making small changes to the top-line revenue can help you in creating drastic differences in profitability for a big company. You can consider any business that can generate more than 20 percent profit margin as profitable. Your costs will not reduce magically to 20% when you lower the top-line costs by almost 20%. Your profits are going to be zero percent.
Therefore, if a startup decides to cut down the costs to 80 percent, you are going to cause much damage to the bigger companies. Larger firms will not be able to chase when you do this. If you ever decide to cut down the top-line by a mere 10%, you will divide the profit almost in half. Now, this is going to be a penalty that they cannot endure.
When this happens, the large enterprise is going to shift their focus on the top end of the market. They do not want to lose that category of the market the same way they lost the low end of the market. This strategy might work for the company. But, it is quite okay, because you caught hold of the low end of the market which might be almost half of the company’s market share in the low-end.
You are wrong if you think that the big company is going to sacrifice some portion of its earning. Now, this is a game-plan of a disrupter. Do not forget the valuation of a company is based purely on future earnings. Growth is essential because it can lead you to earn more. Growth is never crucial for just growth’s sake. Now, this is one argument most of the startups believe in, and they focus on dominating the market before other players get inside.
But it is quite essential for you to understand that you can enjoy all these things when you focus on attacking a product line which has the capability of generating huge profits. In case you are choosing to attack a loss-leader, your situation might reverse in contrast.
Most of the big and profitable firms have other lines of businesses which are not that profitable. They take funds from profitable businesses to support these businesses. For example, Google’s most profitable business is their search engine. They fund Gmail. Amazon was funding AWS all the while it was not generating huge profits. Now that AWS has crossed the $10B mark generating almost 20% margin in profits, their focus is to fund other businesses.
It is not a wise decision to target a company on its loss-leaders. The company can use its power to thwart you from doing it. They can invest a lot of money to win. Since they do not have a business model in place, these companies can make or change their decisions drastically.. Netscape became a victim to Microsoft as it used Internet Explorer, a loss-leader.
Compete with the large companies as long as you are focusing against them in parts that they are fat. Be aware that they are going to beat you in your own game if you do not follow this strategy.