What is a competitive advantage?
"An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support." Source – investopedia.com
"In business, I look for economic castles protected by unbreachable 'moats'." -Warren Buffett.
You must have a moat. Do you have a competitive advantage? What is it that makes your idea for a company better than anyone else's? To be successful in a competitive marketplace you must have a moat. An aspect of your company, product or service that a competitor can't duplicate. This can exist in many forms. It could take the form of a patent, which prevents competitors from copying your design. It may be the brand you have built (think Coke, Harley-Davidson), which people believe is the best of breed – you can only get this here. There has to be some type of advantage that protects you in the same way a moat protects a castle.
Once this is established, always be mindful of the possible invention of flight – the moat worked great for centuries, until the air-raid bombing campaign begins. Meaning, don't lose sight of the many ways a competitor can storm your castle.
A closer look at the definition
Examining the definition above and then later in the article discussing the two different types of competitive advantage we will provide some insight on how to create competitive advantage.
Allowing it [Business] to generate greater sales – Looking at the first part of the definition, how can we use that to create an advantage?
In my option one of the most overlooked areas of sales for a small business is sales margins. You could do everything listed above and still not have a completive advantage if you ignore sales margins. It would actually be very difficult to do many of the items without first addressing margins. In many cases, the sales margin is not known by a business owner. We are all guilty of this from time to time, we may have figured a rough idea of our "profit" but have still not determined the sales margins for our business. More goes into the equation to determine an actual sales margin or gross profit margins as it is often called then what most people consider.
To determine the actual sales margin we need to measure how much of every dollar in sales stay with the company as gross profit after accounting for the cost of the items sold. There are many factors that can go into this calculation; overhead cost (lease payments, utilities, equipment lifespan), employee wage cost, material cost, shipping/delivery, just to name a few. All of this can be determined by performing a Cost of Goods Sold Study (CGSS). Having a CGSS performed will provide a detailed report of every aspect of your business right down to the time it takes for an employee to complete a job. This study can also determine which products/services have the highest profit margin within the company, having this information allows you to focus on sales for this product/service.
Why is the sales margin so important?
By comparing two companies, both of which are in the same city, selling the same product for roughly the same price, we can illustrate the importance of margins. Both companies sell their product for $100, they both have an office, warehouse and have employed a sales force that facilities the sale of the products.
Company A has calculated their sales margin at 20%, they're making a profit and are happy. Company A figures that since both companies are selling products at the same price, they are competing with Company B and will soon win the market share of the business.
A year goes by and Company B lowers their price by 20% as a spring special and it never goes back up, which means they are now selling the product at the same price as the Cost of Goods Sold for Company A. Over the next year Company A struggles to compete, after lowering their price by 15% to stay within range, they are barely getting by on a 5% sales margin. They have lowered cost, cut employees, slashed spending, but nothing is helping. In the end Company A goes out of business. What went wrong?
Turns out Company B was operating off of a 50% sales margin and putting all the extra profits back into the company to streamline operations, pay off debt, systemize their process and reduce their cost by purchasing materials in bulk.
Company B owned the warehouse they where using and also rented out part of it to other companies making it profitable. Company A rented warehouse space. Company B used part of the warehouse they owned as their office. Company A was renting a nice space downtown that they couldn't afford. Company A was paying their sales force a lower wage with a commission structure setup which increased with every sale and provided bonus incentive for top performers. Company A was paying a high fixed wage with low commissions and no bonus, their cost stayed the same regardless of sales. Company B used their profits from increased sales margins to pay for professional branding and marketing services that made their product a household name in the area. Company A setup their own website and hired people to pass out flyers.
the surface it seemed like Company A was competing, but under closer examination, they weren't even playing the same game.
Earlier I mentioned that there are two main types of competitive advantages. The above illustration is an example of comparative advantage. Comparative advantage, or cost advantage, is a company's ability to produce products or provide services at a lower cost than its competitors, which gives the business the ability to sell at a lower price while still generate a larger margin on sales [think Walmart].
The second type is called a differential advantage which is created when products or services of a business differ from its competitors and are seen as better than a competitor's products by customers.
Focus on this part of the second type, 'are seen as better' by customers. There are two ways this can be done, one, create a better product or service. I believe that most business owners are always trying to improve their products and services. They may not know the best way to go about doing this, but they are trying to produce better products/services or they wouldn't be in business for long. How to creating better products/services is company and industry-specific, so we won't address that in this article. Instead, let's see what we can do from a marketing standpoint that can be applied to all companies and industries.
Let's look at this in a different way, the phrase "are seen as better" is a perception, not a fact. It is the perception of the customer that the service/product is better, a perception can be created! This perception can be created with a brand moat, your marketing campaign creates a perception of your company for good or bad. To create a brand moat you must do more than just advertise your product/service, you have to create a following, a brand that stands for something greater than the product its self. Once this is accomplished you will achieve something that is worth its weight in gold.. brand evangelist. Creating brand evangelist or using evangelist marketing is an advanced form of word-of-mouth marketing in which companies develop customers who believe so strongly in a particular product/service that they freely try to convince others to buy and use the product. The customers become voluntary advocates, actively spreading the word on behalf of the company.
There are many examples of a brand moat. One of the best examples of this type of marketing is Harley Davidson. Their brand stands for something, it has a following and the customers that purchase their product would almost consider it a sin to ride anything else. It stands for being free, independent, rough, tough and against the fray.. but you already know this because of successful marketing. They have a loyal following that is so dedicated to the brand that they will not only purchase the product, they will wear advertising that they purchase while using the product [riding]. If we could all be so lucky!
This loyalty or perception of the brand was created and now their product is seen as better by their customers. You can create this same type of loyalty and perception for your brand on a local or national level. This is done through a detailed, planned and carefully executed marketing strategy.