For a company to maximize its value and be truly successful, it must compete in a significantly sized marketplace wherein its products/services are meaningfully unique and the marketplace appreciates this differentiation. For example, while commanding a large position in an addressable, though insignificant, marketplace may provide a business owner with a livable income, it is not likely to attach high value to the company.
Future owners need to believe that a company has significant room to grow before they will invest in a venture. Additionally, having a unique business is not enough. A company’s products or services must address the goods or services that consistently receive high value within the market and drive customers to come back for more.
Many owners focus too heavily on putting their heads down and getting their product out the door. While moving product is important, it is also essential that you understand what makes your product unique and desirable. That is to say, what compels buyers to purchase your product over your competitor’s product?
Start by asking yourself questions, such as, why would anyone buy my product or service? How am I different from my competitors and does it really matter to the ultimate customer? Can I objectively measure my differentiation? Does my differentiation allow me to maximize my margin? Is my addressable market large enough to drive meaningful sales volumes? And, how does this tie into my reputation and brand? These are often not easy questions to answer, but they are essential when laying out a strategic approach to enhancing the value of your company.
After wrestling with your questions, you can begin determining and documenting your answers. During this step, it is important to find supporting documentation that establishes a current base case on your differentiation. This will serve as a good benchmark going forward as you continue to re-measure these same questions in the future.
When differentiating your business, you must also factor in the dimension of continually needing to reinvent yourself. Even though your company might initially be meaningfully unique, your product or service often becomes commoditized over time—thus introducing the need for reinvention.
Think of great companies that have lost their positions in the market, or their very existence—Yahoo, Xerox, Palm, etc. While their initial product or service created a buzz, these companies weren’t able to sustain their innovative edge over time. We will discuss this idea more in our blog regarding innovation.
The above graphic highlights the importance of product differentiation through showing the life cycle of a typical product or service. Meaningful product or service differentiation is an essential component in enhancing the value of a company.
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