Warren Buffett has a philosophy when investing in businesses. He is quoted as saying;
“In business, I look for economic castles protected by unbreachable moats”
Warren Buffett
Buffett goes on to describe business as a castle with an impenetrable moat around it, protecting it. The castle (business) needs to be strong and well built with solid foundations. It needs a strong leader who will not self sabotage the castle (business). And it also needs points of difference which means customers keep coming back, no matter how hard competitors try to lure them away. This is the moat.
In this article we will be looking at the 6 customer lock in strategies that will help create a secure ‘moat’ for your business. See which of these can be applied to your business and further increase its value.
Looking for a handy reference guide that will walk you through all that’s needed when preparing your business for sale? Why not download The Exit Checklist from the free resources on our website.
1. Expertise – Get Qualified
This is about standing out from the crowd. All accountants and solicitors need to qualify, so being qualified adds nothing to their ‘moat’. It is simply the status quo. But if you operate in a less regulated sector, what is there that stands your business out from the next?
If your run a decorating business, are your employees experienced, or do they hold City & Guilds, NVQs or other qualifications to prove it. This is where you begin to create a point of difference between your qualified employees and perhaps a competitor who cannot demonstrate that level of workmanship. These small differences are key when you sell direct to the public.
And if your customers are other companies, the ‘qualifications’ we speak of may be ISO accreditations, health and safety certifications, advanced driver licences or any number of things which mean something within your industry.
An example is a Canadian company that disposes of radioactive waste and decided to get licensed by the Canadian Nuclear Safety Commission. It was a lot of paperwork and training, but the certification is now a barrier against other competitors joining the market.
Is there a certification or qualification your employees or your business could obtain that would reduce competition? Do you practice knowledge sharing? Definitely a significant business value increase.
2. Create an Army of Raving Fans
Delighted customers will defend your business against the competitors entering your market. They will recommend you to friends and family and introduce you to their business network.
Customer satisfaction is not enough. To add security to your ‘moat’ you need super-fans. Apple knows this and creates fans with each new product launch from the first iMacs through to iPods, iPhones and now the Apple Watch. And for a period of time, each of these items was the must have device of their time.
Inevitably, competitors catch up, but super-fans have been created by then and it is much more about the wider service, reliability and support for Apple as to why customers stay.
3. Vertical Integration
Is there a way you can get your customers to integrate your product or service into their DNA and become key to their operations?
An example here is a chemical company whose unique formula forms part of their customer’s manufacturing process. But what also happens is that the chemical formulation has to be specified and identified and documented in the CE mark processes of the manufacturing company. If someone did come up with an alternative chemical formulation, the manufacturer would have to re-write procedures to make the change. That’s a lot of extra work that makes them more likely to stay with the original supplier.
Free trial software is everywhere! So the real cost of changing CRM software is when a business starts to integrate it into the way they work, customising procedures and reports and training staff. Ask a sales manager to change his CRM when his sales staff deliver his weekly sales funnel on a existing system. The answer is most likely to be ‘no”.
Ask a company accountant to change their accounting software and you get the same response. Free trials everywhere, but such a lot of extra work to make the change.
Supermarkets could outsource their distribution to Ocado, but few of them do. The majority control their own distribution and home delivery. If you want a food delivery from Tesco, it is Tesco staff who delivery to you in a Tesco van. As a company, they can cross charge whatever they wish for food delivery. And if you can control the supply as well, it becomes very difficult to penetrate the ‘moat’. Its known as Vertical Integration.
Amazon is an example of this. They started out selling books, but now they also act as publisher. Apple sold great products, but in 2012 they also bought a company called AuthenTec which makes the fingerprint recognition device that goes into their phones. They now control the supply of that particular part.
And one recent change has been with Royal Mail. They have delivered to our doors for hundreds of years but in 2020, in order to compete with the likes of DPD and UPS a new parcel collect service was introduced. You can now have your local postman collect up to 5 parcels from your home. They may be a little slow on the idea, but you can now have Royal Mail as an end to end provider from collection to delivery without having to leave your house.
So you may be selling your product or service to a wide range of customers, but the key to strengthening your ‘moat’ is getting them to embed you into their own business in some way.
4. Become a Verb
Think back to the last time you cleaned the floor or looked for some information. Did you “vacuum” or did you “Hoover“? Do you “search the internet” or do you “Google“? Do you “video call” someone or do you “Skype” or even ‘Zoom“? Part of these companies’ competitive advantage is that their names have become verbs. Every time we refer to hoovering or googling, we reinforce the competitive position of those brands.
The challenge is to think of the way you can control the vocabulary people use to refer to your category or specialty?
You’re not looking to conquer the world here, just to conquer your market, your geographical location, or your sector. You want your company name or brand to become synonymous with what your offer. So that when something comes up in conversation in any business setting, your brand is part of that conversation.
Biro, Jacuzzi, JCB, Jetski, Lilo, Memory Stick, Sellotape, Velcro, Tupperware are all brand names we now use in everyday language to describe products of their type.
5. Create a USP
Having a unique product (first smartphone), or a unique service (delivering glitter bombs to your enemies) gives you a USP. How long that USP is protected varies. So if you’re Apple and have created the first smartphone, you had about 10 years of patent protection before Samsung and the rest were launching their own. Glitter bombs might get a few weeks head start and nothing more.
So creating a unique product or service will only get you so far.
Consider what other Unique Selling Points you can create that will engage with your customers and keep them loyal.
For Budweiser, their tagline of “The Great American Beer” ties them into something much bigger, national patriotism, and with much more loyalty than the low priced, mass market product they are.
Bitly hit the market with “Shorten, share, measure”. Not only could you shorten enormously long links and share them, you could measure their reach.
Dollar Shave Club offered “A great shave for a few buck a month”. A total change from expensive blade refills and a unique proposition.
Away from the States and bigger corporations, there is the local joinery business who guarantee “no mess”. If their joiners don’t leave your property in as clean a condition as they found it when a job is done, your house will be cleaned by a team of professional cleaners for free. Now that focuses the employees on their part of the role and it wins business from many homeowners.
6. Price
Points 1-5 all develop a loyalty from your customers to your business almost irrespective of the price you charge. If you can demonstrate a point of difference or added value, customers will pay more for it.
We are willing to pay more for our food at Waitrose than we are from Asda. We will pay more for a BMW than we will for a Kia.
But this does not mean that your point of difference can’t also be price. In certain sectors, being the cheapest on price could be your USP. It can grow your business turnover very quickly, but just be wary of your profits.
Selling more because your price is cheaper than your competitors may still leave the uninitiated with less profit. Be wary, do your numbers and always look for supplementary routes to market which aren’t low priced.
You can also explore subscription-based pricing models. Ask us.
Why are customer lock in strategies important?
As much as every business would like to be a true monopoly without competition, very few are. So at every point of a business lifespan, there is a competitor looking to breach your defences and take your customers away from you.
Digging a wider moat to lock in your customers produces a virtuous cycle:
Locking in your customers by utilising some of the 6 points above makes it more difficult for your competitors to steal them away from you. It also makes it much more difficult for your customers to voluntarily leave you, so they tend to be much longer relationships.
That makes your turnover more predictable, which helps with cashflow and feeds into profits.
And the key thing that buyers look for is not just how a business has performed in the past, but what the future stream of profits also looks like. If you can demonstrate the loyalty of your customer base, you will attract more buyers to your business when you sell. More potential buyers will likely lead to competitive bidding for your business and a higher sale price for you too.
Conclusion
If you want to sell your business at some point and retire on the price you receive, you have to build a strong business that others want to own.
Using our Value Builder expertise we know what aspects attract buyers to a business and encourages them to pay top dollar. Having a secure and loyal customer base that stays with you is high on the list. So protecting it should be high on your list.
If you would like to speak to us about this topic or would like to know more about Value Builder, drop an email, pick up the phone or reach out on Linkedin.
