“Competition is for Losers” — Peter Thiel
“Every moment in business happens only once. The next Bill Gates will not start an operating system. The next Larry Page won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.”
We all want to start profitable businesses with millions of sales each day. We want to take advantage of million-dollar markets by immediately solving million dollar problems. This doesn’t come overnight. The best innovations typically start off small as the best in what they do in a small market, then gradually expand outward to scale and grow. On the contrary, businesses that don’t profit start off large and shrink gradually as the guise of profitability starts to wear off. Here are some key points, according to co-founder of Paypal and Palatir Technologies Peter Thiel, on best practices to create million-dollar businesses and innovations.
Don’t lie to yourself about where you are.
Let’s first take a look at the two ends of the spectrum — perfect competition markets, and monopolies.
As a prime example, the iPhones that you and I both have is typically sold for ~$1,099-$1,499. When we look at how much it costs to make one iPhone, it is actually estimated that all of the components amounts to approximately $490.50. Despite this huge margin in production costs and revenue earned (to the point where their profit margin is at least 55%), people all around the world still buy the ~850,000 iPhones that are sold today. That’s because the iPhone is a valuable product. It’s 10x better than what we had previously, and everyone uses it to 10x the convenience in their lives.
People’s willingness to buy the iPhone goes up, to the point where Apple gets to charge a premium because of the product’s perceived value.
The thing is, when monopolies start playing in the market, the government is eager to go regulate those monopolies to upkeep innovation in society and prevent these big companies from getting too powerful. That’s why companies that do actually have monopolies don’t ever say that they have monopolies.
It’s like when you know something that gives you an advantage above other people. Do you blab about it telling everyone you know so much more than them, or do you keep quiet and continue reaping the benefits of knowing?
That brings us particularly to the case of perfect competition. See, people who do choose to blab about the revolutionary secret that probably no one knows about probably don’t know much themselves. They know that their business model does not have a 10x difference than other products in the market, and that they’re not likely to make much money from their biz anyways. This is why they have to brand themselves like something unique to seem like a monopoly.
In reality, they’re just about as different as Panda Express is from all the other restaurants in the food court.
Think 10x
The first restaurant that you see on that list though is McDonald’s, which, as you know it today, is a global enterprise for fast food.
Brothers Maurice and Richard McDonald started the first McDonald’s restaurant in 1948 by converting their drive-through barbecue restaurant into a burger and milkshake joint located in San Bernardino, California.
At the time, storing burger patties under high heat lamps and having a self-service counter was not the ordinary for the restaurant industry. McDonald’s differed from other restaurants by selling at half the price of competing restaurants in this way.
Being ahead of it’s time, McDonald’s actually had a significant advantage over other similar restaurants in its field. This attracted the attention of Ray Kroc, who saw how McDonald’s was owning the market share locally. Kroc then decided to scale this restaurant up into a national level. Eventually, McDonald’s started to franchise all over the nation.
Numerous other McDonalds were opened in other countries, such as Canada and even Russia at the end of the Cold War. This made McDonald’s a national icon as McDonald’s continued its aggressive global expansion.
But then…McDonald’s started to lose steam. But why?
Know Your Endgame
In an effort to create new energy around its brand, McDonald’s launches its all-day breakfast menu. This backfires and causes a split in its existing customer base rather than bringing new customers into the restaurant.
The root cause of McDonald’s recent decline? An inability to shift with the times and a lack of a clear endgame.
Just recently, McDonald’s pulled its breakfast items off the menu because COVID strained the business. The reason why the breakfast menu was pulled was because it didn’t provide them with enough of a benefit to stay.
Additionally, McDonald’s has been under fire for lack of healthier meal options and unwillingness to improve on the products that their company offers. It’s not only that employees are paid at minimum wage, it’s also the fact that their grand plan to win back customers was to toast the bun on the hamburgers for 5 seconds more than usual.
Instead of focusing on the quality of their products, what received more focus was how much bigger executives’ paychecks were than the workers preparing the food. This, plus the fact that the better restaurant chains out there (Chutney’s, Chipotle’s, etc.) are also sustainably minded, has brought McDonald’s to a dead end.
A huge reason of why this became the case was because McDonald’s had no vision heading forward since its success in the late 20th century.
As Peter Thiel said, asking how the company will still be a leader 10–15 years from now is one of the biggest questions to think through. He illustrates this with an example from chess, where White (the first to go) has a 1/3 of a pawn advantage. Although there is an advantage, it doesn’t mean that it’s simply unwinnable if you played as Black. It only marginally affects the whole game because of this concept of ‘last-mover’s advantage’.
“You want to be orders of magnitude better, but you don’t want to be superceded by anyone else… You can take over the world, but two years later, someone will come and take over…”
In the last two centuries, numerous extremely important innovations came into existence: the first airplane, general relativity, electricity, and more. No scientists profited off of doing any of this because of a key miss in the money-earning formula:
“Generate $x, capture y% of x.”
Many people also assume that if you’re a scientist, you have to be not financially motivated, that y must be 0.
Take a look at Tesla. The company that pioneered electric cars earns hundreds of millions of dollars per year. On top of proving to the world that electric cars are substantially better, they’ve also captured a substantial % of their revenue.
This is because Tesla was not only successful in vertically integrating as many parts of the production process as possible, but also do so quickly enough so that it had a large period without immediate competition.
When Tesla integrated the factories that were needed to produce its vehicles and bought out the dealerships that would sell those vehicles, and even had charging stations for each Tesla user to use, it minimized the costs that would be leaking from its revenue pipeline.
Key takeaways:
- Perfect competition vs Monopoly doesn’t just apply to businesses, but workflows too. It’s about working from what you want to achieve in the future back to what makes most sense to do in the present
- Make sure to capture the y% from the $x revenue that you bring in through your work. Otherwise, it slips through your fingers. People won’t just automatically credit you for your work.
- Be product focused. People won’t make a switch unless it’s 10x better, and this 10x better gets harder and harder to keep up as time goes by.
I’m Xiangan — a 17 year old blockchain developer passionate for learning, and I appreciate you for reading! If you enjoyed the article, please feel free to follow me on my LinkedIn, Twitter, or check out my BitClout. Drop me a line & let me know your 🔑 to success!
Thanks for making it to the end!
