When the Scratchpad companies are planning for the future of their scalable businesses, we consistently focus on what their barriers to entry are. Barriers to entry are the aspects of a company that make it more difficult for others to imitate. The higher these barriers to entry are, the more likely a company is to return profit and have the ability to charge high prices, as well as create loyal consumer bases. When structuring your scalable business, it is important to understand the importance of creating barriers to entry that drive venture returns and keep other companies from taking shares of your market, whether this is in a fashion or technological industry.
In the recent past, “barrier to entry” for scalable companies was often seen as synonymous with “network effect”. Your product or service has “network effects” if people are willing to pay more (in money or time/attention) as there are more people in the network. Network effects are generally accrued by firms having obvious competitive advantages that generate consumer engagement, as well as having strong logistical aspects of your offering. This is especially prominent with messaging apps and social media, as you can’t connect with anyone unless they also create accounts. For instance, one of the Scratchpad companies has specific styling tips or recipes that go with their product through a company app, a consumer can only utilize it if they also have that app. However, some of entrepreneurship's cutting edge thinkers are arguing that network effects will not be the most important barriers to entry in the future; “Systems of Intelligence” will be.
Systems of intelligence have become a key component of a venture worth investing in. Unlike network effects, the technology does not create the barriers itself, instead, value is derived from the systems and how they relate to your specific market. Software as a service (SaaS) technology is being rapidly adopted among all the the business world, so the software itself is losing its value. The more common a piece of technology, the more it tears down its economic value.
So, how should our Scratchpad businesses differentiate themselves in the face of rapid change? The experts suggest a few key strategies:
Expertise: Create an edge for your product. Human capital cannot be overlooked while continuing to develop sophisticated systems, and picking one specific technical problem to be the best at is still a defensible business model.
Complexity: A business system is more than just what is available to the general market. Having complex enterprise software that accommodates your specific enterprise is invaluable.
Finding the best of both worlds: Not everything can be done by a machine. Your business should be able to take both the most valuable attributes of intelligent systems and match them with human expertise.
“Systems of Network Intelligence”: Intelligent systems should help share value across consumer bases, cashing in on the still present network effects.
Stay on the frontier: Keep up with the latest software trends, they offer new opportunities that have large potential returns.
Data: Look for new and important consumer data, as well as investing in multiple data sources. The more data you train on with your product, the better your product is.
In summation: a true barrier to entry is in creating a system that is unique to your company in a world where everyone has access to the same software. Create a product of system that is better than the rest, and you have value worth investing in.
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