Concept
Escaping competition
Escaping competition is Thiel's goal for every company: become so good at something that no other firm offers a close substitute, through proprietary technology, network effects, economies of scale or brand, so that profits are not competed away.
Thiel's economics are blunt: in a perfectly competitive market no company makes an economic profit in the long run, because every advantage is copied and every margin is bid down. The valuable companies are the ones that escape, and he calls what they build a monopoly: a company so good at what it does that no other firm offers a close substitute. Four things build one. Proprietary technology that is at least ten times better than the alternative, because anything less is likely to be seen as a marginal improvement and is hard to sell. Network effects, where the product becomes more useful as more people use it, which only work if the product is valuable to the first small group. Economies of scale, strongest in software, where serving one more customer costs almost nothing. And brand, which Thiel warns cannot stand on its own: a strong brand rests on substance underneath it. The founder's question is which of the four applies, and if the honest answer is none, the company is competing, and competing is what Thiel says is for losers.
A real-life example
Three Istanbul installers sold the same rooftop solar systems, and a price war cut their margins to almost nothing. A fourth company, started by two engineers in Kayseri, built software that sized a roof from satellite images in about forty minutes, work that took the others a day-long site visit. It quoted every request the same day, never discounted, and within two years was installing more systems than the three competitors combined.
How to use it
- 1Ask which of the four you are building: ten-times-better technology, network effects, scale or brand. Write the answer down and be honest if it is none.
- 2Aim for tenfold, not ten percent; a small improvement is a claim, a large one is a category.
- 3Avoid fights you can only win with money, such as discount wars, and put the money into the thing that makes competition irrelevant.