The Toll Bridge
In the world of Warren Buffett, the toll bridge is similar to the consumer monopoly except the toll bridge is the only available option to local consumers, product or service-wise. For example: a movie theater that is the only movie theater in town. Consumers have no other options if they want to go see a movie. They must go through the toll-bridge of the single movie theater. As long as competition does not move into town (and consumers continue to go to the movies), the movie theater will continue to benefit from the toll-bridge environment.
It is also not necessary for the toll bridge to have a brand consumer monopoly, (although having both is the equivalent of having an economic nuclear weapon) the opposite is inherent; a consumer monopoly builds a brand toll bridge. If you want a Coke, you have to go through Coke. Duh!
In the movie theater example, in order to have a solid model, the business should have additional legs to stand on and not rely solely on the fact that it is the only gig in town; in-demand movies, good customer service, a quality viewing experience, hot, buttery, expensive popcorn, a quality viewing experience, 3D glasses which make everything appear $3 more expensive. But it is not necessary to dump excessive dollars into bleeding edge technology unless the new project can be justified return-wise.
If a new piece of equipment costs $10,000 and will return $2,000 in additional ticket income per year for a 20% rate of return, the owner may elect to move forward on the project if his hurdle rate is say 15%. Otherwise, the competition is just not present to justify the extra expenses.
Building on this, keep in mind that in analyzing a “go”,” no-go” decision for a new project, it is necessary to determine the additional revenues the project will generate:
1) Will the new revenues come about simply via marketing of the new digital projector and the extra attendance this generates?
2) Can an extra $2 be tacked on in order to pay for the new viewing experience?
The second scenario provides a more definitive analysis since the $2 uptick can easily be multiplied by the average number of yearly tickets sold minus a slight drop-off due to a “turn-off” factor to arrive at a projected revenue number. The first scenario involves a soft forecast which can be a good guess at best. How many consumers will truly be enticed by a brand spanking new digital projector? It might have appeal initially but soon, the new wax coating wears off. I would argue for a synergistic combination of both strategies: advertise the new projector and bump up the ticket prices by $2. In the analysis, count on a slight increase in traffic due to the marketing of the new projector which will probably be wiped out by the price increase. Thus, it is prudent to multiply the average number of yearly tickets for the one auditorium by the $2 uptick in price. Additionally, extra expenses to maintain and run the new projector such as repairs and parts and utilities must be factored in to arrive at net earnings of the new project. So there Dad, take that!
Of course, technological obsolescence is another factor, in which case the entrepreneur should wait to adopt until absolutely necessary since competition is not a factor.
But I Want to Build a Business That Warren Buffett Will Love – What the Hell Are You Talking About?
How to Build a Consumer Monopoly
Start by inventorying your local competition; write out the names of competitors, both big boys and small fries. Next to the businesses names write out the key, differentiating aspects of the businesses. For example: a hamburger stand operator might list McDonald’s as a key competitor. The key attributes might be; “largest hamburger stand in the world, reasonably priced, systems-based, enormous buying power, kid-friendly, Hamburgler, Grimace, Officer Big Mac, Mayor McCheese”[1] Now, the big question is, how is your hamburger stand going to differentiate from McDonald’s and its $24 billion of revenue from last year? Are you going to offer cheap hamburgers in a systems-based, kid-friendly establishment? I should think not, unless you want to lose your shirt or purchase a McDonald’s. McDonald’s will win, you will die. You will most assuredly die. I will place my money on the golden arches.
Instead, you might offer a premium burger. You might offer a family friendly environment, perhaps in an art-deco restaurant complete with servers dressed as 50s movie characters, John Travolta and Uma Thurman. The sky is the limit, and it is important. How will you differentiate from the mega burger chains?
Don’t forget the small guys either. Even if you are installing a tomato sauce spewing volcano in the center of your establishment and Tony’s already has a tomato sauce spewing volcano, you can still probably mooch Tony’s customers if Tony does not have his duck’s in a row. But why not create instead of plagiarize, it is much more fun.
Make sure to detail the small guys differentiating factors and how your business will differentiate in order to build a consumer monopoly that Warren Buffett will love.
[1] As a side note, McDonald’s has had even lesser known mascots such as Mac Tonight, CosMc, Iam Hungry and “The Wastebaskets” who encouraged kids to throw their trash in the wastebaskets. – www.answers.yahoo.com
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