The E-commerce Leader

7 Moats of Defensibility Part 1
[00:00:00]Jason Miles: Michael. Today we’re talking about the seven modes of defensibility. You ready to jump into this?
Michael Veazey: I’m, I’m ready to jump into the mode, but as long as you explain what that means.
Jason Miles: X. All right, well, let’s, let’s do it. Let’s dig into this. So this is going to be a fun conversation. We’re going to go into a little bit of a framework.
Dialogue and talk about a model that I like to share with people, and I’m the seven modes of defensibility. What it meet. What we mean by that is, uh, you want to build a business that has layers of protection around it so that your economic [00:01:00] interests, your business profitability, and all the aspects of your business can really be defended.
Uh, but from competition and from ruin. And, uh, so that’s what I mean by it. That’s the topic of the day.
Michael Veazey: Excellent. Well, I’m going to translate that into a nice little British metaphor here. So I like the Castle’s idea. So I want you to imagine a castle, which is your business, and you’ve got to moat around it with water that’s filled with crocodiles.
Another world moat around it that’s filled with sharks. Then another that’s filled with Brian is another one that’s filled with giant anacondas where you get the idea, we’ve got seven moats, seven layers of defensibility, which in your castle on the outside world. So why should you bother having all these moats?
Well, on the other side of the moats is an angry mob of Raiders that is set to take your opportunity, kill you, blend it to the ground and run off with your treasure. So if your family and livelihood. And your income all depend on the moats. You really want to think about them hard and work to improve them over time.
And by the way, acknowledgement for that to Mr. Jason Miles. So obviously you came up with this cool metaphor, which I know you’re [00:02:00] very into metaphors. How did you come up with this idea?
Jason Miles: Well, thank you for reading my little story there. That was really cool. That sounded terrific. Um, yeah, it’s a good question.
Uh, you know, I heard, of course, Warren buffet talk about the castles with unbreachable moats. Idea. And many, many people have heard that, of course, it’s, he’s famous for creating that phrase. And, and, uh, I love the idea of it. And so let me, if you’re not familiar with that, let me just read a little tiny paragraph here from one of his annual letters, uh, where he describes this idea a straight from the horse’s mouth, if you would.
But here’s the paragraph. The dynamics of capitalism. I guarantee that competitors will repeatedly assault any business castle that’s earning high returns. Therefore, a formidable barrier such as a company as being the low cost producer, Geico or Costco, or possessing a powerful worldwide brand. Coca-Cola, Gillette, American express is essential for sustained success.
History is filled with Roman candles, companies [00:03:00] whose moats proved the losery. And we’re soon crossed. And man, when I read that, I was just like, Oh my gosh, I want a business that has a castle. And of course, and the moat, and I know I want like a bunch of modes. And he mentioned a couple there. And it really spurred the thinking of, uh, you know, I mean, how, yeah, how do you build a business that has a really, really strong, a set of defenses so that you can sustain yourself or, uh, you know, uh, years, decades, uh, the long
Michael Veazey: term.
Yeah, I love that. And what I think is interesting about that quote, I’ve, I’m familiar with the concept, but I hadn’t heard the exact quote read out. And, um, there’s something very powerful about that because the idea of Roman candles, so now there’s a, there’s a firework that goes absolutely massive for a while and then dies pretty swiftly and actually on the online world.
Including Amazon, in my experience, it, that’s incredibly common. So therefore he’s put his finger on, uh, something very real about this industry. Right? E-commerce and internet marketing in general. Um, so look, I [00:04:00] presume those moats don’t actually consist of the Puranas and sharks and anacondas. So it sounds really cool, not very practical to, to build a business with those things.
So what are the actual seven moats that you’ve come up with? Yeah.
Jason Miles: Let me just read the list and I’ll say before I read it that this is my list that I’ve come up with, but I, it’s not exhaustive, I don’t think, I think each of us could brainstorm for our own business. What are, you know, layers of defensibility and I, and so, you know, as with the nine mountains, I think is a framework that we talked about for traffic that is con in concrete in my mind, there only nine mountains of traffic.
But with defensibility, with the seven modes, uh, you know, you could have 10, 15, 20 things on the list. So let me read the seven and we’ll go from there. The first, a profitable in demand product with near monopolistic characteristics. The second high functioning brand that’s powerful, attracting the right people.
The third is a community or a tribe of loyal followers. The fourth is a [00:05:00] channel dominance and mastery. The fifth is data specific. For example, email lists or traffic. The sixth is high switching costs built into your model, and the seventh is a culture of innovation. So they’re, they’re, they’re the seven that I’ve, I’ve put together that I’ve tried to implement into my business.
Yeah. Wow.
Michael Veazey: Okay. So those do sound extremely attractive things. So, um, the first question then, let’s, let’s discuss them one at a time. The first question is at the monopoly, I mean, it sounds really powerful. It’s obviously very valuable. Um, so how do we get even close to them monopoly in an eCommerce business?
Jason Miles: Yeah. I mean, I think there are a few different ways. I mean that when you start to ponder that idea, there are a few things that come to mind. Obviously, if you’re an artist, you’re creating one off pieces. You have a monopoly on your own creations. If you’re a writer, you have that. If you’re a course creator, although topically you don’t, but for the specific content you share, you do.
[00:06:00] But those are not product focused strategies. So for the product focus strategy people, the simplest one that comes to my mind is, uh, like an exclusive with a manufacturer or no license to sell. In the United States. We have coaching clients, um, that have that arrangement with. Manufacturers where they made, they found the opportunity to work as the exclusive United States seller, and it really creates a powerful barrier.
Uh, around their, their model. I don’t know in your, in your a 10 K collective group, if there are any folks that operate that way with exclusives or licenses, but it can be very, very powerful.
Michael Veazey: Absolutely. Yeah. That’s somebody in that group who is in DECA, licensed with a very large manufacturer in the toy space.
Should we say, without giving any, any names way into. Yeah, that’s really puffers, those creating private label products, but with a license from those people. And one of the really important things to point out about licensing very briefly, and this will be a topic to deep dive into as a [00:07:00] lawyer, Robert Wright was saying to me the other day, interviewed for the amazing FBA podcast, that it’s one thing to get intellectual property rights.
It’s a whole other thing again, to enforce them. Just like. Creating law is one thing in law enforcement is another. The wonderful thing about partnering with a really powerful entity of some kind is that they have got lawyers and legal assistance, what have you, that scoured the internet for intellectual property violations and come down really hard, and they have the budgets to enforce it.
So you’ve just allied yourself with, you know, somebody who can actually deal with a reinforcement of your exclusivity. So I think there’s a lot in that.
Jason Miles: I’ve never thought of it that way, but you’re totally right. I’ve been on the wrong end of that kind of situation.
Michael Veazey: Yeah, exactly. We’ve all been on the wrong end of those.
Right. I mean, I certainly have, I mean, not frequently, but I’ve, I’ve had Getty images get in touch, for example, when I used one of their images very foolishly while they go in there, and it just struck me while if I were the person on the other side of that equation, you’re partners with them. You’ve got big brother in the house, you know,
Jason Miles: you got a Mo, [00:08:00] they’ve got a Mo, you’re on the, you’re the Raider, and you realize real fast the power of the defensibility of that model.
Yeah. So that’s, that’s, so that’s, uh, uh, near monopolistic characteristics that we want to strive for. Right.
Michael Veazey: Are there any other ways that you can think of with Jeffrey briefly on the other monopolistic characteristics that you can get sued exclusive license? Any other ways.
Jason Miles: Well, I mean, there are industries that have that lean towards winter takeoff situations and sometimes the internet does this for you.
I mean, sometimes the internet. It puts you, it is, you know, Google will do, Google will do this in a way for you. I mean, if you, if you’re in the top one, two or three search results for Google, you have a near monopolistic characteristic of the traffic that’s coming in. So, I mean, there, there are ways to look at this, I suppose.
Um, licensing is the simplest one to think through for product or original creation of a product that you then enforce with your own intellectual property rights. And that is, to your point, at some expense [00:09:00] to it with lawyering up and stuff like that. But there are clients that we have and, and even, you know, I’m business partner Kyle on the coaching business.
He’s done very, very well by having. Original concepts he’s put together. He’s even done original concepts. Think about this. He has a, uh, uh, uh, product that’s generic, generic. It’s a private label product, but he got a design, um, uh, design trademark on his or a design protection on his packaging. So was packaging has defensibility.
Even though the product doesn’t, and so it really interesting way, he’s created a layer of defensibility with just even protection of the packaging concept, which is a very interesting and unique idea, but it wasn’t hard for him to do. Um, he just had to think it through. And, uh, so that, you know, those types of ideas go into it.
Yep. Hmm.
Michael Veazey: So one thing that’s obviously we’ve touched on there, which I’d [00:10:00] like to, um, dig into how these things connect a little bit without confusing as sales because this is just the overview where we’re going to deep dive into this. But you mentioned channel dominance as a, an extension of monopoly, but I, I’m presuming that’s actually kind of a separate thing as you, you put it yourself as a separate thing.
The channel dominance, you mentioned that Google. A dominance thing. For example, if you’re in the top two, three results, it kind of gives you a quasar monopolistic thing. But you’re also saying is that, is that kind of what you meant by channel dominant?
Jason Miles: I guess so. I mean, yeah, it, we’ll think about a new 10 K collective.
Um, how does that impact your, you know, you have a. Collective group of a lot of successful Amazon sellers is that play into their success at all. Having that, you know, Amazon’s choice, getting into the buy box, having the number one search result, the most reviews, all of that, does that help sustain their business and is it a part of their success?
Michael Veazey: Absolutely. Yes. I would say out of all the things you’ve mentioned, I mean, I’ve mentioned also one person with the licensing deal. [00:11:00] That’s a very powerful sort of Quayside monopoly. The other guys aren’t, haven’t got a monopoly at all. They’re in very competitive arenas in some cases, but the most successful business by far in terms of revenue and revenue growth, and that has been with us.
The owner of the business being in the groups for a couple of years, two and a half years now. So it’s been quite consistent. It is that they, for a lot of the main keywords for the products, they, they dominate position one, two and four of the top of Amazon search results. And probably similar to Google, I don’t know, the click attribution sort of.
Sensitive, but I know that something like 75% of all Google clicks come from the top three positions organically. And I don’t know how true that is for Amazon, but it’s gotta be quite close. So it’s, it can be an exponential change between being positioned six for a keyword and position
Jason Miles: one right.
Michael Veazey: Yeah.
So yeah, for sure. It’s real. Yeah, very, very, very weird.
Jason Miles: And it’s so, it creates a self fulfilling success. Prophecy or ever, I guess you could call it a virtual spiral, where because you’re ranked number one, you get the most reviews and the most [00:12:00] reviews. Then just reinforce you get the most sales and the algorithms.
Really bake in. I mean, they eat, they kind of cook you into the top slot if you’re lucky enough to get it, um, in many of the platforms. And I’m lucky in, on you to me to have that occur, you know, for my, for one of my courses. Um, and when that happens, it’s magic. I mean, it just, it feels like, wow, I’ve got somebody helping me here, you
Michael Veazey: know?
Yeah. I think you’ve made a very good point. And one other tiny point on that before we move on is that, um, there is a lot more stability in sales volume at the top of page one because you don’t keep changing rank. You have consistent rank, which means. You are sending quite a consistent percentage of that market.
What changes a bit over time is either demand or sometimes supply issues or Amazon can’t fulfill like we’ve had in the covert crisis, but, um, it’s a lot less variable than bopping between position 10 and position six or something. So there’s another bonus as well. Um, so let’s come to the, you, you mentioned the [00:13:00] branding thing already with, you know, the infamous private label, so-called, whatever that means exactly, yeah.
And branding the packaging. So what’s the importance of the branding, and I know you talked several times already in our conversations about the word high functioning brand. What do you mean by that and why is it so important in sort of dominating and creating a moat?
Jason Miles: Yeah. Well, I mean, I think for Amazon sellers in particular that have been exposed to the idea of private label product strategies, they’re not given a lot of training, at least in my experience as a, you know, kind of gone through the process a few times and they’re not given a lot of.
Training on the real deep meaning behind brand creation and the power of what goes into a real brand, a authority brand. I mean, you can use any phrase you want, but uneffective brand that has what you might call a motive. Qualities. Uh, the best model I know of that for, uh, for working through that idea is James Burgin and Jon ward, uh, created this model or used this model [00:14:00] called the iceberg.
Metaphor where they talk about the visible aspects, like, like an iceberg floating out in the ocean where there’s visible above the waterline aspects now would be the name and the logo and the tagline and the colors. And then they talk about what’s below the water line. The invisible aspects, which would include the promise, the deep meaning, um, the elements that aren’t.
Necessarily visible to the outside observer, but the, the aficionados, the real followers, the customers, those are the things they end up valuing, you know? Um, and I think that’s a really powerful thing too. Build into your model. That’s what Warren buffet was talking about in that quote, you know, for Coca Cola.
You know, the other of the businesses that he’s overtime valued and, and you know, try to invest in were ones that had an absolutely crushingly dominant brand. Yeah. If we’re going to make a product, private label product. That’s on us, you know, we got to learn to do that stuff. Yeah, [00:15:00] that’s the idea.
Michael Veazey: Absolutely. And um, one thing that I think you’ve put your finger on, I’ve, I’ve gone through this process with you in the past as a, when I was coaching clients and, um, it’s really powerful because I take all of my clients through this stuff now. Um, I’m afraid, I guess most John burger’s pass it to use, pass it to me.
And I think the idea that you have. A very strong awareness of who your customer is, the values they have, the values you have as a brand. None of that is about get a logo and get nice looking packaging. I mean, obviously you’ve got to do those things, but they need to represent those, as you call it, the visible parts of the values, which I think is very powerful.
I just want to trust on one, one touch on one example of that for the corporate world, which I think is very. Powerful that somebody leaked a document from McDonald’s, which had on it the promise, the ultimate brand promise that it was, that they would be their trusted friend. And they did also say in that, um, that nobody was ever to use that exact phrase.
Um, now I know you’ve got some thoughts on why they would do that as well. What, what do you see? What was behind
Jason Miles: that? So [00:16:00] on the document that was leaked, it said, do not use this phrase
Michael Veazey: exactly. You would never actually say McDonald’s is your trusted friends. So what do you think’s going on with that?
Jason Miles: Well, that’s interesting, isn’t it?
Well, so I guess they were following, just, if we use the iceberg framework, they were saying below the waterline, our mantra, our ethos, our goal is to be the trusted friend, but above the water line, that’s not the terminology we use. I mean, that’s exactly what they were saying. Do not use these phrases or this term, but build a brand that.
Expresses that ethos. Yeah. And I guess brand owners, famous brand owners, if you ask them about the ethos or the they’re, you know, they’re, they’re really, you know, what’s behind it. Um, you know, I remember, uh, Howard Schultz talking about Starbucks creation, and it’s a local company here in pike place is the first location.
And everybody comes to Seattle, goes there, and he, he, uh. He talks about going to Italy and seeing the power of a cafe environment and that third place where people would congregate, [00:17:00] and that was the deep meaning that he wanted to install. It’s not about the coffee, really, it’s about the community. Um, it kind of gets to our next point.
I guess if I could ask you the question about the next point, which is the, uh, community or a tribe of loyalists is the other thing that I have on the list. Um, tribe of loyalists or a community. You have any examples that come to mind in terms of a 10 K collective or how have you seen that play out in terms of business or your area of expertise?
Michael Veazey: Uh, yeah, two examples. I mean, one is in the 10 K collective mass minds where one of the groups, uh, one of the people in the group has got a Facebook group that they use in a very interesting way, uh, without reading too much. But it’s broadly speaking. A sort of brand loyalty program and that’s worked really well for them in terms of increasing their review percentages quite a lot.
I mean, that’s really been powerful. It’s not a short term hack to get more sales. It’s, I guess the driver of it and the mechanics on Amazon would be reviews, but I think it’s actually even bigger than they thought originally. I [00:18:00] think they were just doing that with the Amazon hat on and they quickly realized there was a lot more power in it, so that’s.
One thing. And the other thing is that you and I both have communities of people on Facebook and what have you. And uh, I think, uh, yeah, the, the power of the community that I’ve seen the most powerful, to be honest, is a very small group of people in the mastermind is actually much more powerful in terms of producing revenue for my business, but also helping the members than giant Facebook groups.
So it’s not always about size is the one thing I would say about community as well as bank engagement. I think,
Jason Miles: well, that’s what I really have appreciated about your model is that you built your. You built your, you know, a business model around the idea of bringing successful sellers together locally, which is so cool.
I mean, that’s the neat part to me is that you guys meet up locally, you have it, you know, kind of a formal process in, you’re the convener, you’re the conductor, uh, orchestra leader there. And, uh, that’s really, really cool. So that, that level of community I think is powerful. And, um, yeah.
Michael Veazey: I think so. And one [00:19:00] of the things about it, of course now we haven’t moved online, but I mean there are online communities you can build and the Facebook group is, is a model for that.
Um, obviously you guys got a pretty good thing going with your membership program and you’ve got saying with cinnamon. Tell me about that. I don’t,
Jason Miles: yeah. Well, yeah, so, you know, we were, we were working on our business a few years ago. I’ll tell you just as a, if we have time, I’ll tell you a quick story. We had, um.
Set of physical products that we started selling. And I was using this concept. They called me the most complete provider, which we can talk about at some point. And I started selling a bunch of physical products, and after two years we realized we really hated selling physical products. And so, but it was a six figure revenue line.
And, uh, not much profit on the six figure I’d be lying, but it was 60 revenue line. So we wanted to re, we wanted to kill it. And we were like, man, that’s a lot of money to just stop. So what could we do as an alternate to that? And so I had heard about a membership, you know, a monthly recurring membership [00:20:00] models.
I saw the kind of guru or expert on that assumed McLaren give all the credit to him. I went through his course and we launched a sewing with cinnamon, a membership site. It’s a monthly recurring membership. People have paid, you know, between nine and $14, basically, depending on how they buy into it.
Monthly, um, and, uh, we have about a thousand people in it, and it is all digitally delivered content. And it has become a, you know, a real meaningful part of our business. And, uh, so yeah, so I, I’m a huge believer in building community and tribe and that there’s a lot of lessons to be learned there, but it can be a really, really powerful defensive mechanism as well.
In your business, you’ve got to tribal loyalists, you’re, you’re, you’ve got a level of defense. Uh, against competition. You know,
Michael Veazey: really interesting. And what I think we both talked about is paid versions of that. And I think there’s often an assumption that it’s all about, um, part a is a huge marketing [00:21:00] thing.
Like Facebook community, Instagram followers, Twitter followers, whatever it is, YouTube subscribers. Right? And then part B is you monetize that by selling them products. But what’s interesting about, um, your model is that you monetize it as the membership, and then presumably you monetize it again by selling those people digital products as well through, you know, the, the, the Dole design stuff.
Jason Miles: We absolutely do. And I’m, I’m very happy to be open-handed about how we do that process. In fact, we have a couple layers of how we do that, but you’re right, we, it’s a, it’s stacked product on top of our one-off digital sales on top of one off online core sales. So yeah, it weaves together nicely. And, um, is it, there’s a real powerful opportunity there for physical products and Amazon sellers who want to migrate off of, you know, or beyond Amazon, that kind of thing.
Michael Veazey: Yeah, I think that’s gotta be a real deep dive, at least one or two episodes on that, because then the monthly recurring revenue thing obviously has huge cashflow stability. Advantage is less [00:22:00] stressful. Um, but we, yeah, we could, but let’s not get into the weeds about that today, but that’s one to definitely discuss a future.