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Are you a web programmer familiar with LAMP stack and want to work from home? Please fill out an application here! Full time job, salaries range from around $1,000-$6,000/month.

As I worked on my business WM Media today, I started thinking about what our competitive edge is versus other businesses of our type. Our business model is quite simple: buy websites and sell advertising. What could be easier? Anybody can do this right? Can’t a competitor just come in and “steal” our customers?

To answer this question, we have to think about what it’s like from a competitor’s point of view. Let’s take an example of a normal website making $200/month and say the market price of a website is around a P/E (See What is P/E) of about 12 months. We’ll see what it looks like from each company’s perspective:

A Newcomer’s Perspective
This website makes $200/month, but we have to get hosting, and that costs $10/month. It also seems kind of risky in that we don’t have any experience in this area. So normal market price would be $190*12 = $2280, but since we want to be conservative, let’s offer $2000.

Our Perspective
This website makes $200/month, and we have plenty of room on our servers, so the hosting cost is negligible. In addition, this website is related to a bunch of our current ones, so we can just link to it and give it some referring traffic. Also, with our SEO and marketing techniques, we can increase the traffic of this website by 50%. Oh right! The ad placement is terrible, so we can instantly increase the profits by 100% if we just redo them a little.

We expect to make about $200 * 2 * 1.5 = $600/month from it, so at a P/E of 12 months, we can offer $7600. Since we have a lot of capital and know that this type of site is steady, we might be able to go up to a P/E of 24 months ($15,200).

If you were the seller, who would you sell your website to?

Website valuation wise, WM Media tends to pay higher prices than most of our competitors. Why? Because we have skills in ad placement, search engine ranking techniques, marketing techniques, a large cash reserve, etc. that our competition doesn’t have! Precisely because of this, we can offer a better deal.

Over the long term, sellers would simply sell their websites to us, instead of listing it in public auctions. How would newcomers even find these sellers?

And this is exactly what a brand name does! Over the long term, a brand name is like an entity that consumers form relationships with. Once they like the product, they’ll continue to purchase this product from the source they trust. If a newcomer wants to compete, they’ll have to offer a much more enticing deal.

Yet, it’s precisely at this time that the newcomers have no edge and cannot make a more enticing deal and still make money. For example, in the website acquisition example above, the customer would still pick us even if the newcomer matches the $15,200 (since our customers wouldn’t know if the new person is trustworthy and might not want to deal with the headaches). Therefore, the newcomer may have to offer more than $17,000, to purchase the same property that we do. However, with their initial knowledge of SEO, etc., they can only make $190/month from the website. That makes a P/E of 89 months, which is way too high for a risky asset like a website.

To be more general, it seems like a natural barrier of entry always forms no matter what business we are in. It may be in the form of knowledge, assets, relationships, or a combination of any of these.

Of course, that barrier can still be really low if it’s something really easy to do, doesn’t require much assets, and there are so many people around that quality doesn’t matter. For example, selling newspapers on the street is easy to do, doesn’t require much investment, and one newspaper boy is the same as any other. Making an operating system on the other hand, is hard to do, require lots of people and marketing, and need to form relationships with a user base that likes your OS.

Even so, relationships will inevitably form in any kind of business. Even if you are a newspaper sales boy and people always know you are at your corner at a certain time, they are still more likely to buy from you! Just imagine yourself as the customer. You walk home every night and get a newspaper from a kid on the corner for a few years. Then one day, another kid suddenly appears, which kid would you buy your newspaper from? Therefore, even in very low barrier of entry businesses, you can still establish a slow, natural barrier of entry by establishing good relationships with your customers.

So work hard by making a good product, being nice to your customers, and learning new skills! Before you know it, the competition may have to pay 10x as much as you do and only make 1/20 the money you make!

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