Let me explain:
If you create a product (or service) which is innovative (i.e. new and useful), you differentiate your business from your competitor’s.
As long as there is customer demand for your product/service, you can charge more because there is no other product on the market with the same advantageous characteristics.
If you do not innovate, your product has no sustainable competitive advantage, and it becomes difficult to charge more.
In fact, you may need to reduce your price, which leads us into a downward spiral until there is no margin left.
After all, if you are given two bags of identical coffee beans (of the same type), why would you pay double for one of them?
In simple terms:
Innovation →
Differentiation →
Higher Profit Margin
Let’s look at an example:
Imagine you create a barbecue sauce which is:
- healthy (no nasty E-numbers),
- is cost effective to manufacture at scale, and
- tastes amazing.
This puts you head and shoulders above your competitors’ products and can allow you to charge a premium price.
Without your differentiation, you would be stuck in the same price range as your competitors.
From Innovative to Patentable
Now, let’s suppose that you choose to approach the big players in the food industry (think McDonalds or Burger King) to licence your sauce in exchange for royalties.
If you keep your product as a trade secret, there is a risk that the client could reverse-engineer the recipe. They could just claim they had a similar recipe already in R+D.
If you apply for a patent, however, you can reduce this risk, since infringing a granted patent would create legal risk for them.
To get to a patentable product, the invention must be:
- Novel
- Useful
- Non-obvious
What does this mean?
Novel:
The invention cannot be previously known to the public and must not have been published or sold anywhere in the world before your patent application filing date.
Useful:
The invention must have a specific and practical purpose.
Non-Obvious:
This ‘inventive step’ must not constitute an obvious improvement over the existing technology (called the ‘prior art’) as understood by a person having ordinary skill in the art.
On top of these 3 factors, you must also bear in mind the following:
Statutory Subject Matter:
The invention must fall within certain patentable categories, which include machines, processes, manufactured articles and compositions of matter. These categories may differ depending where you file your patent application.
Enablement:
Finally, the patent application must describe the invention in sufficient detail for a ‘person skilled in the art’ to be able to reproduce it.
For more information, please consult with a patent attorney in your area.
So, let’s assume you have now filed a patent application, and you have a meeting set up with a major food manufacturer, such as McDonalds.
One important lesson to bear in mind is the following:
Never Trust the Incumbent
Let’s look at a real example:
If you had found yourself in the video rental business in the early 2000s, you would have been up against the titan of the time: a company called Blockbuster.
Between 1985 and 2010 Blockbuster had at its peak 65 million users, 9000 stores worldwide and 84,000 employees.
In short, they were the King of the Crop.
They were the ‘Incumbent’.
As incumbents, they already had a business model that worked.
And they did not want to change it.
Above all, they did not want some rascal of a startup disrupting their space.
However, along comes a small startup offering to sell Blockbuster their new online video business for $50 million.
Blockbuster rejected their offer.
That little startup was called Netflix.
Heard of them?
Netflix’s market cap now stands at $380 billion (at the time of writing).
So, if your startup is ever in the same position, where you are up against an industry titan, you have no choice but to innovate.
The alternative is to compete against the industry titan on their ‘home turf’ and compete on price alone, when you have less market share, an unproven business model and no traction.
That is a difficult nut to crack!
Innovation is all about Profit Margin
So, what does innovation have to do with profit margin?
Well, unless you have been living under a rock for the past 24 months, you will have noticed a technological shift to Artificial Intelligence (AI).
AI has upended the labour market, disrupted financial markets and even caused stress on energy markets.
Legislation has had a hard time trying to keep pace with the seismic shock of what AI is bringing us.
- Programmers out of work
- AI bots doing creative tasks
- AI robots are just around the corner, ready to take over what some people still consider to be ‘safe jobs’ (plumbers, electricians, chefs, etc).
No job will be safe from AI.
That is not to say that AI will steal all jobs, but it is safe to say that AI will impact many jobs (sometimes for the better, sometimes not).
This AI revolution (or is it an ‘evolution’?) depends on hardware that can process the 2.5 billion prompts that ChatGPT alone receives every day.
And sitting at the heart of this AI hardware stack is the ‘AI chip’ (more specifically GPUs, ASICs, SoCs, etc).
And the king of the AI chip right now is:
Nvidia.
Due to the sheer market dominance of Nvidia and their superior technology, they currently command a Net Profit Margin (NPM) of about 53%.
Looking at the top players, Microsoft, Alphabet and Apple are not doing too badly. They have profit margins of 25% to 35%. So how can Nvidia sell at 53% profit margin?
Innovation.
Dominant innovation.
Nvidia is riding the insane market demand for AI with a proprietary technology that is highly innovative, and upon a market with no sign of slowing pace.
Wrapping It Up
So if you are still in any doubt about whether it is worth the time and effort to create an innovative product, try copying existing products and selling them at a premium.
You might get lucky, or maybe you have a trick up your sleeve, and you manage to win some market share.
Question is: will you be competing on price? Or will you be competing on fortuitous market timing?
And will your competitive advantage be sustainable over the long run?
A better strategy is to invest in innovation.
And to protect your innovation.
Then dominate the market with your superior product, and command a superior profit margin.
