November was Entrepreneurship Month on the Rule Breaker Investing podcast, and in this segment, Motley Fool co-founders David and Tom Gardner discuss some of their best advice for anyone else who wants to start a business, be their own boss, and create a lasting enterprise.
Tom's fourth tip relates to value: Whatever product or service you're offering, make it superior enough that you can charge above-market rates for it -- if you choose to.
A transcript follows the video.
This podcast was recorded on Nov. 9, 2016.
David Gardner: No. 4. And I realize, you're probably starting to lose it, here. I mean, we may be running out of time, but if this isn't as good as your first, second, or third, you might start ... do you even believe in point No. 4, before you present it?
Tom Gardner: I believe in point No. 4, but I also can see that it's circumstantial. That's why it's No. 4.
David: All right, good.
Tom: So, point No. 4 is, I believe you should go for premium pricing in the business that you're creating. You should take your unique talent, and you should find a great product/service/solution/expression of that talent and insight, and you should earn the right to charge above-average prices on it, whether or not you actually charge those prices. That's a choice you can make. But that you have the ability to charge more than the competition, and that you actually demonstrate that you will be able to sustain growth at higher prices than the market.
Again, you don't have to do it. Costco has taken the opposite approach, and they're constantly trying to find ways to drop costs for their customers, and that's great. But they have the ability to raise prices.
David: Yeah, they've hit massive scale, which makes that a little bit easier for them to do. That's actually become, presumably, part of their competitive advantage now.
Tom: Very similar with Vanguard in our category. They get to massive scale and they use it to lower prices, and it's a competitive advantage for them. But I think the key is -- and this is a Buffett principle as an investor -- that [Buffett] loves to find companies that have the demonstrated ability to raise prices.
They may not always use that opportunity. The classic case is Starbucks, of course. You could take Tesla as another example. You could take Apple as an example. You could take Whole Foods as an example. And sometimes there's price competition. I'm not saying you automatically win, but really looking at what you have to offer the world. If it's not good enough to charge more than the average, it may not be worth building a business around.
David: Now, what is it, Tom? What's underneath that point for you? Like why is that a good tie-goes-to-that-strategy answer?
Tom: Because you've created something that's unique, that's proprietary, and that your customer would purchase and enjoy. You've created a unique delight for them, versus one of many that they just chose ...
David: Just copying, and then trying to undercut on price.
Tom: Yeah, once it's a battle ...
David: The other paper firm.
Tom: Yeah. And I know John Mackey just said this about Whole Foods, now. He's taken over, again, as just the sole CEO and he's like, "We're not going to race to the bottom on pricing," and I think that's a smart move for Whole Foods. It does mean you have to earn it, right? Because there may be seven other markets that are getting so close to the experience and the quality of products, and all the rest. So, Whole Foods, or any business out there, needs to demonstrate. They can't just put higher price tags and expect to win. You have to earn those higher prices.
And to me, what you're doing in that case is, in Peter Thiel's parlance, in his book Zero to One, you're creating something new for the world, and that's the breakthrough that we all want.