Fight Competitors on Their Business Model, Not their Regulatory Model

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When companies bring new products and services to market, they are addressing some unmet need. It might be an unserved or underserved market; it might be significantly lower costs - and therefore price to customer at the same margins - for a similar product; it might be a lighter and simpler product for a lower price; it might be one of myriad different ways that your company wants to differentiate itself.

What all of these have in common is that the new competitor, especially a smaller one, is challenging the incumbents' business model. The competitor is claiming that the existing companies' business model is rigid and leaves it open to attack in areas that it cannot profitably serve.

For the most part, this is a good method to approach defining your market. However, there is one area where this is rarely true, and never for the long-term: the government.

If your contention is that the incumbents' business model is weak because it is subject to government intrusion - either in the form of regulation or taxes - and you can operate without it, you will rarely succeed over the long-term. Over the short-term, until you are big enough to be a serious threat, the regulatory and taxation arms will ignore you, because the incumbents are ignoring you. But if you become big enough to be on their radar screen - which you want to do, because being big means having lots of revenue, and, after all, didn't you start this company to make the world a better place for a lot of people? - eventually the same regulatory and taxation rules will be applied to you as well.

Uber and its constant fights with taxi commissions are one great example of this; this past week, Airbnb provided another.

Both Uber and Airbnb have been trying to undermine incumbents - taxis and hotel, respectively - on 2 elements of their business models:

  1. Core: The products offered by the incumbents (yellow taxis for Uber, hotel rooms for Airbnb) are too expensive, too inconvenient, or both, for customers.
  2. Regulatory: The relationships between the incumbents and their governments (taxi commissions for Uber, city taxes for Airbnb) make the incumbents' products too expensive, where they could be cheaper.

The Core argument is 100% valid, and a winning argument.

  • Who wouldn't prefer to order a taxi in New York City of London using their smartphone, knowing where it is, who the driver is, what their ratings are, and having it all handled via credit card without fishing for small bills in your wallet while standing in the rain?
  • Who wouldn't prefer to rent a lovely home near the beach in San Francisco with 3 bedrooms and a full kitchen from someone just looking to get some money back while away on vacation, over 2 overpriced small hotel rooms in the financial district?

At their core, both Uber and Airbnb offer a better business model than the incumbents for many customers.

The regulatory argument, however, is a poor one. Yes, in the short-run, Airbnb can get away without charging hotel taxes. And the law might even be structured in a way that never thought of renting out private homes. But eventually laws get adapted. The taxing authority has no great interest in not collecting from your version of hotel-room rentals for tourists while taking from formal hotels. As of summer 2014, Airbnb will collect those taxes in San Francisco; San Fran will not be the last place.

If you want to change the law - whether for regulation or taxation - there is an excellent process for that, but it isn't via competitive business models, it is via the ballot box, public campaigns, and lobbying your local, regional or national representative. You may succeed in reducing those hotel taxes from 14% to 5%... but that would help the real hotels just as much as Airbnb.

Compete on the real business model, not on arbitrage and temporary blind spots in regulation and taxation; they will disappear before long.