The Faith Premium
Your margin is your oppurtunity
Making a purchase is risky because you pay for items or services before you get to use them. You’re not sure whether the new candy bar or video game’s going to be worth it. You give someone your hard-earned money on faith that they'll deliver what they promised. Great businesses are built when their audience can stop constantly questioning whether they trust them.
If I buy an Apple product, I think that all their products will continue to be near the best, that they’ll be greater together because the integrated experience is so good, I’ll always have access to the best apps, and that people will continue to care about the blue bubble as a result.
If I like Coke, I believe that the taste/experience I enjoy will continue to be great, and I’ll continue to be able to find it anytime I want one. (Coca-Cola famously has a better logistics network in Africa than any government or NGO)
If I buy Salesforce, I’m betting that Salesforce will continue to keep up with all the cutting edge functionality that keeps my team competitively efficient and organized. In doing so, I won’t be fired for buying Salesforce.
All enduring margin is a reflection of how much faith your audience has in you.
Find an audience that’s lost faith in existing options (highly fragmented, low NPS h/t Keith Rabois) or find an opportunity to build a 100x service (Google, Stripe, etc h/t Paul Graham). When you’re a startup, you will ideally find a bit of both. What you’re really trying to do is build in markets with huge gaps in faith. 1
Airbnb entered the couch surfing market at a time when no platform handled payments, creating awkward and risky transactions between hosts and visitors. By processing payments and offering insurance coverage (up to $50,000 for both parties2), they dramatically expanded their potential market.
Standard Oil heavily invested in refining its kerosene to dramatically improve safety standards. They quickly became the only option consumers trusted to be safe. Using this increased profit margin, Standard Oil rapidly scaled and famously bought out or drove out most competitors across the United States, reinforcing both their market share and the market's inherent faith in them.
Stripe's first customers paid 5% per transaction—far higher than competitors' standard 2.7% + $0.30—to prove their front-end API and merchant-account-free solution was significantly more valuable. The initial premium helped create a feedback loop confirming their product was truly an order of magnitude better than alternatives.
A good way to build trust is through better UX and technology. By eliminating clutter and friction, reducing load times, and providing more reliability than existing options, you can earn users' confidence. At first, people might doubt how accurate ChatGPT is. But after using it successfully a few times and comparing its answers to Google searches, they start to trust it more. People keep coming back to ChatGPT because it's faster and easier than searching through multiple Google results. ChatGPT took something people aren’t used to paying for (search) and were able to find a premium against it.3
Higher prices enable better service, building customer faith that justifies premium pricing. Enduring businesses are built on the faith premium.
I acknowledge that businesses can develop advantages over time, but rarely are they handed out on inception. They’re earned through an audience who believes in them. There’s probably some correlation between the 7 Powers, and how successful a business is, but it’s incredibly unlikely that you start with any except counter positioning. Moving forward, all those powers really do is make it easier for a business to accrue more faith.
PG&E having regulatory protection (for better or likely worse) makes it much easier for them to deliver me power. Most importantly, they do so reliably enough for the government to believe that they’ll continue to utilize their legislative protection and keep transmitting it’s constituency reliable power. (Yes, California is the real customer here).
NetSuite is incredibly hard to rip out, and NetSuite’s brand reputation is quite poor. When customers are faced with this friction, what they’re really communicating with their dollar is whatever marginal benefit they might gain today by switching doesn’t meet their ultimate need (avoid termination because the company doesn’t have it’s finances in order). It’s possible to have a poor brand but still be the company buyers believe in most!
Marc Andreessen famously encouraged Airbnb to 10x the insurance to make the value proposition appealing enough to warrant it’s value to both parties.
I’m pricing in confidence that OpenAI will find a way to monetize through both ads and subscriptions to dramatically increase the LTV of their users over Google’s. Need to pay for all that inference somehow!