Sometimes customers end up choosing both competitors
Most of the time, when businesses compete for customers, one business gets the sale and the other doesn’t. Buying diapers exemplifies this typical transaction. I either buy Huggies or Pampers. I don’t buy both. One brand wins, one brand loses.
But there are other scenarios when both competitors win the full value of the sale. Consider the bond rating agencies, Moody’s and S&P Global. When companies issue bonds they nearly always get rated by both agencies. So while Moody’s and S&P are competitors, they often both win the sale. You might say the market share adds to more than 100% in this example.
Cloud computing can show a similar dynamic. Large businesses need to diversify their computing operations. Redundancy and backup are key IT needs. This means that while Amazon, Microsoft and Google compete for customers in their cloud computing businesses, often a large customer will choose more than one vendor and double spend for safety and reliability.
Businesses that benefit from markets that add up to more than 100% are unique. After all, your product or service must be very valuable to the customer if they’re going to double spend on you and your competitor.
This “multiple competitors can win” dynamic supports more stable profit margins and more predictable businesses. Rather than racing to undercut competitors on price, businesses that compete in this manner are trying to win by being consistently dependable. These are the kinds of businesses that can grow at attractive rates for longer than most businesses can.
Disclosure: Dock Street Asset Management, Inc. and our clients own Moody’s (MCO), S&P Global (SPGI), Amazon (AMZN), Microsoft (MSFT), and Google (GOOG). This article is not intended to be used as investment advice.