Software Social

Michele chats with Summit founder Matt Wensing about intangible assets, switching costs, and network effects, and how they apply to indie software companies.

Show Notes

Michele chats with Summit founder Matt Wensing about intangible assets, switching costs, and network effects, and how they apply to indie software companies.

Huge thanks to all of our listeners who’ve become Software Socialites and support our show! You can become a supporter for $10 a month or $100 a year at softwaresocial.dev/supporters
 
 
 

Creators & Guests

Host
Michele Hansen
Co-Founder of Geocodio & Author of Deploy Empathy
Editor
Cory Stine
Audio Editor
Writer
Meghan Coleman

What is Software Social?

Two indie SaaS founders—one just getting off the ground, and one with an established profitable business—invite you to join their weekly chats.

Michele Hansen 0:00
Hey, everyone, I'm so excited to have a guest with me today. We have Matt wensing, who is the founder of Summit and co host of out of beta podcast. Welcome, Matt. Hey, Michelle, thanks for having me. I'm super excited for this conversation today.

So as we are wont to be, we were on Twitter, discussing things and got into a conversation about competitive advantages and moats and all of these things and kind of realize that this isn't something people in the indie world talk about very much. But it's very relevant to us as we run our businesses, as we think about strategic direction as we think about competitors. As we think about, you know, advantages we might have or disadvantages we might have. And since both of us have a little bit of like a quasi investor bent, I thought it would be good to sit down and chat about competitive advantages for indie founders. And how people might might think about that in their own businesses.

Matt Wensing 1:15
Yeah, that makes I love the topic. And I would say also that whether you're investing dollars, or you're just investing, sheer lifeforce and time, you know, I had a mentor of mine, tell me once, like, we're all investors, sometimes you're just thinking about it from a financial, external perspective. And sometimes you're just investing your time and energy. And the reason that we start talking like this on Twitter, I remember now is that I, that's so much of a sub tweet, I waited until the example was sort of in the rearview more, but I just shared that I am always sort of surprised when people are surprised when their stuff gets copied hand, I think, you know, you can always tell folks, and I think you had some good encouragement for folks like that, which is like, just keep moving. And, you know, they can only copy what's sort of in the past. And then my also thought was, like, well, but there's also things you can do that help you to become more aware of your competitive advantages or develop those. And I think it's fun to just continue that conversation in a more nuanced medium here.

Michele Hansen 2:24
Yeah, and I think also in a way that will, will help people think about their own businesses. And when they see opportunities, be able to look at them from a lens of which of these are building on competitive advantages, or which ones could lead to competitive advantages. Versus ones, which ones are taking me in a direction that maybe is more commodity or is more easily copyable by a big competitor? That does have more competitive advantages than me.

Matt Wensing 2:55
Yeah. Sounds good. How should we start?

Michele Hansen 2:59
I think we should start with of a word that people are probably familiar with, but probably not in this context, which is the word moat. Now people probably know of that as the little river thing that surrounds a castle. That's not what we're talking about here. But also it is. Because if you think about it, what is a moat? Do and you know, of course, it's, you know, full of swans and ducks these days, right? At least the the moat, in the castle ruins near us and Denmark is the moat protects the castle. And the key about a moat, in a business context is that it protects your business from outside, quote, unquote, attack. So whether that's a new competitor coming into the space, or you know, other sort of industrial or sort of environmental kind of forces going on, even changing customer interest, right, having a moat can help protect you against those things. And so I feel like we should dive into what those components of a moat is. But before we do that, I feel like you mentioned that previously, that you had an analogy for thinking about boats. Do you want to share that?

Matt Wensing 4:25
Yeah, so it was kind of extending the metaphor. So I think it's just a really easy, visceral illustration of something that creates defensibility and I think that's the thing that we're really worried about is how much how defensible is this and you kind of have, then your then your mind can kind of go into what are all the different kinds of defenses that one can have and moats are interesting, because they're, they're highly visible. You can see that even if you're the enemy you know, you can see But there's this myth out there. And that might be enough just to dissuade somebody from even trying to do the you know, to to attack your business or to take on your business or to do like you are, you know, you see this giant moat, you're like, that doesn't look easy to cross, we're just not going to attempt that. Right. And so in some sense of moat, part of its job is just intimidation, like its mere presence and the size of it, intimidates would be competitors from even attempting to cross that boundary or do that. And so that was that was part of it was just realizing that things that look hard to do, or hard to copy, generally don't attract as many folks to them by definition. And so if I, if you said Google, you think about searching the entire internet, there's a moat right there around how many people know or even have a clue about how to start to do that, you know, compared to, hey, here's a piece of software that creates a static blog post. Oh, I think I could probably figure that out. Right. And so that sort of this perception of how difficult it is to, you know, to do that is part of it. And it's just part of the it's just an example of okay, this moat is visible. Network effects are also usually pretty visible. Once I started thinking about that, I had just other thoughts around, okay. You We all love it when people go, I could build that in a weekend, right? I don't know if you've seen that. But that's like the Hacker News meme, which is, people see something that someone else is doing, and they say, I can build any weekend that to me, it's really funny, because that reaction implies that they don't see like a big moat, or something difficult to overcome, right, the fact that they think that they can do this in a weekend means that either they can, in which case, it's not very defensible, which is bad. Or there's a ton of stuff that they just aren't even thinking about or seeing about that problem, or about that business that they're going to encounter along the way. And it's just going to eat them or kill them along the way. And so they're these invisible, sort of moats are hard to see things that just, you start out on a Friday night, because you're at some hackathon, you think you're going to build this thing. And that's around 2am, you realize, oh, my gosh, this one little part is so much more difficult than I realized it was going to be. And I think that is also an example of defensibility. But it's not visible, right. And I kind of like thinking about those, because I think we can also use that knowledge to maybe decide not to pursue pursue certain opportunities as founders because, you know, we see the moats and maybe it doesn't seem like it has won. But do we really understand all of the pitfalls around that idea? So one way of extending it, just that'd be fun to talk about. And I know, in things I built, those things tend to those pitfalls as hidden ones tend to be encountered first, like the most that you see is somewhere off in the distance. And you kind of you kind of like dream about maybe getting to the point where that mode is even relevant. But meanwhile, you're sitting there going, like, I can't even get this file to do extra, I can't even get this code to run fast enough, or whatever it is. And you just kind of thought that was going to be the easy part. Right? And I'm pretty sure that's probably the case with something like geocoding, or other things where like, from the outside, you're like, sweet, you just do what that's so simple. But then you try to build one and you realize this is actually incredibly hard. In the minutiae,

Michele Hansen 8:42
right. devils in the details. Yeah,

Matt Wensing 8:45
that's another way saying it exactly. And I think that shouldn't discourage us from even trying those things. But from a defensibility standpoint, if you're not encountering those things, you probably don't have as much defense, as you should you, the struggle you're going through is a good sign that you're building something valuable, right and defensible. Because I think a lot of people just don't even want to put forth that level of effort. It's just, it's just hard. Hard work is its own sort of form of defense. I'd say.

Michele Hansen 9:19
Hard work is its own form of defense. So I think to kind of get the conversation started about moats and sources of competitive advantage or other sources of sources of moats, I guess. Yeah. First of all, I feel like it's worth noting, the fact that we're even talking about moats here is because it's one of the most important factors that long term investors will look at when they're analyzing a business. Indeed, it is the primary thing that Warren Buffett and Charlie Munger, arguably maybe not even arguably the best investors Um, of our lifetimes, if not, you know, the past 80 years, right 7080 years, the primary thing they're looking for are Moats. And so actually to help us frame this conversation, I'm, I reread one of my favorite books on investing, the little book that builds wealth. I recognize the title sounds spammy, but it's actually really good and written by people from Morningstar, which is an equity analysis software company, it's really, really good and talks about the sources of competitive advantage and modes in a way that is very approachable, you don't have to have a finance background to be able to read this book. And you could even read it in like, two evenings sitting down to read it. And so, so there's some broad categories of sources. And I thought it would be fun if we could kind of go through and talk about each one. Sure. There are also some false sources of moat, which kind of gets to your original tweet on this that I think well, we'll get into that later. So the first one, and we kind of touched on this a little bit, are intangible assets. Now, the most. I feel like the easiest example of this is patents, but not only patents, but organizations that are really good at creating patents, right, because one patent alone is not defensible that one patent alone does not make an organization that is capable of creating patterns. Instead think about like a pharmaceutical company, and like how much they're able to charge compared to other types of companies, right. But we're talking a little bit to that about, sometimes the invisible work that goes into a business is a form of an intangible asset. And that, for example, might be you know, I think of like, maybe data processes that you've built or ways you are, you are doing things that maybe aren't patented, but would be incredibly difficult for somebody working on a project at a hackathon, or even working on a project for six months or a year to replicate.

Matt Wensing 12:17
Yeah, I agree with this. I was listening to a podcast called invest like the best with Patrick O'Shaughnessy, and he was interviewing John Collison of stripe. And they were talking about accounting, and modern accounting and how intangible assets is not something that you can put on a balance sheet and say, What is this worth? Right? Like? What is it worth to have hundreds or even one talented person working through a problem building a data model that solves the problem better than anything else that's been built, having customer conversations to understand the problem more deeply than your competitor, these, these don't even show up on a balance sheet. But we call them gold, sort of, metaphorically. But those insights you get from customer conversations, the data model, you choose the designs you put into practice that have these long term effects, all intangible assets, right, and I think patents was, that's something that we've we still have, but I every time I think of patent, I literally think of the diagrams that you still have to draw to get a patent. And it reminds me of like how non software oriented patents are at their roots. It's like, you're drawing a diagram. Why? Because this is something that was important to do when people were mostly building machines in factories, or shops or whatever. And like you needed to diagram the fact that putting this bolt here and this thing doing this, this thing doing this, like that was your invention, right? These days, like how would I even put the data model behind summit into a diagram into a patent application? That's, you know, does it justice, right, and you kind of can't, but yet, those choices are worth more as much. That's the intellectual property that's the intangible assets. So I completely agree and I think the other thought that comes to mind is people write code people create systems. So the people you have is to me like the first input or ingredient into all of the intangible value of the business right which is also explains why we fight people fight over talent, so desperate to recruit the right people, because we're in a knowledge worker economy, right? And therefore, it makes sense that like the people you have is like the first step and having a really great defensibility around again, like you said, intangible assets so that's what I think of when you when you mentioned that tonight patents are one thing but code that just works and does the right thing and can be extended easily. sounds even better than a patented like if you gave me a choice as a founder starting out like which Do you want, like pen? Sounds good, but, you know, that software being well written and, and not having any technical debt? Like that's That sounds amazing, right?

Michele Hansen 15:12
I want to say that there was actually somebody who are, you know, a company that had a patent on geocoding at one point, but I think it was either invalidated or basically abandoned because it wasn't defensible. I'll have to check on that. But you know, that it is relevant for software, but not quite in the same way. And I think actually, you know, the lack of proprietary pneus, in terms of what we use is actually a big engine of the software engine industry, right, like you think back to, for example, the early days of Amazon. And something that really set them apart was that they were able to use open source languages to write the website and their databases. And rather than going out to, you know, spend $200,000 on just the privilege to use a programming language like that, to us seems insane. But you know, there's that there's that famous talk from the founder of constant contact on what is the the slow SAS ramp of death talk from business of software, which is a fantastic talk for so many reasons. But the reason why I always think back to it, I think is not a reason most people think back to it is because in the beginning, she's talking about how expensive it was to start a software business, because you actually had to buy physical servers, you had to buy Oracle licenses to have a database, you had to buy licenses for the programming language, like you had to buy these God significant outlays at the beginning that we we don't have now. And in ways that actually allows us to get faster to those things where we do have those unique advantages. And you know, to what you were saying, you know, I was talking to someone I think about a year ago, and they want to be a founder, but they just kind of haven't found the right time. And you're they haven't felt found the right idea. And they're like, you know, I've been working in this industry for like, 20 years, like, you know, I don't I don't know what what I have to like, I don't have any startup experience. And I was like, the fact that you have been working in an industry for 20 years is a huge advantage. Because you understand how that industry works. You have connections in that industry, you understand the problems, you know, how they buy things, you know, how they sell things? Like, yeah, you have so many advantages, going into this, that somebody who's just graduating from college or dropping out of college and wants to start a startup does not have because you have extremely deep knowledge that, as you said, is very hard to replicate, is defensible. Oh, and by the way, the average age of a successful startup founders 47. So just throwing that out there. But that kind of like, like industry expertise that someone may have built throughout their career or that their employees have felt elsewhere. Yeah, that is a form of an intangible asset that would be difficult for, you know, a company of 22 year olds just coming out of college to replicate.

Matt Wensing 18:06
That's right. Yeah, this is a good one. And I completely agree, I think patents are now sort of used as a offensive weapon by a lot of large, large companies sort of lay claim to things that are absurdly like one click Checkout kind of stuff. But in the early days, that's not for most of us in the early days, but in the early days, developing the intellectual capital and hiring the right people to make those decisions. That's a big part of it. And I guess, before we move on, like decisions is another one that I was recently thinking about, because why couldn't Adobe with $120 billion market cap build figma? It's like, the product is there. It's it's they can use it. Is it patents? Is it? What is it have all these people, they have all these views and even have an existential threat like they're watching figma eat their lunch in this sort of product subset, that's very important to them. And yet, they still decided to spend $20 billion to buy figma instead. And I think one thought that stuck with me was the number of decisions that Adobe would have to make to arrive at a figma. They're not capable of moving that fast, especially in a large organization. So yes, the large organization has certain defenses in terms of patents and everything. But in terms of intangible assets, the speed with which you make decisions, and the number of decisions you're able to make on a weekly or daily basis is a huge competitive advantage. Like every time you look at a thing and you go, we should make that just a little bit narrower, and then you choose to not spend any more time on it. But you're able to just make that decision in 10 seconds, so 20 seconds. Huge compared to, I mean, how many meetings do you need to have to make the same decision at a larger company? So I think decisiveness would be my other addition to this is that, yeah, if you're making something that requires a lot of decision making, good for you, you might make wrong decisions. But even the willingness to just decide and move on, is fantastic. Like, give yourself partial credit, at least because there's a lot of companies and others who would just analysis paralysis, can't decide which is more important speeder. How robust is that they just can't decide. So that's something that I've always tried to do is just be incredibly decisive at the beginning, because you don't know anything anyway. Right, usually. So that's, that's another intangible. And, frankly, now think about how much time we spend this, this, this one feels like probably the biggest one for startups to take advantage of, to me, because it's so accessible. And like, doesn't cost a lot of money in and of itself, like you're really just acting, and moving, and kind of pulling things out of your own head, right. So this one feels like a big opportunity. And if you're making a product that's pretty thin, and doesn't require a lot of decisions, you probably should keep moving, would be my recommendation, because then, you know, somebody else can replicate that a lot more easily.

Michele Hansen 21:30
Exactly. I mean, it's, you know, think about the difference between a 27 foot racing sailboat and a container ship, it was gonna be so much easier to move, and turn, and otherwise navigate that, you know, 27 foot sailboat, then a giant container ship, even though it offensively you know, it has bigger engines, right? Like, turning a container ship or a cruise ship is very difficult. And that's what a lot of big enterprises are. But I'm so glad you brought up Adobe, actually, because that goes so nicely into the next source of moats that I wanted to talk about, which is switching costs. And, ah, it's so good, isn't it? Right? Like, it's such a good one. And actually, the book talks about Adobe. So yeah, because a huge advantage for Adobe is, and this may have changed, but for a long time, if you were learning graphic design, in college, or in boot camp, or whatever that is, or on your own, you were learning Photoshop, and because that was what was expected of all of the jobs that you were going into. And so there was this incentive for, you know, educators, whether they be online course creators, or college professors to keep teaching their students Photoshop, and they had very generous student plans for that. And then also for the employers who were hiring designers coming in, because that's what everybody knew, for everyone to retrain design tools, would be a huge amount of effort and time spent. And it's interesting, actually, you know, there has been over the past 10 years, the emergence of these two competitors to Photoshop, which I don't think were around, you know, 1015 years ago, which is sketch and figma. And one analysis I read of the Adobe deal was that it was Adobe, realizing that they could use this percentage of their market share, basically, to defend the rest of it.

Matt Wensing 23:44
That sounds like pretty good analysis, I as you were talking, I can't separate Adobe from dot psd, like every time you say Adobe, I think.psd.pdf.ai. I just think of all of those file extensions and formats that basically have their branding built right into them. And I think the thing that figma did, so that's, if there's a lesson learned there, it's if you can create the standard, you know, obviously fantastic, you sort of unlocked you got Boardwalk and Park Place, that's amazing. He kind of kicks control the whole thing. If you don't have the standard, I think what figma did, like that's switching costs. Let's talk about switching costs, that's switching cost, just switch to a different file format, oh, we're gonna use this thing. Well, I can't open that one. Or when I do, it doesn't look great. or something's not quite right about it, or it's too big. It's too small. That incompatibility was sort of the definition of why you couldn't, that was the price of switching. Right. And that was that was high like you needed to be compatible with everyone else in your industry. Like you said, I think figma the magic trick was, Oh, what if we said that you can export to things PNG, jpg, etc. But the working file like the PSD, doesn't exist anymore. Really. It's just the URL. It's just a live copy. It's just a thing that's on the web. And anyone can visit it. And anyone can come on and anyone can use like Google Docs. You know, in the same way, Google Docs doesn't have like a dot g doc extension we talked about, it's just this living document, I think figma got into that collaborative space so deeply that they basically broke that switching cost price and said, You don't need a, we don't need a dot psd anymore. It's the web. It's just a living document. That also means you don't need underscore V five, underscore final, you know, we're going to get rid of all those file naming convention problems, too. And that was a weakness. And it started out as a strength with Adobe saying switching costs. This standard, they really weren't prepared for the collaborative web. When there's no such thing as file formats anymore. We barely we have saved icons that kids are like, what's this little blue square with the silver on it? Is that a? That's a floppy? That's a floppy disk, it means save. That's what your files go. And it's completely foreign. Right? So I think Adobe had that switching costs built in, but then figma, they just found, they found a hole, right? And they, they jumped right into it.

Michele Hansen 26:28
So let's bring this down to a level that's I think it's good to talk about it like the big enterprise level for the examples, but then also, how can we apply this? And I think one way that switching costs apply to b2b SaaS is thinking about API integrations. So for example, if you have something integrated into your service, you know, I think we see this a lot, right? Like, if it's a core part of how your own product is functioning, yep. For someone to switch from your API to something else, there is going to be a switching cost. Now, that switching costs might just be the developers time to go in there. And it's not just to change a URL and an API key. There's also you know, there's different data schemas, where's all that data going? How many places do they have this integrated, if they're a small company with a small app, that might take them you know, anything from a couple of hours to a day to a week, if they're a big company with a lot of people with roadmaps that are locked in a year in advance, getting time on that dev calendar to just switch out an API key alone can be incredibly complicated, and it just keeps getting pushed down the road. And this is incredibly powerful. And I think something that is, you know, I don't want to say it's easy for indie founders to do. But if you are going to be an indie founder in a developer focused b2b business, the switching cost of someone on integrating your what is the word for that unintegrated, D, integrating disintegrating, like disintegrate, taking out your API from their app, like there's a real switching costs there. And that, that gives you some power. Right? You know, there's a quote from Charlie Munger that, you know, if you have to hold a prayer session before you raise prices, you don't have a good business. Now, I say, you know, we haven't we lost him we raise prices was three years ago. And we were definitely crossing our fingers and hoping it went well and holding our breaths. So I'm not, I'm not gonna say that I have a business that Charles sugar would Vanover. But that's an example of where that comes from. Because if you are so tightly integrated into someone else's application, especially if you're, you know, to something that your co host, Peter has been talking a lot, like close to the money, right, of how their company is making business. That is a very powerful switching costs to have as an advantage.

Matt Wensing 29:13
Agree, I think there's two, there's a couple dimensions to that. One is how mission critical is this? And then how much of a difference does it really make? So even if somebody came along tomorrow, and if you use stripe, said, here's one that's 10% better? 20% better? 30% better? How, how much percent better? Would it have to be for you to say, Okay, let's go ahead and make that a priority. Tomorrow, next month, next quarter. Like that's got to be a pretty high number, right? Of even if they're worse than the new thing, you're not motivated to switch because you're creating risk to like if you change that out and it breaks, pain, right? And you're like, all this pain. One was Steak, all of a sudden obliterates all the value of switching anyway. And I used to have people email me when I was running my last startup. And they'd say stuff like, oh, yeah, well, you know, we were doing payroll in this new and amazing way. I think it was, like Zenefits, or somebody else, like, Okay, we use ADP or something boring. But the odds that I take the few folks who deal with that at our business and tell them or suggest to them that, you know, what we should do is we should replace this thing that's working, that gets people paid with this new shinier thing. And that's our priority. It's, it's just extremely unlikely. So I think that's one level of switching costs. That's, that's very painful. We already talked to the other one of being like the standard. And that's what Adobe did with the network. One other one that I benefited from at my last business was if you can get yourself in between the customers, your customers, customer and them. So for example, plaid, right? Plaid is really important. It's used in the backend to do connections, but they're doing something, they made a decision in the early days where they were going to put the plaid logo and connection box in the client experience, like when a end customer connects their bank account. It says plaid. And they did that on purpose, because they want people to start to associate their brand with this trusted point, this thing I'm doing right. And so now, sure a bank could go with somebody else or switch. But if you can get yourself in front of their customer and start to establish yourself as Oh, this is the trusted one. This is the high quality one. You also there's a switching cost there from a perception standpoint, which is well, if they're not using that one, why not? Like? Are they too cheap as this one actually better? Like why aren't they using the standard one that I'm used to or the one that I trust. And so if you can create something that's very differentiated, and you can begin to create a brand with the end consumer infrastructures, sort of the low low level of switching costs, this would be the opposite end of the spectrum of being the trusted consumer brand for that is also very powerful. And so like, this is an old school example. But Google had like the best search results. At some point, people acknowledge that Yahoo like used Google search results at one point because they didn't even do their own search, they sort of just gave it up. At that point, the consumer is like, Okay, I'll use the Yahoo search box. But that's because it gives me like Google results, right. And I trust, those are like the best at that point, like Yahoo is kind of stuck with Google as their search results provider. Because if they switch to a different provider, their customers are going to look at them as like, Okay, I wonder why they did that, or it's just not good. So as much as you can build a relationship with the end customer would be my suggestion. And I think Stripe has actually done a really good job of that, like Stripe is credit card processing, like completely back of the house. But for some reason, like lots of people who buy things are also aware of them. And their brand is super shiny and very visible. That's strategic.

Michele Hansen 33:13
Yeah, yeah. And one more I want to add into this, that actually kind of ties in nicely to the next one, which is sort of a subset of switching costs. But it's enough to be different category is simply data and information that you're storing in your application. That would be difficult for people to take elsewhere. And so for example, if you think you know, if you've been running your business on Gmail, and Google workspaces for the past 15 years, all of your company's Google docs are in Google Docs for the past 15 years. Yeah, it's going to be very difficult for you to then migrate to Outlook, because you have 15 years worth of documents and data and spreadsheets and everything else sitting in Google Drive. Right. And that is a powerful form of switching costs. And so whether that's something like that, or it's simply that there's data in your application that it's working with, like I think QuickBooks is kind of the quintessential example here that if you have all of somebody's accounting data in there, right, and it's working. And as you said, like with ADP, it's boring, it's annoying, but it works, what your accountant knows how to use, that will prevent someone from switching, or will make it very, very difficult for them to do so. And I think this is why from a policy perspective, we see more and more attention on data portability, and the rights not only that, you know, sort of, I think the big trends, right our right to repair but also the right to take your data elsewhere, or at least remove it. And and that gets into the next one, which is network effects, which I think that the biggest example of this is You know, QuickBooks is an example of this, but really Facebook, right? Like, sure you can download your data from Facebook, but you cannot download the entire Facebook experience of all of your data of that plus all of the people you know, and that they are using that service, you cannot just upload that to another service. I mean, and I think the real difference here is I think that like email, versus Facebook, right, like, if you want to change email accounts, you can just forward every single email you've ever received over to your new email address, download all of your contacts, re upload them set up a forwarding, and you can still do basically the same thing on an entirely different platform. That is assuming you're not following my previous example and have everything Google Drive. Yep, you can't do that with social networks. And I think this is why those network effects are so powerful, and not only so defensible, but also something that Facebook really aggressively goes after acquiring Instagram, copying every new feature that Snapchat has, right? It shows the power of Facebook and their network. And the, you know, the comparative competitive weakness of Snapchat. Yeah, that they can just go in and copy those features into Instagram into Facebook. And people never even migrate over to Snapchat, we've all basically forgotten about it.

Matt Wensing 36:27
Yeah, that's, that's an interesting one. I think it's Facebook specifically missed mobile for a while, and then they came back to it and figured it out. But by then it was a little too late and Instagram and Snapchat, kids love Snapchat, especially in the US. But you know, to your point, people know that they're stuck with, you know, I have certain wiring that's coming into my house, I had no choice in that whatsoever. It's, that's the utility company that serves my house, I have maybe two choices when it comes to internet. Right. And I have no choice when it comes to power, no choice when it comes to water. And those industries are highly regulated because of that. And I think it's it's interesting how, you know, sort of side bar comment here, Facebook, despite the switching costs, you mentioned, despite like anti competitive behavior, buying companies that just extend its graph, network effects to be bigger and bigger. It's not regulated as a as a locked in Network Utility that we have. Right? Yeah, exactly. And I think my question would be, how do you? How would you even create or pursue network effects be one question? I mean, that's, this is rare air in the startup sense. But it is something that you can be deliberate about, if there's an opportunity for it. So not sure if that's something you've encountered in sort of your entrepreneurial journey, but I think it's a tough it's, it's a tough one. What is there? It's there when it's not, it's kind of hard to manufacture.

Michele Hansen 37:58
Yeah, I mean, I, you know, I think QuickBooks is also an example of network effects. Because, for example, the fact that your accountant knows how to use QuickBooks, yeah, over some new competitor that's up and coming, right, and that all of their other clients are on QuickBooks. That is a network effect. Like I actually I know someone, they either have to switch accountants or switch to QuickBooks, because their accountant or their bookkeeper has decided that they are only going to take customers on QuickBooks now. Right? Because there's such a process there because they have such a profit. And yeah, all the accountants who are going to serve small businesses are trained on QuickBooks is a little bit of a combination of some of those. But I think there's a very strong network effect there. I think, for us, as I think about it, network effects are very clear, I think for consumer businesses, right, like, especially social media, and they just got it they just buy the audience, right. Like you just run advertising on your competitors to take their their users. Yeah, it isn't really a source of moat that I've ever thought about much for our business, because I think switching costs is a much more relevant one. But I think where a network effect comes into play is, is the overall value of the entire service, or the entire product increased, the more people are using it. So you know, an example of that, you know, is something like the telegraph or electricity, telephones, the internet, right? There are massive, massive network effects, their social media, the more people use a particular app, the more useful it's going to be to me, assuming I want to be around those people. Yeah, we're not we're not gonna talk about how I've muted 90% of my Facebook friends. Gotta do what you got to do. But like, like, I think for us, you know, and I think actually with with a lot of b2b SaaS, actually, I guess, I guess Salesforce and exhibit is an example of one that has a network effect, because it's just what everybody uses. But like for geocoding to the value to our customers does not increase, the more people use geocoding, there's actually there's, there's really, there's no impact on them. If anything for a SAS, it might actually get worse because there's more load on the servers, there's more infrastructure concerns for the business, they're spending more time on infrastructure rather than products and, and user facing improvements. So it's yeah, it's not really one that I guess in my head, I think of it as a bit of a consumer. One, a very, very difficult one to get. But then there's also that sort of more traditional example of utilities.

Matt Wensing 40:52
Yeah, I think I can think of two maybe helpful examples where if you're doing b2b SaaS, for example, or more enterprise, you could start to work on network effects. One is obviously the simple question of like, yes. Is this getting better the more people use it, if the customers data can improve your data? Great, you know, you're starting to build something. When I was doing enterprise sales to my last company, one thing that we started to leverage, in a good way, was this concept of best practices. And we had worked with enough of this industry, that when we were doing sales, or when we were doing customer success, our customers were indirectly benefiting from the learnings that we had gotten from working with other customers. And so they want to be the best. They're working with us, we're experts. So expertise is essentially a benefit of working with these people, because they know what they're doing. Right. And so maybe in a very, you know, in a different sort of way. Yeah, I want to work with a company, that's the has the best CRM for small businesses, because they have a customer success team is going to talk to me and like I can learn a little bit. I think in enterprise, it's easier because you're having these real one on one conversations with people and like consulting more. So that consultation creates this, oh, she's the expert on this, let's work with her, because that's gonna give us the best benefit versus this new company. That's never done it before. So those logos on our home pages are basically signaling this network effect of best practices, expertise, knowledge, I think the other one that you start to see lately is all these communities that are sprouting up around SAS, right. So it's, it's come join our circle community or our wherever you Slack community, etc. I think people are trying to essentially, when they do that they're basically building in this network effect, you're trying to create that community around a product that is otherwise maybe just it's just a product, you know, but if the brand creates this community or this group, you kind of want to be in the group, right? That's, that's its own sort of network effect. Like, I want to use this product, because that's what everybody in this channel uses. Right? It's the cool thing. And I don't want to be left out of that. So I think community is a fairly recent attempt to add network effects. And I think people got really excited about it for a while, haven't heard about as much recently. But I think the last couple years, it seemed like I mean, we ended up having new companies launching that just did community software, because it was so hot to to have a community manager for your SAS, like, I don't remember community managers for SAS in 2006, or 2008, or 2010 was like, why would you have that? But now it's like, oh, we do banking infrastructure software for devs. And by the way, join our Discord. Like what? But that's worked for some, so it might work for you.

Michele Hansen 44:08
Yeah, I'm so curious what Rosie Cherie the former indie hackers community manager would would say about that she's Yeah, the community queen. And actually, I mean, maybe even indie hackers is an example of that, that I mean, Stripe acquired indie hackers because it had that community because if you get people to integrate stripe when they're just starting out, and then even if 1% of those companies go on to be huge companies, like your if you're in from the very beginning, it's going to be very hard to switch away from it. And actually, before we move on to the next one from switching costs and network effects, which are sort of closely tied to one another. I want to just quote from the little book that builds wealth on finding sources of switching costs that actually made me put my fist in the air as I was reading this switching costs can be tough to identify. Because you often need to have a thorough understanding of a customer's experience, which can be hard if you're not the customer. But this type of economic moat can be very powerful and long lasting. So it's worth taking the time to seek it out. Interview your customers, y'all.

Matt Wensing 45:24
That's right. That's right. And that, that brings us back to the original, you know, intangible assets defensibility here, because from that comes ideas about the rest of this right, from those conversations from understanding your customer becomes the What opportunities do we have to defend this? So yes, I say when I hear that, I think, yeah, that's the benefit of talking to 100 people earnestly, and listening to what they have to say. putting that all together. Imagine that,

Michele Hansen 45:55
yeah, it's funny. I mean, I talked to people about customer interviews, and you know, I get the reaction often that it's like, oh, you're just, you know, being nice to people. And that's nice. You listen to them, like, but it's sort of like, well, that's cute. Like, that's not doing anything for your business. And it's like, no, like, this is the primary way we have figured out our strategy and which opportunities we should be pursuing or not. And I'm actually when we had our, our chat last year on the show, which which we should lead to people should listen to it. I got off of that. And I was like, Matt really gets it. Like he really gets how jobs to be done, and interviews and research. It's not just what people might see on the surface of, oh, it's just nice to get feedback from people and build things that they like, no, it's a real resource that most companies are overlooking, that's actually free, basically, except for the time you might spend on it all the time, you might save building the wrong things. Yeah. And then you turn that into your strategy, right? QuickBooks has that moat. And they know those switching costs, because Intuit spends a ton of time on customer research. Now, the way they express that, quite frankly, I mean, feels like they're kind of being a jerk, because they raise my prices every single year, even though it really hasn't gotten any better. But they know that it would be very difficult for me to switch because they have researched their customers, they know exactly where that source of competitive advantage is coming from. And they take advantage of it in terms of their pricing. And in terms of their product.

Matt Wensing 47:36
Completely. Yeah. And I think the encouraging thing is you don't have to be big, or even talk to giant panels of people over and over again, to do this, you know, Bob molesta jobs have been on King talked about small data on a recent podcast of his circuit breaker podcast, which is excellent. But he talks about how noticing what's not said or noticing what's said by a few people, out of the many people the anomalies are sort of the secrets revealing themselves. So it's not about it's not about large amounts of data or analyzing it, or averages or all this, it's the I talk to 50 people, you know, and two of them have this very unique, acute complaint, because it just doesn't work for them the way it works for everyone else. That's gold, right? Like you said, and two out of 50 Doesn't sound like a lot. But when you think about the 50 being 50 million. Now that's actually 2 million. That's a lot, you know. So, again, are you that's still

Michele Hansen 48:33
out from that, like batch of 52 said something that was really interesting and unexpected. So then you go find another batch of 510 20, who have similar behaviors to those two. And then you found something really interesting, like the people who are hacking, what you're doing to solve a painful and frequent need of theirs that isn't otherwise solved. That is interesting. Extremely. Yeah. Other people muscle, they all probably had very interesting things to say and they loved your product. But those people that is where you dig.

Matt Wensing 49:10
Yes. Couldn't agree more. Okay, I

Michele Hansen 49:13
love it. We can talk about this forever. Hey, it's Michelle here. As you can tell, Matt and I had so much fun talking about competitive advantages and moats and how they apply to indie software businesses that we ended up talking for a really long time. And so we have decided to cut this episode in half and publish it in two parts. Because we don't think most of you signed up to to, say, Run 15 Miles rather than three when you were listening today, so we will have the other half of the episode with Matt Next week, and now I want to shout out to everyone who helps support our show. And starting with our newest supporters Laravel which is the community for women, non binary and trans Laravel developers. You can become a supporter for $10 A month or $100 a year at software social dot dev slash supporters. Chris from chipper CI the daringly handsome Kevin Griffin and Mike from gently used domains who has a nice personality Dave from recode max of online or not Stefan from talk to Stefan Brendan Andre of bright bits team tuple Alex Hillman from the tiny MBA Remi from memo.fm Jane and Benedict from user last Kendall Morgan. Ruben Damas of sign Well, Corey Haynes of swipe Well, Mike Wade of crowd sentry Nate Ritter of room steals an amass of subscribe sense, Jeff Roberts from outside it. Justin Jackson from Mega maker, Jack Ellis and Paul Jarvis from Fathom analytics, Matthew from appointment reminder, Andrew Culver at bullet train. John Koster. Alex Of course. Oh systems. Richard from stunning Josh, the annoyingly pragmatic founder, Ben from consent kit, John from credo and editor ninja cam Sloane, Michael Kapur of new see proposals. Chris from URL box Kayleigh of testlet Greg Park from trait lab. Adam from Rails autoscale Lena and Alex from recap. See, Joe Mazza allottee of rails devs.com proud mama of AbleNet, LLC, Anna from cradle Moncef from Ruby on Mac. Steve of being inclusive. Simon Bennett of snaps shooter backups. Josh Smith of key hero.io Yes, we're Christiansen of form backend. Matthew of Work Cited. Chris of jet boost.io Darrell Shannon of dogmatic Arvid call. James sours from castaway.fm Jessica Melnik, Damien more of audio audit podcast checker, Eldon from nodal studios and Mitchell Davis from recruit kit. Thank you so much, everyone. And be sure to tune in next week for the second part of my conversation with Matt

Transcribed by https://otter.ai