Self-reinforcing competitive advantages can generate high and sustainable profits

Schickler has started Cargonexx in its own incubator. Cargonexx is now the fastest growing trucking startup in Europe. Rolf-Dieter Lafrenz, managing partner at Schickler, Co-Founder of Cargonexx, explains the idea behind Cargonexx.

Why did you choose the logistics industry for your start up?

Lafrenz: The logistics industry in Europe is a one trillion Euro market. It is far bigger than the automobile industry and four times the advertising market – and trucking is one of the biggest parts of it. The trucking industry is very fragmented and works in traditional ways. There are fantastic opportunities to increase efficiency with new technologies and business models.

What is the basic idea of Cargonexx?

Lafrenz: We have made trucking as simple as e-commerce. We call it One-Click-Trucking. With Cargonexx, you can order a heavy, long distance truck load at spot market prices in less than a minute – and no logistic knowledge is required. The heart of Cargonexx is a self-learning algorithm which predicts market prices instantly. This Artificial Intelligence will later be able to predict as well truck loads and to optimize freight capacities in advance.

How does the market react?

Lafrenz: Very positive. We have entered the market in December 2016, seven months ago. Over 2.500 transport companies have already registered. The number of orders has increased by 300% in the last three months.

The competition is fierce in the transport industry. What makes you believe that your start up Cargonexx can prevail?

Lafrenz: Most entrepreneurs do not pay enough attention to the underlying business model. Take e-commerce as an example. It is almost impossible to realize high margins because of the price competition. Food delivery is another example. The market entry barriers are very low for regional or specialized competitors. I doubt that even the market leaders will see sustainable high margins.

Could you explain these mechanics more in detail?

Lafrenz: Amazon, Zalando and Otto are the three largest E-commerce companies in Germany. Each of them makes less than 5% return on sales in their core business. Axel Springer and ImmobilienScout are two of the largest operators of classified markets in Germany. Their return on sales exceeds 40%. This is a huge difference in terms of profitability. Classified markets do have sustainable competitive advantages: a two side-market place is very stable and almost impossible to attack. If you are a market leader in so called “the winner takes it all – markets”, you can generate enormous profits. But many entrepreneurs enter in markets where they have no opportunity to gain such margins.

I guess it is because they are difficult to find or already taken?

Lafrenz: That is right. The obvious opportunities are taken. But technology helps. It can be a game changer. If you combine a two-side market place with a new technology, you might be able to beat the actual leader. We see many business models changing. Look at the job classified market. Professional networks like LinkedIn or Xing combine their reach with data intelligence and provide a more sophisticated service than job boards. The service of AirBnB is more comprehensive than a market place for holiday homes, and so on.

What do you recommend?

Lafrenz: At Schickler, we have examined a lot of digital business models. There are some business models with self-reinforcing competitive advantages which are or promise to be very successful. But the kings of the digital industry are the business models which combine two or more self-reinforcing competitive advantages which reinforce each other. These models can achieve a strong and sustainable market leader position with very high profit margins.

Do you have an example?

Lafrenz: We believe that Cargonexx is such an example. The first competitive advantage will be the two-side network effect. The more shippers the platform use, the more attractive the platform will be for carriers. The more carriers register, the better will be the service for shippers. The second competitive advantage is based on the data intelligence. The more data the platform gets, the more accurate will be the prediction. The better the prediction, the more attractive is the platform.

The best part is, that both competitive advantages are reinforcing each other. The bigger the network, the better the data intelligence – and vice versa. If you are first mover with such a business model in a huge market, you better move quick and take the opportunity. Now you know why we have founded Cargonexx.

But I strongly believe that there are many more opportunities still waiting. Smart Data and Artificial Intelligence will change a lot of markets and business models. It is even a good time to attack a lot of established market leaders. Being smart in the digital economy means to bet on a business model with self-reinforcing competitive advantages.