Commentary

Competition & differentiation – Startup Briefs post #14


Few folks come to me having done extensive competitive analysis about their idea/product. What ensues goes something like this:

“What do you know about the competition?” I ask.

“Oh, what I do is different?” the young entrepreneur states proudly.

“Really? Different, how?”

“Well, others have [x feature/approach/etc.], and we have [y].”

“What if your competitors add that [feature/approach, etc.]?”

“Well, they could, but…”

The conversation keeps going, and I keep needling the person who is really not answering the fundamental question about the competition. Understanding your competitors is not about comparing features and functionality. That’s dangerous because you are not looking deeply at the competition or competitive reactions. Having a new technology, a different approach, or different features may not enough differentiation to get you very far.

To make sure that you have a real business opportunity with your new product, you need to understand the competition – their strengths and weaknesses. It’s through that analysis that you can determine if you can get in the market (beating the competition) and stay in the market (further beating the competition). I’ll break this down for you in the following short sections.

Barriers to entry.  These are the barriers that your competitors erect to keep others out of the marketplace. These barriers might include:

  • Intellectual property (IP) which can lock you out or impinge your freedom to operate
  • Partner relationships/contracts, which makes it hard for you to gain customers
  • First to market, so they have the brand recognition and maybe even customer loyalty
  • Cost of entry could be high – this is acutely true in the life sciences space where regulatory and reimbursement hurdles are high
  • Switching costs may make customers loathe to try new products

The list goes on but you get my drift. Figure out the barriers to entry for you and then develop strategies to get over the barriers.

Barriers to competition.  These are the barriers that YOU can erect to stop others from getting in and being successful in the – in your – market. Sound familiar? Learn from the best, baby. And make them hard to get around or over!

  • Develop solid and defensible IP
  • Lock up your customers with contracts that give them benefits to stay with you. Give them great customer service and no reason to change vendors.
  • Be the first to market, or, if you are second or even later, don’t worry: develop the best product. Think of Google. You think they were the first search engine? Or the second? Third? Fourth? They were way down the line, but they did something better and more efficient than the others so they rose to the top.
  • Erect any cost barriers that you can, or build in switching costs to your model with customers
  • Start and stay customer focused and make everything about them – it will make it hard for new entrants and existing companies to steal market share.

Never ever ever say there is no competition. This is a major red flag. It usually comes out like this, “We have no competition because no one is doing the exact thing we are doing.” Just because no one has invented your exact solution does NOT mean that there is no competition. There is ALWAYS competition. You have to look for what is competition.

The status quo is a big part of your competition. People can be herd animals and they can do things that they’ve been doing for a long time for no rational reason – just they’ve been doing them like this for a long time. Even if what they are doing does not solve their problem, you have to get over that apathy and stasis.

When you research your competitors, rather than talk about a lot of individual companies, I recommend that you chunk the competitors into the different types. Your pitch might go something like this: “My competitors fall into those who are direct and indirect. Within those categories are companies which focus on [a, b, and c; and x, y, and z]. Here are the leading players in each of those categories. And here is a table of what makes us different.”

Differentiation

Part of analyzing and understanding the competition is knowing what makes your product/service different. And it has to be way more than just a few features, better technology, or price. Usually the differentiator falls into one of several categories:

Market – New ventures should often target new and underserved markets. This requires serious segmentation of the overall market to find the segment(s) who are not satisfied with current solutions. Often these segments are small and are over looked by large competitors. They are usually good entry points for startups hoping to gain traction in a market that needs a solution.

Disruption – If a problem has been solved in any number of ways for some time, often a new entrant can solve the problem in a totally new way. This can disrupt the way that customers view their problem – and the solution. It’s not just about trying new things; it’s about looking at the world in a whole new way. And that paves the way for needs that can be met by new products and services, going about it in entirely new ways.

Value – Why is what you do important enough for customers to choose you over you competitors? By recognizing what customers really want and need, a startup can provide a solution that is attractive over the competition. Sometimes this involves building a different product or solving a different problem, and even benefiting new or different customers.

A word of caution about relying on lower price. Many entrepreneurs start off by telling me that they have a solution that will be cheaper for the customer. “That’s great,” I say. “What happens if your competitors slash their price to match?”

“Uh, I mean…” Usually the reply is less than confidence-building. It’s not a great practice to base your business on low price. First of all, as a startup you rarely enjoy the cost benefits of economies of scale. In addition, the entrepreneur usually doesn’t understand the cost of customer acquisition and the importance of high gross margin. And they never consider the competitive reaction of a well-funded (or profitable) competitor who can just lower their price to match – yes a price war. Startups ALWAYS lose those wars.

If you have seriously breakthrough technology that totally changes the game, and that means significantly lower costs – which can be passed along to customers as lower price points – then that’s great, BUT it’s not enough. You need to take understand the price sensitivity of the market to know if price is a key factor, or only one of many. So think twice about staking your career on a business which has as its primary advantage merely price.

Conclusion:  Research and analyze your competition so that you can articulate why there is room in the market for your offering. And make sure you know them, intimately and deeply. Finish with knowing how you are different and why that matters to customers. If you are better than your competitors, then you better be seriously better: 3x better; 3x cheaper – either or both!

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