Posts Tagged ‘First Mover Advantage’

Innovator’s Dilemna

December 15th, 2013

The biggest challenge for truly disruptive technology companies is how to fund their market adoption. “Do we bootstrap it or do we raise funding?” I admit it was much easier almost 15 years ago when I was raising money in the dot-com era. There was a lot of investments getting done on concept, but not anymore. Rule of thumb these days seems to be that entrapenuers are responsible for design and prototype, while angel investors fund on proof-of-concept and early market validation. Series A seems to be primarily for funding adoption. Now, there are always exception to the rule; either the founder has prior experience , the technology is sufficiently complex and expensive, or there is sufficient differentiation to drive displacement within an existing market sufficient to reduce risk for the investors that they will fund earlier. But, for most early stage technology companies, funding is tied to business performance. In reality, the management team needs to plan for bootstrapped growth to survive until you thrive.

It has been surprising to me to see how many technology companies that still believe that investors generally invest in your technology innovation. It is even more surprising to find how many of those same companies think their buyers do the same. When we talk to the investors and the buyers, the conversation is about adoption; investors are focused on how to drive market adoption, buyers are focused on their problem adoption. The key to understanding how to help the business grow, solve the buyers problem, and mitigate the investors risk is simply understanding the inverse relationship between disruptive technologies and adoption. The more disruptive the technology, the harder the adoption. The harder the adoption, the more risky to buy for the buyer and the investor. The harder it is to buy and invest, the harder it is for the business to survive, let alone thrive, and reach wealth creation for the founders.

So here are my Top 5 Myths /Misconceptions for Disruptive Technology Companies

1. Market Adoption Takes 18-36 Months – Look, the reality is that new markets don’t just form. They are expensive to build. Truly new concepts are even harder. In reality, markets are an aggregation of buyers. Markets for when a critical mass of buyers starts to use the same language to self-identify with a a category. After a while, new buyers will use that language to find the category and the vendors in that category. The misconception is that it takes a long time to build a critical mass of buyers. It takes a long time for the buyers to ADOPT your solution language, but they are discussing business problems today. Investors look for short-cuts that lower their investment costs in building the market. That is why they look for sales relationships, OEM deals, ready made buyer relationships, competitors who have already invested in building the category, etc. Anything to shorten the time it takes to get in front of the buyers and get the critical mass of sales. They know it is expensive to pioneer a market.

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Web Marketing: Leveraging First Mover Advantage on the Web

June 2nd, 2009

Since I did a MBA research project on First Mover Advantage on the Web in 1996 for a hybrid Micro Economics & Marketing class, I have approached marketing on the web with an eye to the economic impact that the low (near zero) cost for distribution on the web would have on competition.

We have seen it in multiple online vehicles; first it was email, then application distribution, ecommerce, blogs, online communities, and now social media tools like Twitter. My research was about the challenges first movers have in creating sustainable barriers to entry for subsequent market entrants. The ability to create entry barriers for competitors directly impacts their ability to maintain profit levels (reflection, in part, of customer acquisition costs) as subsequent companies enter the market.

We are seeing in the IPhone market with applications. Someone creates a popular application and then there are four similar applications. The challenge is that there is very little in terms of barriers to entry for the competitors. The first mover can get a very limited runway to market themselves with a unique offering before the market is established. The subsequent buyers cannot really differentiate in quality. The only barrier to entry for later entrants is the number of users of an application (popularity) which provides a small advantage for the first mover.

Now, a first mover can take advantage of the web to solidify a lead if they can combine entry barriers with exit barriers. If I can get into the market before others, create a differentiation that is hard to duplicate, and find a way to make it even harder to switch (for cost or niches), then you can build upon the lead.

First mover advantage, even in that situation, is not absolute as there are large numbers of examples where later entrants, with deep pockets and brand equity, were able to catch up to the first mover. The reasoning is pretty simple. you are the market leader with a large percentage of the market, but only sell to 5% of the available market. The competitor buys 80% of the next 10% of the available market that actually buys & they all of a sudden they can catch you and become the market leader.

Here is the lesson for early stage technology companies & the tie back to the title.

  • Because the internet allows you to communicate cost effectively to large number of people, this means you have a relatively low barrier to entry into a market.
  • At this point, a potential buyer will not be able to differentiate the quality of your offering or the credibility of your firm.
  • If you pioneer a market and prove successful, you have validated the market for potential entrants.
  • If those entrants have an existing customer base & available dollars for marketing to the market, you do not have a very sustainable barrier to entry.
  • Hence, you will have to spend more of your dollars as you grow to obtain customers because the market will be more competitive & the economics of scaling communications on the internet. It is exponentially harder to get 1000 people to listen to you versus 100, and exponentially harder to get 100,000 versus 1000. Economies of scale work against you on the internet due to the messaging noise.

Ok, so if you are introducing a new product, how do you protect your advantage?

  1. Word-of-Mouth Marketing = Lower Customer Acquisition Costs - You have to drive an effective referral program over the web. Social media allows you to do that if you can get a core set of evangelists. This is fundamental to lowering your AVERAGE customer acquisition costs. Free referrals balance your costly marketing and sales costs. Don’t count on word-of-mouth marketing, though, very few companies get homeruns. Hope for the homeruns, but be prepared to manufacture runs to stay in the game until you see the right pitch.
  2. Offering Value = Adoption – you have to meet & exceed the customers expectations around the value of the offering with something they cannot get anywhere else easily. That means you cannot satisfy everyone, so target an audience who will appreciate your offering. Make sure you get them to be raving fans. This gives you a core group of evangelists. Provide features and functionality that are must-haves, not nice-to-haves. This will involve a great deal of market research to understand the difference. This means investment in technology, automation of processes, unique approaches, patents, etc. Differentiation is not absolute, but it the starting place….
  3. Pricing & Packaging = Competitve Positioning – Assume that you will have competition and that they will be strong. You need to plan on an aggressive pricing and packaging strategy that creates both barriers to entry for competitors and barriers to exit for your customers.
  4. Partnerships = Distribution - the right “big brother” partner can enable you to leverage their customer base and brand marketing power to lower your average customer acquisition costs. Partnerships are difficult to build and are time consuming to manage. If done right, you will seed the market for the partner, provide them with sufficient channel support, and assume that you will have to do most of the heavy lifting in terms of closing sales until they see success.
  5. Creating Long Term Relationships = Barriers to Exit – This is the tricky one as there is a fine line between providing customer value & building in barriers to exit; ie. contracts, location, ability to export data, feature breadth, etc. Barriers to Exit can be perceived by customers as barriers to entry with a vendor. My belief is that companies should strive to be “easy to do business with” and they should focus less on building artifical barriers to exit, but rather more on the true barrier to exit for a customer which are value-based pricing, planned commoditization, continual innovation & service. At the end of the day, if a company can provide competitive pricing for the basics, unique differentiated functionality, and provides world-class service; why would anyone switch?

My next post on this topic will be for companies who are entering an established market with a new, differentiated offering. How do you leverage the web to displace entrenched, but less capable competitors.