Customers & Competition

In the Customers & Competition chapter, you will explore two important fundamental components of a winning business model – the market (customers) and industry (competition).  Your startup must be different in a way that’s important to your customers.  Without meaningful differentiation, you’re forced to compete on price, which puts your startup on death row.

In this chapter, you’ll learn how to use your competition to gain an advantage, how to break down a market, and why that’s so important for customer acquisition.

Most importantly, this chapter gives you the opportunity to step away from your idea and take a broad look at your proposed battlefield.  As Warren Buffett famously said, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.”  No matter how good you are as an entrepreneur, it’s hard to succeed if you pick a shrinking market or a cutthroat industry.  Avoid the most common pitfalls and learn how to identify promising opportunities with the strategies in this chapter.

Zero Degrees of Separation

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It shouldn’t be a special occasion for you to talk to your customers.  They are your lifeblood, so get close to them and understand what’s happening on the front lines of your business.  Making a habit of talking to customers provides unequaled and necessary feedback.  You’ll follow trends in your industry, understand your customers’ problems intimately, and be able to identify your weaknesses early.  Blockbuster is one of the best examples of what happens when you bury your head in the sand and ignore customers.  It took the competitors nearly a decade to erode Blockbuster’s market share, so there was plenty of time to react.  Yet the executive team didn’t take the competitive threats seriously.  Had management listened to customers, it’s highly unlikely they would have missed the transition to the internet and streaming.

You must always improve your offering to stay competitive.  Customer appetite shifts like the wind.  By keeping zero degrees of separation with customers, you’ll be able to predict changes in demand and get ahead of the curve.

An average customer interview takes less than 10 minutes, so set aside some time every week to meet with customers.  One meeting a week is often enough.  Alternate between current and past customers to gain a solid understanding of why people prefer you or your competition.

You Need a Moat

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A moat is a deep, broad ditch that surrounds a castle and provides it with a preliminary line of defense.  In their heyday, moats rendered the enemies’ most effective weapons useless.  You need a moat.  In other words, you need a sustainable competitive advantage.  It’s possible to start a business without a moat, of course, but it makes your life a lot harder.  The problem is that as soon as you’re successful, you can expect company.  Remember the hundreds of Groupon copycats?  With a moat you can seize the advantage by keeping enemies away and customers protected.

How do you create a moat?  There are many forms of barriers, including intellectual property (patents), know-how (trade secrets), speed of execution, brand awareness, cost advantages, government protection, and distribution rights. The most commonly employed technique is patent protection.  With the right patent protection, the smallest company can hold Google or Microsoft at bay.  If you don’t have much of a moat right now, brainstorm ways to create one and work them into your plan.  Down the road you’ll be glad you did.

10X Better

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When entering an established market, you have to worry about switching costs, or the costs required for a customer to switch from a competing product to yours.  These costs vary based on the nature of the switch, whether they’re intangible (brand to generic) or tangible (cash spent to switch database vendors).  When starting out, think about the switching costs you will ask customers to make, and why it makes sense for them to buy your solution despite the extra expense.  Some companies go so far as to pay the switching costs to get customers to change.

When thinking about switching costs, one rule of thumb is that your value proposition needs to be at least ten times better than the competition.  For example, if you introduce a new email program with better spam technologies, it needs to be 10x better at blocking spam.  If you want to start a consulting business, you’ve got to be 10x in your area of expertise.

10x can be hard to quantify, so just make sure that your offering needs to be significantly better.  If it’s marginally better, people won’t switch.  Regardless of the product or service, don’t rest until your value proposition dwarfs your competition.

Stand on Their Shoulders

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Founders usually think that they’re at war with their competitors, and they should despise everything about them.  They dismiss competitors’ strategies as foolish and incompetent.  In actuality, your competitors are probably quite capable.  Plus, your competition has already been through the growing pains of finding and landing new customers.  They’ve probably already experimented with the very strategies you want to pursue.

You can learn a lot from your competitors’ activities.  In fact, you must learn from your competitors.  It is by watching their trial and error that you can accelerate your success and eventually land on top.  It’s like NASCAR – the race usually comes down to the last few seconds, when the drafting car uses the car in the lead to build momentum and win the race.

Isaac Newton said, “If I have seen further than others, it is by standing on the shoulders of giants.” Think of your competitors’ strategies as free advice, and stand on their shoulders.  Instead of despising the competition, study them.  Learn from their activities, keep what’s working and drop what isn’t.  If they’re public, read their annual reports.  Analyze their marketing campaigns.  Reverse engineer their strategies.  Use this information to make your own product offering better.  Find startup success by standing on the shoulders of your competitors.

Fast Followers Finish First

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Entrepreneurs always want to be first to market.  There’s a sense of security about being first and not having any competitors to worry about.  New founders brag about the lack of competition to potential investors, and try to demonstrate that they will dominate the market by virtue of being first.  Unfortunately, the idea that you gain an advantage by being first in a market is wildly misleading.  The companies that eventually dominate new industries are almost never first movers, they’re the fast followers.  Think, for a moment, of as many fortune 500 companies as you can.  How many of them were veritable pioneers of the industry and how many were fast followers?  Google, Microsoft, Apple, GM, eBay, and Wal-Mart—all fast followers.  The companies you name will undoubtedly follow the same pattern.  Fast followers are companies that are not the first to market but close on the heels of the first movers.  They look at what previous entrants have done and learn from their mistakes.  So don’t worry if you are not first to market.  Use your delay as an advantage to learn everything you can about the competitors, and then out-execute them.

Get a Job

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Strong experience in an industry is one of the highest indicators of a startup’s likelihood for success.  This is well-known by professional investors, who often insist on industry experience before they’ll invest in a company.  And this makes sense – if you don’t understand an industry, you’re likely to make rookie mistakes that could have been easily avoided with experience.  With limited room for error, mistakes lead to quick startup deaths.  If you want to start a new company in an industry in which you have no experience, consider getting a job with an existing company in that industry.  This might sound crazy, but three or four months is the blink of an eye compared to the years you’re about to commit.  Plus, it’s the best form of primary market research you can do.  Not only will it give you more credibility with investors and partners, it will also greatly increase your likelihood for success.

If you do go this route, be careful with your employment contracts – you don’t want to sign something that would later prevent you from starting your own company.

Follow the Leader

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When first starting out, you have to de-risk your startup by eliminating as many unknowns as early as you can.  The way the industry works is one of key unknowns to focus on, as there are often unspoken rules or norms that will heavily influence your strategy.  Being aware of these nuances will improve your chances for success and help to minimize course corrections.  For example, let’s suppose that you have a new technology that you want to license to industry manufacturers.  You then spend six months building the business around a licensing strategy, only to find out that the manufacturers have never licensed a technology before and won’t work with you.  Oops.  Or, suppose that you notice that a lot of restaurants don’t accept credit cards.  You set out to create a robust credit card payment system, only to find out that they like being cash only because of the “tax” benefits.

Industry details fundamentally impact your venture, so learn as much as you can about how your industry works.  Talk to suppliers, distributors, industry veterans, competitors, and anyone else in the industry.  There are times when innovation is good and times that you should follow the leader.

Competition is a Good Thing

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When pitching their startups, first-time entrepreneurs often brag that they don’t have competition.  This boasting usually implies that they’re onto a unique opportunity that’s never been thought of before.  News flash – there’s no such thing as a new business idea.  Capitalism is amazingly efficient at allocating resources and filling needs.  If there is a latent need of a significant size, it has likely already been met.  In other words, if there really is no competition for your idea, then it’s probably a bad idea.  Competition is a good thing.  Not only does it establish that there is a market, but you can learn valuable lessons from your competitors.  In fact, if you take a look around, most industry captains were not first to market.  Instead, they were fast followers that stood on the shoulders of competitors who went before them.  Granted, while incredibly rare, it is possible that you actually don’t have any direct or indirect competitors.  If this is the case, you better have a bulletproof story as to why you believe this market exists and how you’re going to create it.

Differentiate or Die

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A surefire way to fall on your face is to lack meaningful differentiation from the competition.  A startup that tries to win market share by copying an already established brand is dead on arrival.  If you’re creating a new market, differentiation is already built in, but if you’re competing in an existing market then your product has to be unique in a very compelling way.  Find a way to carve out a niche and appeal to the slice of the market that isn’t satisfied with current offerings.  Your differentiation will help spark distributor interest, get attention in the stores, give the press a reason to talk about you, and ultimately generate sales.

If you aren’t different than the competition, the only way you can compete is on price.  A startup competing on price is like a little leaguer going up to bat against Roger Clemens.  Startups don’t have the cash reserves or economies of scale to win that fight.  And the only way to avoid competing on price is to create differences between you and your competitors that buyers actually care about.  Differentiation is essential to premium pricing, so identify meaningful points of difference and make sure they’re loud and clear.

Make a Competitive Matrix

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When it comes to starting a new business, you can’t overlook the competition.  You have to know who you’re competing against, and how you’re going to beat them in at least one segment of the market.  A common mistake is to underestimate the competition, particularly when it comes to new markets and innovative products.  Naïve is the entrepreneur who denies having any competition.  Whether direct competitors or indirect substitutes, you always have competition.  And every competitor has features and offerings that appeal to different customer segments in different ways.  The easiest way to visualize all this information is with a competitive matrix that captures the companies/products along one axis and the features/benefits along the other.  In the boxes of the table you use check or ‘X’ marks to denote that a competitor has a feature or not.  If you want to add more detail you can also write text in the box.   The point of the matrix is to quickly summarize who you’re competing against and what features or benefits they offer.  A matrix will help you highlight how your product is different and why it matters to the customer.


Study Your Best Performers

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When you’re running a company, it can be hard to figure out how to improve continuously, week after week, month after month.  Fortunately, there’s an “easy button” hidden right in front of you — your star performers.  In any organization and any function/role, there are always standout employees.  Whatever it is, there are people who can find a way to do things better and faster than everyone else.  This is your key to unlocking massive organizational improvement.  You can study what your best performers do and how they act and distribute these findings to the rest of the company.  Is your best sales person positioning the company or its products in a certain way?  Have the rest of the sales force parrot this same language.  Is your best ops person using checklists to ensure nothing is lost or forgotten?  Learn this system and train the rest of the ops team with it.  Your star performers are your short cut to excellent performance across the organization.

Trust Your Instincts

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Mark Pincus, serial entrepreneur and founder of Zynga, said “an entrepreneur’s instincts are right 95% of the time.” When you first start your company, it usually starts with an instinct. You can feel in your gut that there’s a big problem that needs to be addressed. Then you have an idea as to how to solve that problem, and this is where you need to be careful. According to Mark, you’re instinct is right 95% of the time and you should trust that feeling. But the initial idea you have to solve that problem is usually WRONG. According to Mark, your initial idea is only right 25% of the time. This means that while you can trust your entrepreneurial instinct, you have to be flexible on how you try to solve that problem. In fact, when first starting your company you should EXPECT to change your idea multiple times. Listen to your customers and be open to how you solve the problem so you can build products and services that really solve the problem for customers.


Think Backwards

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When thinking about how much money you should raise from investors, think backwards. First, figure out which milestones you want to hit. These should be meaningful BHAGs – Big Hairy Audacious Goals. Usually, these milestones are achievable in an 18-24 months timeframe.  Then, you have to build a plan in reverse that is designed specifically to achieve the milestones you created in the future. In this way, you are actually building your plan backwards, starting with the milestones in the future and working in reverse to the present. Building out a detailed financial model of what will be required to achieve those milestones gives you the total amount of funding you’ll need. And be sure to add a small buffer for unknowns along the journey.

Play to WIN

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You can’t play not to lose. You have to play to win.  When you play not to lose, you won’t have a winning mindset and strategic approach. You hedge your bets, and don’t go all in on a strategy or business model. If you want to build a world-class company and dominate the industry, you absolutely have to have a winners attitude. For example, you are hedging when you refuse to pick just one customer segment and instead try to serve all customers in a market. If you try to serve both large and small customers, you’ll split your forces and divide your focus. By not focusing on one segment, you are destined to be mediocre at best. Your sales teams, product managers, and customer service will all be split between many different types of customers with different requirements.  If instead you play to WIN a certain type of customer, it’s possible to WOW that customer beyond all expectations and dominate that segment. After WINNING the first segment, you can proceed to other market segments.  This is just one way you have to play to WIN.  This WINNING mindset should cascade throughout the entire organization and impact every aspect of the business.  The stakes are big, so play to WIN!!

Focus on the Key Points of Leverage

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“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” –Archimedes

Any company trying to achieve massive scale needs to find their “lever.”  Think about your leverage as your unfair advantage, or something that only your company can wield to its advantage. Your job is to identify the leverage, protect that leverage as much as possible (e.g., patents, trade secrets, etc.), then exploit it to achieve sustainable, explosive growth.

As a resource-constrained startup, you can’t tackle everything at once. You can’t vertically integrate 100% if your product, and even if you could it wouldn’t make sense to try. Instead, identify the key points of leverage in your business where you can get an damn-near-impossible-to-copy competitive advantage. Then, make sure you OWN that advantage. Focus ALL of your efforts and resources on achieving and maintaining that advantage. This is the essence of a sustainable competitive advantage, and if you can do this it will be very difficult (if not impossible) to compete with you.

Without some kind of leverage in your business, fending off the competition will be impossible. The moment another talented team of entrepreneurs and engineers sees the potential of your innovation, they will be quick to steal it.

There are many kinds of leverage that you can exploit in the world of startups.  Most of the time, the leverage comes from a significant technical advancement. Any technology that’s significantly better/faster/cheaper gives you leverage. By definition, a cutting edge technology-based startup will have leverage over the competition.  This technology might allow you to profitably price your products below competitors’ costs. Another way leverage can come into the picture is through your business model. Any aspect of your business model, from distribution to revenue model can reveal significant points of leverage. Tesla’s core competitive advantage comes from its highly differentiated centralized OS architecture is so counter to conventional car manufacturing that it would be impossible for incumbents copy.

10 Things You Should Never Do Before Starting

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Whatever you do,

  1. Don’t write a business plan – this comes later
  2. Don’t try to get a loan – you won’t qualify anyway
  3. Don’t start building immediately – get feedback first
  4. Don’t rent an office – work from home
  5. Don’t advertise – what would you advertise, anyway?
  6. Don’t buy fancy equipment – rent or borrow, save your cash
  7. Don’t quit your job – there’s a lot of setup you can do first
  8. Don’t incorporate – worry about this distraction later
  9. Don’t look for a partner – explore the idea first
  10. Don’t hire for employees – start building it yourself

These are fatal mistakes that can doom your startup from the beginning.  They are either major distractions that pull your focus away from what matters, or they’re a waste of your precious startup capital.  Put first things first, and avoid these ten temptations.

Congratulations, It’s a Boy!

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Founding a company is like having a baby. It takes just as much time, energy, and attention. Like raising a child, your startup is a direct reflection of you, and it’s up to you to make sure that it has the right values and mission. You have to protect it when it’s young, and help it grow up to be strong and independent. You pour your heart and soul into it, and will do anything to make it succeed. It sucks your bank accounts dry and you gladly pay.

If you have a business partner, it’s like having a spouse. In fact, in the early years you will likely spend more waking hours with your partner than your spouse.

Like parenthood, owning a business is also one of the most rewarding things you can do.  To watch your business grow into a powerhouse is amazing and inspiring.  To see that you created something where before there was nothing, to know that you made your own little dent in the universe, creates an unparalleled feeling of pride and satisfaction.

Before you get started, recognize that starting a company is a serious commitment.  If you are going to succeed, it will take the same dedication and lifestyle rearrangement as parenthood.  Are you sure you’re ready to bring a baby into this world?

A Family Affair

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You already know that starting a business is an all-consuming pursuit.  What you may not realize is that it will consume your family as well.  Starting a business is truly a family affair. To one degree or another, everyone will have to step up and make sacrifices.  Your income will decrease significantly for the foreseeable future, which means you won’t be able to afford many luxuries.  Instead of leisure time, your family will probably end up putting in time on your business. You will be working for most of your kids’ childhoods.

Startups have broken up many happy homes, so set expectations from the beginning. Make sure your significant other is 100% on board, and ready to make the necessary sacrifices.  Starting a business usually does one of two things: it brings you closer together or drives you apart. Make sure your relationship can withstand the stresses of a startup.  Address any hesitation or trepidation up front, with an open and honest discussion. Your family’s unwavering support will be critical to overcome the challenges you’ll inevitably.

Welcome to the NFL

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This isn’t your neighborhood little league.  You’re competing against the best, and you have to be the best if you hope to win in the marketplace.  Capitalism is ruthless, so don’t expect any mercy.  Customers are flippant.  One day you’re flying high, the next you’re bottoming out.  Entrepreneurship is as competitive and cut-throat as the NFL.  You’re going to have to pour it on and give it everything you’ve got.  Just when you think you nailed it, the market will shift, a new competitor will enter, or something will go wrong.  Right when you reach the top, you’ll get knocked off.  To win, you’ll have to excel at the fundamentals, stay eternally vigilant of encroachers, and always search for new opportunities.  Then, the moment you start to get traction you can expect company.  Current competitors or other aspiring entrepreneurs will take notice of your success and copy your model.  Start your business with your eyes wide open, know what you’re getting into, and understand how truly difficult the startup path is.  If it was easy, everyone would do it.

Unadulterated BS

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People like to think that there’s a typical entrepreneur personality. Yes, entrepreneurs are all passionate, good at selling, and diligent about follow-through.  Beyond this, there’s no such thing as a “typical” entrepreneur.  Entrepreneurs come in all shapes and sizes. Every now and then you’ll see a personality profile quiz that purports to help you understand whether you’ve got what it takes to become an entrepreneur.  These profiles are pure, unadulterated BS.  The personalities of successful entrepreneurs are all over the map, from neurotic and obsessive compulsive, to kind and easy-going. Your personality does not determine whether you should start a business.  However, it does play a role in what kind of business you should start, and what kind of culture you will create.  Don’t let a personality profile tell you that you don’t have what it takes.  As long as you have the prerequisites of passion, salesmanship, and follow-through, then you have what it takes to build a business. There’s a place for everyone, so find your niche and pursue your dreams with everything you’ve got.