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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.