In a previous article, I described many unappreciated risks in competing in a crowded market. This article explains when to try and how to succeed in attacking a crowded market.
Research has shown consistently that high tech markets exhibit network effects. Network effects enable the biggest winner in a market to take both market share and market rewards disproportionately from other competitors. Three such examples are Oracle in relational databases, LinkedIn in professional social networking, and Salesforce in sales automation. Winners stay winners until they miss out on the next new thing, and while they win they seize the vast majority of economic rents in the space.
This fact has tremendous implications for an entrepreneur’s decision to compete in a tech B2B market that is crowded with competitors. Being #1 in a market is far more lucrative than #2 (usually by about 2:1 in terms of profits and enterprise value) and vastly more so than #3 (usually 6:1.) Once you realize this, it becomes clear why entrepreneurs should not compete in a crowded tech market space unless you believe with good reason that you can be #1, or at worst, #2. Otherwise, you will not be rewarded for your hard work.
It is always obvious after the fact who the winner is and why life is so much better for him/her than it is for everyone else. However, research on the relationship between market rank and profits tells us little about how the winner-to-be got to be the real winner and what tactics he/she used to beat everyone else. However, it does suggest strongly that when a firm looks like it will become the winner, it begins to accrue, at a faster and faster rate, the many benefits of network effects that lead to market leadership.
Therefore, the key to becoming the winner in a crowded space is to establish early leadership in the space sufficient to convince people that you are a strong candidate to be the winner. The sooner you can do that, the sooner the network effects turn the competitive tide in your direction and you actually become that leader.
There are three stages to building market leadership:
1. First, introduce a unique product/service/business model innovation which quickly catches the attention of prospective customers and gives you disproportionate mindshare.
2. Next, win a quick succession of lighthouse customers, proving the competitive superiority of your unique offering.
3. Finally, reap the financial results and rewards that reinforce the impression of market leadership.
This is a serial progression, and the tactics used to win in each stage are different, so you must match your tactics to the stage you’re in.
By far the hardest stage to move out of is the first, and it is even harder to move out of successfully if you are entering the market late. The key here is to identify a unique differentiator, value-add or use case that can be quickly demonstrated with high confidence. That will force prospective customers to stop talking to the other vendors and get you to the head of the line.
After my first startup was sold to Broadcom, we entered the Wi-Fi chip market. We were one of the very last entrants, and almost no one remembers today that our first six months of sales were very disappointing. Then, we demonstrated a working 802.11g chip to key prospects like Apple, Dell, HP, and Netgear nine months ahead of when any established vendor would have their alternative. In three quarters, we went from being a struggling market entrant to the market leader.
The reason why being the first with a new technology to market was so important was that the 802.11b market had become commoditized and the product vendors needed new technology to establish more profitable system prices. We delivered on a first-to-market solution and the market declared us the new leaders with mammoth purchase orders since we were the only game in town.
First-to-market is a great way to demonstrate leadership, but leadership can also arise from a superior business model. When Salesforce brought their unique SaaS business model to market, it was immediately attractive to prospects. It turned a bureaucratic CapEx approval process for buying software into a much easier to approve OpEx one. It also showed Salesforce’s confidence in each customer’s satisfaction with the product, because every customer can cancel at any time. Did the product do anything revolutionary relative to competition? Not really; in fact, it was missing many features vs. other CRM solutions. It was Salesforce’s business model which established leadership and a new direction for the whole industry.
Another way to show leadership is for a product to be demonstrably more accurate and reliable than the competition. When Google first deployed search results based on PageRank in an already crowded field of search engine competitors, they blew away everyone else on comprehensiveness and accuracy. Google has kept that lead and the leadership position for over a decade.
These examples show how to establish leadership with a unique customer proposition. The second stage is when the broader customer base sees key lighthouse customers buying into your proposition and they switch vendors to your solution. In my case at Broadcom, Apple switched from Agere Semiconductors to Broadcom in one fell swoop. Once that happened, every other potential customer started calling us. The high pitch dog whistle of being the dependable first to market vendor had been heard and accepted because of Apple’s reputation for being the first vendor to market with a high quality Wi-Fi capability.
Leadership in the final stage happens almost automatically once a unique proposition has a broad following among customers known to be savvy buyers. At this point, strong financial results and lots of customer success stories, as well as continued execution, will maintain leadership until another disruptor comes along.
We’ve now seen that the winner in a crowded market space wins disproportionately due to network effects. As network effects accumulate, clear leaders emerge and cement their status. Establishing a unique customer proposition that is rapidly accepted by customer thought leaders in a space leads to the strongest financial results and compelling customer success stories. That initial leadership can come from engineering execution, developing a better business model, from delivering the highest quality or another differentiated attribute.
If you plan to enter a crowded market space, make sure you have a path to a unique customer proposition which you can deliver and then go to it!