Archive for the ‘Barriers to Exit’ Tag

Unhorsing an Entrenched Competitor

Since my last post was about first mover advantage https://rosenhaft.wordpress.com/2009/06/02/web-marketing-leveraging-first-mover-advantage-on-the-web/, this post will be a how-to on enter a market with an entrenched, but less capable competitor. The assumption is that your offering is of superior quality or has unique attributes for the market at large. There are different strategies for purely niche products, “me-too”, or purely local offerings that are the subject for later posts. This post is for that company that has developed a better mouse-trap and needs a market entry strategy to unhorse an less capable, but established competitor.

My last post discussed the micro-economics behind the marketing and this post will do the same. Displacing a competitor is all about two costs:

1. Opportunity Costs – the value of your opportunity outweighs the switching costs; time, money, resources, pain, risk, etc.

2. Switching Costs – hard AND soft costs; time, money, resources, training, risk, pain, etc.

The entrenched competitors barriers to exit are your customers barriers to entry for your offering. Many companies under estimate the switching cost equation in displacing a competitor. Many times a company has a much better offering than their entrenched competitor, but cannot seem to get traction. When you di deeper, you find out that there is much more to the “cost” of switching beyond features or a small price difference. You find out a customer has to go through extensive training, has an extended contract that is not up for renewal, or doesn’t perceive the value of the offering as worth the hassle of switching for such a small price savings.

The keys to switching are really about changing the rules of the market. Bringing something new in terms of capabilities, changing the cost structure through planned commoditization, providing a different focus, bringing a targeted solution, AND FINALLY – being easier-to-do business.

Major Factors

1. Price –  Competing on price alone is a very difficult as it actually devalues the offering and discourages loyalty. “Cheep” is different than “economies of scale”. At the onset of the article, I positioned “me-too” offerings as a different strategy. This is why… “me-too @ a lower cost” has a place in the spectrum of the market targeting the cost-conscious buyer. Knock-offs are a good example; however, this takes a different type of positioning to target the cost-conscious buyer with a specific call-to-action. This is a particular market strategy that, in reality, is a niche. If done poorly, or not by design, it can lead to devaluation and rampant commoditization. If you can match the quality with 20% less cost, you generally can attract a portion of the market’s attention depending upon the industry and the competitor (see relationship below).

2. Capabilities – Features & Functionality – This is the secret-sauce approach. We are better because we can provide better capabilities that the competitor cannot. This may be a segment of the market or the whole market depending upon your capabilities. Features tend to not be sufficient on their own to motivate switching.

Better functionality may not necessarilymotivate a buyer to switch either. If you are higher priced with better functionality, you will have trouble with major displacement . The cost factor will be weighed into the equation unless your capabilities significantly change the buyers value equation; ie you save them much more money than the offering’s cost. “Our product saved the buyer 35% in processing time which translated into $250,000 in savingsover 3 years.” If your product costs $75,000 installed, which is $25,000 more than your competitors, but you save them $$225,000 in total cost over 3 years, you can make a case for displacement. If you are more expensive and cannot calculate a hard $ ROI, you will have to rely on a combination of techniques for displacement. For products that are truly revolutionary in which you change the cost structure of the market, you can introduce a lower price, and show a better ROI; then you have an opportunity to displace a large part of the market.

3. Relationship – Customer Support /Responsiveness /Ease-of-Use / Easy-to-Do-Business – Most companies provide mediocre service by definition. Whether by scale issues, complacency, or distraction; a majority of entrenched industry players are vulnerable to displacement based upon customer dissatisfaction. The notable exceptions are the ones that really shine. Service is particularly challenging for product companies.

If you are a new entrant, make service a hall-mark of your offering. Take the time to put in place the processes that will enable you to demonstrate your responsiveness to the challenges of the market. If your competitor’s customers are annoyed by the amount of training it takes to get people productive, then this should be your focus. If a competitor takes 2 business days to answer an email, then this should be your focus. My guess is that average companies probably have 10-20% of their customer base vulnerable to switching due to service. Below average service companies probably have a lot more.

4. Speed– the axiom of “time is money” is a great selling point for a potential customer if you can demonstrate the ROI from the change. Selling that we are faster (slightly) in itself does not generally motivate buyers. Proportionality is critical. Did you upgrade your last PC because it was milliseconds faster? If so, you were a minority; hence why the PC & chip industries are rethinking the “speed is better” industry sales pitches. Save 20% in a major operation & improve quality; you have a customer’s attention. Do it at a lower cost due to changes in technology; better. Now, do it without disrupting their organization’s operations while they switch; you have a “winner”.

5. Tailored Solutions –A large competitor’s niche or market segment, may actually be your market. Once again, proportionality applies. For your competitor, a segment may be 10% of their total market. A niche may be 1 or 2% of their revenues. For a company with $2B in revenues, $50M may not be sufficient to focus. For you, $50M is a sufficient market to enter and begin your market domination. If you competitor is not focused on a part of the market, then the obvious strategy is to pick a small enough market segment that you can dominate with a more tailored offering.

The challenge is to balance the entry into the niche without pigeon-holing yourself or awaking the sleeping giant. Your ability to service this niche with ramifications for the rest of the market, may be just the wake-up call and the validation for upgrading their offering. You could create your greatest competitor; who then leverages their relationships to the market with a “me-too” offering. Your competitor could even use your “newness” against you as a risk mitigation strategy.

Figuring out how you will enter, how you will communication the value, how you will expand beyond the entry point, and how you will evolve your offering to stay ahead of the competitor is critical. You don’t want to win the initial battle and find yourself losing the war….

6. Risk Management – Most new entrants fail to gain traction because they fail to account for the buyer’s fear of change and overall inertia. “I am not really happy with our vendor, but….. we would have to go through training, we have a contract, saving that little money isn’t important, we are comfortable, we are used to it, etc.”

Pick your excuse…. what they are really saying is that your offering isn’t worth the trouble in switching. You haven’t built a sufficient case to risk switching. Contrast that with a resounding YES that certain products and services elicit. These offerings provide a significantly, measurable, emotional, and tangible improvement over what they are doing today. AND these offerings do it in a way that seems easier and doesn’t involve much risk of switching.

Pull all of the above together to build a multi-faceted, multi-stage market entry strategy and you have the potential for a “disruptive” offering. The reality is that most companies don’t have a disruptive, “home-run” where they can drive word-of-mouth merely by “building it and they will come”. The majority of younger companies will have to focus on the fundamentals and build upon their slight advantages. In essence, they will have to manufacture runs from their singles and wait for the “right pitch”. Understanding your competitors strengths and weaknesses, the market opportunity for improved offerings, and understanding the market’s risk equation are the keys to successfully entering a new market. 

There is a concept that I call “switching point” which is the micro-econmomic version of Malcolm Gladwell’s “tipping point”. The switching point is the threshold in which you have created sufficient value to convince the potential customer that the opportunity of your offering outweighs the switching costs from the competitor. This is not an absolute, in fact may be unique to each customer, but a good market analysis should incorporate an identification of this equation into the sales process. Understanding the buyer motivation, switching challenges, and pain points will assist you in displacing an entrenched competitor.

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Web Marketing: Leveraging First Mover Advantage on the Web

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.