Perspiration Principle #72 – FUN TO BE A FIRST MOVER? NOT SO MUCH.

Perspiration Principles – Principle number 72 by Howard Tullman

FUN TO BE A FIRST MOVER? NOT SO MUCH

Every entrepreneur I know talks about being a first mover. Very few of them actually think deeply enough about what this really means. And, unless you actually understand what it means to be a smart first mover and you carefully analyze how to fully take advantage of the competitive opportunity, you might just as well be talking about the winter and all your conversation will have about as much impact on your business as whining does about the weather.

The conversation really needs to start with all the very good reasons NOT to be a pioneer. Pioneers aren’t automatically entitled to anything except maybe some arrows in their backs. If you don’t have an ongoing strategy and a specific plan to seize upon the opening that you’ve created by being ahead of the pack as well as the ability to keep moving forward and raising the bar, all you’ve done is set the table for someone else to roll right over you and eat your lunch.

It’s tough to be first. Here are a few of the key reasons why:

(a) You’ve got to learn about the new marketplace and the new customers – exploration and discovery is expensive, uncertain and time-consuming.

(b) Once you know your story and your pitch, you’ve got to explain it to your team and to your prospective customers – education is also very expensive especially with new and disruptive products and services

(c) You really don’t know what the demand for the new offerings will be, but you have to invest and build the team and the delivery capacity in advance (at least for the initially expected responses) and not everything in life can be a variable cost or bought on the fly from AWS.

(d) You can expect that the buyers’ needs and demands will quickly change over time and you’ll have to be ready to adapt and respond quickly to these changes before fast followers can “one-up” your product or service and steal your customers. Customer expectations are progressive.

(e) In establishing the market and defining the new product or service offerings, you have to commit to certain investments and parameters – 24/7 availability might be a good example – and then – unlike your competitors – you discover that you’re saddled with these early commitments while other players aren’t and – even worse – when the customers really can’t tell or don’t care about the differences in the offerings.

(f) It’s quick and easy for competitors to imitate your product or service and sadly it’s also much cheaper. You can expect almost immediate price competition and pressure on your margins.

(g) Too many things today on the Internet are just a click or two away and customers can jump quickly and easily to alternatives. There are very few powerful impediments to these kinds of shifts and some of the traditional barriers (like brand) are no longer significant advantages.

On the whole, not such a pretty picture. And it doesn’t get any better or easier because if you really want to capitalize on your early advantage, there are more than a dozen considerations and calculations that you need to take into account and which will ultimately determine how smart and successful a first mover you will be. You need to design your approach, your marketing, and even your timing to try to optimize each of these dimensions of the problem for your benefit. As you will see, some of these things cut both ways and you’ll need to make some difficult choices (and some rapid changes) as you move through the process.

Here’s a summary list of the things you need to be thinking about if you want to win.

(1) Hide the Ball from the Competition (Lack of Information)

As you are rapidly coming up the learning curve about the new business, you have to do as much as you can to avoid educating your competitors and to keep them from quickly (and more cheaply) imitating your product or service. Let them make their own mistakes and not learn the shortest paths and the best answers from watching your stumbles.

But this gets tricky because you’ve got to weigh a bunch of constantly competing considerations. First of all, your customers need product information and other assurances that you’re for real. Second, your investors and lenders (as well as future financiers like VCs who couldn’t keep a secret if their life depended on it) need details, progress and performance reports, and even competitive information. And finally, you need to think about all the standard issues like PR, marketing and promotion concerns because you’ve got to get the word out about your product or service in the broader market.

And the Web, if anything, has made these concerns even worse. Instead of a quiet and confidential test or launch, the minute you put up a functioning website, the whole world can basically see it; copy it; reverse engineer it; and claim that they can do it better and frankly, the general population of consumers out there can’t really tell the difference.

(2) Competitive Ju-Jitsu (Delayed Response)

Disruptive early entrants often succeed because their larger, in-market competitors may be unwilling to immediately cannibalize their existing businesses and/or may be constrained by legal or regulatory considerations (think AirBnb or Uber) or by other reasons such as concerns for near term financial results. In addition, it often just takes large organizations a frighteningly long time to recognize, evaluate and formulate a competitive response to new threats and entrants particularly when these new players enter at the low end of the market.

(3) The More the Merrier (Economies of Scale)

This is pretty obvious. As your production increases and your facilities and resources can be more fully and efficiently utilized, your costs come down. More importantly, in a market with limited overall demand, the next few potential players can’t find enough customers to scale up to a size where they can compete effectively with you.

(4) I’m not Necessarily Smarter, I’ve Just Been Doing It Longer (Producer Learning Curve)

In addition to cost savings, the longer you are producing and servicing customers, the more efficient and experienced you become -especially with respect to their specific needs and requirements – and the more knowledge you gain which is not readily available to competitors or new entrants. Compliance issues, regulatory requirements, security and confidentiality considerations all create new and highly effective barriers.

(5) Inertia is a Wonderful Thing (Buyer Switching Costs)

When users find it costly or time-consuming to switch – even to a better product – the guy who got there first wins. High switching costs are usually associated with cases where (a) the products are expensive and long-life (durable goods); (b) where the buyer needs to make large co-investments; (c) where it’s expensive and time-consuming to seek out and evaluate alternatives; and (d) where the buyers have to invest a great deal in training costs.

(6) Take My Word for It (Reputation)

Today, there are many products and services that the consumer really can’t accurately evaluate until they’ve been bought and used. So buyers adopt and rely upon shorthand references such as your brand equity and the length of time you’ve been around and then equate these with quality and stability. First in good; but best is better.

(7) The Gang’s All Here (User Multiplier Effect)

First movers get to ride the product adoption ramp and take advantage of the fact that certain products dramatically Increase in value and utility as the number of adopters grows. This is basically Metcalfe’s Law of the compounding value of networks. Products of this kind also create tremendous market pressure for standardization which moves the market toward a de facto standard.

It probably wasn’t much fun to be the only guy on the block with a fax machine and no one to fax to. As a result, a particular product or service can quickly become the market’s means of coordination. No one wants to be left holding a Zune.

And not too long along, the VHS video tape format killed the Sony Betamax because, when Sony refused to share or license its technology, 4 or 5 other manufacturers all adopted the alternative VHS standard and it won the hearts and minds (and dollars) of the consumers.

(8) Smart Buyers Buy Blue (Buyer Evaluation Costs)

As new buyers are confronted by competing offers and have significant costs, time constraints and other difficulties in evaluating them, they try to Free-Ride on the presumed analyses of the larger and better informed players in the market who have already signed up with the market leader. As they used to say: “No one ever lost their job buying IBM.”

(9) It’s So Crowded No One Goes There Any More (Advertising and Channel Crowding)

Early entrants have less crowded and competitive venues and spaces as well as more alternatives for advertising and distribution channels. As the market becomes more congested and the competition for the consumer’s attention grows, everyone’s messages get dimmer and it becomes far more costly to create and build customer awareness and/or to secure shelf space. Late entrants typically chase smaller niche opportunities or have to buy access and distribution thru third parties.

(10) It’s Lonely at the Top, but at least It’s Not Crowded (Pre-Empting a Product Position)

First movers have the chance to choose the most attractive (typically high-end) positioning in a market which then creates future opportunities to expand and diversify the product lines at lower costs and with less competitive resistance. Premium pricing which early adopters are willing to pay as well as aggressive and influential word of mouth creates self-fulfilling buzz and increased demand.

(11) Not Everyone Gets a Great Date for the Prom (Channel and Partner Selection)

There are demonstrably better channels, representatives and distribution partners in every market. Once these are paired off and spoken for, late entrants settle for the remnants and their products suffer by comparison. More importantly, in some cases, there are only a limited number of acceptable and appropriate strategic partners in a market and, once they are committed to a competitor, there’s very little chance of finding alternative and viable partnerships.

(12) Musical Chairs (First Call on Scarce Assets)

First movers get the opportunity to control and lock up scarce facilities, end caps, websites, locations, suppliers, and other resources including key personnel. Slotting fees and other costs emerge later. Typically, early on, these scarce assets are available at lower relative costs as well because the sellers/leasers don’t initially identify or appreciate the levels of future demand and the scarcity of their offerings.

(13) Do It My Way (Opportunity to Define Standards)

The chance to define, control and continually advance the product or service standards in the market and to keep raising the bar for the competition is invaluable. Frankly, the federal and state governments, by and large, no longer have the personnel, skills or resources to regulate these matters in many industries and, as a result, the smartest and fastest operators are seizing the initiative. Standards Drive Scale.

(14) Leave It to Larry (Institutional Barriers)

This is another area where governmental shortcomings have created a void. As the number of applicants, entrants and competitive offerings in a market grows, the time, ability and interest of various institutional parties, regulators, suppliers and other gatekeepers to deal with, support and accommodate all of the potential players rapidly diminishes. Pressure mounts on new entrants to obtain connections and other access through existing players at much higher, brokered prices. Charges and costs emerge for validation and vetting actions, hook-ups, access to scarce personnel and services or unique data feeds which dramatically raises the operating costs for late entrants.

(15) Save Something for A Rainy Day (Early Profit Margins)

You’re gonna make mistakes and have plenty of false starts. But first movers can command the higher margins associated with new, novel and often scarce products (for a period of time) and this lets you build up some cash reserves for the future price battles to come and, in some cases, you can even do some early price cutting to discourage other entrants.

PP: “You Get What You Work for, Not What You Wish for”