A friend of mine told me recently that he closed a $240,000 account. A competitor (let’s call it BigCo) was bidding for the business. I doubt that BigCo even considered my friend’s company (let’s call it SmallCo) a direct competitor. BigCo is a major player in their space and it raised a lot of money from good VCs and has a strong customer base.
SmallCo’s product doesn’t have a tenth of BigCo’s features. And yet in spite of that, SmallCo won the account. Actually, it was because of that.
As products mature, companies continue to compete in heated battles with their competitors by adding more features and more functionality. Investors and shareholders want to see steady revenue growth, so prices creep up. Yet, the truth of the matter is that a lot of customers need only a fraction of a product’s capabilities. In fact, many of them would prefer fewer features because extra features tend to make products clunky and difficult to use. Still, companies become feature-producing machines.
As a result, what often happens is some small company comes out with a product that’s just good enough and just cheap enough for the lowest tier of customers and BigCos start losing business. BigCos console themselves by saying the customers weren’t all that profitable and that it’s too expensive to serve them. And they walk away and focus upstream. SmallCos gets a foothold and releases a new set of features. And the process repeats.
There are hundreds of examples. PCs disrupted mainframes exactly this way. Japanese cars and electronics disrupted American ones, only to be disrupted later by Korean companies and now Chinese companies. Merrill Lynch was disrupted by Schwab and then E-Trade. Phone companies by Skype. Visa and Mastercard by Square. Cisco was disrupted by WebEx, then acquired it, then screwed it up, then got disrupted by Citrix and LogMeIn. Smartphone cameras disrupted Nikon and Kodak.
So why is this relevant to the deal that I mentioned above? Because I believe the process starts much sooner now. Companies that are barely out of the gate are getting disrupted. The rapid pace of innovation we are experiencing, plus the low costs of starting a company and the reasonable availability of venture capital, add up to a large number of startups fighting for survival in very close quarters. I found the following perceptual map of photo sharing services a couple of years ago.
So what can be done about this?
- Identify the function that most customers of your segment find most important – this requires a lot of customer discovery – and make it the focus of your value proposition. Be AMAZING at it. Photobucket is good at mobile, but Instagram is great. For example, RingCentral provides VoIP as a part of some of its services. But we never positioned ourselves as a VoIP company because that’s not our most important thing. Cloud business phone system is.
- Think about your space not only in terms of who competes with you directly but who is capable of addressing the same customer needs you do. When talking to prospects, don’t just ask them which competitors they are looking at but ask them about ALL the needs they hope to address with your product. By asking this question a few weeks ago, we identified the opportunity we won today.
- If you are a larger company, defend your lowest tiers fiercely. Better yet, disrupt yourself. Launch a stripped down, low-cost version of your product. This doesn’t happen much. I discussed the difficulties of this on my blog earlier this year. One example I gave is Charles Schwab’s launch of eSchwab. Do you have others?