Startups fail when they run out of money. Startups run out of money when they lack focus. Without a maniacal focus on serving customer needs in a unique way, startups can flounder amidst competition. Without product market fit, the business is challenged to generate strong metrics and faces fundraising challenges. That’s why it’s critical to identify and focus on your startup’s competitive advantage.
Most of the time, start up competitive advantages fallen to five categories: product, cost, positioning, distribution and execution.
Product improvements are common startup differentiators. A better chat experience; a data modeling layer for data analysis, near-instant transcription of expenses. All of these innovations are product innovations that cause users to switch to a new product. Product advantages can be replicated by competitors given enough time, but they often last several years or more.
Cost is another competitive advantage when a new business understands how to minimize their costs relative to competitors. Amazon Web Services can offer low prices on infrastructure because of their scale, similar to their initial e-commerce business. This pricing advantage is created by economies of scale, and once a leader emerges, it’s very expensive to for others to catch up. Price advantages are more common when hardware or manufacturing are involved, because these types of expenses can be reduced at scale. Most software businesses costs are dominated by salary and very few businesses can outcompete their challengers by paying their employees substantially less.
Positioning is a more amorphous competitive advantage but can be just as powerful as the rest. A premium brand versus a value brand: which is your startup? Responsys positioned itself as a premium email marketing company with an ACV of $250k+. In contrast, Marketo’s ACV was roughly $26k and ConstantContact $265 (dollars). Each of these businesses ultimately exited for more than $1B.
Another component of brand is category creation. By developing a brand that resonates with customers, that creates a category, and that sufficiently differentiates a business from its competitors, a startup can create a lasting competitive advantage. Gainsight is synonymous with customer success and Intercom for customer communication.
Distribution advantages don’t come around very often. It could be the dawn of search engine marketing, mobile app store distribution, enterprise apps or distribution, relationships with a key distribution channel, or novel marketing tactic. Dropbox refer-a-friend. Zendesk’s community and referral marketing effort. Bill.com relationship with a national bank. Xero courting accountants to acquire businesses. Distribution advantages place a startup’s product in front of customers in a scalable, cost-effective way that is difficult to replicate.
Execution is a competitive advantage when the team is uniquely qualified to pursue and opportunity. David Duffield founded and ran PeopleSoft before starting Workday, a SaaS disruptor to an incumbent whose business he understood better than anybody else. Because after all he had built it.
To be successful, a startup needs only one or two of these competitive differentiators to succeed. Trying to do all five increases the complexity and execution of the business. Consistently, the startups that differentiate based upon the founders’ strengths (product, marketing, partnerships, expertise)are the ones with stronger competitive advantages. Pick one or two for your business and focus on those.
Published 2016-10-23 in Strategy