First-to-market principle in niche markets: Can competitors survive?
This is my first time on this part of SO. Go easy on me :)
Say for example you know a company building a tool or app, but you discover that their way of doing it is flawed or in a more kinder way of saying it - you find loopholes in their product that you can improve upon. Now in a world where the client-base is big, competing products can survive, but say this is a niche market. What I would like to know is:
Will a similar but better product have a chance at competing or is the first-to-market principle enough to capture the entire niche market initially and then choke out competitors? In order to define a niche, say for example I am addressing the fitness or taxi-hailing market. These are just examples, so don't use them explicitly when answering.
This question above may have an obvious answer, but I was just thinking that if I was the first to market, I could probably capture 70-80% of the market and then when competitors come out with better products, I could just copy those features to my product to prevent competitors with a better product from stealing market-share. Companies are obviously doing this, which is part of competition.
I look forward to the answers. If any of you are aware (off-hand) about empirical evidence that shows that even when the first-to-market product copied the competitors better products, the competitors still took away market share, please share. Otherwise your answers without empirical evidence would be fine :)
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Great question! I am sure many engineers are wondering about this often, especially those in search of an idea. – Webbie 11 years ago
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Thank you =) ... – Joe 11 years ago
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Thank you for asking, I am bookmarking this page :-) – Webbie 11 years ago
4 Answers
It depends on the specifics of a particular niche market. In particular, the switching costs and network effects will affect the first mover advantage. If the network effect and switching costs are low the first to market doesn't give a sustainable advantage. In fact it may help competitors to validate the market and the product/problem fit and learn from the first mover mistakes without bearing the costs. There many examples of quick/resourceful imitators beating the company who was first to market with an innovative product.
For starters, I would suggest familiarizing yourself with Michael Porter's Five Forces analysis and augmented models (e.g. 5F + complementors)
http://www.quickmba.com/strategy/porter.shtml Teece wrote extensively on rent extraction from innovation and different industry's appropriation regimes which to a large degree determine who will profit from innovation. Have a look at Teece, D. J. (1986). Profiting from technological innovation.
There is also a great book by Robert Grant on contemporary strategy analysis: http://www.contemporarystrategyanalysis.com
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Brilliant answer. I also find the links very relevant too. I wonder how far the models may be able to distinguish an idea from an actual business. – Joe 11 years ago
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Thanks, Joe, glad that you found it helpful! The models are of course simplifications and generalizations of what goes on in the real world. As one [brilliant statistician](http://en.wikipedia.org/wiki/George_E._P._Box) put it "all models are wrong, but some are useful". Models are useful in providing structure for your market analysis, but in the end, it's your knowledge about the market that will determine how valuable these models will be for you. – Aseidlitz 11 years ago
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Regardless of model you'll choose, try understanding it's assumptions and limitations. If you are going to use Porter's forces analysis, have also a look at alternative models, like [resource based view](http://en.wikipedia.org/wiki/Resource-based_view). Again, your knowledge of the target market will determine which model or combination better describes what drives the competition in the market and how to position your product or service in it. – Aseidlitz 11 years ago
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Again, brilliant insight. The only thing that surprises me is that you haven't been on this Q&A site longer, as you seem to possess great analytical ability in competitor/market analysis. – Joe 11 years ago
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Great answer and comments, thanks for input and links. – Webbie 11 years ago
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Thank you for the upvotes and very supportive comments! – Aseidlitz 11 years ago
If you're first to market and capture a large percentage, you still have to retain customers. There are a couple of drivers that could influence how many you keep:
- Strength of Branding - Chances are this niche market is aware your product is the most popular but also has acheived a high-status. Maybe the brand is attached to quality or being the coolest because of the popularity.
- Customer Lock-In - Some products are harder to switch than others. If users have put a lot of data into your app, they may be reluctant to learn a new one and reenter, transfer, convert etc. Since everyone else is using it, switching to another product may break links to other users like in a social media situation or an industry that shares information. Some products require an upfront cost/investment, so there really has to be a strong reason to switch and pay another fee.
- Barriers to Entry - Your niche market may be difficult to approach. If most of your sales come from getting a pricey booth at their annual convention, this can hinder a new company. There could also be new technology required that only has a few developers familiar enough with it to build a production app.
A competitor may find an overlapping market. Maybe you managed to corner the market on high-performance snow mobile ski wax until the worlds largest manufacturer of snow ski wax came to the conclusion they could come after this niche market as well.
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Thanks! Brilliant points made. – Joe 11 years ago
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A large company deciding to go after a certain market based on small startup's success is something that is very real and all too common I think. Personally, I feel like that should make many entrepreneurs paranoid enough if not to enter certain markets, then at least realize success can be short-lived. Think Google and analytics software marketplace (I wouldn't want to be in that business). – Webbie 11 years ago
It depends on the market, but you can enter a niche market even if its crowded as long as you have a marketing angle you can play with, e.g. positioning your company within the niche market differently than your competitors.
You can have all features of your competitors (or better), but get a different positioning. Also look if you can segment your customers, start with one segment and then grow gradually from there.
You can choke your competitors by delivering the better product (or similar in features) at a cheaper price with a stronger brand.
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What if your price is more than your competitors? – Joe 11 years ago
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@Joe: Then focus on having the better distribution than your competitors. – Max 11 years ago
If a product/service is marketed very well it can steal the leadership. Example with the iTunes Music Store and the iPhone.
In some cases the product doesn't even need to be better, the marketing is sufficient. Example with Domino's pizzas, great service and marketing but bad product (that improved later).
When it comes to internet based businesses however, the chances for competitors are lower as there are usually no second runner in the prospect's mind.
