While it is easy for entrepreneurs to get caught up in the hype surrounding brand new inventions or innovative Internet offerings, the reality is that most entrepreneurs start up by replicating existing products and services.
In many ways, starting up in a competitive environment is a good thing, as competition sends a strong signal; that demand exists, and a market has already been established to meet this demand. This removes one of the biggest issues entrepreneurs face — will there be demand for my product or service? If there is no competition it may be evidence that no market exists, or if it does, it is currently too small to serve profitably. For cash rich entrepreneurs with the vision of Steve Jobs this may be perfect, you have spotted a huge opportunity before everyone else, but for the general population of ‘mere mortals’ it is more likely to be that you have simply misread the opportunity!
Competition enables the new comer to have strong reference points when deciding how to design and position their offering. After all imitation is the sincerest form of flattery. Competition also helps from a marketing perspective — trying to educate and attract a market on your own is a very costly exercise.
On the flip side, those with years of history and a head start can be difficult to displace, so the question this article seeks to address is — what is the best strategy to implement when arriving ‘late to the party’?
Take for example, the wedding stationery market. It is an intensely competitive market with low barriers to entry, no clear market leader and where localised referrals and reputation play a large part in informing consumer choice.
Demand is largely a function of the number of weddings so the market size is relatively easy to estimate and market growth largely a function of wedding numbers. Given weddings are typically ‘one-off’ events (not withstanding remarriage numbers) lifetime customer value is predominantly limited to the initial transaction value. Given a relatively static market size and growth rates, incumbents tend to be extremely protective of market share as new entrants are essentially taking a share of the pie rather than growing the pie (where everyone benefits).
So what should a new entrant do in such a context? Chose to look elsewhere?
The reality is that competition is increasingly intense in most industry sectors. The growth of the Internet has also lowered the barriers to entry as it provides relatively cheap access to much greater audiences without the cost associated with physical outlets. The key is to recognise that competition has benefits (as listed above) and is a ‘fact of business’. If you offer a more compelling value proposition and have an effective marketing strategy in place you can compete effectively. Potential entrants must not be dissuaded from entering competitive markets but rather should focus on the elements they can control so they can target a niche they can profitably exploit. Finally while it is hard to generate strong profits in intensely competitive industries, by focusing on certain niches you can still prosper.
The following represent some things to consider when starting a business in a mature and/or competitive market.
1. Undertake Extensive Research of the Industry
One strong source of competitive advantage incumbents have is their experience. As a new comer you may lack this especially if you have not served an apprenticeship in the same industry.
2. Chose a Basis for Competition
While one obvious basis for competition is price, the new entrant needs to ensure they do not price at a point where margins are unsustainable/ unprofitable. In a competitive industry competing on other bases can be more profitable.
3. Out Think the Incumbents
For some established players they may be resistant to change and lack the incentive to take risks and to innovate. There may be alternative business models or ideas from other industry sectors that can be deployed in your new industry. Think Ryanair!
4. Take Advantage of Technological Developments
Given the amount of technological change there is every likelihood that new entrants can take advantage of such changes more effectively than incumbents. For example, the use of social media has exploded in recent years particularly amongst younger tech savvy users. Mastering the art of engaging and communicating with your target community using new media can be a source of competitive advantage.
5. Ensure Investment is Appropriate
You need to ensure that the level of investment is commensurate with the likely return. Increasingly most activities can be outsourced, so there is no need to invest in any assets which need scale use to drive a return. Perhaps older more established companies may have a higher cost base as a result of decisions made in a time when they had less choice.
6. De Risk the Proposition for Consumers
Established players offer less risk to consumers. Hence you need to overcome this by offering money back guarantees, strong references and testimonials.
7. Learn From the First –Movers
Another strong benefit of ‘arriving late’ is you have an ability to deconstruct the strategy and tactics of earlier entrants. Given the wealth of information available on the Internet you can learn from the often costly mistakes of others.
When starting a business in a sector where there are already many competitors you need to be very clear on the strategy you intend to pursue so as to give yourself every chance of succeeding. In the wedding stationery example, it is clear that at first glance it would appear to be an unattractive market to enter due to competition levels. However given the Internet is a primary distribution channel a new entrant with exceptional Internet marketing skills, a primarily outsourced (low cost) operating model allied to a strong customer proposition stands every chance of a successful entry.
Alan Gleeson is a B2B Marketing Consultant based in London with a passion for helping SaaS businesses to grow.
Originally published at www.alangleeson.com.