Really good points. I especially like the point about inertia.
Perhaps you could comment on the difference between competition from similar startups vs. competition from mega-corporations.
One of my board members in my startup used to say, very correctly, "our biggest competitor is percieved need" or "Percy" for short. That is, many prospective customers didn't really need what we sold, so, duh, they didn't buy it.
There's a trap for the unwary entrepreneur. If you give your stuff away early on, you'll never find out when you lose a sale to Percy. If you charge something, it's much easier to measure how strong a competitor Percy is.
When you're up and running, selling stuff, the Lost Sale Report is a tremendously valuable tool for competitive analysis. It takes a lot of discipline to do this right. Some person, NOT your sales rep, calls the prospect who didn't buy. She starts the conversation by saying something like, "We have a great deal of respect for your decision. I'm curious about how you decided not to accept our proposal. Could I have a few minutes of your time to hear about that?" Then she lstens, NEVER trying to change the prospect's mind about the decision. Finally, she writes a brief report and circulates it as widely as possible.
There's one exception to wide circulation: if the reason for the lost sale is a sales-rep screwup, that information should go to the rep and the sales manager ... unless it is a systematic screwup like a lack of followup process. If you publicly humiliate sales reps, they will conceal lost sales from you, and you won't be able to do these reports.
I've done many dozens of these calls, and about half of them offered some kind of surprising new insight.
Adding Michael Porter's five forces (add sixth element if you wish) diagram could strengthen your argument.
I find it difficult to differentiate between "researching and learning" about competitors vs "copying" them. I am always searching out competitors and even blogging about them (trying to be honest as you describe), but I generally avoid actually registering with them and trying them out, even if an account is free. I base my opinion of them only on what is visible of their site without an account. My reasoning is that 1) if I see something they do that I don't it will be very difficult to mentally separate myself from it enough to develop my own product without "copying" this feature; and 2) I feel that I may be unduly influenced by their design or their features into putting something similar in my product when in fact it may not be necessary--I should be working on MY users' priorities, and if I haven't felt Feature A to be important, then just because a competitor does it shouldn't bump it up on my priority list.
Another consideration is legal. If I am influenced by looking at a competitor's site and then I consciously or subconsciously work in similar or identical features into my product, am I doing something illegal? Could they take me to court, and am I on solid legal ground? I just don't know about the legal aspects, so I play it safe.
But it's definitely a constant question in my mind, how much to watch the competition and how much to ignore them and do my own thing. Do you have any further thoughts on that?
Dharmesh, I think these points are really great (probalby mostly because I've already embraced them) -- the struggle I have is then figuring out what my comptetive advantage really is.
It seems that unless you have patentable technology, that the only true differentiator is you
, the entrepreneur. Your attitude towards the consumer, the culture you instill in your company, the team you put together to get the job done.
For example, with my company (we provide web-based software to construction industry sub-contractors), I feel that our advantage is that we take a lot of time to learn about the industries that we are targeting, and that perhaps, since we target niches, we'll be so far "under the radar" that we'll build up enough market share before the "big guys" wise up and become a threat.
But it would just require someone else running another company to make those same decisions. So the real difference will be my ability to execute and lead... right?
I feel a little like I'm too caught up in my head about the whole thing... HELP!
I believe that competitive analysis should center on the customer problem you are solving rather than on your product's features or capabilities. Analysis should first deal with whether the problem is important enough that the prospective customer is even interested in solving it, then with what other solutions might exist, and finally with where the customer might find those solutions. Analysis that centers only on your product will give you very limited visibility about what the real competitive environment is, and may lead you to believe that you don't have effective competition when in fact you do.
Rahul Gupta, can you post a link to your product? I am interested.
I really appreciate this advice - something about it just feels right. I've had too many conversations with other founders that assume that their competitors are complacent or stupid, and your framework (particularly wrt relevent/hard-to-fix metrics for weaknesses) is a good way to formalize our thinking in this area.
I'm curious, though, how one should talk about competitors in a presentation. I presented at the YC event you blogged about recently (and am taking your advice about not demoing off a live server to heart) and my co-founder and I wrestled a lot with how to deal with competitors. In a ten minute presentation, is it worth addressing these issues at all? Ultimately, we didn't spend any time on it in the presentation, but looking forward, I wonder if we should have at least mentioned some big names in our market. Particularly in a longer presentation, I feel like it might help the audience understand where we see ourselves fitting in. Does hearing about a startup gunning for a market dominated by large players (eg MS, Google, IBM, Apple, etc) make you more wary?
There's a variant of point 5 (Identify Future Competitors) that's probably the biggest threat. Consider a weak competitor with a founder who is a terrific at self promotion and salesmanship. He get's his business bought out by a mega corporation that wants to be a player in that space. And all of sudden, there's money to throw at every problem, including excellent marketing. On example that comes to mind is a small company that I used to work for. They got bought out by a small promoter type for $870k and less than two years later on-sold to a mega-corp for $30m. Not bad ROI ! Imagine what it's done to the other three $1-3m players in the marketplace!!!
In my experience, many people in development-stage companies try to position their not-yet-ready products as being in a "new category" and thus not having any competitors. When this is true, it's a long-shot high-stakes gamble. It's a long shot because successfully establishing a new category of product or service is quite unlikely. It's high stakes because it takes many years (longer than your VC's cash and patience will last!), gobs of money, and some luck.
And, lots of people will move in to your space if you do become successful. If your business strategy is to get bought by a big company so they can own the category you created, that is valid, and your investors will like it. (They will most likely want it more than you will.)
So, having competitors isn't a bad thing. It is excellent to differentiate yourself from them early on by offering a better sales process, superior support, and better focus, in other words a better customer experience. Loyal users are very valuable.
An option is of course to phone up your potential competitor and introduce yourself! You never know strategic alliance potential!