One of the pieces of advice that I’ve heard doled out. Over the years is this. “Don’t build a product that goes head to head against a company like X.”, where X is usually Microsoft, Oracle, Google or some other large, public company with billions of dollars sitting on pallets in a dark bunker somewhere. Increasingly, the names mentioned are companies who are much smaller, but tend to have extremely large networks of users, such as Facebook or Twitter.

The reason these upstart companies have become so “dangerous” to startups is that with their substantial networks of users, they can institute changes such that your user base can be sucked away virtually overnight by little more than a press release and a beta version.

Regardless of the opposing company or the type of power it may wield, the situation is very similar and can generally be described as follow:. Your startup is “David” and their company is “Goliath”. In some circles, this is referred to as a death sentence. When your startup stands in the way of a powerhouse who has resources that it can bring to bear on defeating you, there is often little you can do.

Something to keep in mind is that “often” does not mean “always”. There are a few very important strategies that you can use to compete effectively against a larger competitor. Many of these strategies will remain valid whether you are each going after the same market, or if you have decided that you are going to go on the offensive because the product “Y” from company “X” is so abysmal, that its users can’t possibly withstand the pain much longer.

Strategy 1: Fly under their radar

This is a short term strategy that you can use to survive for a while. It’s not perfect, and it does have some flaws. For example, it won’t work very effectively if your opponent sees this market as critical to their success. Trying to tackle Google and build a better search engine is almost doomed to failure. Just ask the Bing team at Microsoft. They have billions of dollars at their disposal and to date, have still come up short.

It’s also not going to work well if you are both new to the market with your product, because you can bet your favorite de-motivational poster that they’re already on the lookout for competitors. When they find you, they will actively seek to copy the features of your product and beat you in the market.

If your competitor knows who you are and you know that they know, look for another strategy because it’s too late.

However, if you’re the upstart in the industry and it’s a relatively mature industry with several enterprise level vendors selling into it, this will probably work quite well. In Enterprise sales, mature products are handed off to teams of people to sell who consistently don’t get any real work done. This is not to say that they don’t make sales, because they do. Their problem is that they become so entrenched in the status quo, that eventually they lose all respect for their existing competitors and don’t realize that an upstart like you might have a shot in the market, especially if you address their shortcomings.

It’s not until you start taking multiple sales per quarter from the same regional sales reps that someone is going to notice anything is wrong. It could be months before this happens, or even years, depending on the regional sales rep churn rate at your competitor. The time that this can buy you is crucial. An enterprise company will put out a new release, on average, once or twice per year. Occasionally they will do a quarterly release, but as a startup, you can beat them at the release game. You are more readily able to churn out a new release for each customer, as new demands come to the table and it takes more code to land each customer.

Strategy 2: Be where they aren’t

If you’ve never heard of the technology marketing pyramid, don’t worry about it for two reasons. First, I’m about to explain it to you, and second, I’m remembering it from a conversation I had with the VP of Sales from a company I worked for a long time ago. There’s probably an official name for this, and if you know it, please drop me a line to fill me in. Otherwise, bear with me for a few minutes.

Any market for a high technology product can be divided into a few different segments within a pyramid. At the very top of the pyramid, you have the people who want or need the bleeding edge stuff, for whatever reason. The definition of what is considered to be bleeding edge is going to change based on the type of product. However it may make it easier to understand if we use a more concrete example.

Let’s look at the database software market for a few minutes. When it comes to bleeding edge performance, whose name leaps to mind first: Microsoft or Oracle? Most people will think of Oracle first. Remember that we are discussing impressions of performance, not actual performance, nor are we discussing usability or pricing.

Oracle created their database software with the intent to run it on as many different platforms as they possibly could and wanted to do so with rock solid performance. Most people would agree that Oracle licenses are way overpriced and the way they sell their software is little better than the tactics employed by a used car salesman.

Customer: “How much for 4 Oracle licenses?”

Oracle: “Well, there are a lot of things that factor into it, including number of processors, types of processors, modules, software maintenance, how close I am to my quarterly bonus, etc. What’s your budget for this project?”

It’s probably little consolation that every single Enterprise vendor operates this way. But Microsoft did something smart here. Microsoft looked at how Oracle had positioned itself in the market as the elite database engine with the best performance you could possibly buy and on as many platforms as you could ever imagine. So what did Microsoft do? They shipped Microsoft Access. Many would argue it’s not a true database, but then again, neither is Excel and people use it extensively as if it were. Hell, Microsoft even shipped an ODBC driver interface to get at the data inside of Excel.

But the point is that Microsoft chose to go where Oracle wasn’t. Oracle was well known at the high end, but they were also known for being expensive. You get what you pay for, right?

Microsoft decided that if there was a small segment of the market at the top of the pyramid that were willing to pay Oracle for bleeding edge performance, then Oracle could have them. And Microsoft was going to take everything else. And so Microsoft did.

Microsoft Access went on to become one of the most prevalent desktop databases, a market position that it still dominates. Indirectly, they leveraged that success to assist with the establishment of SQL Server in the small to mid-level enterprise. But they still have issues pushing their database into markets where extreme performance or scalability is required. It’s not that SQL Server doesn’t work in these environments. There’s simply the conception that it doesn’t work well and is going to be a hassle to implement or somewhat unstable.

Over time, this strategy can also fall apart. As you can see in today’s market for databases, there’s a lot of ambiguity. Oracle has nowhere to go but down market, so they’ve offered free versions of Oracle to help attract developers and get into deals they otherwise wouldn’t. MySQL started at the bottom of the pyramid and is working its way up, pushing into Microsoft along the way.

Microsoft rests in the middle. It is attempting to push higher by releasing high end versions of SQL Server to compete with Oracle while at the same time trying to fend off MySQL with free offerings on the low end.

It may be a long way of saying it, but the point is that regardless of facts, you can choose how to position your product in the market and you must differentiate yourself from your competitor, even if the differences are minimal.

This means that if they are pitching performance, you pitch reliability, or scalability, or something else. You can’t also pitch performance after they have started that marketing effort. It just doesn’t work and customers will be skeptical of your claims. Market positioning has little to do with facts and more to do with perception. Use that to establish where you want to be, rather than to emphasize where you are.

Strategy 3: Exploit their weaknesses

Are you going to compete with a desktop application? Build a web app. Are you competing with a web app? Build a desktop app. Do you hear their customers complaining about something relatively major? Pick that as one of your marketing points and start taking away their customers.

The idea here is to find chinks in their armor and begin exploiting them for your own gains. Large companies often don’t realize that things are going terribly wrong until it’s too late. Then they simply buy out their competitor to regain the lead. Sounds great, doesn’t it? See? I knew you were in this for the money.

Strategy 4: Find the users who are pissed off

This strategy plays with fire a little bit. It’s usually pretty easy to find where people hang out who hate the product of your competitor. Just add “sucks” to the end of their company or product name and do a search. You’re almost certain to find a forum that tells you exactly why they suck. Or a URL redirection back to the company website because they were smart enough to buy it first.

Finding these communities does a few things for you. First of all, it serves as valuable market research. These people are more than happy to share why that product or company sucks and how things “should” be done. Take the good, and leave the bad because let’s face it. Customers don’t always know what they’re talking about.

Second, it gives you a place to market your ideas. If these people really hate the other product or company so much, chances are good they would be willing to defect and use yours instead, especially if it addresses their issues.

And finally, people who a pissed off tend to vent online… A lot. And they’re more than happy to tell all their buddies about this great new product from a competitor of their old vendor that is ten times better and here are all the reasons why. Basically you have a built in evangelist network you can tap into.

But there is also fire to contend with. As I already mentioned, these vocal customers have a tendency to believe they know how a product should be built and what it should do. Sometimes, they are in the distinct minority. Worse still, sometimes they don’t even know it. So before you go pitching your product to these people, make sure you can meet their demands and that they are at least reasonably justified in their requirements.

Just be cautions. The fact of the matter is that they are going to be a fickle bunch. They’ll give you a lot of slack in the beginning. As your product matures, they will expect your product to match all of their needs. When it doesn’t, you will have to leave them behind and accept that they may very well be on another forum denouncing your product. Chances are it won’t be nearly as loud or nearly as vocal because they tend to feel like large companies deserve their full wrath and they should save that wrath for them… As if they can’t simply create more.

Strategy 5: Integrate with third party software or develop a plug-in API

Enterprise companies don’t tend to play well with others, especially when it doesn’t suit them to do so. However, building integration points with other products can be the bread and butter of your business strategy. When an Enterprise company starts losing deals because they don’t have a good story to tell around a type of product such as help desk software, they’ll do the only thing they know how to do: go out and buy a company that sells help desk software.

They won’t build their own. When is the last time you saw an Enterprise company release a new product? I know there are a few examples, but they are the exception rather than the rule. The reason for this is that is time consuming and expensive to build a new product from scratch. Even worse, from the standpoint of the Enterprise Company, building a new product is exceptionally risky.

What if they build something that customers don’t actually want because they misread the market? What if they find it too difficult to establish solid market penetration because of the entrenched players? What if they launch a minimally functional product and they tarnish their reputation as producing bad software? Anything involving a tarnished reputation takes a long time to overcome. More often that tarnished reputation hangs like an albatross around their necks which is difficult, if not impossible to shed.

So instead, they trade money for the time it would take to get a foothold into the market. In doing so, they get the code, the market penetration, complete rights, all the future benefits of the product, and a new source of potential customers to peddle their existing product line to. You obviously don’t have that option.

Instead, by providing integration points between your software and the products of other, preferably larger vendors, you can gain a steady stream of customers from those other products who are looking for integration points with products that they already use today. As this third party product grows, the potential for your revenue to increase grows as well. Building integration points into multiple products can compound this growth.

The disadvantage to this is that there must be a valid reason that users of this third party product would use it in conjunction with yours. Not all third party products will be a good fit. In addition, you have little to no control over those products. If they decide to go in a different direction, change their API, or eliminate it altogether, there is little you can do about it.

Finally, you must provide solid value to the customers via the integration points you provide because the customers must now pay for multiple products. Depending on the price point, this could be a difficult pill for customers to swallow.

Final Thoughts

Finding companies who have successfully employed one or more of these strategies isn’t terribly difficult. Certain open source products such as Linux and MySQL have certainly carved out rather large portions of the market. On the commercial side, you don’t have to look any further than companies like Mint.com, Skype (which took on traditional phone providers), and Netflix. For smaller, self-funded companies you can look to Red Gate, 37signals, Source Gear, and Atlassian.

To people like us, these companies are financially doing quite well today. But they all had to start at the bottom and cut their way through the competition before they got to where they are today. That takes time, effort, and a lot of hard work. Any questions? Leave them in the comments below.

1 Comment

  1. Manoj Shinde on June 7, 2011 at 10:44 pm

    Great Great Great Article !!!!

    I was looking for this and it will definitely help me into my start-up.

    Thanks a lot!



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