Entrepreneurs worry about competition all the time. And they’re correct in doing so. I think the “focus on customers, ignore competition” is a terrible business advice. Customers will never ask you to introduce switching costs, yet that’s precisely what businesses should do in order to be profitable for a non-trivial amount of time.
In my last article, I wrote about how an entrepreneur should go about creating a legal monopoly via network effects and economic moats. In this article, I’ll talk about how even legal monopolies get killed.
What kills them is not direct competitors (after all, they’re monopolies). They usually get killed as a collateral damage while someone else is doing their thing.
Vectors of competition
Entrepreneurs usually dislike direct competition. Colgate competes with Pepsodent. Coca-Cola competes with Pepsi. Mac competes with Windows. You compete with that-company-with-bad-products-and-worse-customer-service. You get the drift.
However, if you ask customers about what alternatives they have for your products, they’ll amaze you with their responses. For VWO, our competition isn’t so much other A/B testing products, but deciding via opinions or gut feeling.
Customers care about their life, needs, family, happiness, and progress. Using your products is definitely not on their life’s bucket list. In fact, using products or technology is an extra effort for them. The best radio is not a radio – it’s simply a room full of sound waves.
When customers abandon legal monopolies, they usually do not switch to direct competitors. They’ll switch to things that allow them to live their life as they want – with or without products from either you or your competitors. Say, for example, if you sell best radios in town, your customers will likely switch to Apple Music and not other radios.
So, if you are the number 1 product in the market, your customers are switching to products that you never even considered as a competition. You laughed at them as toys, until it was too late.
The biggest competition comes from people who compete on a different vector.
You want to make money, someone else wants to make an impact.
You want to make an impact, someone else wants to become famous.
You want to become famous, someone else is just having fun.
— Paras Chopra (@paraschopra) January 24, 2018
There are numerous examples of competition coming from a totally unanticipated vector and unintentionally destroying a legal monopoly:
- Linux vs Windows. Who would have thought that a student trying to learn OS fundamentals will take away billions of dollars from Microsoft in the server market?
- Wikipedia vs Britannica. Who would have thought a group of unpaid volunteers can create world’s largest and most comprehensive encyclopedia?
- Altavista vs Google. Who would have thought that one simple algorithm by two grad students will disrupt an established market leader?
- Match sticks vs Mobile phone. I know someone who is in the business of supplying chemicals to the matchstick industry. He says his industry is dying because people in small towns aren’t buying matchsticks for cigarettes because their smoking breaks have been replaced by watching videos on phones! Mobile phone companies certainly did not mean to kill the match stick industry
Of course, as per the news yesterday, the #1 payments platform in India (Paytm) is feeling threatened when the #1 communications app in India (WhatsApp) integrated payments. Who would have thought that competition for a payments platform will come from a messaging app?
So remember: starting a business is hard, growing it is harder and keeping it alive is almost impossible. Only the paranoid survive, but it has its cost in terms of psychological unrest (that not many talk about!)
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