Market leaders get killed by non-competitors

As an entrepreneur, you worry about customers all the time. And you’re correct in doing so. Focusing on customers is obviously important but customers will never ask you to introduce switching costs, which are precisely what you should do in order to continue making profits.

To anticipate future competition, keep an eye on the habits of your customers

Once you’ve been able to build a defensible business by building a big moat, you can pat yourself on the back. Your business now won’t get killed by competitors.

You’ve successfully thwarted risks from direct competition but your business is now likely get killed as collateral damage to something else where you weren’t even a player. Microsoft Windows had an absolute monopoly on personal computing and that’s why Linux or Mac OS didn’t impact its growth. What weakened its grip, however, was the shift of computing from the desktop to mobile phones that accessed services running on cloud servers (none of which were running on Windows). 

To prevent yourself from getting caught off guard, keep an eye on your customers who are switching to products that you never even considered as a competition. You may have laughed at these non-competitors as toys, but before you know it, all your customers are using them. Be in the desires business, not the solutions business.

Underestimation of new trends is basic human nature. In fact, often the biggest competition comes from people who compete on a completely different vector than you:

  • If you want to make money, they want to make an impact (think Google entering your market and offering products for free, subsidized by its main search business).
  • If you want to make an impact, they want to become famous (think raising ever larger rounds and expanding aggressively, even when it’s unprofitable to do so).
  • If you want to become famous, they want to just have fun (think Satoshi Nakamoto disrupting banking by open sourcing bitcoin).

Remember: if you sell the best radios in town, your customers will likely switch to Spotify and not other radios.

This essay is part of my book on mental models for startup founders.

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