This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. This is how to manage hyper competitive markets written by Pete Flint, read by NFX. Everyone loves the notion of companies dueling. It's a narrative that the media loves the spotlight as a competition between 2 characters. Uber versus Lyft, Amazon versus eBay, Apple versus Microsoft.
Sometimes companies themselves play into this dramatization with their marketing. Like with those famous Apple ads where Justin Long played the Mac character opposite the PC character played by John Hodgman. These public battles pitting company against company capture the public imagination because they bring a familiar dramatic trope, teams competing for a prize to the business world. While this can be entertaining for spectators, for the contestants themselves, the experience can be intense.
Inside the war rooms of companies locked in the battle for market leadership is an atmosphere of voracious competition. Mustakes are high because whoever emerges on top can shape the future of an entire industry. It takes this competitive spirit to drive true innovation at scale. And the reality is that it's often very cutthroat. It's public companies that usually get the most press for their larger than life power struggles, but startups often face the same dynamic.
For example, it's very common that 2 startups will launch around the same time with a similar idea, spurring ferocious competition. The same applies when one startup or even an incumbent player will pivot to copy the better idea of another startup. A common occurrence. I experienced the hyper competitive environment myself when I was CEO of Trulia, where we faced strong competition, not only from rival startup Zillow, but also from realtor.com and many, many other real estate listing companies.
For many years, we found ourselves locked into fierce struggle for customers and consumer investor mindshare against capable and well capitalized competitors and incumbents. Companies dealing with this kind of hyper competition are often operating in a market where in our NFX parlance, defensibilities, a sim Pete. In other words, there's a lack of meaningful differentiation between the competing parties and low switching costs, leading to a higher occurrence of multitenanting.
If you're a founder operating in that kind of competitive atmosphere, there's one thing on your mind. How do you emerge on top? Today, I'm sharing 7 key strategies I've identified to help founders manage a hyper competitive market and get ahead. One, become an expert on pricing. In a hyper competitive market, your number one priority is to escape the trap of having a commoditized product. The pressure to stand out, however, can often cause some strategic errors, especially around pricing.
Under normal circumstances, businesses compete to provide the same value at lower pricing for the consumer by cutting down on cost, or to increase the user experience or value delivered by product improvement. All else being equal, the businesses that are able to provide the most value at the lowest price gain a competitive edge and defensibilities like scale or network effect allow them to sustain that edge over the long term.
But if the product experience is commoditized, lowering pricing artificially can feel like the only way to gain a competitive edge, This isn't always the best way to go. Sometimes you'll overpay or subsidize the cost too heavily and risk going out of business.
It's important to think strategically about pricing, not only for this reason, but also because lowering pricing almost always forces a response by your competitors, And then to sustain your edge, you have to lower pricing even further incurring a price war. Think carefully about your pricing strategy and what the appropriate cost to acquire customers really is. Aggressively lowering prices or spending to acquire market share isn't often the answer.
In addition, for networked businesses, you need to deeply understand the downstream implications of your pricing strategies and how they might drive meaningful long term defensibility. For example, getting the rake right for marketplace businesses is one of the hardest and most important decisions that can be made. Some questions you might ask yourself in setting your pricing strategy. 1, do you observe a seemingly irrational player in the market who may be overspending?
Do they know something you don't know about the lifetime value of a customer, or are they just spending like a drunken sailor? 2, Is there an opportunity to capture additional margin per transaction? This can give you a valuable boost to revenue and superior unit economics are a competitive edge that can help you accelerate the growth of your business. 2, find and dominate the most profitable market segments. Not all market share is created equal.
Some market segments will have drastically higher revenue per user and lower churn than others. Identifying and targeting these segments becomes especially crucial in a hyper competitive environment. Even if you are the market leader, So rendering these segments could mean surrendering your position.
And vice versa, if you're the number 2 or 3 player, finding the right market segments can let you catch up to a larger competitor In a competitive dogfight, there is a notion that every customer you get is a customer that your competitor doesn't Pete, so you fight for every customer. However, with rapidly growing companies going after large market opportunities, you only have so many resources.
So identifying and doubling down on the most important market and customer segments from a defensibility and profitability perspective is critical to build beachheads that enable you to capture the entire market. This clinical precision and smart calculated bets can help smaller companies catapult themselves the leadership position. For example, at TRULIA, I found that some market segments produced significantly higher revenues at significantly lower marginal costs and churn rates.
Identifying and then doubling down after these segments early is a crucial competitive advantage in a hyper competitive environment. 3, everything that can be copied will be copied. If you accept the fact that everything that can be copied will be copied, You'll need to arm yourself with as much information about your competitors as possible. Learn from them. Speak to former employees. Do your homework on the history of the Morgan, know what's already been tried.
It's pretty much guaranteed that your competitors are doing the same to you. And with competitive research, you can potentially generate valuable insights and save significant time. That said, you also need to focus on things that might be hard to copy in your own business. Since everything about your product can be copied eventually, that means focusing even more on culture and brand because these are fundamentally much more challenging to copy.
Sometimes for mid stage companies, optimizing for a high performance team and culture can be your single best strategy within a highly competitive environment. We've written about how to create an outstanding culture before in our culture manual. In addition to that, brand positioning in particular can set you apart. Brand leadership can put you in an extremely strong position within your market category.
Being seen as the leading brand creates a bandwagon effect, and in a market where there are many competitors, getting the optimal positioning and scale seeing a larger competitor in a hyper competitive market, just surviving long enough can give you option value. The longer you stick around The more opportunities will arise to capitalize on their mistakes or strategic shifts in the market. By watching your competitors closely, you can understand when they are faltering or failing.
And that's when you have the opportunity to strike. If you're in a duopolistic situation like Lyft, for example, the missteps of your competitor can be one of your biggest opportunities has happened with the hashtag delete Uber period, where Uber's scandals caused Lyft to pick up significant market share. 1 of the key strategies in a hyper competitive environment is having enough resources and fortitude to stay in the game and capitalize on your competitors' missteps.
4. Take the high road with competitors. Company building takes a long time. You never know how things are going to play out in an environment of high competition and uncertainty. You do want to be aggressive in the Morgan, and keeping that competitive fire going internally is key.
Sometimes it fires up the team to posture aggressively against competitors If this is done with moderation, a healthy spirit of competition is good and probably necessary, but it's unprofessional and can seriously derail your culture internally if you take too far and distract from the core purpose of any startup, to delight the customer.
One of the most alarming stories to come out of Theranos from my perspective was the company ritual to yell expletives about their competitors in a chant led by their COO. This can be assigned to the team of a flawed culture. Letting the natural spirit of competition go too far can turn into something really negative if it goes to this extreme. Externally, there is rarely a long term side to burning bridges by ridiculing or abusing your competitors publicly.
For one thing, it's just plain unprofessional. For another, it reduces your ability to partner with competitors. You frequently must do when you reach scale. For example, investors sometimes like to invest in the market, not any particular player in the market Pete se. So if you're publicly abusive of your competitor, you could end up driving away those investors who are looking to invest in both sides.
It could also create if you end up merging with, acquiring, or getting acquired by a competitor, an entirely possible outcome, especially in a market with high levels of competition, which typically experience a period of consolidation. It's often harder to take the high road, but it makes you look weak if you start abusing competitors publicly, and it's not strategic. Be cordial and respectful. It can pay off later on. 5. Use capital as a competitive weapon.
As I said earlier, everything about your product that can be copied will be copied. Since it's often possible to get an enormous amount of data or intelligence about your competitors, Winning often comes down to being better at fundraising. More capital means more at bats. You can afford to make more mistakes and therefore run more experiments if you have longer runway than your competition.
Capital can also be used as a blitz scaling technique to capture a disproportionate share of the market early on, which can become an escalating advantage. The danger of a capital advantage is that you can't rest on your laurels and lose your frugality, which is the hallmark of a great startup. Thoughtful use of capital is an advantage if you can use it to build brand and gain market share in the most profitable segments.
But there are also many familiar horror stories of start raising huge rounds and going on to squander it, either because of complacency or because they're in business for the wrong reasons. To use capital as an effective weapon, culturally, you need to make sure that you're moving at high speed, that you're moving aggressively, and that you're executing. Especially in the early days, this is critical.
Be smart about capital and you can use it as a competitive weapon, whether or not you're the one with a capital advantage. 6. Focus on being uniquely better, not just on being different. With all the emphasis around differentiation in a hyper competitive environment, It's easy to start trying to differentiate your product in ways that don't fundamentally benefit the user experience and distract you from the core.
You'll get a lot of pressure from the board and others to be different to go into adjacent businesses that other competitors may not be in. In the trulia versus Zillow battle, for example, there was a lot of pressure internally to divert focus adjacent opportunities community on rentals, mortgage, agent tools, etcetera. Whereas that time and energy would probably be better used focusing on the core home search value proposition.
The key to effective differentiation is to focus on what matters to users, not to focus on being different per se. Being different for its own sake doesn't matter to users. Who are looking for reasons why your core product offering is preferable than your competitors. So it's strategic to ignore the pressure to differentiate in ways that don't affect your core product offering and to execute towards being better and creating more value. 7, managing your psychology is key.
As a founder in a hyper competitive market, managing your own psychology is also an important challenge. Often success can be about staying the Morgan, and the ability to maintain constant customer focus and execution. Beating out an incumbent or competitors in a hyper competitive market can take years So founders who are able to stick with it for the long haul and remain true to their beliefs will have the best chance of success. The fact that things get copied can be incredibly demoralizing.
You work hard to innovate, so it's mentally taxing when someone else benefits from that hard work by hitching a free ride. In addition, being constantly compared to your competitors, and always being evaluated against them is also common and can be quite demoralizing. It's no fun, but that's the reality you can expect. For founders facing this, it's essential to take the time to recharge mentally and physically and avoid burnout.
Just as it's important to avoid burnout personally, You also want to build your organization sustainably. Build a culture with long term orientation, but that internally celebrates the short term milestones and successes to keep up morale. Because it's a marathon, not a sprint. Finally, while not being the market leader poses many challenges, even the market leader can't rest easy. In the famous words of Andy Grove, only the paranoid survive. Planning for the future.
Most hyper competition will not last forever. New or emerging categories are likely to see hyper competition wane as the market matures. Either one of the competitors will figure out a way to develop defensibility that doesn't a symptom or the market will continue to be commoditized and there will likely be some sort of detont driven by investor sentiment or customer segmentation. If it ends in the second option, you want to be the leader before that happens.
Because when DATON comes, whatever territory you've already captured tends to get locked in. Hypo competitive markets are tricky to navigate, but understanding the dynamics and having the right approach can make a big difference in outcome. If you're a startup looking to enter a hyper competitive category and you think you have a path to emerging on top, we'd love to hear from you below.
For more audio essays from the people who've built companies like Instacart, Facebook, Trello, HubSpot, and Dropbox, visit the founder list at nfx.com, or subscribe to the nfx podcast at podcast.nfx.com, or wherever you get your podcasts.