First mover advantage

There is a quite a split in opinion between marketeers and economists as to whether first movers have an advantage over fast followers. Let’s look at that in a little detail to see if we can make a decision for ourselves.

There are a couple of main advantages that first movers have. The most important one in my mind is referred to as ‘network effects’.

Network effects impact products or services where the number of users directly impacts the perceived value of the service to the end user. For example, Ebay becomes exponentially more useful to sellers as the number of buyers increases as there are more customers to which they can sell their goods. Conversely, Ebay becomes more useful to buyers as more sellers offer the products they want as the customer can then shop around for the best deal.

Network effects also impact services like Facebook, Amazon, dating sites and Google. Why Google, you ask? Well, Google refines its search algorithms through the searches of millions of users, making it more accurate for future searches.

Clearly, having lots of users in these industries makes the rapid growth of new start ups harder as they won’t have the existing user base, which ultimately drives the value of the product or service. This makes the switching cost for the end users much higher, as if they are going to move their Facebook account to a new platform, they really need to convince all of their friends to move with them, otherwise the new platform, as pretty as it may be, will be useless to them.

As such, when companies are first movers in a vertical that is impacted by network effects, they adopt a ‘get big, fast’ strategy. They grow the user base as quickly as they can and worry about how they can monetise their service later.

A ‘get big, fast’ strategy doesn’t always work & must be properly planned & managed. Friendster for example, adopted this strategy. They failed as they focused their marketing efforts on the USA and Asia.  Neither region interacted with one another, rather operated as two independent silos of users. As such, this was a waste of time and money for Friendster.  Conversely, Facebook sought growth by initially targeting a very narrow market – college students. Once the existing user base was big enough, they opened the platform up to the world.

Also, with the advent of new technology that makes moving contacts easier, the network effects are having less and less impact as the cost of switching for the end user diminishes.

What if I don’t work in an industry impacted by network effects?

If you aren’t working in an industry that is impacted by network effects, you should look to some of the below strategies to lock your customer in and to make their cost of switching as high as possible.

A durable purchase is something that locks you into a particular supplier. This will be an up-front payment, perhaps for specialist hardware, that makes the cost of switching high. You could consider a Hewlett Packard printer to be a durable purchase, as you’ll have to continue to buy their ink, unless you want to spend your hard earned cash on a new printer. You could even consider Xbox as a durable purchase, as you’re then locked into using their games, controllers and Xbox Live subscription service. In both cases, switching will require the customer to buy new hardware.

You can also lock customers in through brand specific training. This locks customers in as once they’ve paid for all their staff to be trained to use your product, they won’t want to shell out again to switch suppliers.

Loyalty programmes also create switching costs as customers will be used to receiving special offers and won’t want to go without them.

Wait, you mentioned Xbox, isn’t gaming a network effects industry?

The game industry is quite unique in this. Yes, it has strong network effects.  However due to varied tastes and requirements of different user groups, several companies can co-exist as market leaders. We call this a heterogeneous customer base.

How do we secure first mover advantage?

Endured first mover advantage relies on slow technological and industry development. For example,  Sellotape is clearly a slow moving industry – the product hasn’t changed in years. As such, it makes it hard for new competitors to come in and do something better.

Contrast this to the personal computing market. Computing power improves so rapidly that companies can be knocked from their top spot very quickly – just look at IBM, they were market leading one moment and then Dell knocked them from their perch the next.

Why do players in rapidly changing industries find it hard to retain advantage? Generally, this is because they’re in the ‘sunk cost trap’.  If they invested millions of dollars in technology X, as they believed that to be the right thing to do, then the new mover uses technology Y, which users love, well, they’ve already committed to technology X. They proceed to throw good money after bad and never re-kindle their market leading position.

Summary

Deciding to be the first mover in an industry is an exciting discussion. If brand matters in the industry you’re heading in to then, of course, being a first mover could be a vital step for your business, as you’d be able to build a trusted brand before the followers entered the market.

Additionally, if the cost of imitation is high, then pioneering could prove to be successful. You can use patents to protect your intellectual property & to build barriers to entry, making imitation far more difficult.

If you believe the industry to be heavily impacted by network effects, then this could present an opportunity for you to launch into this industry & adopt the ‘get big, fast’ strategy. Of course, this needs to be done in a structured way, as Facebook did.

In some industries, fast followers gain more traction than the first movers. We generally find that this is because the first mover has fallen into the ‘sunken cost trap’. If you are a fast follower, you should seek to exploit the weaknesses in first movers model & see if you can force them into the sunken cost trap.

So in short, there isn’t a yes or no answer to the question ‘should I be a first mover’. It really depends on the industry you’re moving into and the specific circumstances of your company. However, some of the points discussed above should help guide your decision.