If your startup company has developed a new product or service that no-one else is offering, you have probably heard about the first mover advantage. But what is it and how can you profit from it?
The first mover advantage is defined as the often insurmountable advantage a significant company gains when it is the first to move a product or service into a market. It’s measured by the amount of profit a first mover makes by being the initial entrant into a market. While it can be crucial to building market share, having this advantage does not mean automatic business success.
Details and Overview
Most startups simply don’t have the money that an established firm has. So, the only way for them to enter the market is by being a first mover. Startups can become successful by exploiting the characteristics of the market and enjoy quick growth while having the advantage over its competitors.
A startup company gains first mover advantage if it is the first to enter the market with a product or service, thereby gaining an advantage over its competitors through resource control. With this leverage, a company that enjoys a first mover advantage can enjoy high-profit margins and even a monopoly-like advantage over its competitors.
In order to be a first mover, your startup must first carefully consider the characteristics of the market you hope to enter. Is there a demand for the product you will sell? Can you supply it in a way that generates money for your firm? If you can answer yes to those questions, your startup can gain first mover advantage in three distinct ways: Through technology leadership; preemption of scarce assets; and changing costs and buyer choice when uncertainty exists.
Technological leadership can lead to a unique breakthrough in research and development. This gives your company an advantage as long as the innovation remains proprietary to your firm. This helps maintain your position as a market leader. Companies should consider using patents to protect their technological breakthroughs. Small warning, though: be aware that patents are relatively short-lived and can be outpaced by the rate of technological change and advancement. Without a doubt, the pioneering firm will reap huge profits at the beginning. These profits can and will undoubtedly fall as patents expire and others move into the marketplace.
Firms can also gain an advantage if they can gain control over natural resources in a specific area. Moreover, they can make investments to upgrade their production facilities, giving them a leg up over the competition.
Switching costs and buyer uncertainty occurs when firms that don’t enjoy an advantage seek to enter a market. First movers can generally be assured that most buyers will stick with their company. Still, they need to be performing their job competently.
How to Gain
Pioneering firms can gain the advantage by getting their product or service to market sooner rather than later. It’s better to get a marginal product onto the market first than to have to overcome a “Johnny-come-lately” status. But, keep in mind that if the product or service you are offering is meaningfully better than what your competitor is offering, you will often come out the winner even if you are the follower.
Before entering the market, do your research. Being first means nothing if you are locked into a specific delivery or technological system. You need to be able to change as the market demands.
Finally, don’t forget your customers. Be sure to provide great customer service while being responsive to their needs. Having a unique product means nothing if potential customers are turned off by poor service.
Pros and Cons
There are several advantages to being a first mover:
- The potential to make a lasting impression on customers, leading to both brand recognition and loyalty.
- The ability to take the time to refine perfect their product or service.
- They can establish Resource control through exclusive contracts with employees and/or suppliers
One of the problems of first mover advantage is that it is hard to define. Should it apply to firms that enter into a market through research, design and technological upgrades or should it apply to a pioneering company that provides a new product?
There are other disadvantages to being a first mover. As a first mover, you take on all the economic challenges that being a pioneer involves. Those who follow you into the market can use those to their advantage.
Followers will learn from the mistakes that first movers inevitably make, which allows them to reduce their level of risk. They will also take a look at the processes that first movers utilized to bring their product or service to market. Furthermore, they update them for great efficiency or profitability.
Once in place, followers are also able to use new technology to streamline the production process. The obvious downside is that first movers may be tethered to older delivery systems.
Many first movers don’t want to stray from their original business plan, even when it isn’t working well. Followers can exploit that by revising the product or service to better meet customer needs. And, first movers may also be driven by fear of a missed opportunity. The end result is that they bring a product or service to market before it is ready.
Being a first mover is usually the result of having a technological advantage and luck. Skill and technological advantage lead to products and services that will sell faster. This in turn leads to greater profit margins for startup firms. And, plain old luck can also play a large role in startup success.
First movers can prove to be less successful than those who follow them into the marketplace. That is why many established firms simply track market changes and quickly respond to them. Ultimately, the decision to be a first mover or follower is dependent on both the resources and capabilities of your startup.
Images taken from depositphotos.com.