Why you should think twice about first movers in any category
The First-Mover Advantage
“First mover advantage doesn’t go to the company that starts up, it goes to the company that scales up.” — Reid Hoffman
First-mover advantage is the idea that the first company to launch a product or service gets a competitive advantage and basically owns the market. Being the first to enter the market allows the company to create brand recognition and build a loyal customer base. Before other competitors join, the company also has more time to work on its product or service and set the market price. Moreover, the company can find cost-effective ways of production and distribution. First-mover advantage is facilitated by innovation or early access to key resources. The first-mover advantage is said to result in huge profits and a monopoly over the market.
The idea originated from research by two professors at Stanford Business School David Montgomery with Marvin Lieberman. They wrote a paper in 1988 describing the “first-mover advantage” as the competitive edge afforded to first products in any field. The concept gained widespread popularity in the business world and was taught in business schools. Several articles were published on the topic. The concept was supported by the early success of companies like Coca cola and Gillette which maintained their initial advantage for over a century.
However, later research showed that being the first mover may not actually be as advantageous. Hundreds of first-movers have actually failed or been taken over by their competitors. What’s interesting is that the researchers behind the original paper actually disproved their own concept of first-mover advantage only ten years later.
Despite having been debunked almost 22 years ago, the first-mover concept has stuck around. It’s easy to see its appeal. After all, the early bird catches the worm. Our language around competition and sports is saturated with the idea of first being the best. We’re taught to value the first comers. Being late to the party means missing the party. The theory seems intuitive and there are plenty of convincing examples.
Hoover introduced the vacuum cleaner in 1908 and ruled the markets for decades. Similarly, when Sony launched the Walkman in 1979, it was the first of its kind and remained the leading portable music player for decades until iPod came around. More recent examples of companies enjoying the first-mover advantage include Amazon which started from an online bookstore and became a global conglomerate and eBay which became the most popular shopping website.
First-Mover Disadvantage
“There is no such thing as “first-mover advantage”. There is, however, “first-winner advantage”, and it is often imagined to be the former.” — Alan Cooper
A growing number of examples is actually disproving the first-mover concept. In fact, being first in the market might actually be a liability for a company in modern times. Marketing first is no predictor of success when technology is rapidly evolving and the markets are constantly changing. There is no guarantee that the first to launch will be the best. For example, the iPad was not the first of its kind. Microsoft introduced a tablet PC ten years earlier in a market that wasn’t ready and when the iPad arrived the market was welcoming. MySpace and Friendster came first but Facebook became the winner.
Most successful companies today were not first-movers. Companies like Google, Facebook, Instagram, and Snapchat built upon the ideas of earlier companies and learned from their mistakes to create better products. Famous failed first movers include Nokia, Yahoo, GM. According to research by the American Marketing Association 47% of first-movers end up failing compared to only 8% of fast followers.
The drawbacks to moving first
- Free-riders
Late movers or fast followers are able to free ride on the pioneer’s efforts and investments. This is because it’s easier to build on an existing product than to invent one. They can imitate the features that work and add new features. The cost of imitation is 60-70% lower than innovation cost.
- Copy cats can beat you
First movers are pioneers in the field. And many others follow them. New companies can copy the first idea and improve the product and as a result take away the first mover’s share of the market. The competition can get tough. For example, for a long time Craigslist dominated the rentals industry, then AirBnB beat it by farming Craigslist to grow its listings.
- Market uncertainty
There is risk in introducing a new product or technology and creating a market. The market may not be ready or the need is not there yet. First movers have to do guess work as there are no precedents to follow while late entrants can follow the established industry standards. It also means that you cannot afford to make mistakes when you are the first.
- Changing customer needs
Though first movers create a market for a new product. If they do not keep up and fail to assess customer needs, newcomers can take advantage of this and develop products that better match customer needs. Customers will respond better to products that are more efficient and affordable.
- High Cost
Being the first to launch a product is expensive. First movers have to face the high cost of research and development. There is also the high cost of marketing to educate the public about a new product. In addition there is a high cost for production and meeting legal regulations.
- Risky business
Being a pioneer business in any field involves a significant risk for failure. It requires a lot of investment. So if it is your only investment, it can put the company at risk. The biggest failed first mover in recent times was the health tech startup Theranos. The founder Elizabeth Holmes put all the eggs in one basket, which was the automated blood testing technology which failed to perform as advertised, leading to disastrous consequences.
Moreover, first products and services also require substantial up-front investments and face regulatory resistance. First movers who establish themselves often find themselves complacent due to their dominance and may neglect further innovation. For example Tesla has displaced its competitors like Ford and GM to capture a greater market value due to its commitment to growth and innovation.
Benefits to Fast Followers
Contrary to popular belief, the fast follower approach has turned out to be actually quite successful for companies. First followers are the businesses that follow soon after the first movers have established themselves in the market. These companies are good at refining solutions and make up the early adopter and the early majority section in the Law of Diffusion of Innovation curve introduced by Simon Sinek. Fast followers actually help the market mature and earn profits from it. At the same time entering the market too late is also not a great idea. Businesses that enter last are referred to as late followers. They usually lack innovation and therefore hold very little profit margins.
Fast followers find the goldilocks balance of entering the market at just the right time, neither too early nor too late. And this approach results in maximum profit with least risk. Fast followers benefit from holding back and observing the situation before entering a new market or introducing a new product. For example Google was not the first company to launch a pay per click search engine. A company called Overture was the inventor and Google launched its improved version two years after Overture.
Fast follower strategy involves a learning process wherein they learn from those who came before. By learning what works and what does not, fast followers can build on the knowledge and come up with better products. In other words, they do not have to reinvent the wheel. Another example is mobile phone technology. Motorola made the first mobile phone and IBM invented the first smartphone but late movers like Apple and Samsung though entering the market later, went on to become market leaders because they introduced the best features.
Despite competition, second, third, and fourth movers can build great businesses. They just have to work hard to create products that are better than anything before them as the first movers generally set the market standards in their field. According to the social media management platform Hootsuit founder Ryan Holmes, “it’s not who’s first to market but who’s best to market”.
There are several advantages afforded to fast followers who enter the field after first movers have paved the way.
- Customer Development
First movers have uncertainty about whether customers will find their product valuable and if they would be willing to purchase. There is also doubt about whether the problem is even worth solving. Late movers can learn what customers want by observing the first to launch. A competitor’s success proves that the product is a valuable solution to a worthy problem. Therefore, late movers can save time and money on customer development, product validation, and identifying product audience.
- Acquiring customers
Second or third movers can save testing and optimization time by studying their competitor’s product. They can also learn how they acquire customers. This can help them with developing a strategy towards gaining customers in a profitable manner. You may even pick up from the sales messaging early marketers employ.
- Market proof
Late movers can observe how well a new product or service is received before jumping in. It can give them a strategic advantage. They launch the product when there is market proof. This can reduce the spending on research and analyzing public perception and market readiness. First movers can test the waters and late movers can learn from their mistakes. When the late movers begin to market, customers are already familiar with it.
- Improved product
Because late movers are slow to enter the market, they can look at the competitor’s products and services and make improvements. This can allow them to introduce their products as a new and improved solution. Such a marketing approach can establish them as more innovative without being the first.
- Reduced Risk
Being a late mover mitigates a lot of risks for you. First movers face the most risk in case the product fails. Late movers can see the competitors’ performance and adjust key features, functionality, and price etc. thereby improving their chances of success.
- Reduced Cost
Late movers have to spend less on product development, prototypes, market research etc. Another cost they save is that of educating the customers. Later movers can benefit from the excitement generated by the first mover’s product and market their versions. As customers are already familiar with the product, marketing efforts should focus on highlighting the product’s superior features.
