What are real unfair competitive advantages?


What if someone copies your brilliant business idea?

About twenty people asked this question on Answers OnStartups:
When I meet with an investor, he may ask me: What if a big company copies your idea and develops the same website as you did?

How can I answer this question?

No, the question is: What are you doing now, knowing that a big company will copy your idea?

No, wait, the real question is: What are you going to do when another smart and quick startup will copy it and gets $10 million financing?

No, wait, I am sorry, the question is: What will you do when there are four totally free open source competitors?

Or perhaps the question is: What will happen if your partner runs with your code, plan, all marketing data and customer base to Bolivia and will begin selling your project cheaper?

The good news is that all these questions have answers!

The bad news is that a majority people don’t have the right answers, but they think they are. And this is fatal, because it means that they do not predict the critical situations.

The first step is to recognize that the problem exists

Over the past week, I detailed the most common misconceptions about the competitive advantages, so go and read it.

Summary: everything that can be copied definitely will be copied, including features, pricing and marketing policies. Everything you read on popular blogs can be read by other people. You do not have the advantages just because you have fire in your eyes, and you’re a workaholic, and an expert in your realm.

The real competitive advantage is something that cannot be copied, and cannot be bought.

Like what?

Insider Information

Some people that the only way to make money on Wall Street is to have insider information. Unfortunately, this is not a joke, though it is illegal and occasionally, some people go to jail for it.
Fortunately, a usage of market knowledge and its problems, it is completely legitimate unfair advantage for a startup.

For example, how this advantage becomes apparent in the reality. Debby worked as a psychiatrist for 10 years, she understands everything from A to Z in this business. Once she had an opportunity to change completely the type of activity, and eventually she became team leader of software development. It turns out that in order to manage the projects in large company more valuable is the ability to feel people, to be a thinking person and adviser, not the expert skills in debugging C + + code.

Now, Debby understands that the traditional software in psychiatric practice is just trash, and she knew the pitfalls of both the field and weaknesses of existing programs on her skin. But now she has a vision and the ability to create her own software, using the best modern trends (for example, web applications, instead of crocky desktop applications) and new versions of the HIPPA (that allows web applications to store medical records of patients as the cards).

Debby takes a unique position: Expert in the field, the ability to transform into her patient, and as well the ability to manage the development team. Even if someone sees Debby’s product after its appearance, it is almost impossible to find a person or even to gather the team, who would have had a unique knowledge and skills. At the best, they will copy. Of course, by the time Debby will release the next version.

A stubborn, uncompromising obsession with the main feature

Popular commentary about the previous post was that the unique ability can be a competitive advantage in some cases. Some examples of when a feature is the main advantage of companies:
Apple sacrifices everything for the sake of design. Apple’s products are overpriced (magically falling twice a year after entering the market), bugs (how many times iOS was cracked?), And every experience with their tech support that I was lucky to get, it was terrible, but their stuff looks cool and pleasant to use! I have iPhone too.
Google’s search algorithm was better than others, so they got the attention and were able to monetize. Of course, Bing and Yahoo are good as well, but the advantage lasted long enough.
Photodex is a small company, and probably you've never heard of it, where I worked in the nineties in Austin. We did an image viewer with thumbnails, so you do not have to open each file in order to understand what it was. (In the nineties, before it was built into all operating systems as default). Our advantage was speed. Today Photodex earns millions of dollars a year, because the speed is the only thing that makes people to do anything.

However, it is not enough just to have the unique feature, because it is still easy to duplicate.

Moreover, most of the innovations that we have demonstrated in Smart Bear in field of code review already copied by the open-source and other competitors.

To a large extent, this requires a major commitment to the main Feature, in spite of everything that is: 1) Difficult and 2) You must not give up in any case.

Google has spent hundreds of millions of dollars to their search algorithm that is the biggest focus of the company even today, after a decade they decided to make it to be its main Feature. They don’t want to lose it to competitors or malicious hackers, whatever the cost.

37signals can produce simple software, and get 3 million customers, because they do not give up their philosophy of simplicity, transparency, and ownership of their company and this is the very thing for which millions of people respect them and support them. The competitors can also create banal web applications, but these products will not have the main Features.

In order to make your main Feature inaccessible for copying, it must be difficult for others to copy it. Google’s algorithm together with the soft and hardware for its implementation that searches millions websites for 0.2 second, it is difficult to copy it. Thousands of really smart people at Microsoft and Yahoo have worked for years to catch up with that. Communications platform for 37 signals ( a blog with 131 thousands of readers) and “Rework” bestseller is almost impossible to build, even with an army of inspired around the clock writers.

It’s hard to do the same, and this is still working advantage, especially if you give it a major energy.

P.S. In details, here are detailed examples of how this mental system also configures the sales.

Personal authority

imageChris Brogan earns $ 22,000 per day of advice in his field that is the social media marketing, where all the information you need is already available online and free. Joel Spolsky makes millions of dollars for bug tracking in the field with hundreds of competitors and a little bit novelty. How do they merit this solid reputation, and how you can earn this stunning advantage?

I am this great example of someone who did not have any reputation, but I raised my prestige to a mark that my company now (Smart Bear) is unattainable as a leader in terms of revenue and the ideas in the field of automated peer code review.

Unfortunately, all this crap in terms of authority takes many years of expensive effort, and even then success is probably just luck or something else, so I am not even sure whether or not worth it? Yes, it is worth, just because it takes years of effort and some luck.

The authority cannot be bought. You can get the venture capitalists money and have the authority over the years. A large company cannot just decide that they want to be recognized as leaders in their field. Even a group of super clever geeks cannot automatically become the group of authorities, because it does not matter how well you write the code.

How the authority can be converted into the revenue. Here's a quick example:
I am speaking on the topic of automated code review at conferences. My competitors are paying thousands of dollars for a room, then they spend thousands on advertising for the participants, asking them to come into this room, then they try to sell the product to disinterested people in the room, it sounds crazy.

At the same time, as I am known as an authority in the field of code review and software development, I am speaking for an hour for the enthusiastic, focused group of a hundred people, who are interested in the topic of code review. Usually, after my speech about 5-20 people want to talk to me personally. Some people come straight into the room to get the demo version, and I give them a private product demo. And it is not unusual to earn about $ 10,000 - $ 50,000 on sales of the product to people who saw me at my speech over the next three months.

And this is just one example! Now add this: What effect does the blog give to the readers? What effect will my book have on sales about the modern impact of code review?

Without a doubt, the authority is costly in monetary terms and time consuming. But it also is a stunning and incomparable competitive advantage.

P.S. I hope that the authority which I slowly get on this blog will help me during the launch of my next startup. Of course, I will use it for profit at the right time!

Dream team

The startup world is full of well-known team-killers: Gates and Allen, Steve and Steve, Page and Brin, Fried and DHH.

In each case, the founders were super-smart, they have complementary skills and work well together, and as the team they represented a unique, powerful and unstoppable force.

Of course, it's easy to see, looking back, and a retrospective is a terrible teacher, but this principle could work for any startup, especially when your goals are more modest than to become a new Google.

Let’s take a look at the success of ITWatchDogs, the company that I helped to create and eventually sell (to Smart Bear). The components of our Dream Team were obvious from the start:
A variety of skills. One had experience in startups / business / sales (Jerry), and the other was a proven software developer (It is me), the third was a hardware expert (Michael).
A shared vision. We agreed on how the product should be, including the ultimate goal to sell it.
Insider knowledge. Jerry ran a successful startup in the same field, I had a great experience with the languages and tools for the embedded software, and Michael had the years of experience in building low-cost circuits and processors.

Of course, the Dream Team does not guarantee the success, but it significantly reduces the risks of a startup, and moreover, that makes difficult for competitors to copy it.
This works in cases where someone is successful in his field in the team, for example, a person has a successful startup or blog.

P.S. This is the main competitive advantage of the startup that I am working on now (and soon I will announce it), so that you will see another example of this theory, which is much better!

(Right) comment from a famous person

KISSMetrics is third company of Hiten Shah. At first glance, this is another marketing metrics company. This is a tight and mature market with hundreds of competitors in all variations of a large / small, expensive / medium / cheap / free, and product / service / hybrid.

But Hiten has something that competitors don’t: the investors and mentors who are famous in the market. These guys are Dave McClure, Sean Ellis, and Eric Ries, they actively promote KISSMetrics in their blogs, Twitter, and in public.

How much advertising will competitors require to surpass the approval and support that Hiten has? Even if a competitor also would like to get a positive comment from the famous person, it is impossible, because these guys already have people who are preferred before all others.

Many competitors have more possibilities than KISSMetrics, but they still cannot outrun its features, because most customers listen to the famous people.

Thanks to these comments, Hiten has receive hundreds (if not thousands) of customers. You cannot buy this startup advantage, even for millions of dollars, because they are not just impersonal people (who saw KISSMetrics on the banner), these are people who trust Hiten, because they associate Hiten with other famous people that they already have confidence.

P.S. If you invest the funds, the investors like to see in the co-founders or even in the advisers if they had been successful before.

Existing customers

Frank Rizzo says: Listen open-mouthed, scumbags!

Anyone that you’ve ever sold something (or those who took the demo version) has the most valuable market research info, and this is the very thing that a new competitor will not have.

This is kind of cheating, because everyone says "I'm listening to my customers" that today means just another crap like "we are obsessed with the idea", because in fact the truth is that if you really learn from your customers and never stop moving forward that will put you ahead of most companies in the world.

As the company becomes successful, it increases its momentum, which means that it moves in one direction with one philosophy. As the physical momentum, the momentum vector of the company becomes more difficult to change. This is logical, for example, Smart Bear has 35 000 users, so we just cannot change the interface or a process model drastically, because that would mean too much retraining, even if the result would ultimately be better.

Even the cool and flexible companies like 37signals are driven into a trap. They were so confident in their philosophy "Do Less" that they cannot even enter the "Less" markets. For example, it is impossible to use Highrise with more than one sale in a traditional organization, and guys from 37signals believe that Highrise is useless.

Of course, the world and customers have been changing. Usually, it frees up some space for the next competitor, but if you already got on the market, you can strengthen your current position, and you will have the insider knowledge and the cash flow for as long as you want.

Now, you have more money, you are better known, and you have these happy customers, helping you to strengthen your image, namely it means that you must have the best insight possible.

Every new competitor can kill your business, using just one of the killer advantages. If you will not use them, someone else may use it!

Zoho used just this argument to explain why they do not worry much that Microsoft became a direct competitor to them:
Generally, the competition does not kill companies, but the funniest thing is that they kill themselves. Office 2010 will be the end for Zoho, if it stops doing innovations.

37signals is stuck in the trap of philosophy that they have made for themselves, but you do not have to do it.

Go and win

Imitation must be the sincerest form of flattery, but it infuriates when someone copies your product.

Of course, you can fight with it on the market, but you really need something that cannot be copied, you must just beat them all, so grab your advantage tighter and do not look back.

Do not be discouraged if you don’t have the unfair competitive advantage yet… I did not have it too when I started Smart Bear! But I worked hard in the right direction, and eventually I earned it.
BumBum 9 june 2012, 11:23
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