It shouldn’t be a special occasion for you to talk to your customers. They are your lifeblood, so get close to them and understand what’s happening on the front lines of your business. Making a habit of talking to customers provides unequaled and necessary feedback. You’ll follow trends in your industry, understand your customers’ problems intimately, and be able to identify your weaknesses early. Blockbuster is one of the best examples of what happens when you bury your head in the sand and ignore customers. It took the competitors nearly a decade to erode Blockbuster’s market share, so there was plenty of time to react. Yet the executive team didn’t take the competitive threats seriously. Had management listened to customers, it’s highly unlikely they would have missed the transition to the Internet and streaming.
You must always improve your offering to stay competitive. Customer appetite shifts like the wind. By keeping zero degrees of separation with customers, you’ll be able to predict changes in demand and get ahead of the curve.
An average customer interview takes less than 10 minutes, so set aside some time every week to meet with customers. One meeting a week is often enough. Alternate between current and past customers to gain a solid understanding of why people prefer you or your competition.
A moat is a deep, broad ditch that surrounds a castle and provides it with a preliminary line of defense. In their heyday, moats rendered the enemies’ most effective weapons useless. You need a moat. In other words, you need a sustainable competitive advantage. It’s possible to start a business without a moat, of course, but it makes your life a lot harder. The problem is that as soon as you’re successful, you can expect company. Remember the hundreds of Groupon copycats? With a moat, you can seize the advantage by keeping enemies away and customers protected.
How do you create a moat? There are many forms of barriers to entry, including intellectual property (patents), know-how (trade secrets), speed of execution, brand awareness, cost advantages, government protection, and distribution rights. The most commonly employed technique is patent protection. With the right patent protection, the smallest company can hold Google or Microsoft at bay. If you don’t have much of a moat right now, brainstorm ways to create one and work it into your plan. Down the road, you’ll be glad you did.
When entering an established market, you have to worry about switching costs, or the costs required for a customer to switch from a competing product to yours. These costs vary based on the nature of the switch, whether they’re intangible (brand to generic) or tangible (cash spent to switch database vendors). When starting out, think about the switching costs you will ask customers to make, and why it makes sense for them to buy your solution despite the extra expense. Some companies go so far as to pay the switching costs to get customers to change.
When thinking about switching costs, one rule of thumb is that your value proposition needs to be at least ten times better than the competition. For example, if you introduce a new email program with better spam technologies, it needs to be 10x better at blocking spam. If you want to start a consulting business, you’ve got to be 10x stronger in your area of expertise.
10x can be hard to quantify, so just make sure that your offering needs to be significantly better. If it’s marginally better, people won’t switch. Regardless of the product or service, don’t rest until your value proposition dwarfs your competition.
Entrepreneurs always want to be first to market. There’s a sense of security about being first and not having any competitors to worry about. First-time founders often brag about the lack of competition to potential investors, and try to demonstrate that they will dominate the market by virtue of being first. Unfortunately, the idea that you gain an advantage by being first in a market is wildly misleading. The companies that eventually dominate new industries are almost never first movers; they’re the fast followers. Think for a moment of as many Fortune 500 companies as you can. How many of them were veritable pioneers of the industry and how many were fast followers? Google, Microsoft, Apple, GM, eBay, and Walmart—all fast followers. Fast followers are companies that are not the first to market but close on the heels of the first movers. It’s like NASCAR—the race usually comes down to the last few seconds, when the drafting car uses the car in the lead to build momentum and win the race. Isaac Newton said, “If I have seen further than others, it is by standing on the shoulders of giants.” Think of your competitors’ strategies as free advice, and stand on their shoulders.
So don’t worry if you are not first to market. Use your delay as an advantage to learn everything you can about the marketplace dynamics, and then out-execute them.
Strong experience in an industry is one of the highest indicators of a startup’s likelihood for success. This is well-known by professional investors, who often insist on industry experience before they’ll invest in a company. And this makes sense—if you don’t understand an industry, you’re likely to make rookie mistakes that could have been easily avoided with domain experience. With limited room for error, mistakes lead to quick startup deaths. If you want to start a new company in an industry in which you have no experience, consider getting a job with an existing company in that industry. This might sound crazy, but three or four months is the blink of an eye compared to the years you’re about to commit. Plus, it’s the best form of primary market research you can do. Not only will it give you more credibility with investors and partners, it will also greatly increase your likelihood for success.
If you do go this route, be careful with your employment contracts—you don’t want to sign something that would later prevent you from starting your own company.