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(Editor’s note: Serial entrepreneur Steve Blank is the author of Four Steps to the Epiphany. This column originally appeared on his blog.)
Trading emails with a startup CEO building an iPhone app, I asked him why potential customers would buy his product. In response he sent me a competitive analysis. It looked like every competitive analysis I had done for 20 years – ok maybe better.
And it made me sad. Looking at the spreadsheet, I realized that competitive analysis tables are one of the ways professional marketers screw up startups from day one. And I had done my share.
- Prove What I Already Believe – Most competitive analyses are: 1) sales documents for investors and/or 2) an attempt to rationalize the founders assumptions.
- It’s Part of the Plan – Most investors require you to write a business plan that includes a section called a “competitive analysis” in which you tell potential investors how your product compares to products other companies trying to develop and sell to the same customers. While most investors don’t actually read your business plan for a first meeting, a summary of your competitive analysis usually ends up as a slide or two in your PowerPoint presentation.
Your goal in this slide is to tell investors: 1) you understand the market you are selling to, 2) you understand the other companies selling in your market, and 3) you understand how and why you are better than any of the products currently in the market. You are also implicitly telling potential investors, “These features on our competitive slide mean we will sell a lot of what we are planning to build so invest in us.”
I looked at the competitive analysis this startup CEO sent to me. This guy was experienced, he worked at lots of large companies, so the table was thorough. It had lots of rows and mentioned all the competitors.
Not only was it wrong, it would set his company back months and possibly even kill them.
Why? In most startups the competitive analysis feature comparison ends up morphing into the Marketing Requirements Document that gets handed to engineering. The mandate becomes; “Our competitors have these features so our startup needs them too. Get to work and add all of these for first customer ship.”
Product development salutes and gets to work building the product.
It’s only after the product ships that the company discovers customers couldn’t have cared less about most of the bells and whistles. Instead of optimizing for a minimum feature set (that had been defined by customers) a competitive analysis drives a maximum feature set. This is not good.
Here’s another problem: How do founders know which features to choose on the competitive analysis table? When I was running marketing, the answer usually was, “We’ll put up whatever axes or feature comparisons that make us look best in this segment to potential investors. What else would you choose?”
At its best a competitive analysis assumes that you know why customers are going to buy your product. At its worst it exists to rationalize the founder’s assumptions about what they are building. This is a mistake – and it is a contributing factor (if not a root cause) of why most startups get their initial feature set wrong.
If you are building a competitive analysis table, do so only after you understand that the features you are listing matter to customers.
Most marketers are happy to build feature comparisons. But customers don’t buy features, they usually buy something that solves a real or perceived need. That’s the comparison you and your investors should be looking at – what do customers say they need or want?
The answer to that question is almost never in your building.
How to Make A Competitive Analysis Useful
A competitive analysis makes sense when your startup is entering an Existing market– where the competitors are known, the customers are known, and most importantly – the basis of competition is known.
(The basis of competition are the features that customers in an existing market have said, “Yes, this is what is extremely important to me. I will dump my current supplier/manufacturer for your new product because yours is smaller/faster/easier to buy/get to/tastes better, etc.)
You win in an existing market when you are better or faster on those metrics that customers have told you are the basis of competition. Your competitive analysis must be around those metrics.
But most startups are not entering an Existing market. They may be trying to take a segment of an existing market by offering a product that costs less (trading fewer features for a lower price) or addresses the specific needs of a customer segment that the existing suppliers have failed to address. Or they may be creating an entirely new market with a disruptive innovation that never existed before.
In a Resegmented market, a competitive analysis starts with the hypothesis of “Here’s the problem we are solving for customers.” The competitive analysis chart highlights the product features that differentiate your startup from the existing market incumbents because of your understanding of specific customer needs (not your opinion) in this niche.
In a New market a competitive analysis starts with the hypothesis of “We are creating something that never existed before for customers.” The competitive analysis table highlights the product features that show what customers could never do before. It compares your company to groups of products or services.
I asked the CEO to go back to the competitive analysis and tell me whether he really knew what features matter most to potential customers. If not, he should get out of the building and find out.