Defensible Differentiation
How to build a business that will stand the test of time
In 2016, Instagram launched their ‘Stories’ feature. Instagram Stories was an almost direct copy of Snapchat Stories (even copying the name). Whatever your opinion on such a move, it has most definitely paid off. In 2019, the daily active user count for Instagram stories was twice as high as Snapchat’s total DAU count.
It’s a common trope of the product management and software world that we need to differentiate our product from competitors. When companies and product teams try to differentiate themselves from competition they usually focus on features. What features can we build that our competitors don’t have? What features can we build that are way better than our competitors’? But in a world where our competitors can copy our best features (à la Instagram), how do we differentiate?
In other words, how do we create a competitive advantage that is truly defensible?
Defensible Differentiation
Defensible differentiation is simply the idea of doing things that your competitors cannot easily do too. More specifically, doing high-value things that your competitors cannot easily do too. Doing high-value things that your competitors aren’t doing will help you to create a strong, durable competitive advantage. This is also often know as an economic moat.
In this post I’ll first review some of the more traditional moats that companies its or it’s
employ. Then, I’ll outline some more novel and under-appreciated moats that can help you build real defensible differentiation.
Traditional Business Moats
Technology: Sometimes, companies can build a massive economic moat by having deep technology that is at least 10 times better than the competition. Google’s search engine is the classic example of this. Google joined the search wars somewhat late but had a solution that was far better than Yahoo’s.
Economies of Scale: The bigger your are, the lower your costs will be due to having more operating leverage. This means that you can earn more money per customer (at the same price) or provide a cheaper solution than your smaller competitors. Software companies in general are great examples of economies of scale due to the almost-zero additional cost of production involved in acquiring another customer.
Network Effects: Your product/service has network effects if its value increases as the number of people using it increases. Social networks and messaging products are classic examples of network effects. Network moats can be incredibly defensible. Why would I download a new messaging app when all my friends are using WhatsApp?
Brand Loyalty: A strong brand can be a moat. Think Apple, Coca-Cola, Gucci. Instantly recognisable brands that have built huge businesses by cultivating brand loyalty amongst their customers.
Under-Appreciated Moats
Note: The moats outline below are definitely most applicable to B2B/enterprise companies. If you work in the consumer space, it would be interesting to think about how you could adjust some of these strategies and apply them to your company/product.
1. Professional Services:
Professional services typically involve providing hands-on setup, configuration and implementation support to your customers. This helps them to have the best possible experience of your product, suited to their specific needs.
Professional services are often overlooked by product-focused companies who are intent on a bottoms-up approach to enterprise sales. This oversight is, in my opinion, often misguided. Providing professional services can create a unique economic moat for 3 key reasons:
Stronger Customer Relationships: By providing hands-on support to your customers, you will build a strong relationship and strong brand loyalty that is very difficult to replicate with “ready-to-go” products.
Sunk Costs: The significant cost, time and effort involved in the implementation process will deter your customers from switching to a competitor without a very strong reason.
Switching Costs: Providing hands-on support will make it very costly for your customers to move to a competitor. They would have to replicate all of the integrations and configurations that you have helped them setup. While also needing to retrain their staff on a brand new system. Costly indeed.
Full professional services will not make sense for a lot of companies. But are there elements of a professional services approach that you could begin to implement? Could you provide setup support via a 30 minute introductory zoom call? Could you run a workshop where you help multiple customers get set up at once? You don’t have to implement a full professional services strategy to get many of the benefits.
2. Multi-Product Strategy:
There is a tendency for B2B and enterprise startups to think that a better product is all they need to beat incumbents - “Our UX is sooo much better, why wouldn’t they switch?”. Thinking like this shows a naive understanding of your customers’ buying considerations.
For example, you may have built a sales analytics tool that is far better than Salesforce’s analytics product. But a large customer is not comparing both analytics tools in isolation. A large customer is comparing your analytics tool against the fact that they can also get their CRM, marketing and customer support software all from Salesforce. One contract. One vendor relationship. One login for employees.
A multi-product strategy is a really powerful way of building a strong moat around your business. Even if the individual products are worse in isolation, the benefits of multi-product may far outweigh the negatives for customers.
This presents a bit of a chicken/egg problem for startups. How do you build a wedge into a market like this? It’s not easy. That’s why multi-product is such a compelling moat. If you do manage to build a wedge into your market, you should consider a horizontal, multi-product strategy a lot earlier than you might think.
3. Data:
Data has always been a hugely valuable resource for tech companies. Many companies have built huge moats around their customer’s data. Companies like Oracle are essentially databases on which different enterprise applications have been built. Another name for this is a system of record.
The huge emerging opportunity in data lies in doing useful things with that data. It sounds simplistic but many enterprise products are still essentially CRUD applications. They may allow customers to easily access huge amounts of data, but they don’t allow you to do much more than create, read and update that data.
With machine learning, we are starting to see products that do really powerful things with data. For example, People.ai uses ML to help companies uncover new revenue opportunities from their customers. This is just the tip of the iceberg. For example, you can imagine an ML product that make hiring and promotion recommendations based on employee data. Or products that make marketing suggestions based on previous marketing campaigns.
It’s fairly clear that incumbent companies have the upper hand here. A company like Salesforce already has access to customer data. They ‘just’ need to build products that can make intelligent recommendations from this data. This combination (system of record + ML) would be a massively defensible moat. As Salesforce provides better recommendations to its customers, they would be less and less likely to move and store their data somewhere else. A virtuous cycle (for Salesforce).
To compete, startups have 2 options:
Build a product that provides recommendations that are so good that customers are willing to switch systems of record.
Combine multiple data sources to make recommendations that incumbents cannot. For example, you could take data from performance product with data from a recruiting product could help you to make recommendations on which candidates to hire.
My bet is that the option 2 will lead to the biggest companies.
More Than Just Features
You will notice that defensible differentiation isn’t just about the software that you ship on a product team. As a product manager, it’s important not to think of your product as simply a set of features and functionality.
Think of your product as the sum total of your customers’ and users’ interaction with your area of the business. With this broader mindset, you’ll notice far more opportunities to create defensible differentiation.