It’s a question that is covered in many books on entrepreneurship. Do I need competition for my new business? And unfortunately, the literature is somewhat vague on this point. In general, advice on the topic falls into one of two sentiments:

  • You need competition for your new product, otherwise you have a very high risk of creating something for which no market exists.
  • As a nascent business, you must avoid competition like the plague, otherwise you’ll never gain market share.

So what is the answer? Do you need competition, or should you avoid it? It’s clear that both choices have advantages and disadvantages.

Well, it turns out that you do need competition. But only of a certain kind. To help illustrate the kind of competition you need, let’s create an example.

Suppose one day, Bill has decided that he wants to get into the market for general-purpose spreadsheet processors. Seems like many people need them, so it should be an easy sell. He codes one up, tests it out, and decides that he’s ready to start selling.

Of course, this is a terrible idea. The reason why is that Bill’s product has a dominant competitor, Microsoft Excel. For his target market (information workers), Excel is clearly superior to Bill’s product in all ways. No-one in the target market will prefer his product to Excel. Certainly Bill’s product has a market that needs it…it just so happens everyone in the market has a superior alternative available to them.

Bill has created a product that certainly has demand, but everyone prefers Excel

After this fiasco, Bill decides that he’s going to avoid competition this time. “If I’m the only game in town, people will have to use my product!” he reasons. So he decides to create a product for which no competition exists. After a lot of failed attempts, he finally finds a great idea which has no competition: 3D-spreadsheets.

After talking to a several people who think it’s a cool idea, Bill gets started. Again, he tests it out, and open up the sales hotlines. Below is an diagram of the market share for spreadsheet-software now:

Bill has created a product that has no market

Not surprisingly, 3D-spreadsheets have no competition…And also not surprisingly, they have no demand. 3D-spreadsheets are cool, but ultimately useless for any practical purpose.

Determined to make it in the spreadsheet market, Bill tries one more time. He’s going to create a regular, 2D spreadsheet program, but he’s going to make it specifically for corporate accountants in the construction industry. Bill talks to several accounts in the industry, and eliminates all of the features that they never use in excel. He includes easy-to-use reports, functions and graphs that all construction accountants use regularly. He also makes it easy to import and export common construction forms and invoices into the program. After a year, he releases the product.

By focusing his product on a small segment of the spreadsheet market, Bill has outmaneuvered Excel and gained market share!

Success! Obviously, Excel is still a competitor, but by being laser focused on a small piece of the total spreadsheet market, and making a product just for them, Bill has finally gained market share. The product quickly becomes an industry-standard tool for construction accountants.

This is the kind of competition you need, which i’ll call Segmented Competition. Segmented competitors are competitors that offer a product which is a substitute for your product - however, you have a competitive advantage over them in a small segment of the total market. In other words, you both offer a similar product, but they appeal to different groups of people.

Ever go to the grocery store, and wonder why there are 3 brands of diaper? Luvs, Pampers and Huggies…They’re all just diapers, right? They can peacefully co-exist because they are segmented competitors. Pampers are the “premium” diaper brand, Luvs are the “value” brand, and Huggies offers a nice mixture of both value and quality. There are enough parents that fall into each segment that no diaper brand needs to worry about the other.

It can certainly be nerve-wracking to design, develop and create a product that clearly has competition, but by ensuring it’s the right kind, you can feel validated that you’re ultimately making the right decision.

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