Competing against incumbents: Flank them
Competing against incumbents: Flank them
It’s exceedingly unlikely that your company and products operate in a world without competitors or alternatives to you. This is especially true in the world of B2B software: you will be against incumbent companies who will be competing alongside you. Having incumbents, or large competitors, isn’t necessarily a cause of concern. There are several advantages for having competitors in the same market you are competing with. First, these competitors establish a product category and a need for products similar to yours to exist. Second, they create a budget for products like yours to operate in and contend for. As a new entrant into this space, you don’t have to create a new category or create a budget for your products: the incumbents did that for you.
The obvious tradeoff is you now have to compete in this marketplace for the same budget with companies that oftentimes have far more resources than you do. I’ll be exploring two common tactics that are very frequently used to compete against incumbents. Those two tactics, in my experience, are both all too common and also ineffective.
The first, and all too common tactic, is to over index on providing a better customer experience. Young companies will hand-hold their customers and provide them with the very best experience they can afford. That is obviously a good trait, I am not arguing for mistreating your customers. However, providing a better customer experience through dedicated CSMs, immediate access to talented support engineers and others, is both necessary but insufficient. Customers, especially enterprise customers, understand this dynamic all too well. A young and hungry startup will offer an overall customer experience that is far superior than a larger competitor. Your customers also know that this personalized and exceptional experience is short-lived. Almost all companies start off offering this exceptional level of experience and in time that starts to wilt and dilute. The thing is, customers don’t buy your products for a better customer experience. They buy your products to solve business problems and unless you are in the experience or hospitality business, a better customer experience isn’t a business problem per se. It’s worth repeating that offering a great customer experience is important, but insufficient. You need more.
The second tactic is around pricing. New entrants observe that legacy incumbents don’t have transparent pricing. The price of their products is shrouded in mystery and gated by engaging with the incumbent’s sales team or a reseller. The startup then moves to offer that transparent pricing by advertising the price of their products directly on their website. This is naive in my opinion for a few reasons. First, you are now offering more information that your competitors are: they keep their pricing private and yours is now in the open. That causes information asymmetry where you now have an imbalance between two negotiating parties, you and your competitor. The second reason has to do with the enterprise buying process. The fact that your price is disclosed on your website doesn’t mean that a large enterprise will end up paying that. All enterprises negotiate. That’s what their procurement departments are there for.
The only exception to my pricing argument is if you are targeting SMB customers, who do care about the ease of transacting with you and who don’t necessarily don’t have procurement departments. If you are targeting that segment of the market, then disclosing your pricing is beneficial. It is therefore, not uncommon to find companies offer a hybrid approach whereby some versions of their products - the lower end ones - have pricing disclosed, while the enterprise tier ones are gated.
Yet another pricing tactic is to try and undercut your competitor by offering products at a lower price point. You should only do that if your unit economics support that. Winning deals at a loss should be an exception not the norm. Remember, your larger competitor probably has deeper pockets and can afford to lose a few deals, or win ones at terrible margins. You do not, again, unless you are able to back those price decreases with favorable unit economics.
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If you can’t win by offering a better experience or through pricing leverages, what then can you do? The answer is to flank your competitor.
“In military tactics, a flanking maneuver is a movement of an armed force around an enemy force's side, or flank, to achieve an advantageous position over it.[1] Flanking is useful because a force's fighting strength is typically concentrated in its front, therefore, to circumvent an opposing force's front and attack its flank is to concentrate one's own offense in the area where the enemy is least able to concentrate defense.” Source: Wikipedia
The flanking maneuver that I am suggesting is obviously a metaphor. Practically speaking what that means is to find those few attributes that your product does that your competitor cannot offer. These attributes have to matter in that they provide clear and obvious value to your customers. The combination of finding a few attributes that are highly valued by your customers and simultaneously your competitors cannot offer becomes a very powerful flywheel. One of the best examples I have seen of applying this strategy was how Snowflake took on Teradata.
We’ll have to go back in time to 2017 to see how this strategy played out, but first a bit of context. Teradata was, and still is, a major player in the data warehouse space. The only Teradata products you could purchase in 2017 were delivered as appliances, like the one shown below. These appliances were physical hardware that was delivered to you and had to be racked and stacked in a data center. Back then, your data warehouse was delivered on the back of a truck and dropped at your loading dock.
Snowflake came along and offered a fully managed and 100% software-based data warehouse. Snowflake customers could then deploy a data warehouse in minutes versus having to wait for weeks to receive delivery of a physical device. Additionally Snowflake customers no longer had to manage the hardware, and datacenters, that host these physical data warehouses. There was another key benefit to the Snowflake approach. Snowflake’s data warehouse offered the ability to scale compute and storage independently. Customers who wanted more power out of their existing Snowflake data warehouse could do so without provisioning more storage. Similarly, if they wanted more storage without adding more computation resources they could do so. Not only could you scale both independently, but you could scale them upwards and downwards. Teradata could not offer that. The unit of scaling for Teradata was an appliance that contains both storage and compute. You thus had to scale both together, which was wasteful.
Snowflake knew this all too well and took advantage of it. You can see how Snowflake started to message this through their social posts. In fact, you can still see the #RetireTerdata campaign on Twitter (eh, X), today.
Flanking offers another important advantage. It forces you to focus on a few traits that your products do better than your competitor and amplify those. Witness how Snowflake focused on two of their attributes: scaling up/down and cloud native. They don’t mention that their data warehouse is faster than Teradata (it probably wasn’t back then), or that their SQL is “better”.
Snowflake picked two traits that they knew mattered to customers and Teradata could not offer, at least not in the short-term. The rest is obviously history. Snowflake now commands a ~$50B market cap. while Teradata’s is about $4.5B.