All startups try to compete in a market by developing a competitive strategy based on gaining a competitive advantage in those markets. For example, Uber competes in the United States with Lyft and many other ride hailing companies such as Didi, Cabify, Beat in multiple markets trying to provide value to the user and capture them.
There are multiple theories of strategy starting with Michael Porter that talk about how organizations should compete. In general terms startups compete through price which can be low or zero to high and the perceived benefits of the product consumed by consumers. No startup wants to be in the sector of low perceived benefits and high prices, which could be the path to failure. The rest of the quadrants focus heavily on low costs, differentiation, or focus.
The low-price strategy can be used when the perceived benefit of the product or service is low, it is in a price-sensitive market segment, and product differentiation is difficult to achieve. Think of commoditized markets where buying a product such as fruit and vegetables is indifferent to the supplier. There are also those customers who are price-sensitive where they are unable or unwilling to buy a product at a higher price. In addition to this, there is the power of customers or the low cost of switching to another service such as mobile phone services or internet packages.
A low-price strategy is achieved by having prices equal to or lower than the competition while keeping the perceived benefits like those of third parties. An example could be those Software as a Service startups for the logistics sector that provide routing services to organizations. The system itself does not provide a competitive advantage to the organization but its interrelationship with the different users, activities, and processes of the company.
Competing on price leads to organizations having low margins and potentially low cash generation which is likely to disable them from reinvesting to improve, grow or expand. Therefore, some companies that compete on low cost such as airlines seek alternative sources of revenue such as charging for seat assignment, baggage documentation, internet usage, in-flight food and beverages, duty free on international flights, etc.
Maintaining a price-based strategy requires knowing how to operate on low margins, building a unique and affordable cost strategy and having specific organizational capabilities that allow you to manage low cost throughout the value chain.
The differentiation strategy consists of providing products and services that offer benefits that are different from the competition and highly valued by the consumer. First, identify and understand who the strategic customer is and what they really value — the product, the service, the brand, etc.
In addition, you must identify the main competitors and determine how the competitive advantage of the opponent is generated, whether through resources (physical, financial, human, or intellectual capital) or competencies (skills and abilities). In the Fintech sector, if an entrepreneur is going to launch a new debit or credit card, he should consider Clara, Cuenca, Oyster, Jeeves, Vexi, Klar, etc.
The success of the differentiation strategy will depend on how difficult it is to imitate. Either by acquiring the resources necessary to compete or by developing the skills and abilities that an organization needs to create a competitive advantage. Probably an obvious case is that of Apple, whose products usually have the highest price in the market compared to the competition because the consumer’s perception of the added value or benefit is very high. Despite this, Apple has launched some products specifically mobile phones that try to compete with the mid-range or low-to-high end of other phone companies.
Moreover, by obtaining imperfect mobility, differentiation can be maintained, e.g., intangible assets that cannot be marketed such as brand, image and reputation. Also, high costs for product or service change, such as switching from SAP to Oracle or vice versa.
Sometimes startups use hybrid strategies trying to achieve differentiation at a relatively lower price than the competition. Advantage is achieved through economies of scale by managing larger volumes than the competition, achieving cost reductions along the value chain, among others. The retail sector is probably one of the verticals where hybrid strategies are most used.
The focus differentiation strategy is based on providing a high perceived value of the product or service by justifying a price premium for which they typically target niche markets. This can be clearly seen in the strategy used by alcoholic beverage brands such as Casa Dragones in the tequila sector, Lexus or Jaguar in the automotive sector.
If your company has a high price and the perceived value of the product or service is too low, you are on the road to failure. So, sit down with your strategists to find a clear competitive advantage.
As an entrepreneur, take the time to define a strategy and evaluate it frequently in the face of changing competitive dynamics. As an investor, understand the positioning of the startup and how it creates value and a competitive advantage vis-à-vis other startups.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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