First to Product-Market Scale

July 1st, 2015

I like to think of this blog as balancing between business school theory and startup execution. While there are many places they don’t add up, usually the combination of the two provides an insightful truth that is hard to see without the theory plus the experience of trying to implement it. One area where I struggled for a while between my experience and the theory was the first mover disadvantage as it relates to barriers to entry.

The first mover disadvantage states that, while being the first firm in a market to do something has its advantages in terms of brand recognition and speed to market, the firm bares an even greater cost of R&D, education, etc. that second movers do not. These second movers can fast follow without all of these additional costs the first mover had to deal with and quickly compete. See HBR for details. In my Chicago Booth studies, both Eric Lefkofsky (CEO of Groupon who taught Building Internet Startups) and up and coming economist Matthew Gentzkow (who taught Competitive Strategy) argued about how potent the first mover disadvantage would be for Groupon, and that now that everyone knew how profitable the Groupon model was, it would be copied as there was no competitive advantage.

In a case study about Groupon in Gentzkow’s class, I did a one man filibuster against this argument. I looked at the data. During the time of the class, Facebook and OpenTable were winding down their Groupon clones, Yelp called theirs “not a priority” six months after shifting almost their entire team to work on it. Living Social started having financial issues. Groupon was winning despite the first mover disadvantage. The question was not would Groupon win, it what the prize was going to be for being first. Why was that the case when economics would argue against it?

I saw this same phenomenon in my own work at GrubHub. Online ordering was not a hard technology to clone, and once we had educated restaurants on the value of online ordering and shown them the additional business we could bring them, a competitor would have a much easier time with their pitch. Yet, we were still winning in every market except New York and college towns, where competitors had entered well before us. After acquiring those competitors, we talked candidly about competing with each other. The folks at Seamless (the New York competitor) talked repeatedly about feeling boxed out due to GrubHub’s first mover advantage in the rest of the country, even though we weren’t first in many of those areas.

Having taken two classes emphasizing first mover disadvantage before hearing this, I knew something wasn’t right, but couldn’t quite nail the hidden truth. Last year, I read Andy Rachleff’s post on first to product market fit. Andy argued it’s not about first mover advantage, it’s about first to product-market fit. It felt warmer, but not quite right either. GrubHub was not first to product-market fit in many of the markets it entered and later dominated.

If we tweak Andy’s definition slightly from fit to scale, the model fits better. One thing about GrubHub is that everything we thought about we thought about at scale and with velocity. We would systematically try to grow every market we entered with the same focus and the same process. If we achieved this, we would overtake successful players that were already in the market. It also didn’t matter who entered the market and tried the same after that. We had already won. Product-market fit implies a product that works with a small product, and the next step in the company’s evolution should be scale. So, the target for startups or large firms entering new markets in order to be successful should not just be product-market fit, but product-market scale. If you achieve that, you dominate markets and cannot seem to be usurped no matter how few barriers to entry you have.

4 thoughts on “First to Product-Market Scale

  1. Jason

    Casey,

    Super insightful post and an critical concept to consider in the world of first mover (dis?) advantage. Thanks for writing it.

    I’m curious what things you think go into product market scale? It’s clear speed of play in the market is part of it but I didn’t get a clear picture from the end of your post what it really means you do if you’re thinking as a business to try to drive to product market scale.

    Thanks
    Jason

  2. Casey Winters Post author

    Hey Jason, thanks for the question. Scale is about consistent focus on growth at a meaningful volume. What is meaningful depends on the industry/market, but what you should notice is that at a certain point, a market tips in your favor in almost permanent way due to the size and growth of your business. I wish I had a better formula that shows when that occurs that could provide a guidepost for what to hit. Maybe some research for another post in the future.

    You’ll find it’s irrelevant though because if you have a growth mindset, you’ll be constantly trying to grow anyway. So, really, scale means, getting a product that people like using (fit) and then finding and prioritizing a way to consistently grow that base into something meaningful that is defensible.

  3. John Spitters

    Casey: thanks for this post! It elevates my confidence & belief in the value & importance of keeping growth at the forefront in all we do to penetrate, expand & sustain our target markets and then leverage those successes & accomplishments as we seek out additional market opportunities.

    That said, are you able to point to any examples where the investment community and mindset has transitioned to this approach and embraced this way of thinking? I wish I had a penny for every comment I’ve heard shouted from the world of investors, not only about our startup but directed at many others, which conclude that we will be eaten up by larger competitions without stronger & more substantial barriers. There seems to be a very real and substantial disconnection here. In general, investors are adverse to first movers based on many things including risk factors & portfolio appetite so it would seem that a shift in the thinking of idiots such as me who are working in line with and have adopted what you’re proposing must be accompanied by a reasonably proportional shift in how investors approach and evaluate investment opportunities that my idiot idea of a first mover startup represent. Of course, I’m just the sort of idiot who feels that numbers attributed to large and high scale do not lie and that substantial scale figures may mitigate even the most cynical of investors. But that’s just me…

  4. Casey Winters Post author

    Hey John, thanks for your comment. Those types of investor responses are common, but it doesn’t mean they’re current. The savviest investors are past that pre-internet MBA thinking. You should obviously try to work with those types of investors. When wooing more traditional investors, I think the best approach is to show the myriad examples where the incumbent did not crush the small guy. In fact, it’s more likely the inverse will happen over the long term. Pick any of your favorite examples.

    Traditional media companies over Buzzfeed
    iCloud over Dropbox
    Google+ over Facebook
    Honeywell over Nest
    Car companies over Tesla
    Cab companies over Uber
    Facebook over Snapchat
    I could keep going.

    I know Chris Dixon at Andreessen thinks this way.

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