First Mover Advantage is a commonly used term for entrepreneurship and new business strategies. It is also the focus of many books, such as Geoffrey A. Moore’s “Crossing the Chasm” and David J. Collis’ “First-Mover Advantage” (both published in 1990 and referred to by many others).
Introduction to the First Mover Advantage?
A “First Mover Advantage” is when a business is the first to successfully commercialize new technology and innovation or simply enter a new market.
Typically, First Movers are awarded lower costs of operation (especially in the case of low fixed charges) and early customer adoption.
Early entrants can also create barriers for competitors by securing rights, holding patents, creating large production volumes, and making deals with suppliers and partners ahead of others. The first mover may be able to set industry standards (in which they benefit from economies of scale) establish a loyal customer base (which makes it harder for later entrants to attract customers away from them – even though some research shows that this is often not the case) and gain early access to distribution channels.
Why Being the First in a Market Gives You an Edge?
The advantages of being the first mover in the market are immense. Let us have a look at each of them:
- First movers can get cost advantages by producing at relatively lower costs than later entrants. This is because of learning curve effects and that a company need not recover its sunk costs when a product fails commercially.
- A firm gets an opportunity to establish market leadership in the initial stages, which gives it a kind of monopoly in the future, resulting in high profits for more extended periods. In other words, early success breeds further success.
- In an environment where there are almost no barriers to entry, being first can give you higher market share from the start itself when consumers prefer one particular brand over others due to existing preferences or through network effects.
- When consumers are unsure about the product or service they might need, being first can give you a greater chance of success since consumers tend to follow existing trends and adopt new products sooner. For instance, Apple significantly increased its market share of MP3 players by launching the iPod before competitors did.
- Being first also has an advantage associated with information asymmetry, which is always present in any market. Being early means you have more time to learn about the needs and expectations of potential customers than your later entrants do, who will be forced to find out their preferences through trial-and-error techniques.
- Being creates barriers for late entrants due to both demand-side and supply-side economies of scale. First movers have a cost advantage due to the learning mentioned above curve effects. Still, they also create barriers for late entrants by creating a higher level of consumer awareness about their brand and products, which increases the costs associated with switching from one product or service to another.
In other words, First Mover Advantage gives you a better chance to exploit your early lead over your competitors.
Points To Remember Before You Enter the Market as a First-mover:
- Know the industry and know the customer – This means that you should conduct a thorough research about the industry, especially if it is an entirely new market for you. What do customers want and what do they not?
- Be prepared to invest heavily in infrastructure – If your product or service requires an infrastructure before it can be made available to customers (say, a factory), you need to make sure that you have this prepared before breaking ground.
- Be ready to face competition – Although there are many reasons why being the first mover helps, remember that competitors eventually catch up and use their marketing skills against yours.
- Consider partnering with other firms – You might have a great idea but not have all the skills to make it a successful product or service.
- Maintain your monopoly for as long as possible – You will still benefit even if you lose market share later on, especially with the first points listed above.
- Never expect your competitors to remain quiet – They will almost always try and copy you and come up with their unique ideas to gain customers.
Summary: First movers have an unparalleled advantage over late entrants in cost, information asymmetry, economies of scale, reduced competitive pressures, etc. However, there are many reasons why being the first mover is not necessarily the best strategy in every situation since prioritizing profits over customer needs is not always advisable; as a result, many first movers end up as the later entrants in some cases.
In addition, it is also essential to be prepared for stiff competition from other firms since they know your plans and might try to exploit any existing weaknesses of yours.
Reasons, Why You Must Take the Risk of Being the First Mover, Are:
- You have superior knowledge of the market – This means that you can understand better what customers want and how to provide it, which gives you a massive advantage over your later entrants.
- You can shape consumers’ preferences. At this stage, consumers are still unaware of your product or service, meaning that you might easily persuade them to purchase your product instead of others already available in the market.
- Your investment is lower than others – If being first doesn’t require much investment on your part (like opening a restaurant), then it makes sense for you to take the risk since there will only be small costs associated with doing so. Even if competitors do come up, their prices will be higher than yours, so you still have a chance to beat them.
- You are not afraid of the competition. If your competitors are merely imitators who can’t do anything better than you, then being first might help you maintain your lead over them since they have no idea what the customers want or how. To provide it, but you do!
- You are not in it for the long haul – This means that your primary goal is not to monopolize this opportunity for as long as possible but rather to reap profits quickly before everyone else floods into the market upon realizing its potential.
First Mover Advantage vs. New Technology
First-mover advantages are only beneficial if they are sustainable over time. It may be difficult or even impossible to maintain dominance in an industry against new entrants with certain types of technology. For instance, BlackBerry dominated the smartphone market for business users throughout the 2000s but could not hold onto its position once Apple introduced its iPhone in 2007.
In BlackBerry’s case, they had a very high customer acquisition cost because their devices were so expensive. Once Apple introduced a much less costly smartphone (and also advertised its multi-purpose uses), customers began to flock towards the iPhone’s capabilities at a lower price. While BlackBerry still exists today as a brand, it has been relegated to niche markets where users prioritize security over advanced capabilities.
“First mover advantage is only applicable if you can maintain your business operations without too many changes.”
While first movers often enjoy certain advantages in new industries, there are also significant risks in being the first company to enter an industry. Suppose you fail to make suitable investments or do not correctly anticipate changes in consumer behavior. In that case, you may find yourself playing “catch up” as other businesses come to dominate your industry.
Before its bankruptcy in 2008, Blockbuster dominated the home video rental market for over two decades. However, many of its customers were increasingly choosing to use services such as Netflix that offered lower prices and more convenience. As a result, Blockbuster could not maintain loyalty among its customer base and eventually could not compete with more advanced forms of technology.
The decision to be first or not should not be taken lightly. It also acts as a double-edged sword since the very same advantages can be disadvantaged if you fail to meet consumer expectations, leading to your failure in the market.
Therefore, do extensive research before you take a plunge and make sure that there is a market for your product or service because otherwise, it would just end up being a costly mistake.