First-mover advantage is an expression often used to describe companies that are pioneers in a particular sector. Being the first company to offer a particular product or service, gives them a competitive advantage.
This competitive advantage may last until other competitors enter the space. It enables a business to create significant brand awareness and customer loyalty before the entry of competitors. The company gains additional time to improve its product or service and set the pricing for the new market.
First-mover advantage is usually followed by increased competition. This is because if there is a market for a product or service, competitors will take notice. Adjusting their product and service offerings to match consumer needs.
Characteristics of a first-mover
Typically, the first mover has built up enough market share, and a strong enough customer base to maintain most of the market. However, this does not always mean that the first mover ends up keeping its large market share over the long term. While a first-mover advantage gives a company an edge over the competition, it does not guarantee long-term success. It is a momentary advantage that may not last long enough to allow the company to be successful.
Here are some advantages of being a first-mover:
- A first-mover establishes a momentary competitive advantage by being the first to market a new product or service.
- First-movers develop significant brand recognition and customer loyalty.
- First-movers benefit from additional time to create economies of scale, which increases their chances of succeeding.
- Their businesses tend to be more cost-effective in producing or delivering a product.
Advantages of First Movers
Being the first company to bring a product or service to market gives a momentary advantage. Time is precious and allows companies to build a set of competitive advantages that are usually associated with first-movers. Here are some of those advantages:
- Brand recognition is higher among first-movers, which leads to customer loyalty, and makes it easier to attract new customers.
- A first-mover is able to easily create economies of scale, which allows them to be more competitive in pricing their products and services.
- First-movers can also have access to better conditions from suppliers.
- Another great feature of first-movers is that they usually have high switching costs.
All of these advantages contribute to the company having a market-leading position and having a larger customer base. Being able to have a great deal of the market share is a great competitive advantage that helps companies succeed.
Does a company need a first-mover advantage to succeed?
The answer is no! Everyone remembers Nokia, as the leading manufacturer of cellphones. However, nearly a decade after Nokia was the market leader in cell phones, the company does not manufacture cell phones anymore. This shows how technological disruption can change markets across the globe. Although Nokia enjoyed the first-mover advantage it did not change the course of the overall market.
This also shows how technology businesses are much more prone to disruption than traditional businesses. It also shows that to succeed a company does not need to have the most revolutionary product or service, it just needs to have a better offering than the competitors. Some of the most successful companies today are not first-movers. There are a few reasons that explain this.
When you are entering a market that already exists it is easier to study, and adapt your product or service to those customers. Conversely, when you are creating an entirely new market there are many more challenges to overcome. It is also easier to estimate the demand for a certain product or service if the market for it already exists. Companies can also develop products and services based on what consumers want in a market that is mature. Overall a mature market allows for precise and accurate market research that allows companies to have success without going through the same challenges of a first-mover.
An example of first-mover advantage
A great way of comparing first-mover advantage and long-term success is by looking at two different cases, Amazon and eBay. Both Amazon and eBay are two companies that have achieved first-mover status. Although both companies have enjoyed tremendous success, the reality is that Amazon was much more successful. What is the difference between the two?
Well, Amazon was able to adapt to the competition in a way that strengthened the company’s competitive advantages. By relentlessly focusing on consumer satisfaction and experience the company was then able to expand its offerings beyond books. eBay did not have the same strategy and therefore the outcomes were so disparate. The main difference between the two companies has to do with product and service control.
Since eBay does not control the product, it can lead to customer dissatisfaction. On the other hand, the company was able to generate far more money in profits in the early innings than Amazon. However, over the years the company has not grown in the same way, due to a lack of oversight and control over its value chain creation. The fact that eBay relies on third-party sellers was a great advantage to generate higher margins, but it also limited the company’s ability to grow in the long term.
Image source: ST4