Given the limited length of my blogs, I did not delve into a lengthy explanation as to critical need to identify the competitive environment as part of the survival skills. Most start-ups I have noticed do not bother analyzing the competitive environment at their peril and are not willing to spend a few dollars to get there.
As a metaphor to the necessity of evaluating competition, I return to the metaphor of football. Virtually every high school football coach evaluates the next opposing matchup by watching films on the opposing teams, scouting reports, and analyzing the tactical trends of their opponents. Some might even consider the impact of the playing field – whether the turf is natural or artificial. The type and condition of the turf will determine the length of the football cleats. And if it rained the night before, the strategy might be to run the ball more often. Good coaches compare the weaknesses and strengths of their players and how they match against the opposing team. They spend money to evaluate the competitors by purchasing video equipment to re-evaluate the players after each game. Does any of this sound eerily familiar when one works on the business plan?
Let’s go back the actual software company in the health field why such analysis is critical to its survival. The first is pricing. The established competitor has decided to shrink wrap its product in such a way that its price is fixed per number of players and the number of evaluations to that quantity. Historically, statistics show that for every 1,000 players, a small percentage will have concussions. So for $500 per 100 players, the licensee of the software pays one fee for the year. In that fixed price, it incorporated those players who suffered concussions on a statistical basis.
Meantime, the Los Angeles start-up charges incrementally for every access. The fee is small. But would the target market be willing to pay additional fees? Well, let us look at the high school athletic market. At the beginning of each season, parents are asked to pay a fixed fee for the student’s participation. That is the only one fee for the entire season. I rightly assume that a parent would get rankled if additional fees are required during the season, which approach the start-up had proposed without evaluating the competition and why the competitor chose that route. It would behoove the start-up to reconsider its pricing model accordingly.
How important is identifying the target market and pricing model? I once met the senior management team of Virginia company that raised $10 million to sell a patented hybrid software/hardware product to telecommunications companies. The company employed 200 salespeople running around attempting to sell the product with few results. After one year, it closed its doors. The problem? Failing to identify the customer profile and pricing model. Since the VC fund had invested some capital in this company, I interviewed the president of the company, whose prior position was COO of a major carrier in the mid-West, and the founder, a software engineer with several patents in telecommunications. After my interviews, I concluded that the team failed to understand the vendor process in telecommunications industry, and persisted to market to telecom manufacturers who were the wrong target for the technology. The technology was great but $10 million had been wasted by not evaluating the competitive environment.
Start-up companies can be too obsessed believing that technology trumps over marketing. Start-up management teams believe that they have all the answers and can be stubborn headed. Some believe including the Virginian start-up that its patent would sell itself — obviously without considering companies like RIM — patented technology but lack of innovation and handing the competition. I did suggest to the Virginia company that I would assist – but for a fee. They rejected my offer. But they were very capable of spending capital on salespeople, patent lawyers, and accountants — resources that in the long run did not help strategically. To quote what a NY investment banker said to me once, “10% of something is better than 100% of nothing” in relation to bringing experienced team members. Now that Virginia company dissolved itself a year after my meeting, sold its patent to a Boston company, and held unto 100% of worthless stock.
In summary, why is it so important to analyze the competitive market? It will identify and segment your target market. It will test your pricing model. It affords the opportunity of understanding the competitors and seeing how you can outmaneuver that competitor –no different from a high school football coach. It will decide whether you win or close your doors.