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7 Mar

Sadly, there's no prize for being first.

I remember feeling slightly amused every time I read about the rewards IIT coaching institutes gave to the top AIR holders. I won't deny the kind of effort and rigour it takes to achieve that result, but a fancy BMW for the first-rank holder?

Might be a bit too much, ngl.

Moreover, I think such and similar reward systems warp our thinking of what merit means. We start associating being first with success.

But the world of business is replete with examples that prove otherwise. Being the first-mover doesn't always guarantee long-term success.

And the question of whether you really have a first-mover advantage or not depends on the nature of the product, the kind of moat you build, and how defensible that moat is.

A classic example of a first-mover failing to gain any advantage is Casper.

Casper was considered the lead disruptor in the “sleep economy.” They essentially pioneered D2C selling for mattresses in the USA.

However, being the pioneer also came with significant costs.

While the idea and innovation introduced by packaging mattresses into a box were novel, selling the product required spending on raising customer awareness. Because up until then, customers were used to buying a mattress from department stores or retailers such as the Mattress Firm and Sleepys.

Casper introduced a free, 100-day trial period to stand out from the incumbents and offered free deliveries. They spent money to educate customers on the possibility of buying a mattress online with the promise of zero downside if it ended up being a bad purchase.

But soon enough, Casper ran into two problems.

Firstly, mattresses last for a long time, which prolongs the purchase cycle and doesn't allow the company to measure user retention.

Secondly, a segment of customers still preferred buying a mattress from offline stores. Buying a mattress is a relatively infrequent occasion but a long-term investment. So, consumers still preferred going out and trying a mattress before buying it.

But by the time Casper could react to these problems, there were more than 175 bed-in-a-box brands.

This is where Casper lost its first-mover advantage.

And unsurprisingly — as there was no real product differentiation between Casper and these other brands — more brands to choose from meant the customer was indifferent to who the first mover was and would rather buy from the brand that offered the better deal.

In effect, Casper spent all its money marketing and changing consumer buying behaviour, only to later lose those consumers to other brands.

The Casper case study is crucial to understand why moving first isn't a guarantee of long-term success.

Here's what the case pushes us to think about:

1. Is the feature (selling mattresses online) a moat in itself?

In Casper’s case, the feature in itself failed to be a moat because it didn't involve any hard-to-replicate operational or logistical advantages.

This is similar to the time when Instagram got bought by Facebook and slowly started copying all of Snapchat and Vine's features.

In fact, Kevin Systrom has many times admitted that he deliberately copied features across incumbents as a strategy to maintain a foothold in the space.

And it worked in their favour because regardless of Snapchat or Vine doing it first, many users who were already using Instagram were now disincentivized to download Snapchat or Vine. And many Snapchat and Vine users who were also on Instagram now preferred to only use Instagram for all their social interactions.

So, the one who implements a new feature first doesn’t always win.

As Kunal Shah puts it, and I paraphrase, high-frequency black holes like Instagram can suck many other apps in and turn them into features.

2. How high or low are the switching costs?

When switching costs are high and the purchase is a long-term commitment, users prefer spending time doing their research.

A mattress is exactly this. You buy it once and you use it for the next 10-15 years.

So, even if you’re the first-mover and are top-of-mind, when it's time to make a purchase, the consumer is likely to do their research from scratch. They might check out your website first, but in all likelihood, they will probably not limit their research to just you.

And in absence of clear product differentiation, with all things being equal, the consumer will often end up taking the better deal.

Hence, Casper, being the first mover in the D2C mattress space, actually ended up advertising for its competitors.

A CNN Money article laid out how Casper advertised to its competitors' benefit —

“The marketplace was flooded by dozens of internet mattress sellers, such as Purple Innovation Inc. and Nectar Sleep, driving up the competition for shoppers and the costs of online advertising to reach them. Meanwhile, incumbents, including Serta Simmons Bedding LLC and Tempur Sealy International Inc. started selling bed-in-a-box concepts. Online retailers, including Inc. began making their mattresses, undercutting the others on price.”

3. What is the ticket size of the product?

Low ticket-size products can have a first-mover advantage if they are sufficiently differentiated or are top of mind and have captured significant market trust.

Because when the downside of a purchase not working out is low, the consumer will usually go for what is top-of-mind for them.

If a product's ad is stuck in your head, you’ll be more likely to specifically look for it from an aisle of similar products and put it in your cart. Even if the purchase doesn't work out, since it is a relatively inexpensive product that'll last a month or maybe two, you will try something else next time.

So, in cases where the product isn’t too expensive, and the customer’s purchase decisions don’t require significant research, the first-mover’s marketing advantage at the top of the funnel could actually make a difference.

But in cases where the ticket size is high to warrant some research, this is when top of mind can stop making such a big difference and the first mover advantage can cease to exist.

In contrast, MUBI created a market that is now relatively difficult for a second-mover to capture.

Why? Because of its moat: the relationships it has built with its suppliers.

MUBI’s relationships with film festivals, independent directors, and parallel cinema movie distributors aren’t a mere feature of the business. They are factors that make it difficult for a new entrant to make a mark.

Unless the second mover has deep enough pockets, they won’t be able to sustain a business where gaining access to content costs more money. The OTT platforms MUBI competes with will also find it difficult to integrate this niche as MUBI and the market it is going after is counter-positioned strategically to incumbents.

To be clearer, the kind of effort it would take Netflix to absorb MUBI won’t justify the money they’ll have to spend on integrating MUBI's content library. And it's very likely that due to MUBI operating in a distinct niche, MUBI's customers also use Netflix. So, Netflix may not see MUBI as a threat at all.

So, while marketing is an inevitable cost all businesses bear,

first-movers have to invest doubly hard in educating the market and creating it first.

And without a defensible moat, this is just doing social service for those who enter the market after the first-mover has run all the experiments, invested, and learned on behalf of everyone else.

In fact, a research paper cited on the Kellog Insight blog points out that pioneers (first-movers) were more successful than late movers in just 15 of 50 product categories.

First-mover advantage usually exists when the first-mover builds some sort of defensible moat: like a network moat, some intellectual property that's hard to replicate, or just high upfront infrastructure investment costs as seen in telecom, pharma, hardware manufacturing, etc.

Even trust can be a moat. Being the first mover, it may happen that the market now trusts you much more than other players entering the market.

But without a moat, it's quite hard to benefit from moving first.

Actually, there's a lot to lose by moving first.

You're spending all that money to create a market that will finally get split amongst a hundred different companies all vying for a small slice of the pie.

Ultimately, the goal of any business is to survive and last for as long as it can, so it can increase its odds of success. And thinking of yourself as a “category creator” simply because you launched first often counts for nothing in the business world, I'm afraid.

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