If your business is targeted by a larger competitor, the natural response is to want to play defense — to squeeze pricing, take special care of the channel, maybe do some promotions and guerrilla marketing. We’d never advise you to take your eye off a competitor, but the defensive reaction isn’t always the best way to fight. A larger competitor will expect you to do these things, and will usually be well prepared for siege warfare. They’ll be ready to match your pricing and outspend you in the channel in order to drive you out of the market.
Sometimes the best defense isn’t defending at all, it’s finding ways to grow the market. If your customers are still early in the adoption curve, and especially if there are new segments you can open up, it’s usually more cost-effective for you to bring in new users than it is to defend every inch of the turf you hold today.
This stands normal industry wisdom on its head; it’s supposed to always be cheaper to keep an existing customer than to get a new one. But think about it — if your market isn’t already flooded by competitors, a new entrant can usually get 10% share just by showing up and being different. You should always defend the core of your market, but that 10% at the fringe can be very expensive to keep. If you made the same investment in a new part of the market where there’s no competition, you might be able to grow in the new area faster than you lose people in the current segment.
This means that before you can decide what to do about a new competitor, you have to understand where you are on the demand curve. If your market’s close to saturation, there’s no alternative to hunkering down and fighting an all-out defensive battle. But if you’re not saturated, driving new growth may well be the best option.
But finding where you are on the demand curve is a lot trickier that most people think. Marketing theory says that market growth is supposed to go through an S-curve, with a slow takeoff followed by rapid growth and then declining growth as the market saturates. If you grew rapidly last year, you’re probably in the steep part of the curve. If growth has started to slow down, you’re probably approaching saturation. Unfortunately, real-world market growth usually moves in fits and starts, so it’s very hard to tell whether you’re close to saturation. For example, if you look the US penetration rate of telephones and automobiles, in the first hundred years from their invention and squint enough, you can probably label those S-curves, but we’re sure they didn’t feel like that to the business executives managing through them. Most importantly, what happened in the last year is virtually useless in predicting what will happen in the next.
Instead of relying on sales history to choose a defense strategy, the best approach is to stay deeply attuned to both your current and your potential future markets. If sales has been flattening (the traditional sign of a saturating market), treat that as an urgent question rather than an investment signal. Be sure you understand who’s buying your products, and most importantly why they are buying. What problems are you solving in their lives? Are there other problems you could solve in the lives of different people? Have you ever marketed to them, and is your product properly configured to meet their needs? If you identify unmet opportunities, consider spending some of your defense budget on growth instead.