Understanding First Mover Advantage

First mover advantage is a term used to describe the benefits of being the first company into a market segment. This can be used to describe a whole company or a particular product or service offering. In this article, we’ll look at how first mover advantage works and what it can mean for a company. (For related reading, see: Great Company Or Growing Industry?)

Being the first company to offer a product or service comes with an often uneven collection of risks and rewards. The risks are fairly well known, including the difficulties marketing something new to customers, potentially negative market reactions to companies expanding their core offerings into seemingly unrelated business lines and so on. Simply put, there are a lot of hurdles in the way of launching anything that is truly new—but if you can pull it off, the rewards are large.

First movers into a market benefit from learning, network effects, size and access. Learning is the advantage first movers get through actually producing a good or delivering a service. Being the first in means they’ll have an edge as they become more efficient over time. Network effects refer to the impact of having a larger segment of customers.

If the product or service increases in value as more people buy it, use it or join it—think social media platforms, online games, etc—then time again favors the initial entrant. With time on their side, a first mover has the potential to use a get big fast strategy to quickly capitalize on economies of scale, hence the size advantage. Finally, we have the access advantage where the first move in a market can snap up key assets including location, technology and people. (For more, check out: J.D. Rockefeller: From Oil Baron To Billionaire.)

First mover advantage obviously works best for a company when the benefits are clear competitive advantages in the industry. This includes industries where learning matters, as in complex production of goods like airplanes or pharmaceuticals. This edge grows with the amount of intellectual property protection that a company has for its processes. Learning advantages often translate into scale because the complexity requires big investments. Scale allows companies to spread those fixed costs across many units, so a rival has to be able to close the learning gap and compete on scale in order to make inroads into the market. The profits realized while other companies play catch up allow the first mover to grab key assets as well. So learning, size and access often come in a package for first movers.

Network effects are bit more subtle. Many tech companies have enjoyed network effects by being the first to launch a particular platform, garnering the most users and increasing the value to each user as the total user base grows. Mobile games are addictive for many reasons, but one of the reasons the most popular games keep growing is that there is always someone to play against. The network effects apply to many of the online services we use, including dating sites, shopping sites, search engines and so on—they improve in value as more people use them. If these effects combine with higher switching costs—for example, if you have to buy a different console to play a game or you have established groups in a social media platform that you don’t want to lose—then the network effect grows. Even the familiarity with a particular brand’s processes like the OS of a smartphone or the layout of a site help lock the customer in. (For related reading, see: Investing In Social Media Startups? Read This First.)

First mover advantage has limits, and its shelf life may be getting shorter and shorter. The two forces that erase first mover advantage are market evolution and technological evolution. Market evolution refers to the tastes of consumers and it can change rapidly, surprising even the pioneers of a particular market. A company making something basic like paint or tape may not see very fast changes in taste. Companies making consumer tech will see consumer tastes change rapidly and more competitors jumping in to fill the new demands. Which, of course, touches on technological evolution.

No matter how complex the process is or how great the learning advantage, there is always a risk that technology evolves to erase that gap seemingly overnight. First movers often find themselves over committed to what worked in the past in terms of their business model and their processes. Then a fast follower comes along with no commitment to the old technology and an ability to learn from the first mover's mistakes, and the pioneer in the field ends up losing. (For more, see: Which Is Better: Dominance Or Innovation?)

In the world of business, however, even the smallest advantage can make a huge difference. First movers can convert their initial advantage into a long-term economic moat. However, they also are at risk of overestimating those advantages. Evolution in the market or the technology used to serve it can erase years of work put into developing the product and the market in the first place. Even without these two forces intervening, first mover advantage erodes over time if a company becomes complacent in advancing its technology and strengthening its value competition. Complacency kills whether you are a first mover or not.