Besides the "X for Y" approach, I find it laughable that every time someone says they are doing just "X" that the usual Bay Area response is "How are you differentiating from your competitors?"
Go ask how UPS differentiates themselves from FedEx. Or how Shell differentiates themselves from Chevron. In reality, while product differentiation is good, unless there already exists a monopoly that has eaten every inch of the market, the market is probably big enough to fit multiple nearly identical products at the same time and still have them all profitable.
The "Zero to One" wisdom is that lots of competition means low margins for the business. It's very difficult to afford much more than minimum wages for your sandwich shop employees. That's part of why you don't see a lot of venture-funded restaurants.
LA has quite a large number of them. The restaurant startup space is quite big these days.
Regardless, the optics of venture funding changes this analysis because now we're looking at ROI and not just say, creating successful enterprises that create wealth and value.
The latter is the thing of interest to me. In technology we've focused too much on the former. A say, twenty person software company where everyone is paid well and the customers like the product is a worthy, fine goal. $5,000,000,000 MRR is fine as well, but the vegas-style way people think of tech shouldn't be the only road out there.
Actually, in the UK at least there are VC firms which invest solely in retail and food businesses. Usually they take an already existing restaurant with a single location and turn it into a chain. It is possible to create scalable value in the retail and restaurant businesses, mainly due to the power of brand recognition.
Creating a recognizable brand means answering the question about differentiation, though.
People know how KFC is different from McDonalds is different from Pizza Hut is different from Chipotle. Hell, most of the time they even know how Burger King is different from McDonalds (white meat chicken tenders and more meat in the burgers), how In'N'Out is different from McD's (simple menu, Thousand Island dressing, onion rings), and how Chick'Fil'A is different from KFC (sandwiches over buckets; Chick'Fil'A sauce; lighter frying). The extent to which these are viable as VC-backed chains is exactly the extent to which they can be differentiated in customer's minds.
Oh, I was referring to how In'n'Out will slice a whole onion (in concentric rings, still attached) and put that on your burger, while McD's uses diced onions sprinkled over the top. Used an unfortunate phrase to describe it, because onion rings are also a real side dish (which I don't associate with any fast food joints - more like clam shacks and stuff). Maybe that makes it a bad example anyway, if nobody knows what I'm talking about.
With sandwich shops, location is a key differentiator. We are X for Y, where X is the sandwich shop and Y is specific location.
Sandwich shops is also a highly competitive market. As such, when you look at a snapshot in time it seems like there is diversity without strong differentiation. However, in most cases, if you look at it historically you’ll see that differentiation at inception was required.
Fun note - the largest sandwich shop of all started growth when it became “a commercial real-estate company for franchised sandwich shops”.
This grab for the #1 slot analysis robs the richness of expression that businesses provide.
The trophy model implicates that everyone but a single group walks away losers. It's not a necessary model or, in my opinion, a healthy encouraging analysis. We are the most social species to ever exist, something that requires ruthless cutthroat individualistic competition leaves out the vast majority of humans who aren't like that.
In some markers, the players try to stomp on each other's heads acting like tyrants while in others they coexist peacefully. Not everyone is always trying to be a dick.
Knowing Subway's market cap now, would you invest in them as an angel investor? You'd be a billionaire right now.
They didn't become big by differentiating product. Their sandwiches aren't that special. They became big by coming into existence where people wanted sandwiches.
They absolutely did become big by differentiating product. There's a Jersey Mike's and an Arby's near my home, as well as a Subway about a mile away. The former two chains came into existence right around the same time (and slightly before) Subway did. They struggle for business, both nationwide and locally. It wouldn't surprise me if most readers of this comment haven't heard of them, while most everyone has heard of Subway. That's despite having a similar product (sandwiches) and similar locations to Subway.
What they're missing is the brand. Subway pushed heavily on being a healthy, quick-service chain with good selection in the late 90s, right as America was waking up to the virtues of healthy food and wanting something different from burgers. (They'd actually been around since the 60s, but I never heard about them until the early 2000s.) Nobody buys a Subway for the sandwich; they buy a subway because they want something quick & easy, from a known source, and don't feel like getting a burger. There are plenty of other sandwich shops that sell sandwiches cheaper, oftentimes with better ingredients (i.e. not 49% soy protein in their chicken), but you'll never have heard of them, and most close up in a few years. Invest in them and you go broke.
I have to believe you're wrong, given how awful Subway is compared to every other sub place, particularly Jersey Mikes, Jimmy Johns, Potbelly, DiBellas, even Firehouse Subs. Without doing in depth research, the differentiator has to be their franchising model.
No, Subway's biggest differentiator was and continues to be the low cost of building one, compared to a McDonalds. You can build out a Subway for $200,000 in some cases compared to $1-2 million for a McDonalds. That's why they're the most popular franchise restaurant.
That’s from the sellers point of view and doesn’t translate into consumer demand to keep the ventures profitable and have a competitive ROI.
A 100 cheese and tomato sandwich shops are even cheaper and would probably go broke or a paper airplane franchise ...etc
I suppose there is a relationship between profits and the establishment cost however customer demand is king
It could be related - a low franchise cost means a Subway on every corner (there're 3 within a 5 minute driving radius of my home), which increases the chain's brand recognition. Same strategy that Starbucks uses, opening a store on every corner, even to the point where they cannibalize each others' sales. Familiarity has an advertising benefit all on its own.
Ok cool, more than one Patel owned motel, more than one Cambodian owned donut shop in the LA basin...
The point is that the existence of something isn't a valid reason to not do it. Sometimes not even an excuse to not do it in a nearly identical way.
If someone wants to make say a tetris clone, I say go ahead, make the best one you can make. Take pride and joy in your accomplishments. I hope it will be great.
YACC was named "yet another compiler compiler" because in the 1970s, there were plenty of others around and it was yet another one. But it was well built, well designed, and done anyway. It survived, the others didn't.
You have an idea, others are doing it? So what? Do it.
And how do you decide which sandwich shop to go to when you want a sandwich? You've just answered the question "how does a sandwich shop differentiate itself?"
Generally speaking, I would say the quality of the bread or the cookies. But I don't really go looking for a generic sandwich (like a ham or turkey sub) most of the time. Instead, I go to a place that might be good, find one thing that they do well, that probably doesn't have a direct competitor, and order it over and over again until I'm tired of it. Or alternate with whatever another place does best.
It's my belief that almost all worthwhile restaurants only have one or two things that they do particularly well, so having a huge menu is a negative.
In my case, usually whichever one is closest. If I want good food I wouldn't be going for a sandwich.
Even in the case of good food, it's usually the closest one that meets a certain bar. You could serve identical food as a distant, good restaurant and I would go to yours if you were closer. You don't need to differentiate, especially if you are serving a standard, authentic rendition of some ethnic dish.
Taste, value for money, what I feel like, distance, change and my feelings about healthy eating that day.
The shop can influence taste, value for money and change by specials
A more direct question would be "Why should a potential customer choose you over $established_competitor_x?"
If your best answer is "We are adding diversity to the marketplace", then you're probably doomed. If you aren't better in some way (faster, cheaper, better tech, etc...) then people are going to naturally gravitate towards the incumbent who has already shown some staying power and has infrastructure in place that you do not.
>If your best answer is "We are adding diversity to the marketplace", then you're probably doomed. If you aren't better in some way (faster, cheaper, better tech, etc...)
We have seen it over and over in tech though...some small time founder starts something and then a VC back startup eats their lunch and takes the market (of course rewriting history along the way to say they invented/disrupted the market).
The sad truth is the answer to why a customer will choose us over established competitor is because...VC capital/your money. We will use VC capital/your money to out spend/out market our competitor because they can only grow as fast as their revenue, whereas we can artificially grow using your VC money, even to the point we can subsidize the price of our widget which the established competitor can't, we will grow our market share, even if at a loss because at any time we can "flip the switch and its all profit."
That's a completely valid reason. If the competition is underserving the market and you think you can outgrow them because you have an aggressive growth plan then that's something.
Often enough though, people are unfamiliar with both your brands. So they're going to choose the person with better marketing. Sometimes marketing IS the difference, and engineers hate to hear that.
I founded a company that, in the 1990s, was implementing a Visa/Mastercard/(Amex, IBM, HP, Sun, RSA, Netscape) backed "Standard" for credit card payments. IBM had "invented" the spec's predecessor in Zurich Switzerland.
We were in Austin, Texas. Tiny, but scrappy. Our first customer was the largest card payment processor in Zurich Switzerland (blocks away from that IBM R&D lab!) and they were an IBM shop.
Somehow, we beat IBM in our toe-to-toe attempt to sell into that account. (Less marketing, and more sales "grit"). I asked their project leader later - "Why?". He said that at the end of the day, they knew that they were one of 100 IBM banking customers. And that they were our "first". When deploying "new" technology, they wanted a vendor that will kill themselves trying before they let the customer fail. They knew, simply, that we wanted, that we needed, their success more than IBM did...
Maybe but here on the Internet there seems to be one search engine which rakes in most of the money, one social network where most people have accounts, one electronic toy maker which sits on top of a mountain on cash. Second prize is a set of steak knives.
I see (at the time of this post) a regional person and a techno-geek respond to your comment, trying to disqualify it as not being universal (sorry globalist techno-geeks!), even though it is, measured by global magnitude.
But I am baffled by the reference to the toy maker? Who is that? Unless you mean Apple?
Google, Facebook and Apple are all increasingly hated though, and can't figure out new ways to make money. The time may be coming where taking a shot at their profitable businesses becomes a possibility.
They're hated because they make a lot of money and you don't have a choice about using them. Companies in competitive markets that piss off their customers don't end up hated; rather, people just don't patronize them, and they go out of business. To be hated requires an inability to simply ignore your existence.
If you look at institutions in terms of their favorability ratings, it's basically an inverse list of the level of competition they face. At the top you usually have things like beloved local restaurants, day cares, variety stores, computer games, etc. where if they weren't extremely good, you'd just go somewhere else. At the bottom you have the U.S. Government, the one institution that nobody in the world can escape. Near the bottom are monopolies with heavy network effects like Facebook and Comcast.
I want to take exception with your neat generalization.
The cable company, at least where I live, (Spectrum) is definitely worse than the government. They have stores, that are like the DMV, but the queue to be waited on is longer - the DMV is significantly more parallelized. And the DMV isn't designed like an Apple store, because people that work for the government aren't quite as shameless about being a monopoly.
When it comes to the feds the IRS has infinitely better customer service than Google (literally, infinitely) and unlike the cable company, when they owe you money, they pay you interest.
Google grew its revenue by 23% from 2017 to 2018. Sure, it's not a startup any more but still I wish I couldn't figure out new ways to make money like that.
If I had a company that made even 0.1% of Google, I'd probably start each day running around the room in feats of joy and delight.
Seriously, if I could pay talented people many hundreds of thousands of dollars, have a nice office, happy customers, a decent product, and only make a paltry 136 million a year, where do I sign up?!
One thing I've learned dealing with other businesses in my company is that businesses don't necessarily need to be good. Selling to the public I'm sure you need to good but it seems to matter far less when you sell to other businesses. Just be able to hit their price point. Their employees could complain for years about it before moving on
I think that's a reasonable question to ask. Most startups do have some way to differentiate themselves from their competitors, and if you ask them what it is, that's often the fastest way of understanding what they value and what their company is like.
I am guessing that you find this question annoying because you have to answer it a gazillion times for Robby. ;-) https://robby.io/ But to me I am pretty interested to hear your answer, of how do you differentiate from all the other delivery robots out there. And if the answer really is "well there's several that are just like us but I think we can all be winners", that's an interesting answer too.
You need to be able to answer that. The answer can be no, and saying why will only help demonstrate your understanding of your business and the market.
It depends on your vertical. Some online centric verticals are winner takes all and rely on a marketplace critical mass, while others have a local presence element and can support near identical competitors. You can’t have too many Uber or Lyft platforms per city (critical mass) but you definitely can have a lot of coffee shops.
Currently they seem to be the "we aren't those jerks" sort of alternative to a competitor with a bad reputation. Just like how Uber gained over Taxis - and ironically Lyft to do the same to them over assorted shadiness and scandals.
Of course to sustain that effect they not to gain a bad reputation.
And I’m honestly not sure what the answer is other than not carrying with it quite the same amount of negative baggage that Uber does. They were differentiated but it turns out most people don’t want to fist bump their taxi driver.
As far as winning the market goes, actual product differentiation doesn't matter that much. In their particular market it almost all boils down to how much the rides cost. I usually just open both apps and pick the cheaper one.
I only started using Lyft when they transformed themselves into a clone of Uber. (Not that I use either all that much.) I found the whole fist-bump, pink mustache, weird pricing, etc. completely off-putting.
All the mainstream ride sharing platforms seem to have more or less gravitated towards the same basic offering(s)--which is, perhaps not entirely surprisingly, essentially an app-enabled taxi.
Chevron, Shell, UPS, and FedEx are all billion dollar companies. They succeeded not because of differentiating product, but because the market is so big that it's hard for a single company to dominate it.
All of these companies were started between 50 and 150 years ago, when there was much less competition. These days you need a better story for how you're going to win a market and keep it.
While that's true that there were fewer people starting businesses, there were also proportionally fewer consumers in the world. I'm not sure things were any easier 50-150 years ago in that respect.
IMO only VCs want a bullsh!t "story". The rest of the world just wants X for $C and doesn't have access to it yet because the competitors aren't big enough. Brand loyalty, network effects, and cost of switching applies to some certain markets, but also doesn't apply to a lot of markets.
Nobody reads the story behind the founding of Taco Bell or Del Taco. They just get hungry, see the sign, and eat. Billion dollar business right there.
Not trivial, but very possible with a lot of hard work.
Let's say you want to start a new grocery store chain and compete with Safeway. Differentiating your product (e.g. Trader Joe's) is one way, but another way is to just build new grocery stores where people want them and they don't already exist.
I think the differentiation factor is relevant to venture capitalists more than end users. Having an equity stake in a new business is a risky proposition. A unique market position, or perhaps an idea that is patentable, provides the prospect of risk mitigation - the idea itself may be able to be liquidated if the business fails. There's also the upside of being the only player in a given market.
I tend to avoid Kroger brands because I do not like that most of their sale prices are dictated by having a Kroger Card. I'm not particularly price conscientious and find Kroger has a great selection and quality. I simply choose elsewhere when I can.
Not really. The grocery chain I shop at the most doesn't even have a loyalty card. The other has one but it's a fairly nominal discount only on house-branded items. But there are certainly chains that require a card to get routine large discounts. (Safeway for example.)
Are they all exactly the same? Target? Safeway? Food4Less? Do you see any differentiation between these? Would it be a reasonable assumption that conversations like, "I like to go to Target over Safeway because..." happens?
Go ask how UPS differentiates themselves from FedEx. Or how Shell differentiates themselves from Chevron. In reality, while product differentiation is good, unless there already exists a monopoly that has eaten every inch of the market, the market is probably big enough to fit multiple nearly identical products at the same time and still have them all profitable.