The First Mover Disadvantage

First mover advantage is commonly cited as being a strategic opportunity. This is largely because by being the first company to bring a new concept to market you will have a unique opportunity to create barriers. However, being the first mover also has several key disadvantages that first movers should be aware of and try to manage.

First, when a company brings a new concept to market, it faces a unique challenge: it must educate its customers about the new product or service. This situation poses a significant risk since would-be customer response to products cannot always be predicted, especially when perceived switching costs are high. Additionally, education can be a costly process, resulting in first movers having sales and marketing costs significantly in excess of later entrants.

Second, the issue of having to educate market participants also holds true for partners and suppliers. Other parts of the supply chain need to not only understand how the new product works and its value, but also they need to have enough faith in your vision to adapt their business.

Third, first movers often make costly mistakes that enable later entrants to penetrate the market. The internet search market is a classic example of this error. Yahoo! and many of the other search players treated search technology as a loss leader – a service designed to attract users to their revenue bearing services. As a result, they invested little in developing their search technology. This strategy provided Google with the opportunity to differentiate itself.

Make no mistake, pioneering a new space brings with it both great opportunity and great risk. While a first mover can’t fully eliminate these challenges, being aware of them can help them improve its odds.

This column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital.  In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist.  He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.  Mark earned his B.A. in Economics with a minor in History at Duke University and is pursuing his MBA at Columbia Business School, where he is the Early Stage President of the Private Equity and Venture Capital Club and the Founder of the Columbia Venture Community .