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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.
A first mover is a service or product that gains a competitive advantage by being the first to market with a product or service. Being first typically enables a company to establish strong brand recognition and customer loyalty before competitors enter the arena. Other advantages include additional time to perfect its product or service and setting the market price for the new item.
First movers in an industry are almost always followed by competitors that attempt to capitalize on the first mover's success and gain market share. Most often, the first mover has established sufficient market share and a solid enough customer base that it maintains the majority of the market.
- A first mover is a company that gains a competitive advantage by being the first to bring a new product or service to the market.
- First movers typically establish strong brand recognition and customer loyalty.
- The advantages of first movers include time to develop economies of scale—cost-efficient ways of producing or delivering a product.
- The disadvantages of first movers include the risk of products being copied or improved upon by the competition.
- Amazon and eBay are examples of companies that enjoy first-mover status.
Businesses with a first-mover advantage include innovators, Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY). Amazon created the first online bookstore, which was immensely successful. By the time other retailers established an online bookstore presence, Amazon had achieved significant brand recognition and parlayed its first-mover advantage into marketing a range of additional, unrelated products. According to Forbes's "The World's Most Innovative Companies" 2019 ranking, Amazon ranks second. It has annual revenues of $280 billion and, through the end of 2019, had a 20% annual sales growth rate.
eBay built the first meaningful online auction website in 1995 and continues to be a popular shopping site worldwide. It ranked 43rd on the Forbes list of innovative companies. The company generates $287 billion in annual revenues, with a 2.8% annual sales growth rate.
Being the first to develop and market a product comes with many prime advantages that strengthen a company's position in the marketplace. For example, a first-mover often gains exclusive agreements with suppliers, sets industry standards, and develops strong relationships with retailers. Other advantages include
- Brand name recognition is the main first-mover advantage. Not only does it engender loyalty among existing customers, but it also draws new customers to a company's product, even after other companies have entered the market. Brand name recognition also positions companies to diversify offerings and services. Examples of dominant brand name recognition of a first-mover include soft drink colossus Coca-Cola (NYSE: KO), auto-additive giant STP (NYSE: ENR), and boxed-cereal titan Kellogg (NYSE: K).
- Economies of scale, particularly those regarding manufacturing or technology-based products, is a massive advantage for first movers. The first mover in an industry has a longer learning curve, which frequently enables it to establish a more cost-efficient means of producing or delivering a product before it competes with other businesses.
- Switching costs let a first-mover build a strong business foundation. Once a customer has purchased the first mover's product, switching to a rival product may be cost-prohibitive. For example, a company using the Windows operating system likely would not change to another operating system, because of the costs associated with retraining employees, among other costs.
Despite the many advantages associated with being a first mover, there are also disadvantages. For example, other businesses can copy and improve upon a first mover's products, thereby capturing the first mover's share of the market.
It costs approximately 60% to 75% less to replicate a product than it costs to create a new product.
Also, often in the race to be the first to market, a company may forsake key product features to expedite production. If the market responds unfavorably, then later entrants could capitalize on the first mover's failure to produce a product that aligns with consumer interests; and the cost to create versus the cost to imitate is significantly disproportionate.