How can you build a differentiated product in a competitive, crowded market?

Hint: the riches are in the niches

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“So how is your product different from X / Y / Z?”

My heart would skip a beat every time I heard that question.

When X, Y and Z are companies who’ve had products in the market for longer, have raised 10X+ more capital, and have much larger and more experienced product and engineering teams, this is not an easy question to answer.

I’d smile. Then confidently say something like

“We offer a lot more flexibility in our analytics than X, and you can configure surveys much more precisely to what your organization needs.”

or

“Our customers much prefer our platform because we’re built to purpose for employee listening and analytics, compared to Y which is a powerful research tool but is more generic and requires a much steeper learning curve.”

or in the worst case

“We’re a lot more responsive in support, and many customers who have switched to Z have expressed an interest to come back.”

All true.

But it’s always nagged at me that I couldn’t give a better response.

Something that immediately stands out as an obvious difference. An obvious value proposition advantage that’ll help us stand head and shoulders above the competition. And make it a no-brainer for our prospect to move forward with us.

Some of my views are moderated slightly by Alex Turnbull’s observation that most features in SaaS are commodities - anyone could build it with enough time and resources.

But that doesn’t absolve founders for figuring out specifically how they serve their market better.

So as a co-founder responsible for product direction and vision, how should I think about this?

Do you need Product Market Fit to have a differentiated product?

Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. - Andy Rachleff, originator of the concept and co-founder of Wealthfront

Indeed, when I started down the rabbit hole of thinking about product differentiation, I kept bumping up against the adjacent concept of Product Market Fit (PMF).

This piece by A16Z traces the origins of the concept to Andy Rachleff, who studied the investing style of legendary venture capitalist and founder of Sequoia Capital Don Valentine.

There are three components to this:

1. Feature set you need to build
2. Audience that cares
3. Business model to reach and entice customers to buy

This doesn’t imply that when you reach PMF you have no competition, but it does mean that the choices you have made for each of the three components above are good enough for your business that you can win consistently.

This can take time - here’s a commonly shared chart:

When I thought about this, it seemed like they were tangential concepts, but suggested to me that the recurring competitive set that you see in every deal gives you a clue about component 1 and 2.

If your hypothesis about 1 and 2 match the competition you see, you’re likely on the right track.

In the employee listening and analytics market that we’ve been in for 8 years (almost 15 if you count our experience as co-founders as consultants in this space), this was not difficult. We know the domain well.

The tricky part is getting component 3 down, and doing that in a way that can deliver value efficiently (in SaaS, gross margins above 75-80%). This involves strategically differentiating along 1, 2 or 3 in a way that sets your company up for success.

Therein lies the challenge I believe any startup that has grown outside the US that’s entering the US market will face.

Additional complication: ensuring robust differentiation across geographies

We decided to take on the US market at EngageRocket relatively early revenue-wise, but we’ve amassed a decent customer base in Asia and have some working GTM.

While this sounds like an advantage, it only is under very specific conditions: if and only if buyers in the US market go through the same buying process and considerations as customers outside, your differentiation outside the US continues to hold when selling into the US.

So far, my experience has been both are very fragile conditions.

The US market for SaaS isn’t actually as homogenous as I thought. It’s comprised of a large number of niches, each of which is big enough to be comparable with entire geographies within APAC.

Mainstream players that sell nationwide in the US have gotten there by successfully conquering niche after niche, building up a sufficient war chest and niche experience to be able to go mainstream.

We had gone through this “nail it then scale it” process in APAC, and earned the right to be mainstream.

But without going through this in the US market, applying the same GTM, differentiation playbooks and broad market targeting fell flat.

This took about 6 months to test out and confirm this negative.

The more developed your product and GTM is in your market outside the US, the more organizational tension it will exert as you go through your US market entry efforts. We touched on this in a previous post examining the US market entry strategies of 350+ other startups.

Especially when you’re figuring out your differentiation strategy.

How do you differentiate across two quite different geos? Especially if you’re not fully differentiated even in your ‘home’ geo?

Current thinking

I will leave out the GTM and business model from this discussion, as while those are extremely relevant in a cohesive winning strategy, it’s gonna be far too long for this post.

Besides, I’m not laying out our full competitive playbook for all and sundry. ??

But I will focus on our thoughts about product differentiation.

The key came from a discussion with another experienced founder who has worked across multiple global markets and exited comfortably recently. He told me “CT, you’re overly distracted by differences between the US and APAC market. Look for similarities in their Jobs to be Done (JTBD), and build product, align marketing and sales messaging, to these.”

Bingo.

How we differentiate isn’t about how well we can deploy the latest LLM. Hell, that would be attacking our biggest competitors in their ICP in their area of greatest investment today.

(In case I wasn’t clear, that’s bad strategy.)

Instead, how we differentiate has to be very selectively choosing the right JTBD for a sub-section of the market that is underserved, and being 10X better than how they’re doing those jobs today.

Cone of Strategic Innovation Potential

That brings me to the Cone of Strategic Innovation Potential(TM). Here’s a simplified market map - not unlike what you’d find in G2 / Capterra / Gartner.

The vertical axis covers the extent of the JTBD for organizations when it comes to our space: employee listening and analytics to grow engagement, retention and performance. The higher you go, the greater the JTBD coverage in this space.

The horizontal axis represents how broad or narrow the target Ideal Customer Profile is. The further to the right you go, the more of the overall market you are trying to serve. Notice this definition is geo-agnostic, but attempting to cover multiple geos does pull you further to the right.

There’s a little red dot in there that demonstrates our struggle so far. By trying to be everything to everyone, there’s a high risk of being nothing to anyone.

The potential to differentiate, therefore, should be somewhere in the top left quadrant of this map. Specifically, the further left we go, the greater ability we would have to cover a broader range of JTBD better than mainstream market players.

[Note: entering an entirely different space with a completely different set of JTBD eg employee benefits, learning management, etc will have to take a back seat, as the incremental investments there are significant and would require even more organizational change and tension than what can or should be stomached.]

Constraints are your friend

“But wait, does that mean we give up competing against the mainstream players?”

Hell no, especially not when they fall within the intersection of our ICP and JTBD.

But it does mean that there are going to be contests where it wouldn’t be worth our while to pursue.

And that’s OK.

As a trained economist, the concept of opportunity costs is always top of mind. And when building product and companies, there are plenty of hard choices and tradeoffs that need to be made.

Saying “no” to one deal because it sits outside your ICP, allows you to say “yes” to dozens of other companies that are in your ICP, to be able to invest the time, resources and effort required to deliver those JTBD 10X better than what they are currently experiencing.

The hard part is balancing the discipline to commit to your ICP, and the allure of short-term revenue with “just a few sprints” to build that additional feature which isn’t additive to your ICP.

That’s an organization and human psychology challenge, not a business strategy one. Perhaps an even more challenging one to solve, but thankfully beyond the scope of today’s article!

Bottom line - time will tell

Strategically, this feels solid, and as we narrow down and commit to executing towards this ICP, the results are likely to come over time.

The discomfort will be the quarters in the short term, possibly until the end of 2024, as we navigate through the transition while maintaining a healthy open mind to the possibility that there’s an easier or more efficient path to growth.

Is there anything I missed in this analysis? Or another way of thinking about this? I’d love to hear from you, please reply or drop me a comment!