"Optimal distinctiveness theory" and how it can help create successful startups

The theory of Optimal Distinctiveness was proposed in 1991 by the renowned American social psychologist, Marilyn Brewer. Over the past thirty years, this concept has seen numerous extensions and reinterpretations in sociology, institutional theory, management, and innovation, as well as in competition theory and category design. It has even reached the realms of venture capital and startups.

In her work "The social self: on being the same and different at the same time," Brewer describes the idea that within social systems, individuals achieve self-identification by balancing differentiation and inclusion in the community. On one hand, you need to resemble others to effectively and harmoniously build relationships. On the other hand, your uniqueness and distinctions are crucial components of identity and autonomy.

Personal Experience

But let me take a step back and give you some context. As part of my involvement with Techstars '23 and the WCBA: Westchester County Biosciences Accelerator (The Catalyst) , I have met around a hundred med tech startups over the past six months.

This focused engagement within a specific segment allows for a good degree of insight and, more or less, the development of relatively valid evaluation principles. Because everything is understood in comparison, and I could compare many products that often address the same problem.

Of course, I've spent many hours in discussions like: "They are similar to these... and that's good", "they are similar to these... and that's bad", "they are not similar to these... and that's also bad", and so on. And you start to think there must be an optimal configuration of similarity and dissimilarity somewhere, increasing the likelihood of success.

After such discussions, it becomes evident how crucial it is to have a deep understanding of the market and players to even form any adequate opinion on similarity or dissimilarity. If you've just started delving into Medtech (or any other category) yesterday, you won't have any basis for comparison. Making informed decisions and judgments becomes impossible in such circumstances.

But let's get back to the theory of optimal distinctiveness.

The Theory of Optimal Distinctiveness

It's intriguing. So what do we do with it? How does this theory relate to startups?

To answer this question and demonstrate how a model built on the theory of optimal distinctiveness can help you make better decisions, I relied on a study of the MOOC platform market titled "Optimal distinctiveness in platform markets: Leveraging complementors as legitimacy buffers."

The authors of this study analyzed how access to high-status complementors helps legitimize a product in the market—meaning, how it assigns key recognition and acceptance triggers to itself. And how this fits in with the need for differentiation.

The basic premise is clear. The MOOC platform market resembles a red ocean. Originality and differentiation provide advantages and the opportunity for your startup to break through to the customer because they reduce competitive pressure. This won't work equally well in all markets. But it can be in the online education market. Because, yes, there's a winner-take-all effect there, but along with that, consumers exhibit taste heterogeneity, and the cost of switching and experimenting is not very high (unless we're talking about long-term programs like 6-9-12 months of study).

A popular platform falls into a success trap, and in such conditions, it's very expensive to start differentiating individual courses or directions within its portfolio. And this is where opportunities arise for young, creative teams and startups.

If you try to differentiate too much and come up with something entirely new to sound cool and innovative in this competitive edtech market, you're more likely to stimulate disadoption of your product. And it will take some time for the market to accept your product and be convinced that it works. Successfully passing this stage will cost you money and the ability to build great marketing. A vast number of projects do not pass this test.

The research hypothesis revolves around the assumption that it is important for MOOC platforms to moderately differentiate (not radically!), even if it creates risks. At the same time, relying on partnerships with players who have high status in the market and help legitimize the product. This combination creates a positive effect.

The study looked at 12 platforms (Coursera, Udacity, edX, FutureLearn, etc.) and nearly 1000 complementary companies. Including such high-status complementors as MIT, Stanford, Microsoft, and Google.

What was found during the study?

• Differentiation harms user growth for MOOC platforms in ecosystems lacking any high-status complementors. It seems that the losses associated with differentiation outweigh the benefits of distinctiveness for platforms without the support of status partners. In short, if you've come up with something completely new in edtech but there are no logos of cool, well-known, big companies (as clients or partners) on your site, it will be very difficult for you.
• On the other hand, the combination of originality and a minimal number of complementors with high status significantly affects the effectiveness of user acquisition. Moreover, up to a certain point, increasing the number of status partners will broaden the range of opportunities for differences and originality. But upon reaching the optimal point, this effect will no longer work in your favor.
• The more institutionalized the market, the more critical it is to have a big, well-known partner nearby (or better yet, many partners). In other words, if you suddenly decide that this is a big conservative market with only 3 players, they have bad interfaces there (or something else bad), and you have a small startup and a desire to revolutionize this huge market, forget about it and change your approach. Or immediately find some very influential partners, investors, or clients.

Everything you've read likely reflects your intuitive assumptions. But the key idea I want to convey is that your differentiating features and alignment with expectations must be manageable and consciously designed. It seems to be a matter of life and death.

And here comes the end of the text. But I'll add a little more. And tell you about another study. Which complements the picture well. It's dedicated to analyzing the role of the common cognitive bias "The Familiarity Principle" in entrepreneurs' communication when seeking investments.

From the perspective of your behavior and decision-making, "The Familiarity Principle" seems to be in the same logic and arsenal as the theory of optimal distinctiveness.

The Familiarity Principle

The study "Sounds novel or familiar? Entrepreneurs' framing strategy in the venture capital market" describes the communication frame of "novelty" and "recognition" that entrepreneurs use to draw investors' attention to various aspects of their product and its prospects, ultimately seeking investments.

This research revealed, firstly, a correlation between the use of both strategies and the amount of investments obtained. Both frames can reinforce each other. If the level of recognition is already high, then the "novelty" frame can amplify its influence. However, in the case of capital-intensive markets, conservatism seems to come into play, and the "recognition" frame begins to have a greater impact on decision-making than novelty.

If you want to read the entire study (which isn't available in open sources), feel free to write in the comments, and I'll share it with you.