Growing the market rather than dividing it: when competitors are worth more than they cost

There are two quite different competitive situations, and a great deal of wasted effort comes from applying the reflexes of one to the other.

In a mature category, total demand is roughly fixed and any sale a competitor makes is a sale you did not. Share is the only variable that matters and competition is genuinely zero-sum.

In an underdeveloped category, total demand is a small fraction of what it will eventually be, the binding constraint is that potential customers do not yet buy the product at all, and a competitor's marketing spend educates buyers who will subsequently be available to everyone.

How to tell which one you are in

Penetration rate is the simplest test. If most of the addressable customer base already buys the category from someone, you are in a share fight. If most of them buy nothing in the category, you are in a development situation.

The second test is why buyers say no. If they are buying a competitor's product, that is a share problem. If they say they do not need the category, do not know it exists, or do not believe it works, that is a development problem — and a competitor solving it for you is doing free work.

The third is the trend in category size. A category growing faster than any single firm within it is one where firms are collectively creating demand rather than dividing it.

What follows for behaviour

In a development situation, several instincts should be inverted.

Competitor entry is good news, not bad. It validates the category to sceptical buyers, it increases the total marketing spend educating the market, and it makes the category visible to distributors who were not carrying it.

Industry-level standards and information are worth investing in even though competitors free-ride on them. The buyer's uncertainty about the category is the obstacle, and reducing it is worth more than the share the competitor gains.

Price competition is usually the wrong instrument. Cutting price to take share in a category nobody buys is spending margin on a problem that is not the constraint.

And distribution investment matters more than positioning. If buyers cannot easily get the product, no amount of preference converts into a sale.

Where this applies in this market

Numerous categories in Ukraine were, and several remain, in development rather than share conditions.

Business services with low penetration — professional insurance, certification services, specialised financial products, industrial maintenance contracting. Energy efficiency equipment, where the constraint has been buyer awareness of payback periods rather than the availability of suppliers. Agricultural technology, where the addressable base is enormous and the current adoption rate is low.

In each of these, a supplier who spends on educating the market is doing something that pays back over years and benefits competitors along the way, and a supplier who discounts to win share is fighting over a fraction of the eventual market.

The general observation

The most valuable position in a developing category is to be the firm that defined how buyers think about it. That firm sets the specification against which every subsequent entrant is compared, and it holds the position for as long as the category keeps growing.

That is a slower and more expensive strategy than taking share, and in the right conditions it is worth several times more.

Related in this archive

• How to read a country report without being misled by it
• Industrial parks: the incentive regime, and whether it works
• The western ports and why they matter more than the map suggests
• Ukraine Annual Review 2016: the year the new economy took shape

I have lived this distinction in my own product line: in the early years I had no competitors and no sales either, because nobody knew the technology. When competitors arrived the market grew and I sold more. Where a category is small a competitor is not a cost but a shared education budget — I have seen many firms fail to understand that.