What is the first-mover advantage?
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Definition of the first-mover advantage
First mover advantage refers to the competitive edge a business earns by being the first to launch with a certain product or service.
By launching first, a business often becomes synonymous with that product or service, thereby securing a place in consumers’ minds and lives, even when newer offers arrive on the scene.
Disadvantages of Being a First Mover
High risk for investors
If the product is not tested and proven in the market, it risks being rejected. This scenario poses a lot of trouble for the investors.
Unproven product
There are high risks. The market may not be ready or willing to accept your product. If it isn’t, you could lose a great deal of money on equipment and other services necessary to produce the product.
Lock-out effect
Your rivals can use your product as a basis for their own. They can eliminate the shortcomings of the first mover product and then produce a much-improved product that drives you out of business.
How Does First Mover Advantage Work?
In business, first-mover advantage is a theory that the first company to enter an industry captures a disproportionate market share relative to later entrants.
Entering the market as first movers can be risky and rewarding since first movers must frequently make decisions with little information about the needs of consumers.
A first-mover often establishes an entirely new industry. In contrast, following competitors offer different products or services within an existing industry.
A first mover in an industry often dictates how future competitors will enter the market.
For example, when Netflix first entered the DVD-by-mail business, it adopted a business model that included postage-paid return envelopes, late fees, and limited viewing time per movie.
Competitors were forced to adopt these rules to compete with Netflix. This way, first movers can set industry standards that reduce immediate competition from imitators.
Where It Works and Where It Doesn’t
First mover advantage works in the following cases:
1. The first mover advantage works in cases where there is a cost advantage in being the first mover. This can be due to fixed costs, economies of scale, and more.
2. When the firm establishes a brand that is difficult for others to imitate immediately and difficult for customers to change in a short time frame, the first mover advantage works perfectly.
3. When the firm establishes a marketplace, consider eBay or Amazon; the first mover advantage wins.
4. The case of a patent, copyright, or trade secret gives the firm a temporary advantage.
5. When network effects are involved in the business model, the first mover advantage works.
First mover advantage doesn’t work in the following cases:
1. The first mover advantage doesn’t work when the market is highly price-sensitive and has low switching costs.
2. In cases where customer experience is critical, consider Apple; the first-mover advantage doesn’t work. Yet, it has created its niche behind its brand and customer experience.
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3. The first mover advantage cannot help when low barriers to entry characterize the industry, for example, retailing.
4. In cases where the product or service is easily copied, for example, consider Coca-Cola copied by many competitors such as Pepsi. The first mover advantage doesn’t prove helpful.
First Mover Vs. Late Mover
The first mover is the first company or person to enter a specific market with the product now being sold.
The first mover does not necessarily need to be the one who invented the product. Still, it must be the first on the marketplace to sell or distribute that version of the product/service.
On the other hand, a late mover enters a market after the first mover has had time to establish market share.
Late movers can sometimes successfully enter the market by offering a product that is an improved version of the original or targeting a different market segment with their offer.
First movers have incurred all the upfront expenses and efforts of starting a new industry. Late movers can be successful without bearing these initial costs.