I was having a great conversation with Sudhee Chilappagari the other day about the difference between Market Leaders & Incumbents.
First we should probably illustrate what is the difference:
Incumbents
Market Leaders
I just wanted an excuse to use Simpson gifs :)
Another way of saying this:
Incumbents: Hadoop, Symantec, Oracle Object Storage, Splunk
Market Leaders: Snowflake, Crowdstrike, AWS S3, Elastic
Do you notice anything about the incumbents? It just so happens that everyone is always trying to go after them. The incumbents keep getting bigger as they acquire more companies, cross-sell/upsell customers, and leverage their distribution & customer referrals to acquire new customers. However, everyone is still trying to compete against them and many startup pitches talk about how the startup’s product will take share from the incumbent.
Now try the market leaders. Notice anything about them? There are almost no companies talking about taking share or competing against them. Why is that the case? The market leaders have less revenue, less distribution, and usually less features than the incumbent. Yet they seem to be more scary?
What’s the reason for this? As incumbents become “incumbents”, the product gets tons of features which can lead to bloat and all of this increases the friction to adopt the product affecting the user experience. Why can’t the incumbent simplify the product or decrease the friction? Fortunately/Unfortunately for incumbents, they have tons of customers that have gotten used to using certain features, have been trained on them, and now need those features for their workflows. Customer centricity at this time actually means changing the product incrementally to not anger the current users/customer base. Changing the product in a big way is a tall task that risks a lot of customer churn and negative goodwill. This is where market leaders come in.
The leaders start off as small startups, solving an initial pain usually only doing a portion of what the incumbent’s product does. However, this pain is solved in a simpler, easier, and more frictionless manner that resonates with the core user. As customers become aware of this, they spread the love of the product which gives them more customers, more revenue, and more talent to work on reimagining the incumbent’s existing products and expanding into new adjacencies. Customer centricity at this time is expressed differently. It’s about frequent communication and product velocity to meet the requests that customers would like as they use the new product rather than the incumbent’s. Since this company is lean, with a simpler & more lovable product, iterating fast, and trying out new product areas with rapidly growing distribution, it is much scarier to compete with!
Eventually the Market Leaders become Incumbents. The current Incumbents utilize their free cash flow and distribution to buy new companies in order to expand into adjacent markets and essentially become Market Leaders again. Oracle for example is executing well on the SaaS/ERP side even as they are losing share on the core database market. This is also why AWS is ok shipping products without perfect UIs (not that this is ever corrected), full-baked integrations, or tons of features. This staves off incumbency making it harder to compete against.
It’s a great lens to use when studying public companies in particular to determine how they view the market and are tailoring their strategy! What areas are they incumbents and what areas are they trying to be market leaders?
It's the cycle of life, Simba!