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This is an idea that is prevelant in both business and poker. In general, it describes the barrier of entry. It says the person who is in second has to do more than the first person to get the same amount done. Or in other words, the first person has an extra advantage in being first.

In poker, it works something like this (let’s assume hold’em style, everyone has exactly one card and that’s the whole game). Let’s say both persons’ range for entering a pot is a 6 or above. If you were the second person and the first person hasn’t entered the pot yet, then you’d enter with a 6 or above. However, if the first person has already entered, then you already know that he has a 6 or above. In that case, you’d need to enter with a higher range of cards in order to have an advantage.

The same is true in business. If there are two companies competing for the same market, the second company to enter the market would have to do more marketing than the first in order to have the same number of customers. This is because it takes extra incentive for the customer to switch to your company’s product. If the two products are exactly the same, there would be no reason for them to take the effort to switch to yours. In fact, oftentimes, your product will need to be much better than the other company’s in order for them to switch. Partially, it’s because they already have something that’s working fine and it takes an effort to switch. Another part of it is that they have developed a relationship and trust with their current business partner. You, as an unknown competitor, poses an extra element of risk which they need to account for (See How Much Money Is Integrity Worth?). You’re asking them to switch from something reliable to something new and risky. Of course they’re going to want a much better product or lower price in order to take the leap.

The interesting part about this is that if you really DO develop a better product than the company who entered first and take their customers, the situation is now reversed. They now need a better product than yours in order for their old customers to come back to them. You can look at that as you got to the “better products” market first. Keep in mind that although you would have a high barrier of entry when you go in first, once your competitor overcomes that barrier, you now have the same problem that he does and the barrier of entry into his market would be even larger than the one that he had overcome.

Therefore, you need to continue increasing the size of your barrier of entry so that other people don’t get over the hump and steal your customers. You can do this by creating a better product, having better support, having friendlier customer service reps, etc. – in general, just remain competitive. Remember that if you’re on top, every dollar you spend would require your competitor to spend more than a dollar in order to keep up. You have the better connections, better people, loyalty of your customers, and just better infrastructure in general.

For an example, we can take a look at Yahoo vs Google. Yahoo had a very high barrier of entry for their search engine product. Most people were using it back in the early 2000s. However, they didn’t continously improve their search engine algorithms and their barrier of entry got smaller and smaller as other companies developed competing products. On the other hand, their competitors, albeit just two grad students, were working on the problem day and night. Every day, the Google search engine improved. Their search engine users started flocking to the cleaner looking and better functioning Google. Now Yahoo has the same problem that Google did back in the early 2000s. They have to somehow offer a search engine much better than Google in order to attract their customers back. This is a much harder task than Google overtaking Yahoo since Google is constantly improving their algorithms, making their barrier of entry higher and higher.

If you want to conquer a market, be the first, or be the best, preferably both!

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One Response to “The Gap Concept”

  1. How To Find A Good Investment on July 23rd, 2007 7:20 pm

    [...] The Gap Concept [...]