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3 steps on how a startup can compete with its business model, not its features

Every day dozens of new startups are launched around the world. Many of them are launched at Product Hunt, but most will die a couple of years after launch.

So what makes a startup successful?

What's the innovation?

If you ask startup founders "What makes you better than your competitors," most of the time you'll hear an answer like

"We have feature A, and they don't have it. We're the ones who do it better than them." 

I call this approach "We're better because we try harder."  It's not always the most effective strategy. 

When I started my first startup, I just watched what the #1 player in the niche was doing and bluntly copied it. This sometimes leads to positive results, but doing the same thing makes it impossible to beat the leader. He already has brand recognition, market share, and the resources to compete. 

There's only one way to beat a big competitor.

Do things differently.

I call this approach "Columbus Thinking." As we know, Columbus wanted to sail to India to break Venice's monopoly on the spice trade (he wanted to hack the CAC). His words were: "To reach the east, you should sail west." There’s a big sense in these words, which can help startup founders look at the world differently. 

If we analyze successful startups, most of them competed by business model, not by features. 

Whatsapp messenger is supplanting email because it transmits information much faster and more conveniently. SalesForce moved all information to the cloud. Youtube made the format "TV on Demand" and allowed everyone to have their media and express themselves. Uber allowed drivers to become entrepreneurs and made it easier for passengers to order a cab. There are plenty of examples like this. 

In the 1990s, the business model of selling software licenses was widespread. A company could buy the software once and use it for many years. In the 2000s, SalesForce revolutionized the industry and invited everyone to move to the cloud using the SaaS model. This is commonplace for us now, but imagine what it looked like 20 years ago. 

You go to a large corporation and offer to store data on your servers. The software vendors of those years couldn't be envious. I am sure they faced misunderstanding, but 20 years later, the advantages of the SaaS model are obvious to all. 

The 2010s saw a heyday for SaaS companies with a bottom-up model where employees start using software for free, and then they confront top management with the fact that they have to buy it because they are already using it. Before that, the software was sold to the top management. So the employees were just told that they would use this software. Outstanding examples of such companies are Basecamp, Trello, Slack, Zapier, Dropbox, and others. 

What will happen in the 2020s?

In my opinion, the next trend is combined business models. Every SaaS company will become a micro media, and vice versa, every Media will make its own SaaS product. Marketplaces will mutate into Community first projects, and communities will mutate into marketplaces. Maybe it will be separate social networks of interest, where you can buy products related to that niche. 

For example, Zoom opened its marketplace for events, Mercury bank seems like a simple bank for startups, but it is more likely it will be a venture capital fund, which hides under the guise of a modern bank. Instagram is becoming a marketplace where you can find and buy things. It would seem that what are the similarities between "photo album and amazon"?

The next trend to come is FTLM (Free Tool As a lead magnet). Traffic is getting very expensive. Today it is easier to create a free useful tool, which people will tell each other about, than try to squeeze the maximum out of Google ads. A great example of this strategy is Hubspot CRM. They provide free CRM functionality while competitors have paid.

The main thing is not to confuse the Freemium model with Free Tools as a Lead Magnet. In the Freemium model, you are giving away some of the functionality for free and trying to make money on advanced features. In the “Free tool as a lead magnet model”, you give away a full-featured product for free and make money on a completely different one. It's kind of like movie theaters. They advertise movies and make money on popcorn. 

When we started Apiway, we chose the simplest strategy SaaS. People paid us for subscriptions to do API integrations. But at some point, we started to realize that no matter how hard we tried, we couldn't beat Zapier. No matter how much we fooled ourselves, reality always won out. They have a better product, they have more integrations, they have more money, they have everything better...

Every day we asked ourselves, "How can we differ? What can we do differently? What do we need to do to make users realize that we're better?"

At some point, we came up with the idea. What if API integration was free, and we could make money on something else? We started talking about this with other SaaS startup founders, and many of them said we were crazy. The first rule I learned for myself - you have to ask yourself:

What do you have to do to make people disagree with you?

All successful startups did something that most people disagreed with in the beginning. The kings of European countries disagreed with Columbus about sailing west. Why sail west when the road to the east is clear? The top management of large enterprise companies disagreed with SalesForce that data is more convenient stored in the cloud. Many investors disagreed with Hubspot and Wix that you can build billion-dollar companies in the SMB segment. 

When you suggest to your customers to add a feature, they will agree with you. They'll say, "Yeah, this feature is going to be useful to me, it's going to be great, I'm going to use it." And then they won't use it, and they won't go away from a competitor because of this feature. 

When you suggest doing something different, people won't agree with you in conversation, but the opposite is true. They, without realizing it, start using your product, even if it's a bad one. 

When we decided to provide integrations for free, the question arose, "How to make money?". In the beginning, we wanted to frame affiliate links to other SaaS vendors. We put ads in the interface and made a couple of sales. But that wasn't enough to make the unit economy add up. We needed to find another way to monetize the product.

We started thinking, "What are people already doing when they use the software?" 

The answer was simple.

People choose it in the beginning. And then, they look for someone to implement the software in their business. 

We analyzed how people choose software. They rely on marketplaces and software review websites. Also, they post on social media, "Guys, which CRM is best for my business?". Automation experts answer them.  And, as a rule, from these same people, they choose a performer who will implement a CRM system. 

So we had the idea to cross the Free API integration platform and automation expert community, where users can create different Software battles. Those who choose software can get information. Those who implement software can write an expert opinion and find clients for CRM implementation services.

So you can ask yourself a second question:

What businesses can we combine to give away one product for free and make money from the other?

It seems to me that in the 2000s, the most vital skill of a technology businessman was to choose an empty niche. Today, it's the skill of "putting a picture together from ready-made puzzles."

It's like lego, where you have different puzzles: the Media Puzzle, the Community Puzzle, the Marketplace Puzzle, the Puzzle-SaaS tool, etc. 

Your task is to find out which one your competitor has the best and which one they don't have at all. Then you consciously take the puzzle your competitor has the most and do it for free. And the puzzle they don't have, you can use to monetize your product. 

In our case, Zapier's puzzle is 3,000 paid integrations, but they don't have a B2B software marketplace. So we chose to provide integrations for free and make money from SaaS vendors.

But there’s another problem. A competitor can see your success and copy the same thing. A prime example is Stories copied by Facebook from Snapchat. The point is that Stories are a feature, not a unique business model. 

That's the whole point of being able to pick out the right puzzle from a competitor. The competitor won’t be able to replicate your moves if that puzzle is big. In our case, Zapier can't be free, but we can because we have a different business model. 

Based on that, we can ask the following question:

What can we do that a competitor can't replicate?

In my opinion, if a startup founder thinks about these 3 questions every day, sooner or later, he will solve the question.

How to compete with the business model, not with the features?

Articles — Case study
ActiveCampaign is a marketing and sales automation platform that helps growing businesses meaningfully connect and engage with their customers. Its SaaS platform enables businesses to create optimized customer experiences by automating many behind the scenes processes and communicating with their customers across channels with personalized messages.