Disrupt and defend with platform envelopment

It can be difficult to convince a customer to adopt your product when they already have a solution they’re happy with. This is why disruptive products typically need to be radically better, radically cheaper, or both. However, thanks to platform envelopment, it’s actually possible for a notably worse app to disrupt superior incumbents.

To pull this off, a startup first builds something adjacent to the product they wish to disrupt. This needs to be something they can sell to the same customers, but something that will be easier to sell than a directly competitive product. Next, you add the features you want to disrupt, and convince your new customers to switch over from the incumbent.

For example, if you wish to disrupt a payment provider like Stripe for SaaS companies, you could build a subscription management system first. If you want to disrupt a dominant subscription management system, you could build a subscription analytics tool.

This method of challenging incumbents works because in the short term, it makes it easier to get your foot in the door with your target market, and in the long term, it makes it easier for you to create something that is radically better (through first honing your skills in a less competitive/defensive market) or radically cheaper (through bundling).

Platform envelopment is actually the primary way that incumbents try to kill startups! Microsoft Teams did this to Slack and Instagram to Snapchat. So, you can think of this as using their tools against them. This strategy is so common for incumbents because they typically don’t need to first identify a breakthrough market — they most likely already have access to the target customer.

Advice for incumbents

If you have territory to defend, it’s crucial to pay attention to what new products your customers are adopting, and consider how they could expand their functionality to gradually erode your moat. Most disruptive products will approach from the side, not the front. That is to say, they will enter your market through an adjacent use case, not a direct challenge to your core value proposition. This means hubristic companies will ignore the threat until it is too late. Envelope them before they envelope you.

Companies must understand their strengths and weaknesses. As an incumbent, you probably can’t move as quickly as a startup, because you have more process and less risk tolerance. But, you can parallelise work, you have easy access to the market, and you have existing product foundations to lean on.

Advice for startups

If you’re on the offensive, you need to choose the right wedge. What smaller problem can you solve that will make the people who buy your competitors products absolutely love and trust you? It’ll be a risky move when they eventually switch from an incumbent’s product to yours, so you’ll need to have a great relationship by then. Ideally, your wedge product should have the exact same buyer persona as the product you’ll expand into.

Take advantage of complacency: avoid appearing as a threat until you really need to, keep your plans to expand close to your chest. It can even be beneficial to integrate with the incumbents. This will make your product more compelling in the early days, as it will play nicely with the existing ecosystem, and also provide a seamless migration path when customers eventually choose to switch.