The Technical Differentiation Recession

Technical differentiation.  I can recall 10 years ago when that was nearly all I heard from colleagues, customers, bosses and potential partners.  There was good reason to care a lot about technical differentiation. "Tech diff" was the single largest moat one could build around enterprise software. Back then, the rise of the consumer Internet was nascent and it was difficult to hear over the din of the enterprise markets.  Selling software and retaining customers was largely a function of whether or not the technology in question consistently outperformed its competitors in capability, performance, scalability and cost.  These were the four criteria that drove purchase and renewal decisions. Today, we build businesses in a different world. Today, technical differentiation is not required to achieve product-market fit.  I find this to be true in many markets within the enterprise space, and also when considering the consumer Internet.

What we’ve realized over the course of the last 10 years is that for many businesses, technology by itself struggles to establish a deep, lasting moat around a business. Technical differentiation does not explicitly attract and retain customers.  It’s frequently cloneable and almost certainly cheaper to clone than to originate.

If you’re an entrepreneur and you want to build an important business, consider learning from Instagram or Warby Parker.  Instagram is important because it teaches us to focus on acquiring an asset that will be difficult for a customer to emotionally or economically part with. It further teaches us to try to create experiential differentiation around how you collect and utilize that asset to benefit customers.  While Instagram built a great camera app, they were not the first, nor the only. Critically, Instagram was first to get the experience of collecting and sharing photos “right.” It was fun, cool and viral.  Warby Parker is equally as enticing.  They changed the way people buy sunglasses, by introducing home try-ons, flexibility and choice into the experience.  There's no specific technology differentiation inside Warby Parker that drove their success.  They acquired experience-to-market fit, and that was brilliant.

A differentiated experience can create an opportunity to capture a customer’s imagination. For that, customers will frequently invest their time and mindshare using the service to manage part of their life.  This should lead to an asset they are emotionally or economically attached to.  This creates a business with a real asset, customer acquisition strategy and native retention program.  If it’s important to the long-term health of the business, the company can now invest in technical differentiation with a distinct advantage, a captive customer surrounded by a deep moat filled with all their data.

I wonder if I'll want to write the same post in 5 years only discussing why 'accessibility' or 'device ubiquity' is a trending axis on which companies can differentiate thanks to the evolution of the 'Internet of Things?'