Criterion for Late Entrants into Consumer Markets with Network Efforts

The key question for a possible new entrant into a market with network effects is when is too late to enter such a market? Or put another way, are there verifiable data indicators that can be used to inform such a decision?

Well, this question is answerable now. Having crunched through the data over the past 20 years, I now have an answer:

In Consumer markets with high network effects and economies of scale, the first company to gain both 15%-to-20% market share AND achieve 67% unaided brand awareness goes on to become the dominant winner. Market capitalization and current market share were the metrics used to identify the winner.

Note: Unfortunately, the data and analysis underlying the above chart embedded in this blog cannot be shared as it is proprietary.

Software services for Consumers have economies of scale that manifest themselves not only because the marginal cost of software is close to zero and the fixed cost of brand advertising is high, but because there are increasing returns of scale as a successful service usually evolves into a platform with a surrounding ecosystem. This results in "winner take all" economics for mass market offerings whereby the financial returns for late entrants are highly unattractive. Examples abound: Amazon in Online Mass Market Retail, Google in Search, Instagram in Social Photo, YouTube in long format video and so on.

So, what is the practical implication of this insight to business decisions? Well, this criterion can be used by company management to avoid or exit markets where a competing incumbent has already achieved 67% brand awareness and over 15% share of the total addressable market. For example, in 2015, even when Uber had a share of only 20% of the total US addressable market for smartphone ride-hailing, two-thirds of Americans were aware of Uber and knew what it was, even though most of them had never used Uber. That was the tipping point when Uber's lead became unassailable. In the US, Uber went on to "win" in the market of Smartphone Ride Hailing with a market capitalization of close to $42 billion as of July 1, 2022, relative to Lyft that has a market capitalization of under $ 5 billion.

The other obvious implication is that unless a new entrant company management has a new disruptive business model, it is too late in the game to take on an incumbent that has met the minimum criterion of share and awareness. Examples of disruptive business models include Instagram and TikTok that both disrupted the social network market where Facebook is the incumbent. And while Facebook was able to acquire Instagram, TikTok is well on its way to winning in the mobile short video format. In the US market, as of March 2022, TikTok has already achieved unaided brand awareness of 88% and close to 40% of share of digital video users.