Be prepared for the industry giant to try to take your market with a “good-enough” product

This week my wife was out of town. Instead of sharing a nice breakfast together, I defaulted to frozen waffles.

I grew up with Eggos. As I got older, I realized they kind of taste like the cardboard box they come in, but they’re quick and cheap.

I love waffles, the fresh kind. And if there’s anything better than a fresh waffle with blueberries, strawberries, or bananas, it’s a fresh Belgium waffle. On my trips to Brussels, I ate a hot, fresh waffle every day. The best were from the little carts on the street and in the subway station. I probably gained 5 pounds on every trip.

But making waffles myself? Too much work. Too much mess. Too much cleaning up. I don’t even own a waffle maker because after a few weeks, it would end up sitting in the back of the cabinet gathering dust.

So I’ve been happy to see an explosion of packaged Belgium waffles at the supermarket over the past couple of years. Some come in bags like hamburger rolls, others boxed as frozen waffles. While not the same as fresh, they’re still quite good, especially when toasted to a crispy crust and covered with fresh strawberries. And ready to eat in less time than it takes the Keurig machine to zap a cup of coffee.

This week while my wife was gone, I was shopping for survival food: sandwich meat, frozen pizza, cup ramen. Yes, back to bachelor life. And for breakfast — waffles.

Unfortunately, they were out of the wonderful St. Pierre Bakery waffles or Euroclassic waffles. But in the frozen waffle section, I found something unexpected — Eggo Liege-Style waffles.

“Inspired by classic Belgian-style street food” the box said. The waffles were made with sweet brioche dough, real butter, pearl sugar and no artificial flavors and colors. A premium Eggo! Count me in.

With only 4 waffles per box, I threw 2 cartons in the shopping cart to get me through the week.

The next morning I popped a Liege-Style Eggo into the toaster with great anticipation as I brewed a cup of coffee.

The first bite was sweet. And chewy. And kind of tasted of cardboard.

In fact, despite the description of sweet brioche dough and real butter, it tasted like…regular Eggos. A bit more sugar. Fancy packaging. And twice the price per waffle as their regular ones.

I don’t want to imply that they’re bad. They’re entirely edible. They make a reasonable breakfast on the run. Were they as good as fresh Belgian waffles? Of course not. Were they as good as St. Pierre’s? Not really. But they’d do in a pinch.

No, this isn’t a product review. It was an epiphany. About competition. Big competition. The kind every founder and every investor should be terrified of. The kind of competition that keeps you up at night.

St. Pierre Bakery/Euroclassic is an upstart in the commercial baking world. In the past few years, their premium brioche rolls, breads, and waffles have shown up in all the local grocery stories from Krogers to Whole Foods.

I don’t know much about either company, but I suspect in the immortal words of Boston Brewing Company, Kellogg’s spills more batter than than make.

Kellogg’s hires a lot of MBAs. They talk to retailers and distributors every day. They spend millions on research reports to predict where the market is going. There’s no chance they’d miss the trend towards premium, high-quality baked goods for long. The question is how would they respond?

Would they update their existing products to higher standards (and cost)? No. When you’re the market leader, you don’t change your flagship product because an upstart is pulling away a few customers at the niches.

I’m not their primary customer anyway. Richer, older, without kids, I don’t mind paying $7 for a bag of higher quality waffles than the typical family that box Eggos is made for.

But the premium segment is a significant market, and probably growing quickly, too, certainly compared to generic frozen waffles. The high end suppliers discovered the opportunity, but the mass market manufacturers have to respond or risk losing market leadership.

They could acquire one of the premium bakers and multiply their sales by 10x by putting the product into their distribution, marketing, and advertising machines. That would be the right strategy if there was technology or a brand name that the giants couldn’t replicate in-house.

But a waffle? I don’t want to say it’s easy. Making a high quality product in high quantity with a long shelf life that can survive the heat of a shipping container and the cold of the freezer without losing flavor takes science and skill. But these are skills the market leaders already have themselves.

So it’s inevitable they’ll make their own competing products. There’s 2 ways to do it: use the existing brand name, as Kellogg’s did with Eggo, or create a new, premium brand as many beer companies did to enter the craft beer market. Nobody would buy a craft beer from Coors, but Blue Moon Brewery? Then sell the hell out of it.

Does the new product need to be as good as the upstart? No. In fact, if mass market products account for 90% of the market and premium products have 10%, the better strategy is to expand the upper end of the 90% than to try to take the last 10%.

And that’s exactly what this frozen waffle did. It’s much more of a premium version of their regular frozen waffles than a direct competitor to the upstarts. Pricing was in-between as well.

The upstarts aren’t going away, but they’ll probably lose some market share and get blocked from moving into the higher volume mass market. This is fine if they can expand laterally into other premium baked goods, but a disaster if their business model is to grab a bigger market share.

What’s true for waffles and beer is equally true for B2B technologies. With most startup pitches I see, the elephant in the room is what happens when the industry giants realize they’re losing customers. You have 5 engineers, they have 5,000. You have 2 patents to shield you. They have 50,000 to attack with.

The usual answer I hear is, “They’ll buy us instead of building it themselves.” Which is true sometimes. But it’s still a huge risk. The other answer is the giants don’t know how to build a premium product or innovate new technologies. They may be big, but they can’t compete with us. The problem is that usually doesn’t matter.

One of my startups invented a technology to make long-distance internet connections faster. Enterprises with operations all over the world flocked to us for a solution.

We didn’t compete with Cisco, the 800 pound gorilla of the networking industry, and were in fact complementary. Our box would connect to their box to build the network. For a while, Cisco even partnered with us to resell our product to their customers.

But customers asked why they needed 2 boxes. Why not add our functionality into the Cisco router?

We had a few discussions with Cisco about adding our functionality into their routers. Then suddenly our contacts ghosted us. A few weeks later, the company made an announcement that network acceleration technology would be available as part of their product soon.

Our sales fell. Everyone in our industry speculated about how the Cisco technology would work and how much extra it would cost. And when it would be available.

Despite rumors, it didn’t make its appearance for over a year when it came out as a separate, optional module. The license cost more than our boxes. It only worked for specific, limited situations. And provided half the performance benefit of our product.

After a year of anticipation, we could finally sigh in relief. Their product wasn’t much of a threat, we thought.

That relief was premature.

No matter how many bakeoffs we did to show our product was better, faster, and cheaper, and we were nicer people, too, no matter how many white papers and testimonials we wrote proving we had a better product, the lost sales never come back.

For many of our customers, the answer was “We’re a Cisco shop.” The fact that we were cheaper didn’t matter because that didn’t factor in the cost of managing a different device. It didn’t include us not fitting into their monitoring systems, or being part of the Cisco training classes.

Their solution was easier for them, and even if it didn’t work nearly as well, many customers didn’t care. As long as it worked “well enough”, that was good enough for them.

Some customers did care, and the performance benefit was worth the extra hassle. So it didn’t kill us, but it did put an end to our hypergrowth.

Soon after that we sold the business to another networking company also making sophisticated products for prioritizing network traffic for which Cisco had a basic version in their routers.

The acquisition was a good outcome, but not the huge exit we’d expected only a year earlier.

Ever since then, I’ve asked myself what we should have done differently? As I nibbled on my waffle, he’s what I came up with:

  1. We should have gotten more funding to grow the business faster. With a bigger name and a bigger presence, Cisco would have had a strong incentive to acquire us instead of rolling their own. However, if we went down that path and they hadn’t acquired us, we would have been dead instead of merely jolted. Many Windows application developers have died when Microsoft added their functionality into the operating system. Does anyone still buy anti-virus software?
  2. We were very focused on making the best product with the highest performance. In other words, we were a bunch of engineers. We should have moved faster with more functionality that would have been more difficult to replicate.
  3. It’s better to fly under the radar as long as possible. Instead of waking the sleeping bear to convince them to partner with us, we should have fed them sleeping pills and convinced them this was a boring little niche they’d have no interest in.
  4. In some situations, patents can provide leverage, though in cases like ours they wouldn’t help. Our better technology was the reason our product provided more benefit for a wider range of use cases, but that didn’t make enough difference to customers. Any solution from the giant was good enough even if it didn’t work as well as ours.
  5. We should have expanded into adjacent network functionality that Cisco didn’t provide. We considered ourselves the world’s experts in our narrow niche, but adjacent technologies were outside our skill set. Had we added CIFS acceleration, too, which we considered and rejected as outside our specialty, we might have ended up worth a billion dollars as our competitor, Riverbed did, instead of being acquired and fading into obscurity.

In one of those delicious bits of irony, after the acquisition, I built a new startup making network simulators. And who was my first big customer? Cisco! And not just Cisco, but the team at Cisco that was my former competitor. Then my former competitor, Riverbed, too, began using our simulators in their labs and in their demos and recommending us to their customers.

Neither company had any interest in test tools, and were happy to leave that to us. Of course, now we were up against the 800 pound gorilla of network test tools — Spirent. Fortunately, they had no interest in our particular niche.

The waffle finished, my coffee cup nearly empty, I was done with my musings, but I was still hungry for answers. So I toasted another waffle. The second one was still chewy and still had a distinct cardboard flavor, but the maple flavor was starting to grow on me. Hmmm. And half the cost, too. Were they good enough? Well…maybe.

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