How do you enter a market that already has an entrenched major player?
That was the challenge facing Mike McDerment in 2003, when he founded Toronto-based FreshBooks, a company that provides accounting software for small businesses.
Intuit Canada's QuickBooks already had most of the market sewn up and dominated the shelves at big retailers.
"That's the question that kept me up at night," Mr. McDerment recalls. "Everyone kept asking how I was going to compete with them. They had all the distribution channels sewn up. How could I even get my product out there to become known?"
Prior to starting FreshBooks, Mr. McDerment was a self-employed Web professional whose income depended on prompt and accurate invoicing.
He was dissatisfied with existing products on the market. He felt they did lots of things that he didn't need, but didn't do the things he did need and want.
So, in 2003, he started to build software that met his own invoicing needs. After a year, he thought he had a product that was ready to launch.
He knew that it might be a long process to get traction in the market against a giant competitor. So he moved into his parents' basement.
It was a long process: He stayed in their basement for three and a half years. During this time, he got lots of advice about how to compete against the Goliath, but little of it resonated with him.
For example,"someone told me that the only way to gain a presence in a dominated market like this was to partner with another giant, such as a big telephone company. But I couldn't imagine how I could get that to happen. Why would a giant telco partner with an unknown startup?"
Instead, what Mr. McDerment did was focus on who and what he knew: IT professionals just like him, who also wanted easy, painless invoicing.
He didn't go head to head against the dominant player in the industry because he couldn't. Instead, he deliberately did two things very differently from them.
"First, I didn't try to offer everything the incumbent offered. I sliced off invoicing, which is a small piece that I knew I could do better. Invoicing is also something that small-business owners care a lot about because it affects when they get their money."
It took some time to get traction. "I think we had about 10 customers paying $9.99 for two years," Mr. McDerment laughs. "I had to keep a consulting business going on the side to make ends meet."
Still, a narrow focus and targeting a customer group that he himself was part of enabled FreshBooks to establish credibility within a familiar market.
The second thing Mr. McDerment did differently from the incumbent firm was to bypass retailers altogether.
"My software is cloud-based, and that's a great fit with the IT professionals who were my first target market. They're on the Internet all the time and get its potential, and want the mobility that cloud-based software provides."
That was a smart decision. Not only was a cloud-based platform consistent with societal trends toward mobile computing and smart phones, it also allowed Mr. McDerment to target a global market from the get-go. There were no cross-border issues, and he didn't have to convince distributors and retailers in foreign countries to give him shelf space.
Mr. McDerment's startup tactics for differentiating against a giant incumbent worked.
FreshBooks' customers now include many kinds of small businesses and self-employed people.
"If you pick one vertical and do it well, other folks will find you. From a narrow niche of IT professionals who were our early target market, we now have a wide variety of customers. We are particularly focused on service-based businesses, where people – including butlers, bakers and dog walkers – are paid for their time and expertise, and whose needs are not particularly well -met by generalized accounting software."
Freshbooks now has five million users who have collectively invoiced $8-billion this year, Mr. McDerment says. Customers are in 120 countries, 60 per cent of them in the United States. Freshbooks now has 110 employees. And Mr. McDerment has moved out of his parents' basement.
Special to The Globe and Mail
Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Small Business website.
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