I hear it all the time, from coffee shops and co-working spaces to the office hallways of the world’s largest companies. The excitement, anxiety, even mythology of startup brand and business model “disruption.”
Because it’s happening all around us and it’s inevitable, right? Pick an industry, any industry, and surely it’s about to be unbundled and upended by startups X, Y, and Z.
It’s a powerful narrative, one that’s inspired a lot of pitch decks and high-priced strategy presentations. I’ve certainly made slides myself showing variations of this classic, alarming-to-everyone-in-the-enterprise trend:
But, as more and more new research suggests, it also might be kind of bullshit.
Or rather, to TL;DR it: big brands don’t get disrupted by startups, they get disrupted by the few startups that become big brands themselves (faster than an incumbent can buy them).
Yes, for all the speed, capital efficiency, product innovation, and customer experience design startups bring to the table, a big chunk of data says it doesn’t matter until the startup gets enough market share to achieve growth and customer loyalty momentum independent of its direct response acquisition investments. To put it more concretely, Unilever (or P&G) isn’t getting disrupted by Dollar Shave Club, Sir Kensington’s or the dozens of other aspiring CPG startups out there hustling to win shelf-space; it’s waiting for them to get traction, then acquiring them. The competitor executives at Unilever likely are losing sleep over is Amazon, which 55% of US consumers now use as their default search engine when looking for products online (not Google).
But, importantly, Amazon’s not a startup — it employs 300,000+ people and is one of the most valuable and brand-recognizable companies in the world. While several of the companies topping Cohn & Wolfe’s most authentic and trusted brands list were startups 15-20 years ago, today they’re more likely to be disrupting their peers than sweating YC’s next accelerator class.
From an awareness, customer acquisition, and customer retention standpoint, size and market share matter, and aren’t as easily disrupted as Valley evangelists might make you think.
BS Myth #1 – Brand Loyalty is Declining and Informed Consumers are Switching to Startups
I hear this one a lot, particularly in investor presentations in spaces like hospitality, travel, and fintech.
“Incumbent Brand X has a terrible customer experience. Startup Brand Y is mobile-first and designed for the modern consumer.”
You might think X is in trouble, and you could well be right, but not on the time frame you imagine.
Take Betterment, a money management startup that automates investments using algorithms. It’s a terrific company with a great product and [likely] a bright future.
Today, Betterment has roughly $10 billion dollars in assets under management (AUM).
Know how much Fidelity has? $2.1 trillion. Betterment was founded in 2008, has been on a growth tear, and still isn’t even 1% of the size of Fidelity. Even if Betterment consistently doubles AUMs year-over-year they’re still a fraction of Fidelity (or Schwab or Ameritrade)’s size in 2020. At that point they likely succeeded in pushing the investment industry to more AI-driven management and lower management fees, both good things for consumers, but I’m not sure that counts as disruption.
If I was leading marketing at Betterment and trying to chart this growth course, I’d be investing a lot in brand reach and awareness channels like TV, social, and out-of-home right now. Because my bet is once you get outside major, tech-informed cities, the average US consumer probably still hasn’t heard of them, let alone been educated to understand what’s distinct about their offering and why it’s worth the switch. Here, even a rarified company that’s well-positioned to be a long-term winner in their market has a long, uphill battle to steal market share from the leaders.
This same pattern exists in almost every major segment of the US economy – think Oscar versus the broader health insurance market, Blue Bottle Coffee versus Starbucks, or Casper versus how many more people just buy their mattress at IKEA or their local furniture store.
In fact, recently Ehrenberg-Bass Institute of Marketing Science researchers examined 26 fast-moving consumer-goods categories in the US and UK over 6-13 years (John Dawes et al, 2015). Despite new startup launches into virtually every segment, no general decline in brand loyalty by shoppers was observed. The findings confirm what Ehrenberg-Bass already found in previous studies: virtually all brands, at scale, generate the majority of their revenue from infrequent purchasers with low loyalty, consumers who typically shop around between the brands with the largest market share in that product category. If your consumer product’s at risk of being disrupted by a competitor, it’s a lot more likely to come from Amazon Basics than the direct competitor who just raised its Series A.
BS Myth #2 – Young Consumers are Rejecting Big Brands for Startups
While it’s been observed (or, at least, claimed) that younger consumers (I’ll refrain from using the “M” word) are rejecting big corporations and seeking out more sustainable, purpose-driven or “hipster” and customer-centric startups, sales data doesn’t validate this one either.
While there has been a recent trend for brands to message a more mission-driven, socially responsible identity across their advertising and product lines (a trend I’ve not only written on but worked on myself), large brands are doing it just as much – and, from a media perspective, far more – than startups are. Think about Anheuser-Busch, it’s 2017 Super Bowl commercial, and the branded water it recently sent hurricane victims.
Or Dove’s #RealBeauty campaign. McCann’s “Fearless Girl” statue for State Street. Boost Mobile’s “Boost Your Voice.”
I’ll refrain from saying anything about brand authenticity or overall corporate social responsibility here, but from a brand perspective it’s easy to don the mantle of purpose (and unfortunately all too easy to trivialize it, as we recently saw from Pepsi).
But for startups, brand purpose alone isn’t enough to acquire customers at scale from big brand competitors. For example, when store sales data for green and environmentally-friendly consumer products were analyzed by researchers, the green products were actually purchased at a 36% lower rate than traditional non-eco competitive products. But, importantly, when customers were asked about their purchase choices, the #1 reason why they didn’t buy the green products was because they weren’t familiar with it. Didn’t know the brand, didn’t trust it. And trying to build awareness and trust for an unknown brand is a fundamental marketing challenge every startup has to overcome to grow.
In another study looking at the top 5 consumer brands in fourteen categories, brand and market share was compared between younger consumers (aged 18-24) versus 25+. Results showed minimal difference between the two groups. In fact, in 40% of category and year analysis, leading (top 5) brands actually had a higher market share among younger consumers than older consumers. At scale, people buy what they know and trust – a direct function of brand awareness and product distribution reach.
It might not be as sexy, but any startup pursuing true brand growth needs to acquire customers across all persona segments and demographic ranges, not just cool-looking college grads in Austin or Brooklyn.
BS Myth #3 – Startup Brand Growth and Industry Disruption is Easier Because of Digital
This is a genuinely nuanced and complex subject I could write a whole piece on in and of itself. But, in shorter treatment, it’s another place where a lot of bad marketing myths and practices get spread around web forums and WeWork shared desks.
“We’re good at Instagram and have a responsive e-commerce site. [Big Market Leader] doesn’t so we’re going to win.”
This type thinking is sadly all too common, and exposes a few fundamental misconceptions about how startups grow and compete successfully.
The first is over-valuing earned media. While most startups can still get reasonably good engagement from their existing followings on email and some social platforms, the entire Facebook ecosystem (Instagram included, sorry, I know) is going to steadily yield diminishing returns. Moreover, empirically, 99 out of 100 startup’s organic audience is simply too small to drive the necessary rate of brand growth without paid investment via ads and/or influencer placements. Unless you’re creating BuzzFeed or HomePolish-caliber content, your existing followers can’t share and refer you enough to get the reach you need.
The second is being channel-driven but not channel and creative and data-driven at the same time. While there are a lot of bad ads out in the world (one could argue almost any public content a brand produces that isn’t helpful to consumers to be bad or, at best, culturally irrelevant), most startups lack resources and budgets for high-quality video production, product photography, and professional campaign creative, and are forced to just hack it through growth experiments and more productized acquisition efforts, something I’ve certainly done plenty of in my career.
And while many startups are better architected for data collection, circulation and insight-generation (yet another topic that’s well-worth writing a separate, dedicated piece), because fundamentally they haven’t been in business long and don’t have a lot of customers/users, they just don’t have much data in absolute terms. From a marketing and growth perspective, that means a smaller contact database for remarketing or building custom audiences, less capacity for message personalization, and a whole host of other competitive disadvantages against big companies with mature, modern data operations like Amazon and AirBnB.
So while there are some very good competitive qualities of being a digitally-native company, like the platform and cost efficiencies of being able to run your company infrastructure on AWS, being digital-first is only an advantage to the extent you wield it correctly. And remember: most of the digital marketing you can do a big brand has the potential to do a lot bigger, like outspend you all over Facebook and Google. There’s also a growing risk that net-neutrality changes will give big corporations a genuine advantage over startups by segmenting the internet into fast and slow lanes.
So does the ‘startup disrupting big brands’ narrative hold up?
It depends, and often it’s plainly BS. What’s clear is the Amazon, Google, Facebook moment in time window is gone with Internet 2.0, and today’s internet playing field doesn’t favor the small. Get big fast, get big enough to get acquired, or shoot for a steady, stable lifestyle business. The other scenarios for your startup could be challenging.
There are also broader questions ‘disruption’ raises. How do you separate competitive innovation from the overall economic health and growth trend of an industry? Or, when we see startups like Theranos and Zenefits cut corners with important compliance and regulatory obligations in the name of speed and disruption, is it ethical to say “that’s just the ‘move fast and break things’ ethos you need to compete with the big players?” What are the social consequences of disruption? As Harvard Professor Jill Lepore reminds us, “when the financial-services industry disruptively innovated, it led to a global financial crisis.”
At the end of the day, I’m a big believer in innovation and creative ingenuity. There will always be openings for the right team with the right approach in the right space (decentralized Internet 3.0, for example). But when it comes to building a lasting brand it hasn’t gotten any easier to go from 0 to 1. Additionally, it’s no longer sufficient for aspiring industry-shapers to simply point at what they want to disrupt and go charge after it. They should have equally good answers for why and how they’re going to do it.
