I got asked this question at a local venture conference recently when pitching our product. I've heard this question a handful of times and I really would like to get some honest feedback on the answer(completely impossible in real life), so we have decided to turn to the internet since no one ever seems to filter their opinion here :) We also would love to hear any concrete examples of how people have addressed the issue of when other companies start copying them.
Background: We've built a software product that is targeting a mature market with a lot of big and small businesses already competing in the space. We've taken some pretty innovative ideas, processes, and built a product that has a very strong differentiator and we've received really great feedback from companies that we would be targeting. They say things like "you're going to change the industry", "this is exactly the type of product we need" that sort of thing. We're really pleased with the response, but we don't really know how to answer what happens if another already established company tries to copy us.
What we think: Honestly, another company could copy us. But I feel that way with just about any company. Obviously execution is key and already established companies have already proven that they can execute, which does scare us. However, we know that the current companies in the space would have to completely re-build a core part of their product, increase their prices, and change their current marketing message. I'm sure somebody will try to copy us, but I would like to think that by that time, we're very far ahead in the process and have already pushed the envelope of innovation beyond what they introduce. We just don't know if that's a good answer to the question.
Even if they did copy us, is there a good way to protect the product now? We're a startup so we can't afford patents/etc...
Thank you for your help. It is much appreciated.
The answer is, unfortunately for you, short: NO The only protection is to stay better than the competition... That is the game. And as you decided to start your business in a mature market (and you've know it) you have to play with no legal protection.
Of course I speak about the situation where, as you explain, your added value is mainly based on operational excellence (and not on some major innovative solution).
There are many approaches. Google will help (look for 'sustainable competitive advantage'), but here are a few:
Brand Built up with fanatical customer service, loads of advertising, and an awesome product that everyone loves. This takes time and a lot of money to duplicate, and once you occupy the 'highest quality X in the world' space in people's heads, you are hard to dislodge e.g. Diamonds were never considered that different from other gems until a wildly successful marketing campaign by De Beers. Many tech products that were objectively better than the competition have failed due to their marketing being less powerful e.g. VHS/Betamax.
Switching costs Make it hard/undesirable for customers to leave. This may sound bad, but it doesn't necessarily have to be perceived as bad by the customers. Facebook has very high switching costs as you have to re-upload all your content to whatever other site you might want to use. You could look at reputation e.g. the points and badges on this site as a similar tactic. QWERTY keyboards are an enduring feature of our lives because of the hassle of retraining yourself and everyone else to type.
Network effect This sort of overlaps with switching costs a bit. The more people you are connected to through the service, the more useful it is. Once this reaches critical mass, it becomes your key differentiator e.g. Twitter is valuable because everyone is using it. A competitor is not attractive because it doesn't have the people to connect with that Twitter does. Same goes for Google plus, telephones, Facebook, etc.
It is a very common question and the reason it is asked so often is not because they want to hear you say they can't copy you but to confirm that you know they will copy you and how you plan to combat that. They want to know that you have actually thought this through strategically.
So you need to start with charting your industry on three scales - product performance, operations and customer intimacy (like customer service). Plot these three on x,y and z axis on a scale of 1 to 10. In order to understand what your competitors might and can do, you have to know where your competitors stand on this scale and where do customers expectations fall on the scale. So for example if customer expectations are a 6 for product performance, 8 on operations (translated to customers being price sensitive) and 8 on customer service expectations but your competitors are 8 on product performance, 9 on operations and say 4 on customer intimacy. Then you know you need to be the best at customer service to stand out and good at product feature (atleast 6) and good at operations to stay in the market. In this scenario, it can be hard for your competitors to catch up with you quickly because changing customer service culture can take time and also will require your competitors to build trust. It is an expensive and time consuming branding exercise.
So to start with you need to figure where you, your competitors in the industry and your customers expectations are with respect to each other in order to understand how your competitors will react to you when you start gaining market share.
You can protect ideas by the way you implement them, like Apple protected several interface designs. You should talk with your local patent office on how to do that.