Consumers prefer early entrants in new markets, but 2nd movers can still win

There’s no shortage of slogans that paint a product as “the original” in its market. The reasoning is simple: Consumers see the first firm to enter a market as the most authentic, while those that follow are perceived to be riding on their coattails.

“First movers are regarded as more authentic because consumers assume they’ve done the work to establish the market,” said Ezra W. Zuckerman Sivan, a professor of strategy and entrepreneurship at MIT Sloan. That’s why the first Mexican restaurant that opens in town is often viewed as the authentic one. “This can happen even before their business model gains acceptance, since consumers don’t suspect first firms of being free riders,” Zuckerman Sivan said.

In two recent papers, he and his co-authors — Emlyon Business School’s Jaekyung Ha, PhD ’16, and Northeastern University’s Stine Grodal — explored what makes first movers in a market seem more authentic (a phenomenon previous research has documented) and whether latecomers can overcome this perception. 

What makes a market legitimate?

The authenticity (or originality) of a first-mover firm is closely tied to legitimacy — that is, the extent to which the firm and its market have been established. 

Any new industry is likely to suffer a lack of legitimacy, Zuckerman Sivan said, since innovators are doing something that’s never been done before. Consumers need to know whether an unfamiliar product or service is safe, effective, or otherwise worth their time.

As the authors of the first paper put it, there’s “risky, costly work” associated with creating an industry — implementing technology infrastructure, setting safety standards, raising capital, building sales pipelines, and more. 

They call this “legitimation work” and establish that consumers are willing to reward the first-mover firms that get that work done by regarding them as authentic. That may be one reason why Netflix remains the top video-streaming service in the world amid ever-increasing competition, as a recent Forbes Home survey found. 

“You’re seen as reliable, viable, acceptable, and not posing a political or moral challenge,” Zuckerman Sivan said. Plus, being the pioneer in a new industry shows a commitment to a unique vision. 

The firms or individuals that follow clearly benefit from the first mover’s legitimation work. However, they may pay a price by being viewed as less authentic because they didn’t do the work themselves. 

“Inauthentic opportunists” can be chefs with menus that mimic a competitor’s, comedians with jokes that sound a lot like someone else’s, or academics with research proposals based largely on existing work. Forbes Home also found that newer streaming services, such as Disney+, Hulu, and ESPN+, are more vulnerable than Netflix to losing subscribers following price increases. 

Consumers reward legitimate business models

To determine whether second movers can close the authenticity gap, Zuckerman Sivan and his co-authors designed three studies to test people’s perception of two firms in an emerging market. 

Study participants compared fictitious firms that had developed smartphone applications to provide on-demand house calls by doctors. In the first study, the first mover entered the market in 2015, while the second emerged a year later. In the second study, the late follower entered the market in 2019, after the first mover had gone through growing pains associated with care quality and data security. The third study made no mention of the exact years the first mover and follower firm were founded, and it described how each firm addressed specific market challenges.

Study participants were asked which firm they preferred to do business with; in all cases, they favored the first mover. The preference was greater if the second mover was perceived to have copied both substantive and cosmetic features of the first mover’s offering, such as the language on its website. 

Second movers were able to close the authenticity gap significantly if they were perceived to have done legitimation work such as engaging physician relations teams or hiring engineers.

“There’s an intimate relationship between being regarded as authentic and having a business model that’s regarded as legitimate,” Zuckerman Sivan said.

Latecomers can be authentic, but it takes work

In a companion paper, Zuckerman Sivan and his co-authors flipped that relationship, describing the inauthentic first mover and the authentic latecomer. 

Inauthentic first movers could be a patent troll or a company correctly perceived as being too good to be true (think Theranos). “Consumers are skeptical of firms that are hiding their motives and look like they’re pretending to care,” Zuckerman Sivan said. “They’re skeptical when the front that a firm puts up isn’t what’s happening behind the curtains.”

Authentic latecomers — such as designers of vintage-style fashion or retro-looking new baseball stadiums — gain traction by showing a commitment to an original vision, as demonstrated in research by Carnegie Mellon professor Oliver Hahl, PhD ’15. Alternatively, a latecomer such as Dell Computer can gain authenticity via “democratizing appropriation,” whereby the second mover expands access to a product. 

Now called Dell Technologies, the company became a powerhouse by cloning the IBM PC. But it still was perceived as authentic because it revolutionized logistics to manufacture PCs more cheaply. 

The Dell example shows that second movers that put in legitimation work can gain consumers’ trust. “It’s contextual based on the industry, and in every authentic latecomer case, it has to be a credible commitment; it can’t be something that’s easily dismantled,” Zuckerman Sivan said.

In many instances, legitimation work happens behind the scenes by, say, overhauling logistics and distribution models. Dell consumers didn’t see this happening, but they benefited from lower-cost PCs that got shipped to their homes.

Legitimation can be visible, too. Pointing to the study of on-demand house-call apps, Zuckerman Sivan noted the value of forming a board of directors, hiring a chief medical officer, or lobbying on Capitol Hill to establish credibility for a fledgling market. 

While these types of moves can be a boost for public relations, they also signal that a second mover is in the market for the long haul and isn’t just trying to get rich quick.

“As long as people pay attention to what’s going on in the new industry, it is less about who came when and more about who did what,” said co-author Ha. “If you free-ride on others’ work, the traction you get may be more tenuous.” 

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