In the premium tea business, there's one leader: Republic of Tea, a company that has won sizable mind share and is sold in most Barnes & Nobles. But that doesn't faze Michael Cramer, 33, CEO and founder of Fair Lawn, New Jersey-based Adagio Teas. Adagio Teas also sells premium teas, but rather than fear Republic of Tea, Cramer hunts for what his company can do better. "We offer more teas-around 100 compared to their 40. We offer Web shopping; they don't. And we're small enough to stay close to our customers," says Cramer. "That's a real advantage: You're small enough to get to know your customers and what they want."
The lessons learned? Even when there's a clear-cut market leader, there remains plenty of room for entrepreneurial firms, particularly in channels the market leader doesn't currently dominate. "We don't see our size as a disadvantage," says Cramer. "To us, we're in a very positive position."
Facing Up to Reality
Sometimes the decision not to be No. 1 isn't voluntary but still proves richly beneficial. Case in point: When Jacob Pechenik, 28, founded Washington, DC-based TechTrader in late 1998, he wanted to dominate the business of putting business processes online. He knew the market was about to explode, and he was sure TechTrader would be head of the class. But then competitors Ariba and Commerce One rocketed into huge companies-and Pechenik faced a decision: Fight with heavily funded companies or try to find another route. "We were up against companies with marketing budgets nearing $100 million annually," says Pechenik. "There was just so much noise."
So he quickly repositioned Tech-Trader. "Our message now is, we can work alongside the big players; we offer complementary solutions." Is that a prescription for financial health? Pechenik raised $20 million in venture capital in spring 2000, when many other tech companies found VC money had dried up.
Lesson learned: "Stay flexible and open-minded," Pechenik says. "Sure, I wanted to be No. 1, but we'll do what's right for the business. And, for us now, that's complementing the leaders, not competing with them."
It's the nightmare of any entrepreneur in a market dominated by a much bigger company. The giant could lower prices to a point where it might feel some pain-but for the small company, the upshot can be a terminal illness. How do runners-up handle this issue? Simple-for the most part, they don't compete on price. "We don't want a price war," says McDonnell. "In our markets, Enterprise determines the pricing, and our pricing is usually slightly higher. People think competitors have to be cheaper, but we can't afford that. We charge a little more but aim to make it up by offering more service."
Balzer agrees: "You have to think about the risks of a price war, but we don't compete on price or focus our customers on price as the reason for going with us."
Lesson learned: Competing on price usually makes no sense for the little guys. The savvy ones know it.
Need more of a pep talk about the virtues of second place? Listen to McDonnell, who could be the poster boy for this philosophy. "Who cares about being No. 1 when profitability's good and you're growing fast?" he says. "Every industry needs a strong No. 2, and that's us. And you know what? Customers like doing business with No. 2. We're proud of our role, and we've found that many people root for the underdog. It's a great place to be."
Robert McGarvey is Entrepreneur's "Web Smarts" columnist.