We're (Not) #1

This story appears in the January 2001 issue of Entrepreneur. Subscribe »

In a nation where only gold medal winners are revered and nobody remembers the teams that didn't win the World Series or the Super Bowl, it's heretical to proclaim a desire to come in second or third. When legendary football coach Vince Lombardi proclaimed, "Winning isn't everything; it's the only thing," he echoed a people groomed to believe "second place" is another term for "loser." But is that smart business?

Some entrepreneurs answer with an emphatic no. "Our core strategy is to be No. 2. We see it as a real competitive advantage, and we'll never sacrifice profitability just to get market share," proclaims Tom McDonnell, CEO and president of Jackson, Mississippi-based U-Save Auto Rental of America Inc., the country's No. 2 off-airport, neighborhood car-rental business. McDonnell, 37, readily concedes that his company, with about 25,000 cars and 500 locations nationwide, comes in well behind sector leader Enterprise Rent-A-Car: "They have 60 percent of the market; we're aiming to have 25 percent," he says. But, he stresses, "for us, being No. 2 is all positive. We absolutely believe it's a key strength."

McDonnell isn't alone in trumpeting the virtues of second place. "I've competed against giants for a long time," says Carey Balzer, 40, CEO and co-founder of Vectris Communications in Austin, Texas. Balzer's company sells broadband services-mainly high-speed Internet access-and wherever he competes, his company goes up against monolithic Baby Bells. "We prefer to go into markets where a Bell already offers broadband," says Balzer, who started the company in 1999 and currently operates in 10 states.

And it's not just entrepreneurs celebrating the role of the runner-up. They're getting plenty of support from researchers. "[Being a second-tier company] can offer significant advantages," says Steven Frumkin, a professor of marketing at Philadelphia University. "You know who No. 1 is, and that knowledge can help you create a profitable niche for yourself."

Adds Bing-Sheng Teng, an assistant professor at the George Washington University School of Business in Washington, DC: "It's much less risky. You get less competitive attention, and you can operate in the shadows while No. 1 takes the heat."

Not being the leader doesn't mean being a mere shadow of the industry giant, however. "Many companies seek to be best in their niche, not to be market leader," says Chuck Matthews, director of the Small Business Institute at the University of Cincinnati's College of Business Administration. "Don't go toe-to-toe against a much more powerful rival. It's oftentimes much smarter to dominate a sector than to try to be the overall market leader."

What benefits do entrepreneurs find by playing this open field? Read on-you could discover there's big money to be made by setting out to own not a market, but a piece of it.

Benefits of Being Small

McDonnell could write a guerrilla warrior's handbook. He's sharply aware of the benefits that come his way as No. 2 to Enterprise. For instance, Enterprise employs large staffs that do nothing but hunt for locations for new rental facilities. They use complex, expensive modeling techniques to analyze each community's likely need for the service, even the exact traffic flow on certain streets at certain times of the day. For Enterprise, picking a location is a science and the result of detailed investigation. But not for McDonnell. "I tell our people to locate as close as possible to an Enterprise store-directly across the street, if possible," he says. "[Enterprise has] done a lot of good work picking a site, and we can benefit from it."

Another lesson learned: "We hunt for customers where Enterprise doesn't," says McDonnell. He claims most of Enterprise's marketing focuses on wholesale deals with auto insurers, body shops, etc. Because Enterprise is strong in those areas, McDonnell says, U-Save Auto Rental "concentrates on the individual driver, whom [Enterprise] ignores. We stress our service to the individual, and our franchisees are active in their communities. They belong to churches and clubs-and their ties bring business from their neighbors. We put little effort into B2B selling; we excel at B2C selling."

Following rich and powerful Baby Bells into markets provides manifold benefits for Balzer. "Usually, [Baby Bells] stimulate demand for broadband," says Balzer. Those telephone companies incur heavy marketing expenses to get customers excited about broadband, and a second-tier player like Vectris waltzes in afterward to pick up customers. Says Balzer, "Everybody hears horror stories about botched installations by the Bells; we stress our service angle, and it's easy for us to win customers."

Focusing on a niche also works in Vectris' favor. "We go after customers the Bells usually neglect," Balzer says. "They pursue very large corporations and consumers. Our strength is with small to midsized businesses, which fall between the cracks at most of the Bells."

Balzer's not just after smaller clients-he seeks out smaller communities with fewer competitors. "In the major markets, there might be 15 competitors selling broadband," says Balzer. "In our markets, we'll face only a few competitors."

"You need to be very focused on what you're good at," says Greg Strakosch, 38, CEO and co-founder of Needham, Massachusetts-based TechTarget.com, a network of portals for IT professionals. Strakosch fights for share against ZDNet and CNET-both gargantuan businesses-but TechTarget, which operates more than 20 specialty information sites and claims more than 500,000 registered users and 350 advertisers, is prospering because its focus is unwavering. "We serve the professionals, and not the consumer market CNET and ZDNet serve," says Strakosch. "We've identified unattended niches where we can provide service and gain market share."

TechTarget doesn't divide its resources or attention, but when it enters a niche, it aims to give the best information available. And that focus is what a runner-up needs to prosper.

Add up these lessons, and a clear strategy emerges:

• Coast on a large competitor's research wherever possible.
• Let the big boys stimulate demand, then be there to fill it.
• Sell into different markets; avoid head-to-head battles.

Sound easy? Those are starting points to survive and prosper as a runner-up, but there are more lessons to learn.

A Tea Business

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."

Competing Prices

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."

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Robert McGarvey is Entrepreneur's "Web Smarts" columnist.