Six sources of competitive advantage for challenger brands

Why a challenger's advantage has to be defined first

By defining and demonstrating their strengths, great businesses give customers powerful reasons to believe and employees authentic reasons to belong. Unlocking that advantage is the first of the three steps in how challenger brands position to beat the market leader, and everything after it depends on getting it right.

The advantage is often hidden, a quality a brand already has but is not yet putting to work. The broader case for looking for it is made in finding your hidden advantage. This article sets out where to look.

The six sources of competitive advantage

The six sources sit on two axes. The first is whether the source is internal to the business or external, in the category around it. The second is how far the advantage is expressed beyond marketing. It runs on a scale from marketing and communications alone, at one end, to marketing plus products, services and experiences, at the other.

1. Leverage a soft asset. Internal, expressed mainly through marketing and communications.
2. Challenge category codes. External, expressed mainly through marketing and communications.
3. Deliver new combinations of value. Internal, at the middle of the scale.
4. Make the category more inclusive. External, at the middle of the scale.
5. Create a new subcategory. Internal, expressed through products, services and experiences as well as communications.
6. Attack a category pain point. External, expressed through products, services and experiences as well as communications.

Leverage a soft asset

Challengers often find early success with a functionally unique product that meets the needs of a niche segment, then find growth hard to come by because the brand is weakly relevant to future customers. The source of advantage is to reframe the core offer for a broader audience by speaking to its more intangible qualities, such as the values that informed it or the intangible benefits it delivers.

Wahed Invest is the world's first automated Islamic investment platform, with over 200,000 clients in 130 countries. To fuel its next phase of growth, it needed to appeal to a broader cross-section of Muslims, not all of whom made investment decisions based on their faith. Wahed reframed a founding principle of Islamic finance, that you can only generate wealth from work, into a message that reflected the immigrant work ethic of many of North America's immigrant communities.

Challenge category codes

Most scale-ups know above-the-line advertising can drive a new wave of customer growth, but lack the budget to fund long-term brand building and cannot afford to wait for returns. The source of advantage is to make your brand look, sound and feel like nothing else in the category, so the advertising stands out, grabs attention and demands action.

Habito, an online home buying service, faced three constraints: limited budgets, a need to drive sales now, and a limited number of consumers active in the category. It built a brand campaign that talked about the pain in the category rather than the product, brought to life in the most unconventional way. Spontaneous brand awareness doubled, customer volumes increased 3.5 times, and acquisition costs were 75% lower than when the campaign began.

Deliver new combinations of value

Challengers often get stuck in the middle, not as innovative or premium as the leaders and not as cheap as the value players. The source of advantage is a new and unexpected combination of value that draws growth from value customers trading up and premium customers trading down.

Turkish Airlines was fighting well-funded Gulf carriers to be the global transfer hub between west and east. Unable to compete in the sky, since you cannot offer showers and first-class suites on narrow-body fleets, it leveled the field with affordable fares combined with Istanbul ground experiences: free city tours, overnight stays and rapid transfers. Those experiences became a key pillar of the brand, and in 2019 Turkish Airlines overtook all of the Gulf-based carriers in annual passengers carried.

Make the category more inclusive

Many categories are dominated by large incumbents that own most of the market, and challengers struggle to break through. The source of advantage is to bring new customers into the category through lower prices, simpler services and more inclusive messaging and engagement.

In 2008, Barack Obama was an outsider candidate against the Clinton campaign for the Democratic leadership. Knowing Clinton's hold over traditional voters, the campaign set out to expand the base by inspiring people who had not engaged in politics to vote. That decision shaped everything from messaging to how the candidate spent his time, and it paid off in a record number of small donations and participation from first-time voters.

Create a new subcategory

When a single large brand commands the majority of a category, a challenger should limit comparisons with it at all costs. Subcategory creation does this by positioning the challenger as an entirely new class of offering rather than a substitute. Formula E's City Street Racing is the worked example, and the method is covered in full in creating a new subcategory.

Attack a category pain point

Mature categories have a set of core needs, in telecoms network coverage, speed and reliability, and the brands seen to deliver them win. Because those needs matter so much, incumbents can deprioritize everything else, including customer service. A challenger that cannot compete on the core needs, and senses peak customer frustration, can throw out the playbook and become the consumer champion.

In 2013, T-Mobile was the number four player without the coverage or speed to compete. Positioning itself as the Uncarrier, it delivered a run of signature moves: ending annual contracts, offering unlimited global data and texts, and paying to end other carriers' customers' contracts. T-Mobile gained customers faster than its top three competitors combined, and in eight years went from number four to acquiring its nearest rival and overtaking AT&T to become number two.

A challenger that cannot compete on a category's core needs can still win by becoming the champion of everything the incumbents neglected.

How to choose your source of competitive advantage

The right source is the one that delivers the most unique value to the customer. Finding it is a four-step process.

1. Deep dive on the 4Cs, customer, company, competition and context, to build a fact base for analysis.
2. Through interviews, surveys or a workshop, develop a long list of all your potential sources of advantage.
3. Evaluate each option on how desirable it is to the largest number of people and how different it is from your competitors.
4. Plot the options on a two-by-two matrix and choose the one that delivers the most unique value.

The matrix sorts options into four groups. Desirable and different is unique value, the one to choose. Desirable but not different is a hygiene factor. Different but not desirable is a quirky feature or benefit. Neither is discarded.

"Good strategy works by harnessing power and applying it where it will have the greatest effect." Richard Rumelt, Good Strategy, Bad Strategy

What to do once you have chosen

A source of advantage only creates value if the business delivers it. The next step is to align the organization around it, using strategic brand pillars.

Adapted from How challengers can position for growth, a Creative Business Company whitepaper.