TL;DR:
- Product positioning is not mainly about differentiation, but about building a market you can dominate
- The best starting point is usually a small niche with concentrated users who desperately need your product
- Structural advantages like proprietary technology, network effects, economies of scale, and branding matter more than marketing slogans
- Great positioning compounds over time because it shapes pricing power, expansion paths, and defensibility
- Products still need to solve real customer problems, otherwise no positioning will help
Positioning matters more when markets move fast
These days, technology develops at an incredibly fast pace. Yesterday’s skills focused on repetitiveness and low leverage tend to become less needed. Companies are pressured to constantly develop themselves internally as well as externally.
Internally, organizations have to shift how they operate. As routine tasks will have to be automated, the employees will have to pivot toward high-leverage work. Along the way, they will step by step use more creative thinking and learn how to use new tools. Culturally and structurally, companies have to build the agility to adapt their operations. The ambition level in doing this will determine how well companies can cope with future changes of any kind.
Externally, companies face risks and opportunities as well. While existing products may face competition from new products, there are also opportunities to introduce new ones. This brings us to the topic of market positioning. Thinking about it through the lens of a sequential game, positioning a product correctly at the beginning is a move that works to your advantage in all following steps of the game. In this article, I look at product positioning from the perspective of Peter Thiel’s book Zero to One.
Although a questionable character, Peter Thiel has enough entrepreneurial success with PayPal and Palantir and enough very early investments in OpenAI, DeepMind, SpaceX, Airbnb, LinkedIn, Spotify, and Facebook to be worth taking seriously on the topic of building companies.
Monopoly over Competition
Thiel argues that our education system both drives and reflects our obsession with competition by teaching young people the same subjects in mostly the same ways. People who profit from this way of learning perform well on conventional measures like exams, which brings them great status and credentials. Ultimately, those people only rise to higher levels of competition until the competition is sufficiently intense to make them forget their dreams. In the end, they compete with equally smart peers for conventional careers. He argues that this thinking translates to the products people build.
One of Thiel’s best-known lines is that competition is for losers. Instead of trying to differentiate in a crowded market, he argues that you should aim to position your product so uniquely that it effectively has no competitors. The possibility of doing this obviously depends on the type of product being positioned. He distinguishes between two kinds of products: Zero to One and One to N. While One to N products aim for incremental progress by copying things that work, Zero to One products mean doing something entirely new. While One to N products lie in the realm of horizontal progress, Zero to One products mean vertical progress. In his framing, technology is the one thing that substantially drives vertical progress. He states that your product should be of type Zero to One. This way, other companies cannot yet offer what you can offer and you can own the entire market from the start, which gives you real power.
Start by dominating a small niche
You should start by positioning your product for a highly specific, small group of concentrated users who desperately need what you are building. It’s much easier to capture a big market share of a tiny market than it is to capture one in a big one. While building your dominance, you can fly under the radar of well-funded established potential future rivals. Moreover, this way you can tailor your product to a small group of customers that really love your product. Try to build a must-have product instead of a nice-to-have product. This will lead to a higher tolerance for flaws as long as the product manages to solve the core problem the customers have. As long as you are the only valid option for your customer, you have absolute pricing power. A high margin can then fund sequential expansion to adjacent, broader markets.
Aim for superiority
Your product has to convey massive, undeniable superiority. As a rule of thumb, you should aim for an order of magnitude improvement compared to its closest substitute in a critical dimension. Only if your product is truly superior does switching away from it stop making sense for customers.
Generate structural advantages
Good positioning is not only about capturing a market, but about holding it over time. For this, you should aim at positioning around some of the following moats:
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Proprietary Technology: your solution is difficult or impossible to replicate.
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Network Effects: the more people use your product, the more valuable it becomes. It must still be highly valuable to the very first users.
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Economies of Scale: the product gets cheaper to produce as you grow.
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Branding: your product transforms from a utility into an identity. You own a category so completely that your name is synonymous with it. Become a monopoly in the minds of the customers. Branding only works if it’s backed by underlying substance like great hardware.
Don’t try to be the disruptor
Thiel warns against positioning yourself as a disruptor. If you try to disrupt an existing industry, you have to fight massive incumbents. This forces you to view your company through the lens of existing firms that are much more advanced in their lifecycle. Instead of positioning against an enemy, it’s much easier to position your product as something entirely new that expands the overall pie.
Apple shows what strong positioning looks like in practice
Apple is a great example to look at if one wants to find out how those principles can be applied in practice. At the start, Apple focused on creative professionals such as designers and musicians so that it did not have to compete with Microsoft in the mainstream corporate enterprise market. Also the launch of the iPhone did not target everyone. Since the original iPhone was expensive, lacked 3G, and was exclusive to AT&T, it was strategically positioned for early adopters who were willing to trade network speed for the convenience of a single, all-in-one device for internet, music, and calls.
The multi-touch display of the 2007 iPhone was massively superior to existing devices from BlackBerry and others at the time, redefining what a mobile phone was. Because Apple designs most parts of its hardware itself, it can tailor every part of it to how it wants its products to be. This makes Apple products incredibly hard for other companies to replicate. The App Store meant that the more iPhones existed, the more attractive it became for developers to create apps, which in turn made the iPhone more valuable for users. Lastly, Apple products are seen as luxury goods and lifestyle choices that become part of the identity of their users.
These principles also matter below MAG7 scale
While those principles become most visible when looking at MAG7 (discussed in The infrastructure of AI), they can also serve as a starting point for smaller companies whose business model does not enable them to generate hundreds of billions in revenue with high margins. The principles mentioned make tangible what separates elite companies from other ones. Even applying only some of those principles in some contexts can lead to real benefits for businesses. In that sense, positioning is less a branding exercise than a sequencing decision: where you start determines what kind of company you can become. If you choose that starting point well, many of the advantages that look exceptional in hindsight become much more understandable as the logical outcome of the position you built first.