How Checkout.com used a Market Follower Strategy to Become a $40B Startup
And compete directly with established PSPs in the industry.
If you have ever been on the buying side of considering buying technology in the marketplace, you have undoubtedly run into Forrester's Wave.
The Forrester Wave is a guide for buyers considering purchasing options in a technology marketplace based on their analysis and opinion. A process in which the technology companies have to decide to participate, and if they score high on the criteria, it can provide them with third-party validation, which generates more leads.
This particular report was the spark that led Checkout.com to change from any commoditized payments service provider to aspiring to become a leader among merchant processing providers.
However, as the majority of the vendors on that list, which included the likes of First Data, Vantiv, IBM, and Worldline, had years and sometimes even decades of experience and jumpstart on the 2012 established PSP, they needed to develop a strategy that allowed them to quickly surpass their competition, in the eyes of the Forrester Report.
Market Challenger or Market Follower
When companies are operating in the second, third, or even lower position in their respective industry, several companies are often on the rise and have already paved the way.
Within the payments industry, we often call those who have paved the way “legacy players”, as their early entrance into the markets has given them the advantage of being well-positioned to grow alongside many of the international companies we know today. Still, due to their size and complex organizational structure, it’s incredibly challenging for them to innovate their technology.
Because of that, companies on the rise have expanded their market share by providing services to overlooked market segments and geographies or by becoming the first to develop how payments can be accepted online and offline.
Those companies on the rise can achieve that growth in two ways.
They can either Challenge the Market Leader and existing competitors by aggressively battling them for market share in existing markets, or they can decide to Follow the Market Leader rather than challenge them.
When deciding to Challenge, companies wanting to increase their market share first must determine who they want to attack.
Attacking the market leader is a high-risk, high-reward strategy, especially if they can establish that the current leader hasn't been serving their market correctly and could be considered a "false leader."
Attack strong performers, often of the same size, rarely produce the desired objective, only leading to increased costs while competing on price. But if those performers sell obsolete or less effective products, are overpriced, and have several unsatisfied merchants, they could gain market share.
Attack contenders, mainly local or regional ones with less financial backing or profits, can be an effective strategy. This strategy has proven successful, especially in domestic markets like the UK or regional markets like Europe.
Once a Challenger has decided who to target, the way they can attack them ranges from competing on pricing, product differentiation, enhanced services, or marketing.
However, when deciding to Follow, the approach is less confrontational.
Where Market Leaders need to innovate, Market Followers can benefit from the strategy of imitating products, as they don't carry the substantial burden of having to develop new products, seeking product-market fit, marketing, and educating their indented market while still being able to be as profitable as the market leader.
This is one of the main reasons companies on the rise would prefer to follow rather than challenge the market leader.
This doesn’t mean the market leader just rolls over and allows these followers to take over their market share. Whenever this does happen, the Market Leaders, who have often had the advantage of higher and longer profits, can easily defend themselves by reducing costs, offering improved services, or continuing to innovate while others follow.
But being a follower only gets you so far; once products and features have been developed, they will need to forge a path of growth of their own but avoid getting sucked into head-to-head competition with the Market Leader.
To do that, they tend to follow these three broad strategies.
Cloning is a Strategy that mimics products and services, marketing, and all the other elements the Market Leader is known for. The only necessary change is ensuring your brand differentiates itself from the Market Leader while staying as close as possible.
Imitator still focuses on copying the elements that the Market Leader does well but diversifies by changing their company's branding, marketing, and pricing. As imitation is considered the sincerest form of flattery, most Market Leaders pay little attention to them as long as they don't operate in the same markets or go after their merchants.
Adapter, a less obvious follower strategy, takes what the Market Leader has created and tries to adapt and improve it before launching it. They often focus on different markets to avoid confrontations with the leader, but as they become successful, they become future challengers.
When preparation meets opportunity
While Checkout.com wasn't created to be a market follower, its trajectory drastically changed when Adyen, a Dutch payments service provider, became an acquirer in 2015.
Having established themselves as a leading Merchant Payments Provider, Adyen focused on Enterprise Merchants. Their addition of Acquiring Principal Memberships with MasterCard and Visa led them to choose to differentiate from the competition by developing their Processing Engine in-house versus the traditional way of having legacy providers like First Data or TSYS provide this to them.
Supported by closing a $250 Million investment from investors such as General Atlantic, Temasek, Index Ventures, and Felicis Ventures, as well as four of the five largest U.S. internet companies as their clients, including Facebook, Spotify, AirBnB, and Google, Adyen changed the market dynamic by differentiating itself from the competition by becoming and branding itself as a Full-Stack Provider.
A Full-Stack Provider combines the different components of the Payments Stack, including Gateway, Acquiring, Fraud, and Optimization, into a single platform.
As Adyen's success grew, which meant that Checkout.com was losing out on deals based not on pricing but on features, they decided to adopt a market-follower strategy, with Adyen as their exemplary market leader.
How to Imitate well
As Checkout.com was already successful through their established, high-risk merchant base, they had the revenue and profits to execute an Imitation-based Market Follower Strategy.
Adyen's competitive advantage was primarily focused on product, especially the three pillars: acquisition, full-stack integration, and data; Checkout.com had to figure out how to build this themselves.
To achieve those insights, Checkout.com focused on attracting ex-Adyen talent who were part of the Product teams in the crucial years of this development.
Bringing onboard this knowledge allowed Checkout.com to accelerate their imitation process, allowing them to develop and implement a Full-Stack integration of their Gateway, Processing Engine, Analytical Stack, and Fraud Engine in a fraction of the time Adyen did.
But not restricted by budgets or market feedback, they were also able to develop features that adapted newer technologies quicker than Adyen or other competitors were able to do, such as Modern-Cloud Analytics and Machine Learning.
Avoiding the Market Leader
Despite Checkout.com being registered in the UK, their real breakthroughs came by focusing on a market region that was underserved by Adyen and many other newer payment service Providers, namely MENA (Middle East and North Africa).
By applying the new features and services to their integrations with local Card-based Payment methods in countries such as Saudi Arabia, Egypt, Kuwait, and Oman, they were able to differentiate themselves from Adyen and start attracting International Merchants such as Netflix, Patreon, Uber, and Wise.
A Strategy that helped them attract enough attention to raise the largest European Series A ever, fuel expansion into new regions, and compete with Adyen head-on in Europe.
Conclusion
As Checkout.com has continued to grow, they have proven to be one or two steps behind Adyen and has grown to be a Merchant Service Provider that has claimed its spot as a Contender on Forrester's Wave Leader list of 2022.
But as the market has become more challenging due to global price sensitivity, the upward Enterprise ambitions from other PSPs such as Stripe, and the increased technology investments from legacy players such as J.P. Morgan and WorldPay, the question will be if their Market Follower Strategy will hold up, or that they will need to adopt to become a Challenger.
A key lesson for Payment startups who contemplate or are currently applying a similar Market Follower Strategy based on the Market Leaders in the Payments Industry.
Thank You for Reading. Feel free to Like, Comment, Share, or Post on Your Socials, as I appreciate all the feedback I can get.
Dwayne Gefferie
Interesting post. Thanks for sharing.