The art and science of product differentiation

Summary‍

“Build a differentiated product” is an oft-repeated advice for entrepreneurs. For some, it may be obvious they have a differentiated product when they hit PMF. For others, it may be a less apparent parameter. However, what is clear is that it is important in any market. More so in hot sectors such as fintech. How should founders approach differentiation? What makes a customer appreciate and stick to a product? These are questions whose answers hold value for founders.

The art and science of product differentiation‍

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You may not have heard of The Deciem Beauty Group. But if you have recently bought skincare for yourself, it is highly unlikely you haven’t heard of their most successful range of products: The Ordinary. In 2021, US-based cosmetics group Estée Lauder agreed to buy Deciem, which began as a small startup in Toronto, for $1 billion. 

Why talk about The Ordinary? For the simple reason that its success story is significant in the cluttered and very competitive cosmetics space. In a market which makes users believe that expensive is best, The Ordinary broke all the rules. It was affordable, had minimalistic packaging, and clearly labelled ingredients that let users see what they were putting on their skin. This is what differentiated them as a brand.

For SaaS-based business founders, differentiation is an oft-repeated mantra. But just like the fuzzy but all-important product-market fit (PMF), there is no tangible way to measure differentiation. For most entrepreneurs, it begins with finding a problem that is worth solving. 

If you operate in a hot market or one with customers who understand the value you offer, the way to rise is through differentiation. Anand Balaji, whose company Xflow works in the area of payments, is a fintech player in an already crowded market. Yet, it's simplifying one of the major pain points for businesses and independent professionals: international business payments. Xflow is solving for simplifying cross-border business payments by making them fast, affordable, secure and compliant. 

How did Xflow get here? How did it zero in on this solution? Was there a process, rules, or figuring things along the way? According to Anand, it was a bit of everything. And while every business is different, there is value for founders in learning from how others before them figured out the path for their journey. 
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Identify the real problem 
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Both Anand and Xflow co-founder Ashwin Bhatnagar were clear they wanted to build a product to solve for payments in India. During their time at Stripe, they realised cross-border payments were an area that had seen little disruption and most users still struggled with transparency and high costs. Before narrowing down Xflow’s offering, Anand and Ashwin spoke to a few potential customers to validate their hypothesis. These were mostly mid-market companies that had faced issues with cross-border payments.  

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“We spoke to almost a hundred different potential customers who were making payments in some way, shape or form,” - Anand. 
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From these conversations, cross-border payments emerged as a theme. However, the non-transparency in the way these payments are made caught the interest of the Xflow founders.

Anand explains it with an example that a customer gave them: If you buy a book worth Rs 100 on Amazon, you get six to seven notifications about where that book is. But if a business is expecting a $100,000 payment from a customer, they have no clue which stage of processing that money is in. There is also no intimation about when the money will reach the business.

With businesses going global from the first day of operations, cross-border payments are a huge opportunity. Some estimates peg the market to grow to $290 trillion by 2030. Yet, there are significant hurdles that individuals and businesses face while making cross-border payments. 

In India, cross-border payments take place primarily through banks. On average, banks globally charge international payments at 1.5% for corporates and as much as 6.3% for remittances. And current systems, even with digital infrastructure available, often take several days for these payments to reach their recipient. There is also often no transparency on the hidden charges involved in these transactions, leaving customers with little to no recourse.

“We figured it was a very opaque system with no guarantees,” Anand adds.‍

Ask questions 
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For founders looking to expand their cross-border business, they need to first understand the intricacies of the market. Once that is done, Anand recommends asking a few basic questions to narrow down their area of focus:
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1. What is the genesis of the problem?
2. Can we solve the problem?
3. Can we build an effective solution to this problem?
4. Is this problem big enough or is it a niche issue?
5. Is there some part of the value we create that we can capture?
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However, building a payments-based company requires a foundational infrastructure. This includes a layer of compliance, regulation, monitoring, transactions and auditing - Anand.
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Build a strong foundation
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Payments is not only a crowded space, it is also one of the most regulated industries in the world. This high entry barrier is an opportunity for a truly innovative business. To stand out in a crowded market, your offering should have elements of unique features, improved user experiences, and most importantly, it should solve a pressing pain point for users.

Anand says Xflow took time to ensure they got all the elements right, even if it meant a longer time to market. The company took 14-15 months to launch their first product, because “what Xflow was building is complex,” says Anand.  
Another area that helped the duo plug gaps and provide a solution came from building localisation capabilities in cross-border B2B payments. There are a couple of areas where localisation helped bring in differentiation:
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• Regulations: Every country has its regulations around how large sums of money are transferred into B2B cross-border payments. Building systems compliant across markets is a differentiating factor.
• Payment methods: This is a unique opportunity to build differentiation. As an example, Anand explains that nearly 40% of all B2B payments in the US happen through paper cheques. Xflow was able to accept cheques as a mode of payment for cross-border payments from the US, which added to customer delight. 
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The cross-border payments checklist list is long: there are limits on fund transfers, foreign exchange fees eat into your actual amount, high commission fees, and transfers move at a snail’s pace, taking anywhere between three to five days to reach your bank. To a merchant in business, this is a real problem that needs solving.

Running a cross-border business necessitates high-volume, high-value transactions. These, adds Anand, cannot be processed by moving bits around, or retrofitting transactions capability. “So take the time to build a strong foundation,” he recommends.

Customer feedback
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Understanding, listening to and building for your customers are the core guiding principles of a differentiated product. 

Xflow had to set up several entities in foreign markets and ensure all their systems were compliant with transaction requirements.

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“The advantage we had during this time was that, our first customers were our partners–the banks. We had to make sure they trust us enough to allow us to use their systems and licences and so on,” - Anand. 
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In the early days of business, customer feedback is important because it helps you improve and fine-tune your product. Solving their pain points fosters trust so they are willing to try out your initial builds. But as you grow, it may be wise to be a little more deliberate about the feedback that comes in.

Customers will always want another feature or capability. But over time, it is wise to focus on understanding their pain point rather than rush to create a solution. “Because if you keep going down that road of building capability, you suddenly realise you’ve incurred so much tech debt. There's no way out of it in the long run,” he explains.‍

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Find your moat

We live in the digital age where getting duplicated is a given. Once a business builds enough credibility, it is not uncommon to find competitors cropping up that compete on prices, services or products. How should businesses think of building their moat? 

Anand has two ways to look at this:

1. Keep on building newer product pieces on top
   

• One way to capitalise on the first mover advantage is to keep building newer products. 
• By the time somebody catches on the first capability you build, you would've added two more. 
• The idea is to keep growing your moat exponentially by building newer product pieces on top.
• For example, from our conversations with our customers, we heard the need to lock the FX rate for predictable inflows. This kind of capability was only available to large enterprises until now. Anand adds that Xflow prioritises launching several such products over and above the core money movement offering. 
  

2. Build for the long-term

• Have a relentless focus on quality that makes your target customer trust no one but you.
• Define your quality markers from day one. 
• Once you do that, create an environment that can support the quality markers with a series of activities.
• This moat becomes evident in the long run and builds strong companies and brands.

It is clear that differentiation, just like PMF, isn’t a one-time task. Founders need to constantly assess, reassess, and execute new layers on top of a solution they have perfected. And the best way to do it is to make it a part of the company’s core offering. It’s an investment in time and effort, but one worth making. 

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