Can you elaborate on "understanding behavior and preferences" with some example behavior and preferences, please?
There are many bases of competitive advantage, but I don't have a clear picture of this one. The main customer-side advantage I see is that your product becomes identified with the idea/technology in the customer mind (perhaps of a tiny niche) - not that it's better than something else, just that it exists. But there's still a problem of getting to this state.
Greenspun has an even better explanation of this than I do:
The most reliable source of supranormal profits is superior knowledge of one kind of customer (Way #3). Ideally this will be the kind of customer that larger companies are overlooking. The founders of SAP, for example, were employees of IBM Germany for many years and got exposed to the accounting challenges of large manufacturers. When they quit IBM, they were among the best situated programmers in the world to build an accounting system for manufacturing companies. It is not because these guys were the world's best programmers that SAP is today bringing in $10 billion per year in revenue and has a market capitalization of $60 billion. It is because these guys were the best programmers who understood the problems of their customers.
Thanks! Domain knowledge - but applying this to a mass market feel a bit mind-bending to me.
Of course, it's still problems and knowledge, and so not qualitatively different from those in a specific niche. I guess the misleading thing is that by the time a mass market is mass, they are well-known (or appear to be).
As an example, Youtube was once small. And while the consumers were perhaps (?) easy to understand, the producers (who created the value), were a much smaller group, a more specific kind of person, using specific new tech (mobile phones) with specific problems. And it only later grew into a mass market (though I guess arguably the producers are still "one kind of customer".)