Startups: Why A Real Market Of A Few Is Better Than A Mythical Market of Millions

September 24, 2007

I talk to entrepreneurs all the time that are very excited about their idea because "…the market opportunity consists of millions of potential customers!". This line of thinking then eventually leads to reasoning that goes something like this:

"Since the market consists of millions of potential buyers, all I need is to capture 1% of the market and my startup will be a huge success!".

I think too many entrepreneurs fall into this "market of millions" trap. Although there's nothing wrong with eventually having a big market opportunity (in fact, I encourage it, and investors require it). I think success is often much more correlated with a startup's ability to identify (and sell) individual customers as early in the process as possible than waiting to serve a much bigger market

Also, on the "1% of a big market" argument, the probability of you capturing a 1% share of a mega-market is near zero. Either you'll get no portion of the market, or it'll be more significant. It's rare for startups to get 1% (or some other small percentage) of a massive market.

Why A Real Market of A Few Is Better Than A Mythical Market of Millions

1. If you build a product that serves the needs of a few *real* customers, it's unlikely your opportunity will be limited to just these few. You'll likely find a way to extrapolate and address larger markets later.

2. By focusing in on a smaller market of real potential customers, you'll actually stand a chance of selling them something. If you're going after a market of millions, it's easy to fall into the complacent thinking of "I'm investing for the long-term and building something that will appeal to the masses later…". I think your chances are much better of you have something to sell to a few people *today* than a hypothetical product that will theoreticaly appeal to millions later.

3. The cost of acquiring customers seems to be proportional to the broadness of the market you're going after. This should not be too surprising. It's more expensive to reach a broad market with a meaningful message that will sell them than a small, contained market. The smaller market is easier to get data on, easier to address, easier to convince and easier to delight (hence resulting in referral business).

Now, here's the one big risk to going after the smaller, more contained market of a few: If you're not careful, you can fall into the "custom solutions" trap. This is where you are so focused on meeting the needs of the few that you have a hard-time making the eventual leap to the market of millions. This is one of the reasons why I refer to the "market of a few" rather than the "market of one". A market of one is dangerous -- as there's a high chance that you fall into the custom solutions trap. But, as soon as you try and serve the needs of two or more real customers, your odds of falling into this trap go down. The trick is finding the right balance: Enough of a market so you build something that is relevant for many, but not so broad that the market becomes hypothetical.

Topics: strategy startups

Written by Dharmesh Shah

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