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

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

 

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.

Posted by Dharmesh Shah on Mon, Sep 24, 2007

COMMENTS

I've heard this referred to as "Chinese maths." http://www.businesspundit.com/50226711/please_stop_with_your_chinese_math.php

posted on Monday, September 24, 2007 at 5:11 AM by Scott Kevill


Great post. Reminds me of the old but wise advice to startups to 'work out who your first five customers will be'. As you say, without the discipline of identifying at least a few specific customers, there is a real risk of falling into a complacent 'build it and they will come' mentality. Since customers are acquired one by one, not as percentages of a market, I think it is far better to talk in absolute numbers: i.e. how to get your first 100 customers, then the next 1000, then the next 10,000, etc. This frames the challenge in a way that leads more directly to actions you should take to get there.

posted on Monday, September 24, 2007 at 6:52 AM by Xavier Russo


"A market of one is dangerous -- as there's a high chance that you fall into the custom solutions trap." I think it depends on how one negotiates. In case of an early-stage software product firm I advised, this was a real possibility. But I helped them negotiate with a large utilities MNC to develop a product plan which helped my client develop both their IP and their domain knowledge to expand their markets in ways they did not think possible earlier. I think clients of early stage firms are like dogs. They can smell your fear and desperation. It is a tricky skill not to show that you really need them when you do.

posted on Monday, September 24, 2007 at 7:59 AM by Shefaly


Your perspective is spot on. I've seen this dynamic play out many, many times.

posted on Monday, September 24, 2007 at 2:32 PM by Dave Lindbeck


Well said, Dharmesh. I see this all the time in the search marketing industry. Try to bite off too big a chunk of the market as a startup and you'll find yourself desperate for exposure with another thousand similar companies. If possible, targeting a smaller market by geographic location tends to work very well. By developing a small but strong client base locally, one can form relationships and a good reputation to build on as the company grows.

posted on Tuesday, September 25, 2007 at 5:40 PM by John Metzler


I agree, based on my own experience with my niche website http://www.aMillionPlaces.com which is directed at a relatively small market of people or online companies who want to learn to use Craigslist to sell or build website traffic. I was able to develop unique demographic data about each of the 289 US Craigslist website areas using GIS, and this information is useful to a small number of people. I have resisted going for the "millions" of general users, mainly because there is no way to consistently attract those types. The niche market I can get using adwords targeted more tightly. I would recommend that people starting out read and think about your article.

posted on Sunday, September 30, 2007 at 7:18 AM by Jamie Robe


Each market starts with the first customer and moves on to the second etc...

posted on Sunday, September 30, 2007 at 2:48 PM by Tilly Ambrose


Right On! What a fantastic article. Another of my favorite questions to ask is "Are you really capable of service 'millions' of customers?" Of course not. Not only that, but most entrepreneurs don't really WANT all those customers. It's amazing how much pressure and stress we eliminate when we focus on just the most profitable few.

posted on Wednesday, October 03, 2007 at 10:42 AM by Ivana Taylor


one word: mobile not that there aren't opportunities - but people see billions of devices and thinks exactly those thoughts.

posted on Thursday, October 04, 2007 at 2:25 AM by sean


Hi Dharmesh,

Once again, an excellent article. I have been a reader of your blog for a long time now and have learnt a lot. It's almost like you sharing thoughts with a close friend of yours.

This is the first time I am commenting here since I am in the middle of building a startup of my own and had a lot of confusion addressing the "go for millions" syndrome. I thought it would be great to share my thoughts with you on this.

1. It's always the best thing to plan your marketing strategy well in advance. By that I'm not refering to coming up with "X no. of customers in Y no. of days" thing but more on the fact that going for a small niche and later on expanding can eliminate a lot of risks, since you don't have to worry about reaching that million mark as long as you are breaking even and are growing strategically. And also, what counts is "how" you market, as it's much more important than "what" you are marketing.

2. You can change your competition by changing your target market. I strongly believe this principle can help any startup get the right start and pretty soon might give competition to the big guys as well. For example, by launching an all purpose online bookstore you are directly competing with Amazon.com ... You are targeting the same market as them. However, if you launch an online bookstore which focuses on selling books dealing only in "Gardening", your competition suddenly changes and you find yourself in a much more better position to reach your goals. People interested to buy books on "Gardening" might look at Amazon as an option but they will look at you as an authority. Once you have gained a loyal customer base, you can expand into other areas one at a time.

3. We all know how important execution is. It is what makes an idea work. However, many view the execution part as an important step only when they are launching new. My point is, if you want to keep growing and expanding, you need to start small and execute well each and every time you even add a simple feature. Whenever you move on to a bigger market, it's an execution in itself. Even companies like Google and Microsoft have to execute carefully whenever they are starting out a new service or a product. So the secret to capturing bigger markets is not to execute once but to do it again and again, and each time treat it as a first time.

I would love to have your views on my thoughts, which are more based on the marketing side of things rather than technical :-)

posted on Sunday, October 07, 2007 at 1:30 AM by Mustafa Khundmiri


I agree with you Dharmesh. A real market of a Few hundred is always better than a mythical market of millions. What I feel is that one should try to make a product which can be used by hundreds and then try to scale the product, price and promotion strategies. This bottom up approach always result in a more mature product and larger market penetration.

posted on Friday, October 12, 2007 at 9:26 AM by Sumit


I read your article twice! This is exactly the same dilemma most SaaS startups are having these days. Going niche and focused is the way to go. Good Stuff...

posted on Wednesday, October 24, 2007 at 4:42 AM by Sahil Parikh


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