As an analyst for a large angel investing syndicate, I get to see a lot of startup business models. Over the years, I’ve built up a list of phrases I don’t like to see in a founder’s pitch. One of the more consistent phrases that are costing founders an opportunity with investors is laziness around defining their target market.
The classic misstatement is, “We only need 1% market share to be successful.”
Founders like that assumption because it sounds like it should be easy to win 1% of the market.
Investors hate that assumption because it is 1) lazy and 2) shows the founder hasn’t bothered projecting how much of the market they can legitimately win. Not to mention, there could be large incumbents in the marketplace that could make it very difficult and expensive to win a 1% market share. For example, imagine trying to win a 1% market share away from Apple’s iPhone.
How to pick a target market
Targeting “anyone” or “everybody” within a market is another expensive mistake you want to avoid. Instead, startups should focus their resources on winning market share in a sub-niche of that market.
Here are a few things you should consider:
- Find a sub-niche with the market that still has a reasonable TAM (Total Addressable Market). Virtually every market has enough TAM to be worth attacking. So, don’t focus your pitch to investors on the top of the market. For example, don’t point to the trillion-dollar EV market as your target market. Instead, as an example, you might say that your startup is addressing the EV re-charging market in rural areas because there is less competition.
- Look for opportunities where market share is fragmented across many competitors, and no one competitor has been able to take a significant lead. Fragmented markets often signal that the solutions with the market are commoditized.
- Consider a niche where you are confident you can delight customers. One way to win market share is to target markets where you already have raving fans. Take a look at your target user persona. In my article a few weeks ago on user personas, I called mine Lee. If my business has done a good job at delighting Lee as a customer, I can likely win other Lees over in the market. It’s also likely that my competitors are not delighting the Lees out there.
When to expand beyond your original target market
You should be focusing on one target market at a time before you try and expand into other niches within that market. Otherwise, by attacking too many markets at a time, you spread your resources thin.
However, there does eventually come a time when it makes sense to expand into other markets.
When determining if the time is right, consider these factors:
- All markets go through the same lifecycle. They include the introductory, growth, maturity, and decline phases. Most startups with high-growth goals target markets that are in the introductory or growth phases. Still, there can be opportunities to win market share and create a profitable business in mature markets. Where you want to consider new markets is when your current one is declining.
- Another time to consider expanding into a new market is when you maxed out your market share in your current market. This can be a tough call. It could be that your market share is maxed out for reasons that have more to do with your model than the market itself or your competitors. However, if you see your market share stabilizing for a long period of time, that could be a sign that you are capped out.
- Sometimes companies have grown so much in terms of their processes that they are able to serve their target market largely on autopilot. They have product market fit, their sales team is dialed in, and the support teams are providing quality services. You need to be careful not to get distracted and start losing market share. But, if you find yourself at such a point, it could be worth exploring new markets.
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