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Why startups should focus on a very small market

Everybody will tell you that if you are building a company you should make sure that your market is big enough. Otherwise, even if you dominate the whole market, you might not be making enough money to build a big and successful business.

The problem is that it’s almost impossible for a new startup to compete with the big guys and conquer a significant market share of a big market.

Luckily, there’s a workaround.
In this post I will share my thoughts on how to start with a small market, dominant it and expand your success to a huge market.

When you are just starting out, no one knows you, trusts you or believes your promises. If that’s not enough, big markets have big competitors that are well known, have many customers, reputation and reliability.

How are you going to position yourself against the big guys?
Are you going to offer a cheaper price? Simpler user interface ? More features?

Usually, this will not be enough to fight the natural scepticism of the users. Not enough to make people take the risk and make an effort to try what you have to offer.

Let’s analyze an hypothetical example:

You’re building a mobile-phone and want to compete with iPhone.
The market for mobile phones is huge, so if you can even acquire a tiny part of this market, you’ll be considered a success story.

You create a cheaper mobile phone with a longer battery life and a bigger screen. But iPhone has millions of apps, it’s branded, trendy, highly publicized and much more.
What are the chances to acquire a share of that huge market? Probably very low.

Let’s consider another scenario:

You are focusing on a small market of professional athletes, and building a mobile-phone that will be tailored for their needs.
Since your market is so small you can build the very best product on earth for this specific market.

You can build a mobile phone with special sensors that are important for athletes. Add an ecosystem of apps allowing to use those sensors in order to share training results with teammates and coaches.

iPhone’s market is huge, Apple can’t focus on professional athletes, it needs to build an “one fits all” phone. This is your advantage, since hypothetically you can build a much better product for a very narrow market.

Doing this successfully will allow you to dominate that narrow market.

 

But what is the point of dominating a small market ?

So now you have a big market share of a tiny market, since the market is so small dominating it might seem useless and you might be losing money.

You need to remember that dominating a small market is only the first stage.

When Mark Zuckerberg started Facebook, the market for it was very limited- Harvard students. It wouldn’t make any sense for the vast majority of today’s Facebook users
to sign up and create a profile (and it wasn’t event possible because of the invite only policy).

Then Facebook expanded to other universities, and the rest is history.

Another great example is Elon Musk’s Tesla Motors company. Tesla started out by building luxury electric sport cars. By focusing on great innovation and technology,  Tesla dominated the market, and built it’s brand.

Later Tesla introduced the S-model, an electric Sedan, and the upcoming X-model was the cross-over. Currently over 70K Tesla vehicles were already sold and the company is growing rapidly.

Back to our mobile-phone example:

Most of the professional athletes are using your phone and since it’s perfect for their needs they are absolutely loving it. They are talking about your phone and showing it to their friends and family. Their friends might not be professional athletes, but since they occasionally jog in the park they might seriously consider trying it.

 

Expanding to the mainstream

Now you’ve built a good product, your brand name and your users love the product and tell their friends about it. Your next step will be to create another version of the product for the general public.

Now you’re no longer just starting out, you’re selling your product, your company gets bigger and you gain interest from investors and press.

Although this is an hypothetical example, I think we can agree that focusing on a small market at the beginning of the way eventually will increase your chances of building a successful company in a big market.

 

Implementing the “small market first” strategy at Kilometer.io

Kilometer stickers

When I started Kilometer I realized that the Online Analytics market is huge and that we need to focus on a small part of that huge market.

That’s why in general we’re following this strategy:

  • Focus on a small market (within the Online Analytics market)
  • Talk to users in this specific market, understanding in depth their problems and needs
  • Build a product that’s 10 times better than the existing products for the specific users included in your target market
  • Get feedback and improve until you dominate that small market
  • Expand to a broader market, repeat the previous steps, until reaching the mainstream

 

How did we choose our market?

The first step was researching our competitors, who are the users they are serving.
We divided our research into three parts:

1) Type of companies using our competitors:

  • SaaS Companies
  • Ecommerce stores
  • Content Websites

2) Size of companies using our competitors:

We found out that the size of the companies using our competitors varies from small unfounded startups to huge enterprise organizations.

3) Type of users using our competitors:

  • Analysts
  • Data mining professionals
  • Marketers
  • Product managers
  • Founders

Of course, a product that serves all of the above audiences can’t fit them all perfectly. So we tried to find out which users slip from the main focus of the big analytics companies.
It took hundreds of emails, conversation, surveys and meetings in order to focus on one narrow audience:

Founders of small SaaS startups 

Here are some of the reasons that made us believe that they are most likely to embrace our product over the existing solutions:

  • Startup founders have a huge need for analytics that will help them find out what’s going on in their business.
  • Founders usually don’t have the analytics knowledge, background and experience which is required in order to use the existing tools.
  • It’s relatively easy to reach out and connect with startup founders (compared to data mining professionals for example).
  • Startup founders are more likely to be interested in trying out early products and providing valuable feedback.

Building a 10 times better product for our specific audience

After we choose our audience, we asked ourself the following question:
What a typical SaaS founder should go through in order to understand what is going on in his startup?
And, how long will it take?
In order to describe the process I am going to use Mixpanel – a $865,000,000 worth analytics company, which is considered one of the leaders of this market.

From “I am blind!” to “I have awesome dashboards that tell me all I need to know” with Mixpanel the process is as following:

  • Sign up to Mixpanel
  • Go over the documentation, learn how to transmit events to Mixpanel
  • Research and define which KPIs and metrics are important for you to measure in your SaaS company
  • Define which events are needed in order to calculate the above metrics, focusing on naming and choosing which data to send with each event
  • Research which formulas to use in order to calculate metrics such as Life Time Value, MRR, User Churn, User Growth and more
  • Create charts and metrics based on the event-data sent to Mixpanel
  • Build dashboards that will include charts and metrics that show the big picture (custom coding required)
  • Roughly speaking the process should take around 3 working days.

Since we’re building a product for a narrow market, we can make the above tasks much easier.

  • We already know which KPIs and metrics are important for a SaaS businesses and we know how to calculate them.
  • We know which data we need the user to send us and we can supply ready made code snippets (copy & paste approach) – No thinking required
  • We can automatically create all the charts, metrics and dashboards a typical SaaS founder needs.

Finally, we just need the user to copy & paste a few lines of code to his project and that code will send to Kilometer all the information required in order to create three pre-defined dashboards:

  • User Acquisition
  • User Retention
  • Finance

The dashboards will be automatically filled with 27 metrics such as Life Time Value, MRR, User Churn, User Growth etc.
The whole integration process should take the user around 290 seconds.
Here is an example of our user acquisition dashboard:

Acquisition Dashboard Acquisition Dashboard

 

We’re using “the power of focusing on small market” in order to create a better product for saas startup founders.
Is Kilometer a better tool for analysts and data scientists?
Probably not, they need much deeper analytics capabilities.
But, we’re perfectly fine with that at this stage, as I explained in our strategic plan above.

This post was heavily inspired by the ideas shared in a book called “Zero to One” by PayPal’s founder Peter Thiel. I highly recommend this book to any entrepreneur.

What do you think, does our plan make sense to you? Join the conversation and comment below:

  • Joel I

    Good read, thanks
    That is a great audience you are targeting there (SAAS startups founders), lots of potential users for Kilometer.

    Kilometer’s dashboard looks really good – are there going to be even more metrics inside?

    • Alex Flom

      Hi Joel,

      Yes, in total Kilometer will automatically calculate 27 charts and metrics which will be divided into 3 dashboards.
      The design you see here is the acquisition dashboard.

      You are welcome to follow the progress in our community forum:
      http://kilometer.io/community/forum/

  • http://www.SnapUpRealEstate.ca David Zirnhelt

    Another great post Alex! Can you provide a little more insight into how you researched the different potential users and their likelihood to respond to your discovery conversations?

    • Alex Flom

      Hi David,
      Check out my post at our community forum, where I explain how we used survey for expanding our research:
      http://kilometer.io/community/forum/thread/online-survey/

      I am also going to write more about the process of reaching our beta list / blog followers in order to get valuable insights on their analytic needs.

  • Matthew_C9

    Totally agree with “Big markets are bad for small startups”, I believe that sooner or later more and more entrepreneurs would learn this and would focus on their more focused markets.

    • Alex Flom

      Exactly!
      Just today I was asked why Slack is so successful while “Google Hangouts” can be used as a free alternative.
      My answer was that “Google Hangouts” is one-fits-all product, while Slack is X10 better for a specific market of technical teams.

  • John Wheeler

    Your passion for business shows in your writing Alex. Enjoyed reading.

    • Alex Flom

      Thanks John!

  • http://www.raultiru.com/ Raul Tiru

    It’s better to build a brand that a few people LOVE than to build a brand that many people LIKE. This way it’s easier to scale. Great article Alex :)

    • Alex Flom

      Couldn’t agree more :-)

  • Martin

    It’s a very important point. Aiming for a niche market is a very harsh lesson that many still fail to grasp in their early days. I think we get dazzled by the potential bright future we see ahead.

  • cmorantz

    How do you decide when the time is right to go after an ancillary or adjacent market?