How to pick a market that will make you money

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: _Essay 📝, Entrepreneurship

As a founder, picking your market is the most important decision you’ll make. It will impact every aspect of your journey, from product development to sales, and ultimately determine how profitable you’ll be. A good market compensates for poor execution on your part, while even the best execution will struggle with a bad one.

So what goes into a good market?

The key attributes are:

Your customers have money to spend.

If you ever want to make money from your product, you’ll need to charge your customers for it. If they don’t have money to spend then it’s a non-starter. You’ll have to grind much harder doing direct sales, just to find the few people that have money to buy.

A corollary is that they are not too price sensitive. For SaaS, making the initial sale is far from the finish line. You may well need to alter pricing in the future, and it will make everything easier to have understanding customers instead of an angry mob because you increased the price by $1.

An often overlooked benefit is that customers that meet these requirements are less likely to churn.

The general conclusion is to avoid B2C (Business-to-Consumer) products. Businesses have much more money to spend than consumers and are less price sensitive. This isn’t to say you can’t make B2C work, but know that you’re now playing on “hard mode”.

You are solving their #1 problem.

It’s important to solve a visceral source of pain.

A common mistake is solving a problem that isn’t actually a problem. Just because you thought of something that theoretically sounds like a problem doesn’t mean it will make for a good business.

Pay attention to the language they use when describing it. Is it a genuine “pain” point? Or is it merely “inconvenient” or “annoying”?

This isn’t something you can figure out by yourself. You must do customer interviews to accurately gauge this.

You directly enable them to make more money.

This feels intuitive but is often overlooked. In what ways does your product save them money (usually via time) in doing so, enable them to make more money?

If you can nail this, it’s a huge advantage in that it takes a tremendous load off your sales and marketing skill. You won’t need to be the smoothest salesman or the more persuasive copywriter if they see that it’s a no-brainer to buy your product. This is as close as you’ll get to a product that sells itself.

You are creating something they already understand.

New founders underestimate how difficult it is to merely explain their product to other people.

If you can identify a product that your market already understands well, it streamlines the sales process and similarly takes the load off.

How do you do this? You pick a product that already exists and that they already pay for. And you make it way better for their specific use case. You niche down.

Something that leads a lot of founders astray is the misconception that they need to think of something “novel” and “exciting” for it to be successful. That they need to conduct novel research or create some secretive proprietary intellectual property.

This may be true if you have rocket-to-the-moon goals, but if you’re just trying to make something that pays your rent, you may well be better suited for a “boring, but profitable” product.

You are not in a cut-throat market.

You’ll likely have competitors, especially if you go the “boring, but profitable” route. But if you choose your market well, this doesn’t have to be a big problem.

First, choose a market that is sufficiently large. This decreases the need for cut-throat competition and makes it easier to find enough customers to reach your revenue goals. Everyone can have a slice of the pie.

But don’t choose a market that’s too large. This opens you up to competition from larger companies with more resources than you. If your market is small enough, it won’t be worth it for those companies to directly compete, as there’s not enough revenue potential. While they still may compete indirectly (i.e. with a broader scoped product) you’ll always be able to create an advantage by specializing for your niche who you serve better than anyone.

Lastly, choose a market that is not winner-takes-all. In a winner-takes-all market, a prospective customer using a competitor’s product actively decreases the value of yours. An example is social media— Facebook and Twitter depend on having as many people on their platforms as possible, and derive their value from their near-ubiquity.

The CRM space, on the other hand, is not a winner-take-all market. While it may seem crowded, a business using CRM A does not make CRM B any less valuable for CRM B’s customers. This creates a friendlier environment without the need for cut-throat growth tactics. This was a key reason for Tyler King’s success with Less Annoying CRM.

Conclusion

It’s worth thinking deeply about your market before diving into product development. It is the single most important decision you’ll make when starting out, and has implications on every aspect of your business going forward, including whether and how fast you reach profitability.

References

Any thoughts?