Go narrow to be sharp.
Business planning is a class taught at most business schools. The usual requirement for a student's completion is writing a competent business plan given some underlying data. There is a story that at least one year, the professor assigned everyone the same town and the same topic: a bakery. Everyone got the same information about the city: demographics, polled preferences, sales at other establishments.
Some people preferred their cakes moist with lots of fudge. Some liked them light and airy - "cakey."Most people were somewhere in the middle.
The professors had a plan this particular year. Rather than evaluate each document in isolation, they modeled a market in which they put everyone's business plan into effect in the municipality. What would happen if a bunch of business school students all founded bakeries?
As one might expect, most students wrote a business plan looking for the most significant market share. Most people don't like their cakes too moist or too dry, so they focused their positioning on being right where the average customer wanted their cakes.
These simulated businesses competed fiercely for the median customer. Each startup bakery had to undercut the others to win that business since they were all vying for the same clientele. When one has a lot of competing supply, prices come down, and profit gets squeezed. These "correct" business plans produced no returns for investors!
A couple of students went a different way. One made a bakery focusing on being the fudgiest cake in town. They would win loyalty from the people who liked those hyper-moist cakes. Another focused on the cakey-est cakes. Light and airy. These business plans each targeted a "tail" of the distribution - a smaller number of customers.
But because that meaty middle consumed the attention of their "smart" classmates, they had their respective segments to themselves. They could serve their market well and avoid most competition. They had a loyal clientele paying a premium while not having to fight for supply as much either. These niche businesses generated profits and returned multiples to their investors.
The smart move was to read the data and maximize returns in the market. The dumb mistake was not anticipating that other people would see the same information and act on it.
Most of the time, people have the same information that you do. The question is can you act on it in a way that lets you put strength against weakness. In the case of our business school students, they put their high-end business school training against a market with limited competition to serve it exceptionally. They gained a loyal and recurring customer base. But to do this, they sacrificed the opportunity to get to the "big" market.
I talk to lots of businesses that are targeting the meaty middle- even bootstrappers. Sometimes, this results from a straightforward reading of the market research, like my Baker-scholar wannabes in the story. Even more often, this is a result of focusing on product building rather than market interrogation. When one talks more to the market, one gets to see where the customer appetite is - and how that appetite is being satisfied today.
Imagine if the business school students could talk to the market. They would hear about how the meaty middle, who like their cakes not too fudgy and not too cakey, have multiple ways to satisfy their quotidian cravings. But those who want something particular are dissatisfied. Those people are not representative of the broader market, but their dissatisfaction is more profound.
In the Mom Test, Rob Fitzpatrick advises that the key to customer interviews is to ask about their wants and alternative solutions. Do not talk about your proposed product. Everyone will say your project is lovely. But what problem are they trying to solve? And how can you solve it for them?
Many entrepreneurs react to this with, "but if we solve deeply here, we won't be able to tap the rest of the market." The objection is that the product they build needs to be broadly applicable. Maybe someday. But this puts the cart before the horse.
I think of this kind of underserved niche market as protected. It is too small to be served well by incumbents. The segment has unique needs that make them profoundly dissatisfied with their alternatives. The entrepreneur has some affinity or inside track with this segment. The founder should cross this market advantage with technical knowledge or supply advantage. It is much easier to serve a protected market deeply and then expand. And investing squarely in the niche market is the right first move.
Investing with an eye on the rest of the market is how we get complexity or fight against the features which the protected market needs. For example, I recently met with a company that is building a product they want to make useful for everyone and is hesitant to start building integrations for fear that this will significantly drive up their costs - can't the customer do the integrations themselves?
Consider if they built integrations useful for one segment that indicates a willingness to buy. Then the experience for that segment could be off-the-charts. Make the cakes super-fudgy. You will not win the business of the other market cohorts who do not like all that fudge. But the target segment will be exceptionally served, and now there is a protected story for sustained competitive advantage.
Expanding into the rest of the market from a protected niche is much more likely to be successful. And if it fails, one has a business to fall back on. We should expect that expansion into other segments will require new engineering. And that is cheap! The value of the company is in the combination of technical and market mastery. The codebase is a derivative of that knowledge. Build new products later. The tooling keeps getting better - I have written elsewhere about the virtues of waiting to build. Delayed development efforts for expansion will be cheaper, so there is no need to bake it in early.
Find your segment and serve it. Whether fudgy cakes or cakey cakes, do what the next company cannot for the customer willing to pay. That is the essence of strategic strength.
Photo by Jeanie de Klerk on Unsplash