Less is More: How to Make Funding Go Further with Market Focus
“As market share increases, a business is likely to have a higher profit margin, a decline in marketing costs as a percentage of sales, higher quality, and higher priced products.” - Harvard Business Review, 1975
In February 2019, I presented at SaaStr a truth that the business world has already known for decades (if not longer): that companies with high market share relative to their competitors benefit from increased operating efficiency and market power. The trick is recognizing that those advantages don’t apply only to the titans that dominate multi-billion dollar industries. A small company can “cheat” scale by defining its target market narrowly enough that it is the leader. In doing so, small companies can position themselves to grow more efficiently with a superior product, a more concentrated sales and marketing strategy, and more streamlined operations.
More Compelling Product
I believe product focus is critical for small and growing companies because, almost invariably, they’re going up against larger, better-resourced rivals. When you don’t have the resources to be everything to everyone, having a narrower product strategy helps ensure that your product is fantastic for someone.
Picking a smaller set of target customers allows you to zero in on your segment’s needs, and to outperform larger competitors in two important ways. You can offer the right features for a given customer set to beat out a gappy generalist product (or fill a totally unmet need). You can also offer intuitive simplicity as an alternative to a product that has all the bells and whistles, but is painfully complex or expensive.
Lower Customers Acquisition Costs
Marketing and selling a product, particularly if you’re evangelizing a new space, is an uphill battle. Geoffrey Moore’s “Crossing the Chasm” advocates that new technology products start with a focused beachhead market for exactly this reason. Focusing on a smaller target market limits the number of people you need to inform and convince. Focus permits you to spread the message less widely, and speeds the time it takes to go from an unknown to a no-brainer.
Once your product becomes an accepted standard with name recognition and relevant reference customers, selling it gets easier and less expensive. Rather than trying to enter a broad market all at once, aim to dominate one sub-section first. Define a group of customers that read the same publications, attend the same conferences, and most importantly, talk to each other.
In making operations more efficient, the name of the game is spreading fixed costs over more units so that the cost per unit is lower. For a manufacturing company, it’s easy to conceptualize how this would work; if you can use the same investment in machinery to serve more customers, or make the line run faster through standardization, your cost per unit will fall. The same fundamentals apply in a tech company. If your customers all use the same complement of software tools, you can re-use a few standard integrations instead of building many custom ones. If support representatives encounter the same types of needs, they can gain efficiency through pattern recognition or automation. Doing the same thing over and over typically costs less, so to the extent possible, do more of the same thing.
Expanding the Target
It’s important to note that there’s a difference between total addressable market (TAM) and target market. I find it’s a very good idea to build a business around a solution that has a large TAM, but it’s an expensive proposition to try to take on that big market all at once. Choosing smaller target markets breaks down that huge opportunity into bite-sized chunks. To grow while holding on to the efficiencies that come from relative scale, take on one target segment at a time, and achieve a dominant position in each new market before expanding further.
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