3 Tips for Choosing the Right Target Market
When it comes to choosing markets, entrepreneurs don't like to limit themselves. Confident in their creations' broad appeal, they imagine serving a variety of industries, geographies and applications. But casting a wide net is a lousy way to pursue early sales. Undisciplined founders risk putting so much pressure on their fragile companies they snap.
Consider what happened when Lou Ennuso took over the startup Adeptia, which turned tough systems-integration problems into point-and-click exercises. Ennuso convinced a huge telecom to let little Adeptia unify its customer-relationship management system after a merger. Other early jobs included a document- management system for a food producer, forms-routing for a printing company, supply-chain integration for a high-tech firm, and claims workflow for an insurance giant. Yet Adeptia's sales pipeline developed slowly. After a while the company was almost out of money.
Pinpointing the Right Market
Ennuso's problem was lack of focus. Adeptia had customers in wildly diverse industries demanding unrelated applications. Every sales engagement became a time and resource sinkhole; every project a one-off with little that could be reused. Ennuso stopped selling to everyone and instead examined where Adeptia was adding the most value. Acting on his analysis, he pitched the large insurance provider on a partnership to develop products for that industry. The resulting joint venture offers a limited portfolio in focused categories, and Ennuso's firm is experiencing strong top-line growth.
At the highest level of targeting, the entrepreneur should look for companies trying to solve the same, specific problem. From there, he begins applying filters such as geography, company size, and emphasis on particular activities until he winnows the market to a homogenous pool.
When evaluating targets, the entrepreneur should ask three questions. Does the market allow his company to:
1. Deliver real value quickly? Early customers should be comfortable using a product that's not soup yet. They must be willing to participate in the development process, to trade abundant features and glitchlessness for early access. Is there a customer segment in so much pain that even partial alleviation will be welcome?
2. Gain access to multiple customers? Startups that work with just one customer risk creating a product too specific to easily re-sell. Entrepreneurs should work with a small group of initial customers to ensure their products are broadly useful.
3. Connect to analogous industries? A startup may become cash-flow positive selling to one market. But to really grow it must eventually diversify. Doing so requires making the case that the problem solved for customers in the first market is relevant to buyers in subsequent markets, even though the product may require substantial modification.
Entrepreneurs who target narrow, well-defined markets find it easier to develop the business cases, references, stories, and data that open other doors. More important, they land only accounts they can successfully service. The more characteristics clients share, the less customization and additional infrastructure are required. The more a company learns about a specific breed of customer, the better it serves that niche. Yes, that strategy leaves intriguing waters uncharted. But those waters will likely still be there after the company gains its sea legs.