Let's face it: tech and non-tech startups don't always succeed. But that's part of the journey: by trial and error, we learn what works and what doesn't. Even if we look at a business and think, "that's never going to work" or "how would they ever make money doing that", some entrepreneurs find a way to entrench themselves within a market or create a new market for their product accomplishing extraordinary feats we never imagined possible. The big question is, "What are they doing right and what can we learn from that?"...
If we look closely at several of the failures it's easy to see that they stem from a lack of fundamental preparation. It turns out that in order to start a successful business, you need this strange thing called "revenue," which you must earn. Furthermore, there is a concept called "gross margin" that shows the quality of your revenue. These aren't the only items that are rooted to success but it sure is a good start and below are ways to increase your chances of success.
1. Size of the market
You might be able to create a niche business that is very beneficial to you personally by focusing on a small market. But... it's unlikely that VCs will support this project. Therefore, if you want to pursue a niche market, you must obtain small sums of money (don't go into a huge debt), maintain as low of costs as you can, and achieve positive cash flow at light speed. In this market an entrepreneur rides that thin line but if you succeed, it is oh so nice. Your downfall will come from accumulating significant losses or attempting to expand extremely quick through sponsored marketing initiatives with protracted payback periods. Those long payback periods is what causes you to need venture capital.
Don't be lazy and skip this step. There are so many ways to research an industries market size and figure out, through some estimating, what is addressable to your business. Try doing some searches for calculating a TAM (total addressable market).
Doing some basic research would look something like this:
- How much are people spending within on this or similar products?
- How much revenue are my competitors generating?
- What is the cost of advertising? Look at what competitors are spending.
- What is the cost to support reduced attrition and increase retention?
Getting to the bottom of these questions are going to give insight to where the value is accrued, who are the competitors and whether there is a hole in the market you can fill to create a profitable business. Don't base your opinion of a market on what seems cool to you, your friends and peers.
2. Market environment
Knowing who controls the market and what amount of the distribution they control is crucial to figuring out what marketing strategy to take. However, if the market is fragmented and there isn't any clear leader, well, that takes a different strategy and honestly makes it easier to disrupt.
Look into any stable market, find the leader in that market and then look at the competitors. What you are most likely going to find is that the leader is holding 50% or more of the market, number 2 is around 20% and then it dwindles down from there. You tend to have twice the market of the brand below you and half of the brand above you. If you are going into a market that has a well defined leader versus being first or having the perception of being first here are a few strategies:
- Define how many players are in the market and determine how many players can the market sustain
- If there is still room for more products what place will you take? There is typically on 7 or less spots to fill.
- Create a new category within that market to define yourself. What is new can be more interesting than what is better.
- In the end there is usually 2 winners within a market. Fight for the number two spot if the leader is already defined.
Keep in mind that this will all need to take place while maintaining a low budget and keeping the business as simple as possible while testing out the market. Your total customer acquisition cost (CAC) relative to your payback period and lifetime value need to align perfectly. Once you begin to see some growth start testing out new markets and if you see an increase in average revenue per month, per customer. If you do, then decrease your CAC because of organic traffic which will increase your overall payback period.
So do your planning up front. Test a simple version of the product before raising a ton of capital. Expand your offering to see if it will convert in other markets with better rates and expanded product lines.
3. Market leader's strengths and weaknesses
Now you're aware of the size and structure of the market in your sector. You're aware of the points along the value chain where value is controlled. However, you must grasp the market leader's strengths and weaknesses, as well as what they will do when you start growing quickly.
What does that mean? At the beginning you are insignificant to them but if you begin to take a portion of the market they start to analyze your business strategy and potential for growth. If you then start to scale with speed they will respond.
The best case scenario is that they are too large with major bureaucracy and cannot keep up with the agile movements that a small team can accomplish. Your goal is to disrupt their movements through cost cutting and making them move away from their core business model and assets. Although they may have the money to do it, this tactic often moves them further away from their current customers creating attrition.
If you haven't started thinking about "unit economics" then now is the time. I'm not going to go too deep into it but the basis of it is to analyze your company's cost to revenue ratio in relation to service your customer. To inform that customer about your products or services, you must market to them. PR, SEO, influencers, and other methods of "unpaid" marketing are all instances of this style of marketing. But, in the end, each of them has a hidden cost. PR requires team time and effort that cannot be employed elsewhere, making it a significant expense. SEO necessitates a content strategy, inbound links, relevancy, keywords, and more. It does not just happen and, in the end, nothing is free.
Without knowing how your product is going to benefit your customer there is no way to start any of the above marketing. Are you saving them time? Dollars? How many dollars? What will you charge? Will the user pay or will a third-party? If it's a third-party will that be through advertising and when will they pay? Today or after a certain amount of CTRs? How much traffic do you need? What type of ads will you offer?
Take some of the information from what your competitors are doing successfully. What are they charging and how much will your customer pay for your services? Do some searches on "price elasticity" to have a better understanding. In the end we are all competing for the same "share of wallet," which, unless you are selling to a very high-end clientele, is not limitless.
However, if you are the first to market then you get to set the terms which holds it's on risks, marketing strategy and research.
5. Days of the past
If the market you are looking into has a longer history find our why the leaders are the leaders and who has tried to take their spot and how many have there been. Why did those companies fail? What went wrong? What can you learn from them?
This is all going to take planning, study, testing, validating data and a bit of general estimation. As you move forward don't hesitate to continually differentiate and pivot. Study up on what previous founders have said "went wrong" but stay critical when it comes to their bias. Also, do the same for any entrepreneur influencers you may be listening to.
One book I would recommend for putting together a good marketing strategy is "The 22 Immutable Laws of Marketing" by Al Ries and Jack Trout.