Never let market size fool you into making a misconceived target market choice. Social media pioneer Ning wisely gave up its Facebook-inspired dream of success with millions of consumers to serve a much smaller set of business customers instead. In making the change, its customer base grew from 17,000 to over 100,000 according to Fortune Magazine, while the certainty of paid subscriptions replaced uncertain advertising revenue.
Ning’s software enables its customers to launch and run their own private social network with employees, customers, fans or suppliers. The switch from consumers to organizations emerged from the CEO shutting down Ning’s free service. Consumers jumped ship for one of the 125 plus free social media Facebook clones. With a narrower but relatively under-served target market, Ning was free to add services that deepen and differentiate its value to business customers. Additions include analytics for the network, mobile applications, discussion forums and integration with business customers’ Facebook pages.
Leaders are often deceived by the size of a target market, assuming that more is better. But revenue depends upon a lot more than market size and growth. Your ability to move to high awareness rates, high consideration rates, high win rates and high average revenue per customer are much more important than market size in driving revenue growth, as long as the market meets some minimum threshold.
Here’s a case in point.
A commercial sewing client faced the “ubiquitous market” dilemma many business-to-business companies face. You’d really be surprised by how many industries use commercial sewers as part of their value chain – office furniture, dental chairs, power sports equipment, laboratory stools, radiology patient exam-tables, shoes, apparel, lawn and garden, etc. You get the picture.
With no end to the number of businesses that might need its services, the company’s direct sales force fell into the trap of responding to customer and prospect Requests for Proposals delivered by mail, fax and e-mail. With multiple high-quality commercial sewers in the industry, the industry’s offerings had become commodities. Price and schedule availability largely determined the winner. My client won orders based on their history of heroic service, an attribute that won customer loyalty but not a price premium.
We dramatically narrowed the target market to companies for which commercial sewing was a distraction, rather than a key part of their core business. These are companies that viewed the work associated with creating low-priced fabric accessories customers used alongside equipment as a diversion from their core business of designing, manufacturing and selling high-priced equipment. (E.g., while customers need life jackets, boat manufacturers love making boats!) We further narrowed the list of potential industry targets to those in a broadly defined industry in which my client already had solid work experience, a customer base and an understanding of end-users of its customers’ products.
We redefined my client’s business as a fabric accessory subsidiary that designs, manufactures, merchandises, markets and distributes its customers’ branded after-market accessories (i.e., purchased alongside or after the original equipment is sold). In outsourcing their accessory business to my client, companies earned equivalent or higher revenue with dramatically reduced overhead costs. That’s a powerful value promise.
My client mastered understanding how end-users used accessories and the distribution channels to reach these end-users. It also hired designers and created a far more consumer-focused culture. All these changes made my client the expert its customers could depend upon to drive sales of their branded after-market fabric accessory products.
One measure of my client’s success is that it so mastered the accessory business that it introduced its own line of accessories at a lower price point than clients’ branded accessories, appealing to end-users who did not value having the equipment brand on its accessory products.
The size of my client’s narrowed target market was considerably smaller than “all businesses needing commercial sewing services.” But serving a much narrower market made it much easier to build high awareness and consideration rates from what had been low levels. As important, my client’s win rates and revenue per customer increased dramatically.
Instead of asking “How big is the market?” strategic leaders ask, “In which markets can we build high awareness and consideration rates and the hard-to-copy advantages that result in high win rates and price premiums?”
Want a fun challenge? Create the algebraic equation that links your revenue to market size, awareness rate, consideration rate and win rate. Then simulate the impact of changing different terms.
lieza@patio umbrella base wheels says
I agree with the main point of your article. There are some businesses which aren’t aiming to the right market decision. This really goes out to businessmen out there and I hope they can read this stuff and review their goals. Great write up! Thanks!