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Wednesday, January 23, 2008

Wed..back from the Finance advisers

I have heard this pitch so many times from young start up's, if we only we get 1% of the market in China, our revenue will be $200m easy, have a read at this article from the GO big network.

Avoid the Lame % of the Market Approach

Tell me if this pitch sounds familiar:
we could capture just 1% of the market for this product, we could do over $500 million in sales! And that's with just 1% of it! It's the basis for the all-too-popular and far-too-lame % of the market approach. The suggestion, used by overzealous (and inexperienced) entrepreneurs is that 1% of a market is so little, that it couldn't possibly be hard to capture.
And let's face it, 1% is awfully small!
1% of a pizza is about two bites. 1% of your mortgage payment probably means you can pay it with the cash in your wallet. 1% of a typical business book is only two pages. Boy that sounds ridiculously easy.
Yet 1% of the market for a particular product ain't a slice of pizza or few pages of a book. It's what entire multi-billion dollar companies are based on. It's not an afterthought or something the rest of the competition forgot about. If it's a market worth capturing, you can bet no one is overlooking that 1%.
Compare it to Reality
If 1% of the market isn't that big of a slice, then let's say 5% isn't that much bigger. Yet 5% of the U.S. computer market makes you Apple Computer, with a $160 billion market cap. Do you really think Steve Jobs at Apple is sitting around thinking Boy I can't believe I was able to just walk in and steal 5% of the market while no one was looking!
Of course not. Whether it's 1% or 10% of a market, no matter how small your slice may be, it's only insignificant if it equates to a dollar figure no one cares about. Incidentally if it's a market share no one cares about, you shouldn't be targeting that market anyhow.
No company in a giant industry is looking at any percentage of their market share as dispensable or insignificant. Companies will fight just as hard for 1% of the market as they will for 10%, so the idea that 1% will be a walk in the park is ludicrous.
Any Per Cent is a Lot
There's absolutely no correlation between capturing some insignificant portion of a market and the effort required to get it done.
Whether you're capturing one customer or one million, the effort required to create a product that people will be willing to pay for is the same. The scale of the effort may be different, but it's going to consume all 80 workable hours of your week whether you're running Eddie's Computer Warehouse or Dell Computer.
A smaller share of a market doesn't necessarily make the market easier to compete in, either. In fact it probably makes the market more difficult to compete in since larger competitors will more likely have a stronger brand, sales force, and product than you have available. In many ways, 1% of the market is the hardest slice to compete for.
Bigger Slices of Smaller Markets
Knowing that capturing 1% of the market is just as hard as capturing 70%, it̢۪s probably a better goal to focus on bigger slices of smaller markets.
Although 1% of a giant market that you can't possibly wrap your arms around may equate to a big number, it still doesn't buy you anything. You're not likely to be in a strong competitive position with 1% of a market.
Instead, it would be more useful to figure out how to capture a major share of a smaller market that you can dominate and grow from. It's better to be Number One in a category that you control (or have invented) than being Number 75 in a category where no one will ever notice you.
Back to the Drawing Board
So let's take that crafty 1% of the market approach and throw it in the trash.
In exchange, let's focus on a market that we can create a dominant position within and build from there. Perhaps the narrow market we initially define is based on a region, such as the Midwest, or a particular industry vertical, such as Healthcare.
If we can't crush the competition in Healthcare within the Midwest, what would make us think we can dominate the whole world in all industries? Ideally we'll take over this segment quickly, adding more regions and soon thereafter more industries. Over time, maybe one day we really will control 1% of a massive market, which would be pretty sweet.
The difference in this approach isn't working backward from 1% but working forward in a logical progression that gets us to 1%.
Possible versus Probable
When making sales and market share predictions, it's not about calculating what's possible, it's about calculating what's probable. Of course it's possible for anyone to eventually own 1% of a market, through a ton of hard work and terrific execution. What matters, though, is how probable that ownership stake is in each progressive milestone of your strategy.



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