Choosing which market to focus on is one of the most critical decisions for startups. It influences their chances to create value and to generate revenues, and even more importantly, it influences the DNA of their newly established venture and has a long-term imprinting effect.
Yet, as founders often stress, this choice is certainly not an easy one. Interviews we have conducted with hundreds of founders show this time and time again: “We asked ourselves do we want to play in this market or that one…this will create totally different firms, in their mindset, in their definition, in marketing and positioning… very difficult questions…it is a fascinating process, but very complicated with lots of stomach aches and no clear answer.”
The main reason for this challenge is fogginess. Until we invent a crystal ball that will tell us the future, uncertainty rules the game. It is simply difficult to know which target market will be more attractive in the long-term. Especially when it comes to innovations, there are always unknown elements that turn this into a high risk- low data decision.
Yet, there are a few traps that startups often fall into when choosing their target market. Whether you are setting your initial strategy, searching for a pivoting alternative, or seeking to grow your business, make sure to avoid these four, common mistakes. They may bear fatal consequences on your new venture, or at a minimum, prolong your entrepreneurial success.
- Don’t Be Blind to Alternative Markets
Many times, founders don’t take the necessary time to research different target markets for their innovation, and they simply jump into the first envisioned opportunity. Founders tend to fall in love with their initial idea, and as a result, miss out on other potentially promising opportunities. Although it may seem distracting, it is actually very important to “look before you leap”- make sure that you are not aiming for an inferior market. In fact, a Management Science study showed that the mere identification of alternative markets, in itself, increases the chances of start-ups success. Therefore, you should take a step back and deliberately search for other types of customers who may need your innovation before you set your strategic focus.
- Limit Your Intuition
Intuition plays an important role in decision making. However, behavioral economists stress that synchronizing our emotional and rational systems is key to making successful choices. When it comes to setting a target market, entrepreneurs often base their decision on a very limited set of considerations: they simply count on their intuition or follow an interested customer. An informed choice, however, must take into account other key parameters. You should strive to verify and validate the value creation potential of your opportunity and the challenges in capturing this value. Be systematic and search for clear evidence. After all, insufficient research or poor evaluation can lead to big disappointments down the road.
- Don’t Focus too Narrowly
Choosing an inferior target market is certainly daunting, but common mistakes relate not only to betting on the wrong market but also to the scope of your market choice. It turns out that the “laser sharp” focus approach – which is so common in entrepreneurship – actually comes at the expense of flexibility. Many entrepreneurs concentrate their resources on pursuing a single narrow path: they develop their product, define their branding, and build their networks to target a very specific set of customers. While resource scarcity makes this strategy logic, locking the venture into a narrow development path means losing the ability to adapt or pivot over time. To overcome this mistake, keep a few other market opportunities open as your backup or growth options. Make sure not to lock yourself out of other market opportunities even as you progress with your primary target market.
- Just Choose
Lastly, some founders find it difficult to be decisive about this critical decision, and they choose not to choose. Waiting until uncertainty fades away and postponing your decision for too long makes you juggle with too many balls in the air, and this is especially dangerous for startups. Spreading yourself too thin means losing the race – it’s as simple as that. Choosing your target market and letting go of other potentially interesting alternatives is certainly difficult but absolutely necessary. So, make sure you are clear on the markets that you are targeting and on the ones that you are saying “no” to. Despite the anxiety that may accompany this process, at some point you just need to choose.
All in all, setting your strategic focus is a complicated process. While doing so, keep in mind that you actually need to consider two questions: what is the most attractive market opportunity that we should focus on, and how can we focus and stay flexible at the same time. Good luck!