What size of marketplace do you need in order to grow your business, before your marketing budget runs dry? In this Vlog, Grant explains why you need to understand your Smallest Viable Market.
Imagine you’re a software platform looking for venture capital investment.
You might talk to the investors about the ‘total addressable market’, that is the entire marketplace around the globe that could use your platform.
While it might be ambitious, it’s not unreasonable.
Think about Google in 1998, who were just working in California and today are a global search engine.
However, for the majority of businesses, thinking about the total addressable market is just ridiculous. For example, just imagine two guys starting their IT maintenance firm in London. In theory, the total addressable market is anyone on planet earth that could do with it maintenance, but they’re hardly going to start servicing businesses in Seattle or Shanghai. Therefore, what most people think about is the ‘serviceable available market’. So if we take our two guys starting their IT firm in London, they might say they could service any business within the M25 and, therefore, that would be the serviceable available market.
The problem is many businesses stop there. In other words, they say; we can service any company within the M25 so why discriminate? We don’t mind where the opportunities come from and, therefore, they try and market themselves anywhere within the M25 and hope that some business drops out.
This is simply not a very effective way of communicating with the market.
The problem is this, the area within the M25 is huge and if you hit a recruitment firm right at the very west of that point, a law firm at the very north and a small manufacturing business at the very south, actually, there’s no serendipity in your communications whatsoever. Apart from the fact, because you’re hitting so many different types of businesses in such a wide region, it’s very hard to make your marketing really relevant. You have to talk in very generic terms in order to appeal to everyone.
It would be much more effective for our IT business to segment further. For example, they might decide to just pick a five mile radius within central London or they might decide to go to a vertical market, for example, Law firms. In either example, going into a much tighter market means they can make their communications really relevant; by talking about the issues that are found just in law firms or within that very tight radius right in the middle of London… And they can make sure that there’s some serendipity. In other words, lawyers know lawyers and we’ll talk to each other and, therefore, it’s easier to get known in that tight vertical market.
Similarly, businesses within a very tight geographical location, like Central London will talk, meet in cafes, go to networking events and, therefore, it’s easier for them to get known within that place. What we’re talking about here is what is known as the ‘smallest viable market’ rather than go to the entire market that you could possibly service, it’s much better to go to the smallest one where you’ll meet business goals.
For example, let’s say our IT startup; its ambition is to get a hundred customers in their first year. Even if they were only to win 1% of all the businesses they communicated with, they wouldn’t need to reach more than 10,000 companies and that would give them their one hundred clients. Therefore, they should segment a market, which goes down to 10,000 and not try to communicate with any more than that. In this way, they can use their time and effort more efficiently, it’s easier to get known and they can make their communications really relevant by sticking with a very, very tight segment of the market.
Of course, smallest viable markets can change, so when they only need a hundred customers, they might go to a smallest viable market of 10,000. When they’re looking for 500 customers that may grow to 50,000 and onwards and upwards as they grow bigger and bigger. But by sticking to smallest viable markets, they will always be able to use their marketing resource both in terms of time and money in the most efficient way.
If you don’t go to a very small marketplace, you will be segmenting, but in the most absurd way ever. Let’s just take our IT startup. Let’s pretend they went to the serviceable available market and stuck to the entire M25. They simply wouldn’t have the marketing budget, time and resource to reach every business within the M25 but, therefore, rather than segment in a way that they choose, they would just run out of time and money, and that is not the smartest way to segment a marketplace.
By sticking to your smallest viable market, whatever that is, at any one time, you’ll be able to get the most bang for your buck from your marketing efforts.