How not to decide what market to create your business for

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This is article #3 in my series How not to build a business. I open up about all the mistakes I made building a software as a service and all the lessons I learnt in the process.

My mistake: I did not define my audience well enough

I came up with the idea of creating a digital menus while dining out with friends. I saw a menu in which the maitre’d had crossed out with pen a dish that was no longer available. This ruined the appearance of the whole menu, and everything clicked. The restaurants had to become digital. The market was clear, any kind of restaurant could be my client. From the tiniest bar to the biggest and most successful Michelin guide restaurant; all of them have to create menus. The market was huge (many billions, specially in Spain) so I only had to capture 1% to have a unicorn company (easy, right?). After I had created a prototype in Sketch, I was ready to pay a visit to a few restaurants. I contacted them using a mixture of cold calling and people that I knew had worked in the sector.

Among those interviews, I remember having a conversation with the manager of a 5-star-GL hotel, which had a well-known restaurant. He agreed with everything I said about the physical menus and when I showed him the prototype he liked it. However, he then told me: ‘I do not want to have the same menu as the bar down the street. It degrades my brand’. Here he offered me a great piece of advice that I had not thought about: ‘who is your client? Be specific. It is not the same to cater for a luxury restaurant than a regular restaurant or a bar.’

I did not define the market well enough because I was under the illusion that the bigger the market the better. That may be a positive signal for potential success in the future, but when first launching, it signals lack of clarity and strategy. If you try to be everything to everyone you accomplish being nothing to anyone.

My learnings:

#1 Select your audience and deal with the problem later

Being an essentialist, we can reduce the main pillars to two:

Product: this is how you deliver value to your customers. If you want to see the main ways in which businesses can deliver value, I recommend taking a peek at my article about how to build your competitive advantage and decide where your company fits within that framework. Knowing your core added value helps you organise resources and make strategic decisions correctly.

Distribution: it entails how you get your product to your customers’ hands. The idea is to get your product to the maximum number of clients spending the least amount of money.

Not that I repudiate other functions of a business - finance, accounting, marketing, human resources, etc. - all are important. However, if one of the two principal functions does not work, you can forget about the others because your business will not survive for long. Having said that, what comes first? Product or distribution? If I had to choose, I would say distribution first, product second.

This realisation is unintuitive, after all, you normally try to think about a product and then you figure out how to reach your clients. However, when you start to think about distribution first it makes everything much easier. I will

#2 Be very specific when selecting your audience

You have to limit your audience and try to make the segment you focus on a very specific niche, arguably a micro-niche. Again, this is counterintuitive because we normally think that the market has to be as huge as possible for a company to have potential of growing. The phrase: ‘this market is 100B, we only need 1% to be a 1B company’ has led many entrepreneurs the wrong way. Here are some right and wrong ways to describe a micro-niche:

Wrong micro-niche	Right micro-niche
The restaurant industry	Michelin starred restaurants
Fitness studios	Fitness studios focused on Hata Yoga
Asset Managers	Family offices with more than 10M in assets under management
Web developers	Front-end web developers focused on React

The advantages of a distribution first, micro-niche approach are the following:

Identify and engage: a micro-niche is easy to identify. Instead of talking in abstract about a huge market to please possible investors, you are forced to define who your customer is specifically. Once you have defined your customer, you have to find out where that audience exists. You have to select and explore the channels through which these audiences can be reached. These may be a forum, a Reddit sub-thread, an in-person monthly meet up, a club that you can join…

Define problem: being around your potential customers helps you understand their problems and try to offer them solutions, with a rapid feedback loop.

Sell solution: the same users that define the problems will be those that want to buy your solution. Therefore, since you have been talking with them about their problems, trust exists and selling a solution is possible - even if it has not been built yet.

Let’s not lie to ourselves. Of course we want to make money, so you may think that a micro-niche is not enough. After you have selected your micro-niche and have managed to grow enough, you can make the move into multiple niches. You could even integrate vertically to solve more problems for your clients. You already have the audience so up-selling is much easier!

Success stories

To give some further context about why an audience first, micro-niche approach is best in class, let’s briefly overview a few examples of companies that have used it.

Hubspot & blog writing: Hubspot is one of the most well-known CRMs in the world. However, before building anything, the founders created a blog to showcase their ideas and later built an inbound community to help small businesses achieve success with inbound marketing. They amassed thousands of readers that wanted to learn about inbound marketing. Once they saw the interest, they packaged the core ideas of their solution - social media engagement, website optimisation and engagement tactics - for businesses to use. They already had an audience so it was a huge success.

MailChimp and consultancy services: many companies begin as consulting firms. In the case of MailChimp, they found out that their clients all had the common need of sending emails to their customers. As a result, they ended up productizing a solution which was originally built for just one client. In this case too, they followed the distribution-first approach when building a product.

Mr. Beast Burger: is a burger joint launched by the popular youtuber Mr. Beast. Of course, he has a huge audience of loyal fans. How long do you think the queues were when he opened his burger joint? You guessed it.

Conclusion

Figuring out the audience is an approach that intends to reduce the probability of failure. Of course, other ways of starting a business can also make you successful. For instance, you can try to reverse engineer the customer from the problem, but from my experience, having the distribution figured out first is an invaluable asset.