Circles of Growth Part 2: Market
or, how to avoid two years of failure
That flash of insight: you know what the market needs, and you can build it first. Suddenly you have endless fountains of energy as you fervently develop your new product and await the crowds of buyers beating down your door.
Only, they never show up.
Then you begin contacting them, hoping they will see your insight and want what you have. Hundreds of calls later, you realize they need what you have, but they don’t want it.
This was my predicament: in December 2013 I started development on a disruptive software product, a product that would later generate 100x returns for our early adopters.
Two years later I shut it down, having found a market that refused to pay for these returns.
ROI be damned: no one would buy.
I reflect often on what went wrong, and I’ve found two critical fundamentals that we missed:
- We didn’t know the market.
- The market didn’t know us.
In this post I will look at the first one: how to know your market.
Market before Product
Your market is more critical than your product, because the knowledge of your market cannot be manufactured; it can only be gathered through observation and illegible research.
Many companies succeed by creating new products for the same market — but most attempts to shift to another market fail.
Why?
When you create new products for the same market, they often result from natural product market fit: your previous products lead to insights about your market that allow you to build what they want next.
When you pivot to a new market, you lack all of the insights you’ve acquired previously: now you must learn a new language, a new culture, and a new set of assumptions in the market. In short, you have to embrace a new worldview.
It turns out grokking a new worldview is quite difficult.
Market and product development
In the early stages, a company can grow through intuition of market: many of the best products started as something a founder needed for themselves, because this was a proxy for nailing the market.
If you can, you should build something for your tribe. This gives you both the inherent permission to speak to them, and the intuition to get it right.
This advice is not new: different types of entrepreneurs approach it differently, but often arrive at the same place.
How Traditional Entrepreneurs Grok their Market
For traditional entrepreneurs, this looks like simply asking your customers what they want.
When Hubspot began, they didn’t really know what to build: early versions of their website talk about ERP and intranets. But they did know their target market: very small businesses.
Eventually they found the value of online marketing for VSBs, and then rode the wave of inbound and permission marketing to establish a feel-good brand on their way to an IPO.
How Disruptive Entrepreneurs Grok their Market
Visionary entrepreneurs resist the notion of knowing their market; they think this will lead to incremental products rather than denting the universe.
As Ford famously said, “If I asked people what they wanted, they would have said faster horses.”
Hidden in this quote is the reality: Ford actually gave people faster horses, by changing the paradigm to a vehicle that can now approach 10x the speed of horses.
Ford didn’t ignore the people; Ford knew the people better than they knew themselves.
When Steve Jobs returned to Apple, every product was built around the insight that the people wanted fashion in their electronics. Very few technological innovations have emerged from Apple in the past fifteen years, but they continue to grow by tailoring existing innovations for their market.
Perhaps no one understands this better than Ramit Sethi. Starting as a financial expert while in undergrad, Sethi is not intuitive about market research.
When I was an undergrad at Stanford, I decided to teach my friends about personal finance.
I printed up all these agendas (double-sided, to save money), reserved spots, even got a bunch of my friends to say they would come.
Nobody ever came.
It took me years to figure out why. Do you know?
First, I talked about financial literacy. Nobody wants to be “financially literate.” It’s naggy! People want to live a Rich Life.
Second, I focused on a group of people (college kids) who NOTORIOUSLY hate being nagged about money. It’s irrelevant, since they’re not earning it yet!
But like a delusional entrepreneur, I told myself that people “should” listen. Once you use the word “should,” you’ve already lost.
It didn’t matter how technically accurate my talk was, or what my friends logically stood to gain. It was just the wrong audience.
It’s like you telling your friend she “should” break up with her horrible, no-job-having boyfriend. Yeah, she should…but she’s not going to. Not until she’s ready.
Same thing with starting a business. You’ll see a bunch of people giving you tactical tips like “14 Ways To Write Your About Page,” but one of the most important lessons you can actually learn is…
…GO TO THE BUYERS.
Like many undergrads, he selected a target market, but in his desire to change them he didn’t understand what they actually wanted.
Through sheer hustle, he would publish a NYT bestseller I Will Teach You to Be Rich, but he still didn’t understand his market.
Only after he began asking attendees of his book tour what they wanted, did he get the true insight: they wanted to earn more.
His market didn’t want to be rich; they wanted to do the hard work to become rich.
Since then, Sethi has developed dozens of products, but he remains permanently in his specific market: tech savvy millennials who want to get ahead.
This position has allowed him to write prolifically to his audience, using his own style (for he himself is in his market) while sharing stories of success from others who look like his audience.
Disruptive entrepreneurs often fail because they jump to their vision of what the market needs, without bridging their vision to what the market wants.
Traditional entrepreneurs often fail because they build what their market is already buying, but they don’t package it in the way the market wants.
When you know your market, you have both: the bridge from your offer to the worldview of the market, and the packaging, the story, that your market wants from you.
How to Validate your Market Knowledge
So many entrepreneurs fail in knowing their market, because it is actually quite difficult.
There is no startup KPI for market intuition, and what doesn’t get measured gets ignored.
This is why your market knowledge is so important: knowing your buyers just a little bit more than your competition can lead to exponential advantages in sales and marketing.
How do you know your buyers better?
There are dozens of frameworks and tools to perform market research, but nothing validates your market better than making a sale.
Of course, nothing gets you a sale better than validating your market. So we have a bit of a chicken-egg problem.
The solution: Tribal Magnets.
Tribal Magnets
Tribal Magnets are low dollar, high value items designed to validate your intuition about your tribe.
Tribal magnets are similar to tripwire offers as popularized by Ryan Deiss, but with one important distinction: while tripwires optimize for funnel and email list growth, tribal magnets optimize for validation of your market understanding.
Tripwire offers emphasize transactional marketing; Tribal Magnets emphasize learning.
Tribal Magnet #1: Write a book
Tribal magnets are still new, but will continue to become more popular as SaaS companies abandon the free models that they couldn’t scale to IPO.
A few tribal magnets stand out as easy wins in the market. The first is writing a book.
On this, let me quote Patrick McKenzie (from Inbound AMA):
Write a book about the problem space…PRIOR TO LAUNCHING THAT BUSINESS. For example, if I were biting off im going to once and for all solve email marketing for software companies, Id write about the strategy of doing so prior to making software.
As of this writing, in 2017, books still provide the halo effect on the author, and this will become useful later in your marketing efforts: you’ll speak at conferences, you’ll be on podcasts, etc.
But more than the halo effect, writing a book allows you to test your market understanding.
Consider just the volume of feedback:
- Hubspot, as a market leader, has 1,462 reviews on G2Crowd and 90% five star ratings: a solid tribe built over a decade of growth.
- Fifty Shades of Grey has 68,298 reviews on Amazon, and only 59% five stars.
That is 4,600% more reviews and 19,100% more mixed reviews.
If you wanted to truly understand a tribe, which one would be more valuable?
Write a book with your worldview, validate there is resonance with a tribe, and you’ll save years of research.
Tribal Magnet #2: T-shirts
Not everyone is prepared to write a book: some personalities are simply better at writing than others.
A faster, cheaper alternative is to design t-shirts for your tribe.
Teespring is the Kickstarter you’ve never heard of. Launched in 2012, Teespring is a market where you can post a t-shirt design and gather minimum pre-orders before printing anything.
While touted as a marketplace for designers, I’ve met a handful of entrepreneurs selling six figures annually, with a fully automated process to create new mediocre designs every single day.
Mediocre products, still clearing six figures. What gives?
The arbitrage value of t-shirts is in the long tail, where few will tread without a guaranteed tribe.
Because Teespring enables entrepreneurs to validate a design idea with minimal investment, these long tail hustlers are instead using the cash to run ads on Facebook to unique tribes.
The results are long tail slogans that would fit right in your sales copy.
Want to sell to playwrights?
What about Dads who babysit?
What about inbound marketers who love Fifty Shades of Grey? Hmm this design may not be SFW. Surely there can’t be a market for this?
Wow 1.5M people. Not only is this a market, it is too broad by FB standards.
Hold on, Ima gonna make a shirt.
Where were we?
While Teespring is mostly used by t-shirt producers with no further back-end revenue in mind, any software company could use the platform immediately to validate their sales copy and understanding of their tribe.
Done right, you’ll also build an email list, but the insights into your tribe will be worth far more.
1000 True Fans and the Minimum Effective Market
How big of a market do you really need?
In 2008 Kevin Kelly published 1,000 true fans about the emerging mechanics of the Long Tail and what it means for artists who want to make a living creating.
In short, you can clear six figures by finding 1,000 superfans who will buy every product you can imagine.
The interesting mechanism here isn’t how to get the math perfect, but rather the concept of the minimum effective market.
Most artists think they need millions of customers to make enough money; it turns out they only need 1,000 to keep the game going.
Similarly, most software companies assume they need hundreds or even thousands of customers to make enough money.
Do you really?
It turns out every order of magnitude in your market requires more intuition about your market and more investment to find them, so it is far better and easier to minimize your target market, if only to maximize the value of your learnings.
- 1 true employer: you can be on the same softball team and know their family personally. You’ll likely max out in low six figures but with the right employer you can call it a great career.
- 10 true clients: you can meet each client personally, sell them on your vision and force of personality, and tailor your product to their needs. You can personally show up for every meeting with them and ensure they get what they want, while intuitively understanding their view. With $10k/month per license, you can clear $1M per year.
- 100 true customers: you can’t know them personally, but you can shake every customer’s hand 3x per year and gather informal anecdotes from talking with them. They don’t really expect the CEO to show up so you can use this to your advantage. You can tailor your message to their needs, even if the product is the same. $1k/mo per customer results in a $1M revenue.
- 1000 true fans: you can’t quite meet all of them except in a performance, so you can only broadcast your art and hope it resonates. The winners in this game rely on discovery algorithms like Spotify and Amazon to engage their audience, then build a list over time to keep the relationship. They must produce new work early and often.
Is $1M revenue enough? For a software business, $1M is enough to keep the lights on, allow you to master your market, and stay antifragile, all without VC funding.
Keep the lights on, and you’ll have infinite time to build something bigger that your market wants; with a minimum effective market, you’ll have the competitive advantage of insights to build the right things first.
You don’t need a huge market. You don’t need to carve out a niche or segment. Just isolate the minimum effective market for your business to be sustainable, grok their worldview, and validate with Tribal Magnets.
Then core product will be easy.
