Here’s a truth that doesn’t get talked about much:
Some markets are bigger, easier to reach, and more eager to pay than others. If you’re hunting for ideas, you should start in an environment that matches these criteria:
- Customers are motivated to spend money to improve their lives.
- You can acquire customers through affordable marketing channels.
- The customer base is big enough to support your business.
Case study: Nathan Barry and Kit
Nathan started Kit (formerly ConvertKit) in 2013, positioning it as “Email marketing for digital product businesses.” During this time he specifically targeted beginners.
Initially, he grew MRR (monthly recurring revenue) to $5,000, but a problem emerged. “Beginner customers are more likely to churn,” says Nathan. Churn is when users cancel their subscription. For a Software as a Service business, churn is the enemy: if you’re losing more customers than you’re acquiring, your business can’t grow.
At the beginning of 2014, a bulk of Kit’s customers churned, and MRR dropped to $1,337.
That year, Nathan made a big decision. He stopped working on all his other projects and decided to focus full-time on Kit. The goal? Grow revenue and make the business profitable. He decided to change his target market from beginners to “professional authors.” Nathan’s full-time focus and new tagline helped! Revenue slowly began to grow again.
But Kit's major inflection point came in March of 2015. Nathan decided to radically change the positioning from “Email marketing for authors” to “Email marketing for professional bloggers.”
Others in the industry mocked him. “Really?” they said, “When are you going to target real businesses?”
However, the hunch paid off. In July of that year, revenue increased 48%. Growth continued from that point on. MRR went from $5,000 in 2015 to over $700,000 in 2017!
Nathan’s story underlies a vital point: target market and positioning play a significant role in a SaaS’s success.
“Positioning was key,” Nathan later said, “we now serve one of the best markets in the world.”
Kit was improving its product throughout, but the real breakthrough came when it identified its ideal customer.
“One truth of successful startups: the thing you set out to make is not usually what you end up making.”
– Fred Wilson
How to find your ideal customer
There are two paths to building a profitable product:
- Create your product first, and then find clients who want it.
- Start with an excellent market, do your research, and make a product for them.
In this book, I recommend the second option. Below are some techniques to increase your chances of selecting a profitable customer.
Start with people like you
Years ago, I met Mike McDerment from FreshBooks. FreshBooks is online invoicing software. Over 5 million folks use their platform to send invoices, accept payments, and track expenses.
Mike explained the genesis of FreshBooks in this blog post:
In January 2003 I was running a four person design agency. I was using Microsoft Word to create our firm’s invoices, and I was pulling out my hair because Word simply wasn’t built to create good looking invoices efficiently or report on my business. One day I accidentally saved over an old invoice, and something in me snapped – I knew there had to be a better way. Over the next two weeks I coded up a solution for my clients, and eventually, we turned that side project into what is nowFreshBooks.
I took a class from Mike on marketing strategies. He told us about all the different ways he was reaching his customers. I asked him:
Me: “Mike, it sounds like you’re only going after web designers. Why not market FreshBooks to other niches?”
Mike: “Starting with web designers made sense for us. We were designers, we knew where they hung out, we knew they were online, and we knew they needed to manage invoices (because we had that problem ourselves). It would have been way harder, and expensive, to go after plumbers. Web Designers was a niche we could easily get to.”
Since then, FreshBooks has expanded to serve a range of niches (lawyers, marketing agencies, therapists), but its initial focus on designers was key to its success.
Choose a market that is easy to reach
Mike also knew that web developers would be easier to reach because they congregated online.
In 2008, FreshBooks ran ads on TweetDeck and Echofon, two well-liked Twitter clients. At the time, Twitter was still a relatively small network, made up mainly of early adopters in the web community. It was the perfect place for FreshBooks to reach its niche.
Interest-based groups that congregate online can be easier to reach than other types of customers.
For example, I've consulted for multiple startups in the health industry. Their biggest challenge has been reaching the medical doctors they aim to serve. The medical community is closed: they don’t hang out online much, and getting their email is challenging. These startups had to resort to cold calling and direct mail to reach their audience, which is significantly more expensive.
Find a market with buying power
You’re looking for a customer who can easily buy your product. In Nathan Barry’s case, the only person he needs to persuade to buy his product is the individual blogger. There’s only one decision-maker; they don’t need to run their expenses by anyone else.
With other types of software products, like project management software, you have to convince a whole team of people to make a sale. You need to talk to the CTO, the COO, the Product Manager, and the development team. Purchasing decisions made by a committee increase the cost of every sale.
Purchasing power also refers to how much money people can spend to solve their problems.
A college student might have the autonomy to spend their money as they please, but they’re generally cash poor. A business owner, on the other hand, has both spending authority and the budget.
Look for a market that has the desire to improve
You want customers who are highly motivated to solve their problems. They’re willing to spend money to overcome obstacles and make progress in their lives.
Professional bloggers make most of their money by building an email list. They are a strong market for Kit to target, as email is central to their business. Furthermore, if they’re experiencing issues with their existing service (such as Mailchimp), they’ll be highly motivated to switch.
If they're not willing to spend money, they're not good customers. Some folks are just cheap! That's OK; they don't have to be your customers. Find customers who have a strong desire and are willing to pay for a solution.
Build a “must have.”
If you’ve ever done budgeting for a business, you’ll notice that certain expenses are non-negotiable. Almost every company I know pays for phone service, website hosting, and email.
However, countless other apps are just “nice to have.” These are the first to be cut when a business needs to reduce expenses.
The more indispensable your product is, the more you’ll sell when times get tough.
Pick a market that’s “big enough.”
To build a sustainable business, you need enough people in your target market who have the ability and desire to pay you. If your market is too niche, it will be challenging to turn a profit. However, if there are thousands (or millions) of people in that market, your opportunity to generate leads increases. Choosing a niche is still important, but it must be large enough to support your business.
For example, my friend Adam Wathan wrote a book called Refactoring to Collections. It shows PHP developers how to use Laravel Collections to refactor their code.
Adam’s potential market size is much larger than that of someone targeting Python programmers.
He had another advantage: PHP was sizable and largely ignored by many publishers. They felt it wasn’t “cool enough.” But guess what? PHP developers were hungry for resources. The market wasn’t being served! So when Adam launched his book, it became a big hit.
A trick for choosing the right market
Ask yourself this question:
Who is already paying you for your time and expertise?
My friend Francois was a freelance web developer. Over time, he started attracting a specific clientele: Shopify store owners.
Eventually, he built a SaaS specifically for this group. They were already paying him as a consultant, so he knew they were likely to pay him for software.
How do you know if you have the right market?
Here’s a good way to evaluate whether a given customer type meets all these criteria.
If a market has a long-running conference or trade show, it’s probably a safe bet. Conferences are expensive ($500+) and require a large number of highly motivated attendees.
Look at Nathan Barry’s audience of “professional bloggers.” The Blog World conference (later called NMX) has been running since 2001 and attracts hundreds of attendees every year.
Another benefit of events like this is that you can register and get a sense of the market by asking attendees questions:
- What tools do they pay for?
- What’s the most recent software purchase they made? What triggered that purchase?
- What are they currently struggling with in their business?
- What workarounds are they using? (What tasks are they currently doing in Excel?)
Do you like them?
Before rushing to create a product, you need to stop and ask: “Do I even want to serve this market?”
There’s a lot of advice on finding product/market fit. My recommendation is to get founder/market fit right from the start.
“Product/market fit is a good market with a product that can satisfy that market.” – MarcAndreeson
When Marc says “good market,” he means a defined group of people who are actively purchasing products.
By that definition, dentists are a lucrative market. They run profitable businesses. They’re willing to pay to save time, save money, or make money. But just because they have problems to solve, doesn’t mean you’re the person to solve them.
My friend Patrick McKenzie had that experience. He previously ran a SaaS company called Appointment Reminder. Before launching, our mutual friend Peldi asked him:
“Is optimizing the schedule of dentists’ offices your passion?”
When Patrick answered “no,” Peldi was exasperated:
“Then why are you committing yourself to working on that for the next several years?!”
Serving an audience you don’t like is the worst feeling in the world. You have to show up every day and answer their emails, fix their bugs, and reset their passwords. To conduct customer research, you need to spend time with them. Want to get sales? You have to attend trade shows, build relationships, and call them.
Put another way: if you don’t like cats, don’t start a feline rescue center.
Why product/founder fit matters
In September 2015, Marco Arment woke up to discover he had the #1 paid app in the App Store. He’d developed an early iOS ad blocker called Peace.
He’d had success with other apps, like Instapaper and Overcast, but nothing to this level.
He should have been ecstatic, but instead, he was miserable. He described his inner conflict on his blog:
Achieving this much success with Peace just doesn’t feel good, which I didn’t anticipate, but probably should have. I still believe that ad blockers are necessary today, but I’ve learned over the last few crazy days that I don’t feel good making one. Even though I’m “winning,” I’ve enjoyed none of it. That’s why I’m withdrawing from the market. I’m just not built for this business.
Here’s another example of why product/founder fit matters:
I was at a conference when I met Chris. He’d spent his whole life in the lottery business. He had just identified a significant opportunity: China and India were just entering the legal gambling market. He had already inked deals worth millions of dollars and asked me if I wanted to join him at the company.
I thought about it. I saw potential: Chris had a product that governments overseas needed and wanted. Getting to that market first has enormous advantages.
But ultimately, I declined.
For me, a lottery product doesn’t align with my values. I don’t gamble. The money was attractive, but I couldn’t see myself working on it every day. It’s just not right for me.
I’m not saying we should only build products that are “exciting.” It's ok to create a "boring" product. The important piece is that you're solving problems for a group of people you’re passionate about. If you can make money doing that, without undermining your values, you're winning.
Market checklist
Selecting a target market for your software product is one of the most important decisions you’ll make. Evaluate each potential market with this checklist:
- Are you familiar with this market? Have you worked with them before?
- Is the market easy to reach?
- Do they have the ability to pay for products?
- Do they have the desire to improve themselves / their business?
- Is the market big enough?
- Would you like to have them as customers?