
The 1% fallacy - aaronbrethorst
http://successfulsoftware.net/2013/03/11/the-1-percent-fallacy/
======
scott_meade
Good article. In fact, I'd go a step further and say that _any_ percent is a
fallacy. Most business plans and pitch decks include the requisite section on
market size, but who cares? The only thing that matters is how many customers
are you going to have. That cannot reliably be determined from a top-down
assessment. You don’t look at a pie and just say, “I’ll take 1% of that”.

Instead you spell out through which methods you will gain and keep customers
and how many you will gain via those methods. For SaaS, that could look like
“We have x visitors to our website. We have shown with previous products and
experiments a y percent conversion rate. From this, we estimate x * y
customers at $d/month. With your funding, we should be able to increase the
number of visitors to the product site by z% while maintaining or improving
our conversion rate."

These numbers are not a factor of market size.

p.s. The only thing market size can tell you is what the upper bounds are for
a product niche. But unless it's a very, very small niche; why does it matter
what the upper bound is. If you hit that, you've got a good problem on your
hands.

~~~
Mahn
> You don’t look at a pie and just say, “I’ll take 1% of that”.

Exactly. Pretty much sums up everything that is there to say about the
article.

~~~
james1071
100% wrong. Most products are launched into existing markets and estimating a
likely market share is essential.

~~~
Mahn
Essential for what? You can get an idea of what the ceiling of your market
looks like, but that's it. Unless you can strongly and credibly argument how,
saying you'll get 1% of the market is equivalent of saying nothing.

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revorad
“He forgot there was a number lower than one percent.”

<http://sivers.org/1pct>

~~~
colomon
Interesting... my reaction to the OP was "Duh, everyone knows that!" But my
reaction to your sivers.org link was "Great story!" Not sure if that says
something about me or about the relative writing skills of the two posts.

~~~
IanDrake
> "Duh, everyone knows that!"

I wish. I still hear it a lot.

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SoftwareMaven
I agree that you should never go into a market thinking, "If I can ply capture
X%, we'll be hugely successful." It's putting the cart before the horse.

You go into a market by finding a pain that you solve. You can go into the CRM
market if you have a method that, for even just a few companies, solves some
significant pain they have. Then, over time, you analgesic grows to soothe
more companies' pains. Then you find you captured some percentage of the
market. The capture is the result, not the plan.

~~~
rgbrgb
I've been taught that your pitch deck should have a slide on TAM, SAM, SOM
[1]. The idea here is that we show that the general market for this product
domain is huge and then we drill down to the niche in that market who's pains
our initial product addresses. It makes the opportunity much more attractive
when there's a huge market that you could potentially become the Salesforce
of, even if you're just addressing pains of flower shops right now.

[1]: [http://upandrunning.bplans.com/2012/06/22/tam-sam-and-som-
hu...](http://upandrunning.bplans.com/2012/06/22/tam-sam-and-som-huh/)

------
icambron
I don't disagree with the OP's basic point about not making "get 1% of huge
market" your strategy. As SoftwareMaven points out above, getting 1% of a
market is not a strategy at all, it's a result, and it's not going to happen
just because the number sounds small. But I do want to oppose the more general
notion that you shouldn't enter crowded markets.

A market like CRM is not one big homogenous thing; it's got tons of nooks and
crannies in it. Maybe you want to be CRM for bakeries, who, let's just say,
are largely not using CRMs yet. You'll end up with a different product, but
more importantly, you'll have different sales channels and marketing
strategies. You go after an untapped niche with special requirements, maybe
even one that's too small for giant CRM firms to target. You compete with all
of those giant CRM companies by not competing with them.

Will that add up to 1% of the market? Seems doubtful, but ask yourself what
percent of $18 billion you can run a company on. It's a lot less than 1%.

~~~
jiggy2011
It would probably be best to target niches with relatively large companies who
have very specific requirements.

Over the years I have built about 6 mini CRM systems for small companies.
Usually these start off as contact form on a webpage and evolve into something
that outputs excel spreadsheets.

Over time though, these things tend to get replaced by mass market packaged or
SaaS CRM systems simply because even though they are not bespoke to that
business they do the job well enough for the price.

The answer is probably not to make "A CRM for bakeries" but to make a "system
to help with the unique problems of large bakeries that might happen to have
CRM-like components"

If you want to build a product for a market as opposed to selling consulting
by building a system for one specific bakery then the sweet spot is likely to
be a very small target area.

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ghshephard
I love his closing comment, "Whatever you do, don’t stand in front of
investors and pitch them the 1% fallacy. It makes you look an idiot. I should
know, because I’ve done it."

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notahacker
The flip side of that argument is that two of the five biggest CRM vendors had
single digit market share (2008; Gartner via Wikipedia) and ~40% of the market
uses vendors outside the big five. It has high margins, few economies of scale
and sales that are more relationship than reputation-based - in other words
one of the markets you genuinely could get very rich off being a smaller
player with a good sales strategy and a generic solution, power laws be
damned.

You won't get anywhere near that mythical 1% without a well-costed and planned
strategy, but the same applies to trying to capture a huge chunk of a tiny
niche market like bingo card creation. Once you've stopped worrying about
phoney percentages, you can afford a lot more false starts in the huge
addressable market than with a misjudged niche product.

------
stevenameyer
The biggest issue I have with this 1% fallacy (which is a huge pet peeve of
mine) is that it shows completely the wrong mindset needed for success in my
opinion. To me it is saying we don't have confidence in our ability so we're
going to target such a large market that if we even have a small amount of
success we'll still make a lot of money.

Your aim should always be 100% market share. If you don't think that is is
possible to create a product that would be appealing enough that everyone in
that market should want to use it then narrow that market into a smaller
subset and aim to get 100% of that. You should never be ok with only 1% of
target users using your product.

~~~
kalms
I agree with this, if only to create the correct mindset from the beginning.
Never settle or be prepared to show weakness.

------
josscrowcroft
The most interesting part of this..

 _"Whatever you do, don’t stand in front of investors and pitch them the 1%
fallacy. It makes you look an idiot. I should know, because I’ve done it."_

was the end, and not elaborated on... I for one would love to hear the story
of how that turned out, with specifics!

~~~
hermitcrab
I am the author. As I remember it the pitch (for a .com company I worked for)
was going ok until I said "...and if only we can get 1% of this market...".
They flinched. I didn't really appreciate what I had said wrong at the time.
It was only when I had more experience in marketing and running my own small
company that I realized how naive this argument was.

------
gz5
When the next person tells you she will get 1% of any market then ask her to
identify her top x customer prospects by name, describe how she will reach
those customers and why those customers will buy her software instead of her
competitors.

~~~
schoper
That's pretty sexist! There's no reason to think that women are worse than men
at evaluating market opportunities.

~~~
lnanek2
I think it is just someone using female for the generic pronoun. Of course
maybe you realize and are poking fun, whatever.

~~~
schoper
If you decide to abstain from the normal generic pronoun "because women feel
that you aren't referring to them when you use he," then that very logic means
that you aren't referring to men when you use "she" to talk about stupid
individuals as above.

Hopefully, our friend above did mean the message in a sexist manner. I find
the modes of failure present in the other alternative too sad to contemplate.

------
ChuckMcM
Interesting, I may be wrong but I don't think its a 'fallacy' (after all if
you got 1% you would be successful) so much as a 'unsupported argument' which
is where you don't say "how" you get that 1%. The Derek Sivers link is also
good in this regard.

The mistake is believing that people will randomly try your product. That is
true if the threshold for their trying it is below their "don't care" point,
but if it's going to cost them more than their "don't Care" point cost they
won't try it unless sold on it.

Its perfectly reasonable (in my opinion) to go in with "The market leader here
has an $X billion market, with Y customers. _All_ of those customers have pain
foo which our product version solves. We're going to reach those customers
through the following channels with the goal of converting 1% of them to our
product which is functionally identical and less painful."

That is a 'go to market' strategy that, if you are right about the pain, can
turn your product into a going concern. But again, it solves a problem you
know exists.

However having an identical product, especially one where you don't
differentiate, means you have to get out ahead of the market leader in
acquiring new customers and that is expensive and difficult. Not a good
strategy over all.

~~~
hermitcrab
It is a fallacy because it is based on the incorrect premise that getting a 1%
penetration in a large market is relatively easy. It is quite widespread -
over the years I have heard plenty of people come out with it.

~~~
ChuckMcM
Your probably right, it would be clearer if they said "We can easily get 1% of
that market." That would certainly sound fallacious.

I have seen folks actually use 1% as a goal in a reasonable pitch, one where
the challenges were laid out and the tactics for mitigating those challenges
identified. I guess it just struck a nerve, like people who say "I hate
generalizations." :-)

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tobyjsullivan
Awesome article. Puts some classic and well established theories to good
application. The age-old advice comes through again: focus on a niche.

------
binarymax
Nice explanation and good numbers. Also bonus I'm in a wedding soon and will
probably need your software, but this is the first I've heard about it :)

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danielweber
This is also known as failure to segment the market on the old-school list of
entrepreneur mistakes.

Maybe there is a $100 B of revenue out there. But 40% of it is locked up in
internal markets, and 40% of what's left is locked up in long-term contracts,
and 40% of what's left is held in government contracts you can't get, etc etc
etc and pretty soon you need to grab something like 25% of the market just to
break in.

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10dpd
I've heard this described as a top-down versus bottom-up approach. The problem
with the top-down approach (i.e. I will capture 1% of the market) is that is
doesn't tell us much about _how_ you'll capture this 1%. By going from the
bottom-up we can clearly see how you are going to iterate and build your
userbase.

------
saosebastiao
Great reality check for you and your business...but it may or may not
translate to better luck with VCs. Plenty of them buy into this innanity, and
plenty more don't care about market size at all and will decided to invest in
whatever other VCs are investing in.

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tonydiv
Reminds me of PG's "Deep Well" concept.

------
pknerd
Imagine if Steve Jobs would have thought like that, world was not going to
experience iPhone.

------
volandovengo
This seems to be 37 Signal's model case and point. It's been doing pretty well
for them.

------
ucee054
Bollocks. 1% is not a fallacy. It's just a way of mentioning a low-risk target
without specifying the strategy.

You don't know the specifics of the strategy because you're a startup - to
quote Clayton Christiansen, the needed market research costs much more than
making the product, so you can't afford to do it - and to quote Steve Blank,
you may need to pivot if you get your hypothesis wrong.

It's called a "fallacy" because idiot VCs don't bother to note these facts,
and just want a sure fire winner business plan handed to them so they can fire
the founders from their own company.

Similarly, idiot VCs don't get why you'd want a hockey-stick graph or to say
"these figures are conservative", for much the same reasons. So these become
infamous "fallacies" too.

If you play by the rules of these idiot VCs, you will find that it's
impossible to make a business plan that meets their expectations and isn't
fraudulent. It's better to walk away than to play their game.

If by any chance you meet a sane VC, they're likely to tell you something
useful. Instead of banging on about 1% being a fallacy, they'll say something
like "at _your_ stage you need to have a working prototype before seeking
investment" or "at _your_ stage you need a more aggressive advertizing plan".

You know, something with content.

~~~
stevenameyer
But if the whole point is saying there is a lot of money in this space so it's
less of a risk then why mention 1%? Mentioning the market size and opportunity
is important but I think the issue people (such as myself) have with this
specific framing is:

1) It makes it seem like you believe there is no way you could get less then
1% market share. Because 1% is so small that it must be easy to get. 2) It
often de-emphasizes why people would choose your product over any others
because you only need such a small percentage to be successful 3) It makes it
seem like you aiming low. Aiming to get only 1% of a market to me means you
ether don't have huge faith in your product.

~~~
ucee054
_Aiming to get only 1% of a market to me means you ether don't have huge faith
in your product._

You forget the question of _time_. Maybe the product is good enough to get
100% _eventually_. But maybe you'll go bust in the meantime if you have a
ridiculous burn rate. "Aiming" for 1% means making your _burn rate sustainable
on 1%_ so can live to fight for the 100%. Microsoft wasn't built in a day.

 _It often de-emphasizes why people would choose your product_

No because that's covered in another part of your pitch, which deals with your
product characteristics. The 1% part of your pitch deals with your strategy.

By the way, you are not supposed to have _faith_ in your product, you are
supposed to have a willingness to deliver whatever product the customer wants.
That's what pivots are for. Business is supposed to be a rational process, not
based on faith.

~~~
stevenameyer
When you are talking about large markets 1% is not a short term goal. It is
important to specify how you plan to keep your company running as you grow,
but I don't see how saying if we reach 1% market share we will make a lot of
money does that.

Also I'm not saying that using 1% and explaining what makes your product good
are mutually exclusive. Just that more often then not people who use a 1%
pitch tend to focus less heavily on the why it is a competitive product. This
is just the trend I see, although I may be wrong and if there is any hard data
on this I would be interested in seeing it.

Maybe "faith" was a bad word to use. What I ment was that by using 1% it seems
like you don't have confidence in your team to produce a competitive product.

When it comes down to it 1% is often used as a place holder for arbitrary
small number, and in this case it is a complete fallacy. 1% of a large market
is hard to get, and if you can get it then why can't you get more? Basing your
math for a pitch based on this arbitrary number kind of renders the rest of
the pitch worthless.

Finally 1% is never a good metric to aim for. If you wouldn't accept it for
retention rate, conversion rate, profit margin etc why is it ok for market
share? My point is you should always be aiming higher then 1% so why use it in
a pitch?

~~~
ucee054
_When you are talking about large markets 1% is not a short term goal_

This is where you are precisely wrong. A VC wants to cash out within 3 years.

 _Finally 1% is never a good metric to aim for. If you wouldn't accept it for
retention rate, conversion rate, profit margin etc why is it ok for market
share?_

Because your short term market share goal is in this context a proxy for your
ambitions for your burn rate. So it is the exact opposite. You want your
conversion rate to go _up_ while you want to keep your burn rate _down_. 1% is
an excellent number in this context.

 _Basing your math for a pitch based on this arbitrary number kind of renders
the rest of the pitch worthless._

You will find that whatever numbers you target in your pitch are arbitrary,
absent a crystal ball that can actually tell you the future. The comical term
for this is Scientific Wild-Ass Guess.

~~~
stevenameyer
_This is where you are precisely wrong. A VC wants to cash out within 3
years._

I think we may have different definitions of "short term". When I say short
term I mean that you are in the process of proving a concept as viable and at
the point that pivots are not very costly. If you've reach 1% penetration in a
large market then you are past this point.

 _1% is an excellent number in this context._

I would definitely agree that it is a good target to hit. I'm just saying that
it should not be your golden standard. There is a difference between saying
"this is how we plan on securing a foothold in the market", and saying "If we
can get only 1% of the market then we will be successful."

 _The comical term for this is Scientific Wild-Ass Guess_

I completely agree. Thats why i actually disagree with stating a target
marketshare in a pitch. Personally I think that stating total market size, an
underserved aspect of that market/competitive advantage and how you plan to
try and break into that market should be enough. I don't think making wild
guesses at market share is really worth while at all.

~~~
ucee054
_I don't think making wild guesses_

The problem is that the Scenarios section in any business plan is typically
full of this kind of bullshit.

In business schools they teach the MBAs to layer it on by the _ton_.

The 1% thing I find frankly the _least_ offensive.

~~~
stevenameyer
If the 1% is the least offensive, I'd hate to see the rest of it. I guess I'm
glad that I'm on the technical side of things :P

