
Ask HN: my startup addresses a small market. How much of a problem is that? - smallmarket
Longtime HNer on a throwaway account.  I've just started work on a startup making a web app for a particular type of business.  (Sorry about the intentional vagueness.)  There's something like 5000 businesses of this type in the U.S.  With subscription billing, if the average customer is paying $25/month, I'm looking at a <i>total</i> market size of $1.5 million/year.  Granted, maybe there are additional apps I could build in the same domain, and other unknown sources of revenue, but I'm starting to worry about potential for growth.<p>Am I overthinking this?  Have any of you launched companies into markets of similar (or smaller) apparent size?  What problems am I going to run into, and what's the best way around them?
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Towle_
You ever hear of a publication called Congressional Quarterly? Extremely niche
market: people willing to pay out the ass for the best and fastest coverage of
everything (and I mean _everything_ ) related to Capitol Hill. Government
employees, contractors, lobbyists, and oh, you know, 95% of Congress because
they're just that good.

They offer a large number of even smaller niche services; you're sort of
expected to make your own bundle of subscriptions that apply to you. But as
you may guess by their name, their flagship publication is the quarterly one.
Yeah, their big moneymaker is published just four times a year.

You know how much CQ charges for their services? Hint: this is their
subscription page: <http://corporate.cqrollcall.com/wmspage.cfm?parm1=79> Yes,
that's like 30 different phone numbers you're looking at. No, they don't let
you subscribe online.

When that happens, you're either dealing with someone living in the stone age
or a hyper-niche publication that _everybody who's anybody_ in the world of
Federal politics subscribes to, despite its absurd pricetag (e.g., four
figures for a one-year sub to just Quarterly). That subscription isn't a
status symbol, it's a necessity. Their livelihood depends on the information
Congressional Quarterly provides.

It doesn't matter how small your market is. If your product is only of value
to a slight fraction of the population, then make it so good they can't live
without it. And charge out the ass for it.

~~~
Maro
A similar example is Forrester Research, which charges $1750 for most of their
~10 page PDF reports.

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patio11
If your count of the number of businesses there are is accurate, than that
sounds like a very small number of potential customers. How are you going to
address them all? Unless they have a website where they all hang out to talk
shop, you'll have to spend money to get to them, and $25 a month does not
permit all that much of a marketing spend.

I sell bingo cards to elementary schoolteachers. The idea strikes most people
as pretty niche. I once estimated the total addressable market at 2,000, which
turned out to be severely understating the number. (Using Twitter accounting I
have over 200k users.) If I had acted upon that estimate, I probably would
have shut the business prior to starting and never learned I could sell to a
multiple of that.

It is highly likely that you are underpricing the service at $25 per month,
particularly if it creates revenue or provably decreases costs for the
business involved. That is a fraction of what an ad in the Yellow Pages costs,
for example. (They cost enough to have pricey sales reps pitch them directly
to customers.)

There is always the option of using the revenue/experience/etc you get from
this app and using it to power your next adventure, by the way. If you're
intimately connected to this problem domain and will have far and away the
best solution for it, and can't see a path to more than $100k revenue per
year... oh well? Try it, learn a little, apply your lessons to attacking the
next problem.

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gizmo
I have a SaaS app, but in a larger (and crowded) market.

First of all, I don't think you should charge $25 per month. A company of 10
people spends more than $25 per month on toilet paper! If you're in a market
where your customers are cheap or have no money (or both) they may actually be
unwilling to pay more than $25 a month. In which case you should ask yourself
why you're entering a market where your customers have no money and no desire
to spend the little money they have?

You're in software! Software is used in every single company in every country
in the world. In planes and cars, in phones and toasters. You could be
building _anything_. You could be saving companies millions of dollars with 12
lines of clever Perl code!

But I digress.

\- the rule of thumb is that you should charge high prices in small markets
and low prices in huge markets. You need a good reason to deviate from the
common sense route.

\- you generally don't need to worry about total market size. Worry instead
about reaching potential customers in the first place.

\- If there are only 5000 potential customers, why not really _sell_ to them?
Get a fresh college graduate to cold call potential customers and schedule a
meeting. Then sell them a site license for $10.000+ and get them to buy a
support contract. This I'd say is the "default" way to sell to these niche
markets. For $25 a month you can't afford to spend any money on customer
acquisition. You can't afford phone support. Every hour you spend per customer
on email support is equivalent to 3 months of use of your product/service.
Insanity!

\- Customers who are only willing to pay $25 a month are a not the easiest
customers to have. All customers who pay for my most expensive pricing plan
are my best customers. They don't email me, and if they do they don't make
demands. They pay on time, every time. The people who send 5 emails in a
single week end up purchasing the cheapest plan and end up leaving after a
couple of months. You're going to attract these customers with a $25 price
point.

\- monthly payments doesn't mean "free money forever who-hoo!". It means your
product has to convince every customer every month again your product is worth
the money.

\- ignore all of the above if your goal is to get to ramen profitably as
quickly as profitable. You're going to make so many mistakes when building and
selling your first product you might as well accept that you're not going to
make a lot of money. Building a second product is a lot easier when you're
already profitable.

\- it's normal to question yourself when just starting on a new product.
Everybody else is flying blind too.

\- if you can get to the point where you have $200.000 profit where you have
to put in 2 hours a day to keep things running smoothly you've hit the
jackpot. You can then use your experience and funds to build a bigger and
better company that can grow to millions of revenue.

\- growth will be linear for your kind of app, not exponential in nature. If
you need another 4 months to build the product and another 2 months to get the
billing/subscription stuff to work right and another month to set up your
company and legal issues you won't realistically launch before April 2011. If
you get 5 new customers every month with an "average" marketing effort (and
this is not extraordinarily pessimistic) you'll have only 60 customers after
12 months! Of which you're going to lose at least 30%. So you're looking at
$25 * 40 = $1000 monthly revenue 12 + 6 = 18 months from now. People are not
kidding when they say starting a company is a lot of hard work! Starting a
SaaS app is not an instant path to riches.

I've written way more than I planned to so I'm going to leave it at this. I'll
just say that I don't have any regrets and starting a SaaS business was one of
the best decisions I ever made.

~~~
terra_t
The sales people at the last place I worked were looking at a target market of
5000 firms, but they were looking at contracts that would cost $10,000-$30,000
a year.

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waterlesscloud
One thing I'd mention is that your price of $25 might well be several times
too low. Businesses, even small business, will pay a lot more monthly if
you're providing actual value.

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rossj
>There's something like 5000 businesses of this type in the U.S

Don't mean to be rude but the world doesn't end at the US border. There are
likely to be other companies in the same market outside of the US, why write
them off before you've found out the size of the non-US market.

------
zaidf
I would be more concerned about what % of that 1.5M you can make and how
confident you are of that. Market size just by itself is a pretty useless
figure in most situations if you don't get into the nuances.

We are in a similar market-size(even smaller). But this issue has never really
worried me too much. At this stage, I am a lot more concerned about _how
easily_ I can make the sale in a market than how big of a market it is. _Right
now_ , I would rather be in a small market I can easily sell and make
payroll/salary. Once you have that covered, you should be able to come up with
new product ideas for bigger market.

This is more of a problem if you are going the VC route. If you are
bootstrapping, it is more important IMO to focus on not dying before shooting
for the stars. So if you are not financially safe(ie. no vc/angel) and can get
50% of a $200K market in 3mos with some certainty, I'd go for that over being
in a 100M market with a lot less certainty! Of course larger market does not
automatically mean more risk. But if it does, I prefer the smaller market.

Rephrase your question:

1\. How much money do I need in short-term to not die as a start-up? Or do
I?(may be not, if you are well funded).

2\. What are the paths to getting the $ along with the _seeming_ risks? You
can cold-call or buy some clicks for each market and see which one is an
easier sell/less risky and vice-versa.

tl;dr: if you are bootstrapping, go after whatever market is _most quickly_ to
get you your min $ you need to survive. maximize profit later with new
products/bigger markets.

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anonymous245
I would start thinking this way: how much _effort_ are you putting into
serving this small market? If the effort is small, ROI might be worth it.

~~~
shib71
More: the size of the market also indicates a certain fragility. The chance of
competitors/demand/etc may mean that eventually it won't be worth enough money
to commit further effort to. If you can bring your app to a point where it's
sellable and maintenance work to a point where there almost isn't any, then
you have something.

Edit: Also - read everything patio11 has ever written
(<http://www.kalzumeus.com/>).

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coryl
Market size matters. If you're trying to build the next big thing, this market
won't suffice.

Take your potential market pie of $1.5 m, apply a reducing ratio to factor in
businesses that won't use your service, customers with competing products or
substitute products, etc. to conservatively estimate what your company can
realistically attain.

With fewer customers, you may have higher marketing expenses because you'll
need to target and focus them individually. But again, it depends on what your
product is; if its something they absolutely need, then this obviously isn't a
factor. Also a factor is how much work you need to put in as another poster
mentioned. If its not that much work, it could be worth it.

A friend sells SEO software subscriptions for $50-$100/month, making about a
million a year. The market is probably only a handful of companies, maybe 6 to
12. Very lucrative for a 2 man operation, make a ton of money by just
maintaining the software and rolling out updates, improvements, new related
products, etc. He doesn't have to do too much selling because the software is
in demand; it sells itself.

------
il
It depends on how good you are at upselling and cross-selling.

If you have a tightly targeted user base and are the market leader in that
niche, there is a lot you can do. For example additional services, job board,
JV with suppliers for those businesses,etc.

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stoney
It largely depends on your goals and also the work required to develop & run
this startup. You wouldn't have to get too many of those businesses signed up
to earn a full time salary.

Take a look at <http://www.softwarebyrob.com>, which is all about
micropreneurial software businesses (basically targeting very small niches) -
his book Start Small, Stay Small is interesting reading. Patrick McKenzie's
(or patio11 on this site) Bingo Card Creator would be another good example
(<http://www.kalzumeus.com/>).

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SabrinaDent
How much of a problem for what? It's not awesome if you want VC, but it's
great if your plan is to bootstrap growth. Why? Because with such a target
audience like that, your route to market is going to be really clearly defined
and as a bonus, pretty low cost. Phone calls, email and direct mail to a
market of 5,000 is cheap. Industry gatherings (conferences, trade shows,
exhibitions) are likely to be few, easily identified and prospect dense.

I agree that for very niche products, $25 is too probably too low. Do you have
a solid analysis of the value delivery?

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guynamedloren
Price high. Better yet - price ridiculously high.

At $25 a month, you are creating the limit of your market size at $1.5MM. If
$1.5MM isn't enough for you, you're nailing your own coffin shut. You will
never exceed that limit unless there is a sudden influx in businesses to the
niche or you drastically change your product - neither are very feasible or
ideal situations.

I read somewhere that you should set your price as high as you can without
breaking out in laughter. Almost a ludicrous concept at first glance, but
ponder this: to your market, that ridiculously high price might be actually
seem ridiculously low for the value that your product adds to their business.

So instead of $25/mo, price your product st $250/mo. If your market sees the
value in your product, it will sell - and your $1.5MM cap becomes $15MM
instantaneously. If your market doesn't see the value in the product, adjust
pricing accordingly so that the price matches the value. After all, it is
relatively easy to lower prices, but nearly impossible to raise them.

Final thought - consider perceived value. The price itself speaks value to
some. A low price might say "We are new to the business and don't really know
what we're doing. The biggest benefit we offer is that we are less expensive
than your current solution, but we might not be able to offer you the best
service in the world." A high price might say "We're serious and we're here to
stay. Though we not be the cheapest solution, our service vastly exceeds that
of our competitors, ultimately improving your business."

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Artagra
If you want to raise Venture Capital, and are looking for a big exit then it's
a problem.

If you are hoping to create a lifestyle business (and I mean this in the best
way - I own a lifestyle business!) then it's not a problem at all. As others
have mentioned, you can make a great niche business. Furthermore, the skills
and experience you gain will be a great platform for expanding into another
business. You've created the ideal software for pet shops? Well, expand to
fruit stores.

------
staunch
Why would you go after such a niche market? Do you know it really well? Do you
have some advantage there? Can you charge more than $25/mo?

Unless you have a compelling reason to go after something so tiny you should
probably avoid it. If you have reason to believe you could own it then maybe
it would be a good source of early revenue.

~~~
zaidf
Yeah, I have seen people with domain expertise in tiny markets completely kill
it and use the revenue from it to scale company with newer products for larger
markets.

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minalecs
I think you need to ask your self if you are going for a lifestyle business or
a fundable business. In terms of starting a lifestyle business I think you
should have no issues, and will possibly do well. If you are looking to
someday get funding, more than likely its an unfundable idea.

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jessor
Startups For the Rest of Us Episode #5 might be helpful (personally I like the
whole podcast):
[http://www.startupsfortherestofus.com/episodes/episode-5-how...](http://www.startupsfortherestofus.com/episodes/episode-5-how-
to-find-niche)

 _If there is no competition, it is probably not a big enough market._

And it goes on. It's aimed at micropreneural business models but perhaps you
can take some valuable insight from it.

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TomK32
Why not double your price and make a $3 million/year market out of it? And if
there's need for 24/7 support offer a even more expensive subscription.

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loewenskind
Why does everything have to be a billion dollar market? I would be quite happy
to capture one third of a $1.5m/year market (provided that one person would be
enough to do all the necessary work). If nothing else, that would fund me
while I work on other more interesting or more lucrative things (obviously I
would be hiring someone to do the small niche job after it was going).

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tapp
Can you give some better idea of why you're charging so little? The general
rule of thumb is that the more niche/vertical you get, the higher the price
(since cost is obviously being distributed over a much smaller client base.)

My (growing and profitable) company is in a market of roughly comparable size;
I'd be happy to compare notes offline since you seem to want to maintain a low
profile.

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arethuza
$25 total per customer is _way_ lower than most non-commodity SaaS
applications. How many users do you expect each customer to have?

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DennisP
The book _Start Small, Stay Small_ by Rob Walling and Mike Taber argues
strongly in favor of small markets for startups. You won't get venture
capital, but for a bootstrap it's perfect. For one thing, it's a lot cheaper
to get your prospects to notice your marketing.

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loumf
My first job was for a company with about 1,000 total possible customers. It
was the early nineties and we could charge 35k+ per company because it was
necessary software to be in the business. I guess what I'm saying is -- can
you charge more? How necessary is it?

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jfarmer
It's often harder to succeed in smaller markets -- lots of hungry dogs
fighting over scraps.

~~~
anonymous245
Interesting. Can you elaborate with some examples?

~~~
jfarmer
Specific ones? It's hard because small businesses are, well, small and not
well-publicized.

My father operates a small business, though, in the live music industry, while
living in a remote part of the country.

You have fewer opportunities to accumulate capital which means you're more
vulnerable to changes in the market, e.g., the economy collapsing as it did in
late 2007.

If someone else decides they want your pie, you have little means to defend
yourself and don't have the option of moving into another market segment if
necessary.

In general I'd say smaller markets mean you can make fewer mistakes on your
path to success. You are more exposed in almost every way.

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antidaily
Tough one - in my experience, servicing extremely small markets has never
worked out. Their business processes tend to vary just enough to where it
becomes too difficult to build something that meets enough customers' needs to
make it profitable.

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jv22222
I think that may be something to ask at onstartups.com as well as here... :)

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ct
That's not a problem. It's an opportunity/challenge. See what I did there?

