Ask HN: my startup addresses a small market. How much of a problem is that? | Hacker News Reader

Ask HN: my startup addresses a small market. How much of a problem is that?

58 pointssmallmarket33 comments

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 total 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.

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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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.

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

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.

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.

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.

A £25 per month product that a significant portion of the market wants to use is a good starting point to: i) understand what people actually want and are prepared to pay more for ii) show a strong background in the market when it comes to the series of pitches and tedious sales cycles associated with the £10,000 enterprise licences you might be able to sell to the bigger players

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.

>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.

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.

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.

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/).

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.

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.

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/).

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?

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."

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.

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.

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.

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.

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...

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.

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.

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).

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.

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

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.

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?

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

Interesting. Can you elaborate with some examples?

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.

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.

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

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

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