The 1% fallacy

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.

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

http://sivers.org/1pct

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.

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%.

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."

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.

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.

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!

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.

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.

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

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 :)

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.

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.

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.

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

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

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

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.