In the pantheon of business books, Geoffrey Moore’s Crossing the Chasm ranks higher than most. It describes the process of moving a product from a community of users who are early adopters into the mainstream.
I read and wrote about this book years ago on another blog, but was recently reminded of a particularly useful conclusion stemming from how Moore defines a “market.”
Defining such a broad term may seem like a trivial semantic exercise, but Moore makes it tangible and useful. Quoting from the book’s 2002 edition, a market is defined as:
(1) A set of actual or potential customers, (2) for a given set of products or services, (3) who have a common set of needs or wants, and (4) who reference each other when making a buying decision.
He draws particular attention to the last point. Why is the connectivity of customers important in the definition of a market?
If two people buy the same product for the same reason but have no way they could reference each other, they are not part of the same market. That is, if I sell an oscilloscope for monitoring heartbeats to a doctor in Boston and the identical product for the same purpose to a doctor in Zaire, and these two doctors have no reasonable basis for communicating with each other, then I am dealing in two different markets….
The reason for this is simply leverage [emphasis added]. No company can afford to pay for every marketing contact made. Every program must rely on some ongoing chain-reaction effects — what is usually called word of mouth. The more self-referencing the market and the more tightly bounded its communications channels, the greater the opportunity for such effects.
Put differently, many small markets do not make a big market. Some entrepreneurs fail to internalize this lesson. They build and optimize a product for a small market and attempt to modify it incrementally for each new (but small) adjacent market with no connectivity.
Without connectivity between populations of customers, these founders may as well be selling to two different markets. Each incremental population requires additional investments in product, sales, and marketing. The up-front costs — in both cash and mental bandwidth — can only be amortized over the new population of users, not the aggregate. This “adjacent market” strategy often feels, in retrospect, like starting from scratch with each new adjacency. It lacks what Moore calls “leverage.”
A classic example is the startup that succeeds in winning over SMBs, but fails to take its product up market. I’ve seen a number of companies struggle over the years re-tooling their product and re-architecting sales and marketing channels in order to access customers who can spend more dollars with them (i.e. mid-size businesses). This strategy of going up market fails far more often than it succeeds because there are very few products that truly scale up the organization with little change in product features or distribution strategy. Moreover, SMBs rarely function as a reference for a big ticket sale. Little connectivity exists up the chain. The founders of these companies often find themselves running two startups in one — with neither being truly successful.
We prefer to invest in entrepreneurs attacking a single, monolithic market. The benefits of leverage and focus far outweigh the challenge of grappling with what is often a more competitive field of players chasing a bigger opportunity.
The starting point might still be a niche (or, as my partner John Vrionis says, a “desperate”) user, but it must be a niche with adequate connectivity to the mainstream. Here are a few good examples of this phenomenon:
- Airbnb started with millennial travelers attending conferences in cities — obviously a niche market — but, it turns out that these folks also travel for pleasure. A fraction booked Airbnb for their next trip, and a fraction of those eventually became hosts. Hosts posted more inventory in more mainstream locations, which encouraged new demand. Thus started a virtuous cycle that grew the business into the mainstream.
- The first users of thredUP* were self-identified “thrifters” who shopped frequently at secondhand stores. Their vocal product reviews attracted others in the mainstream, who had never shopped thrift before. Today, the majority of shoppers on thredUP make their first second-hand apparel purchase on the platform.
- Facebook launched at Harvard College in 2004, when I was a student there. It quickly scaled at other universities and then famously opened up to anyone with an email address in 2006. Its success in crossing over to the mainstream has many viable rationales, but one is the simple fact that its collegiate users (like me) eventually graduated and wished to maintain their connectivity post-college and continue to add new friends.
Like the the founders of these remarkable companies, I’d encourage other founders to anticipate the connectivity of their early adopters to mainstream users in a larger, monolithic market segment they can eventually own. The prize might be bigger than you think.
* Disclaimer: I am an investor in thredUP via a prior venture partnership.
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