How to start a business and select the best market niche for you
22 Nov 2019
Entrepreneurs are normally creative people with inquisitive minds. They constantly generate and select ideas. This article is about the selection of business ideas. Being selective about the ideas we take further is one of the most difficult (and crucial) choices we have to make.
Let's go back to Mike, a lawyer and entrepreneur who wanted to have more clients while doing less.
In the article on Persona, I described Mike’s situation. He didn’t have much money to spend on targeted marketing, so the young entrepreneur needed to maximise his budget by ensuring every lead cost as little as possible. Mike chose between people:
- Starting their adventure in business.
- Who run companies and are looking for an investor.
- That want to sell their company or shares in it.
- Planning to invest: business angels, accelerators, funds.
- Looking to buy a company, e.g. competition.
Lead - potential customer. AKA a sales lead, i.e. a consumer (unit) or company that is interested in a given product or service.
How do you choose the best market segment for your service? How do you find the right market niche? For Mike, the most important selection criterion was the ease of obtaining a lead online - the person who’s just starting their adventure with business. It was less important to him how much he could potentially earn by servicing investment funds. First things first.
Choosing a market segment for a startup
Tier one: Choosing critical success factors for our business idea
Mike wanted to choose the best market segment to use to launch his business. When compiling a list of critical success factors, he took into account only those that are directly related to his problem. For example, the cost of reaching a potential customer and the size of the market was more important to him than geography.
Books on management even say that one should not study all the factors of success, but only choose the most relevant 20% of them. The 20% will be 80% responsible for success or failure.
To make a choice, Mike has compiled a list of the most important criteria:
- Market size.
- The cost of reaching a potential customer.
- The level of competition "attacking" the same segment.
- Customer expectations towards the level of service.
- The price at which the customer can buy his service.
- Customer openness to new service providers.
Tier two: Evaluation of critical success factors and determination of their value
At this stage, Mike had to give different weight to each of the factors, because not every potential customer is as important to him. When determining the level of importance of factors, it is recommended to think in terms of one to three points. This facilitates both weight evaluation and final counting.
While making the assessment, Mike asked the question: how important is a given factor for my service?
- Three - very important.
- Two - medium importance.
- One - not important.
Due to the fact all factors on Mike’s list were very important, they received the highest priority - three.
To assess the value of individual factors, Mike prepared a scale of one to five, where five is great (lots and easy), four - above average, three - medium, two - below average, one - bad and difficult.
In order to be able to apply the scale to each of the factors, Mike explained each of them with questions. He knew how important it was to apply the same criteria to each of the five assessed segments:
- Market size. Are there many clients in this area?
- Easy to reach potential customers. How easy is it to reach the client?
- The level of competition that "attacks" the same segment. Is it easy to fight competition in this segment?
- Customer expectations towards the level of service. Is it easy to meet a customer’s needs?
- The price that the customer can pay for the service. How much is the customer willing to pay?
- Customer openness to new service providers. How open is the customer to a new supplier?
Mike placed a list of factors along with specific questions under each of the assessed segments, along with the appropriate weight criteria. Thus, he began to determine the actual value of the factors.
Mike, answering each question, used publicly available information (CSO statistics, news on economic portals), as well as industry knowledge he had obtained so far.
Let's go through these questions in turn.
Are there many people starting their adventure in business? In the third quarter of 2019, 87,788 business entities were registered, 2.6% less than in the corresponding period of the previous year - according to CSO data. This result deserves a four grade.
Are there many funds and investors? The Polish Investment and Trade Agency reported it worked with a variety of foreign investors who financed 71 projects in 2018. Their value exceeded EUR 2.13 billion, while in 2015 it was EUR 500 million.
We should add that there are 130 venture capital funds operating in Poland, and the total value of investments made in 2018 amounted to EUR 177.9 million, according to the report "Golden Book of Venture Capital in Poland" by the Startup Poland foundation.
These numbers deserve a rating of three. It’s easy to make an assessment. The three are in the middle of the scale, whereas, extreme ratings affect the final grade the most.
Is it easy to meet the needs of a given group of customers? For people who are just starting their adventure with business - yes, easily (grade five). Such people have little requirements, unlike experienced players from funds or companies that buy their competitors.
Satisfying the expectations of experienced players (e.g. investment funds) is very hard (one rating). But unlike novice businessmen, funds pay more, and since they pay more and have high requirements, they are served by experienced larger law firms. The funds are reluctant to change lawyers and aren’t guided by advertising on Google or Facebook when doing so.
Tier three: Multiplying the weight of factors by their value and adding up the final result
Mike created a table where he assigned a rating to each question in a given segment.
Then he multiplied the weight of the criterion (three) by the actual weight of the factors. He added them up and received a value for each segment. The higher this value turns out, the better the segment is from Mike’s perspective.
The segment of people who are just starting their adventure in business received a rating of 72, and the investment fund segment, although it looks more prestigious, received a rating of 39.
Analysis of critical success factors
This method allowed Mike to analyze critical success factors to decide which market segment is the most attractive to him. Mike made a more analytical and less emotional decision. The method allowed Mike to exclude factors such as prestige, ambition and belonging to a selected group of people from the analysis.
Analysis of critical success factors at a glance
If you have several options when deciding on a business idea and looking for a niche market you could enter, you can use this method of analyzing critical success factors:
- Choose critical success factors.
- Assess critical success factors and assign values to them.
- Multiply factor weights by values and add up. This will create a ranking from the best option to the worst option.
Product Design and choosing a niche market, or how to implement a business idea.
I have used the analysis of critical success factors in practice several times. Recently, I was implementing a project in the field of service and product design for a medical startup.
The company's president needed to make a preliminary selection from almost 40 ideas for service segments. We provided a tool that allowed selection through the analysis of critical success factors. In this way, we found a market niche and selected four business ideas for the team to move forward with, preparing prototypes and then testing them. We saved a lot of time and money for a customer that wouldn’t succeed if he’d had to test all the ideas, or if he’d chosen the wrong one.