The Ideal SaaS Market Size: Go Too Big and You’ll Fail
Every expansion-stage SaaS company wants to dominate its market, but most founders don’t build and execute a market-dominating strategy. The problem is that they want to win the entire market so they don’t start by getting clear on the market targets that they want to dominate. Since they don’t have the right focus, they can’t build the right product or go-to-market strategy to dominate their market. This post is all about narrowing your focus and aiming at the right customer segment(s). If you do this, you will have a much better chance of dominating your markets and becoming a great, large company!
Getting to the Expansion Stage
Companies start from various angles. Some founders see products in the market that they think they can improve on (ultra-simplicity is a major current theme — for example, “consumerizing” business products). Other founders identify buyers that are willing to pay a lot of money to solve a particular business problem and then build a product that the buyers purchase. Another frequent angle is founders see a need in a particular domain and want to address that need. Most of the time, the post-founding of a company’s development is messy. There is a need to get a product out the door, a need to get some early users of the product, frequent iterations to improve the value of the product to the early users, and, ultimately, a need to find a source of revenue. So they start developing sales and marketing approaches. Frequently, companies pivot as they can’t find the right product / market fit and need to make adjustments. At some point, the successful early-stage companies start growing and reach the expansion stage. This is the point when company founders really need to step back and determine what markets they want to dominate. Unfortunately, many companies are swept up in whatever momentum they have and simply want to do more of what brought them to this point. The product-focus worked? Do more of it. The inbound marketing worked? Do more of it. The sales approach is working? Do more of it! Some companies are successful without developing and executing a great market domination strategy. The product / market fit is that great and the company is sucked into the vacuum of a unique market. In my experience, this is an extremely rare case reserved for the really lucky companies who are few and far between. The majority of companies flatten out early because they hit some kind of natural limit: Their product might only appeal to a small number of customers. Their marketing channels get saturated. Their rate of new customer addition can’t overcome the rate of customer attrition, etc. The good news is that there is a very straightforward approach to dominating one or more customer segments by building and executing a market domination strategy once you get your SaaS company to the expansion stage.
You Dominate Markets by Targeting Customer Segments and Narrowing Your Focus!
Market domination strategies start with the customer segment(s) that you want to dominate. Let me repeat, market domination strategies start with the customer segment that you want to dominate. I am emphasizing the point because very few entrepreneurs actually do this. Most entrepreneurs are drawn to focusing on their product, their marketing approaches, or their sales approaches, and they don’t step back and consider the customer segment(s) that they want to dominate. My point when I speak with entrepreneurs is that you want to leverage whatever you do as much as possible. Build as little as possible and maximize the market impact of whatever you build. You do this by finding the best customer segment that you can dominate and then do the minimal work possible to dominate it, both with your product strategy and with your go-to-market strategy. The best customer segment for SaaS companies is a group of target prospects that:
- you can build a single whole product for that will be the best product for that segment’s users
- you can build a single go-to-market (GTM) strategy for that will be the best GTM strategy for that segment’s buyers
- represent the best opportunity for the best results
In other words, you can build a single product and GTM strategy that will dominate that very attractive segment. You can learn more about finding your target customer segment here.
11 Objections to Focusing on One Customer Segment
I get several objections from entrepreneurs when I give them this advice. Here are the more frequent objections and my responses:
1) But we already know our markets well. Am I missing something?
Yes, you are missing something. I have never spoken to a company that truly understands its markets perfectly. Some have a better understanding than others, but there is always more that you can know. The key is to find the unique understanding and insights that only your company knows and then use that insight to help you build a killer product and a dominating GTM strategy. You can never know enough about your markets!
2) But I can easily sell my product into more than one segment. Why would I limit my market?
First of all, you need to validate that you can easily sell your product into more than one segment. If it is true and the same product and GTM strategy can be used across segments, then you probably have the opportunity to attack multiple segments at the same time — perhaps with minor adjustments to messaging and collateral. You may also want to check your definition of each customer segment, as you may be using too narrow a definition. The idea is to narrow the focus enough so that the same product and GTM strategy dominates. There is no need to narrow the segment focus any more than that.
3) But I want to be a large company! Won’t this approach limit my growth?
The answer is NO. If you do it well it will speed up your growth. By focusing on the best customer segment, you will have happier customers and a better win rate, and you are likely to have more customers doing your marketing for you by becoming customer evangelists! Narrowing your focus leads to better results. Once you have the program in place for your target segments, you then add the next logical segment(s) to your effort.
4) But I have learned it is all about product iteration. I am supposed to polish my product, see how the market responds, and then do it again. This approach is different, isn’t it?
Yes and no. This approach leads to tuning your product toward a specific segment that you want to dominate. You can still use an iterative product development strategy. The only difference is that you should focus your efforts on your target segment. You have many users from different segments, but you only want to better understand the feedback and usage from the users in your target segment, and then use that feedback to steer your next iteration.
5) But I have sales numbers I need to hit. Won’t this approach limit my sales?
This approach does have the potential to limit your sales in the short-term while you are building your focus on your target segment. However, the way that I propose companies implement the approach is in product management and marketing first. The product management group tunes the requirements to your target customers and the marketing group starts steering messaging, content, marketing channels, and influencer marketing toward the desired segment. The sales group continues to attack the leads that it has, and — over time — the leads turn more and more into leads from your target segment. Then the strategy is fully implemented.
6) But what happens if I get an inbound lead from a prospect that is not in my target segment?
This is a great question. When I get it, I lay out the idea that the market domination strategy is where you put your “proactive” resources to dominate your chosen customer segment. You can still have a reactive strategy of gathering customers that come inbound from other segments. The key is just to put as much resources as possible against your proactive strategy, and to minimize your resources against your reactive strategy. This starts getting pretty specific, but my point to most companies is that if a prospect wants to buy your product, sell them your product. This assumes that you will sell them your core product and service them in the same ways that you service your target segment. If you need to change your product or service approach, my recommendation is to wait until you decide to put a focus on their specific segment, instead. This answer is arguable, but tends to work. The key point is to put as much wood as possible against the arrow aimed at your most desirable customer segment in order to dominate it. If your efforts stir up interest in prospects that aren’t part of your proactive strategy, you can still allow them to purchase your product with a reactive strategy. Just manage it!
7) But does this mean that my website needs to focus on this specific segment? What about the reactive strategy?
This is another great question. The simplest thing that you can do is to have a relatively generic home page that has either buttons or drop-downs for each of the segments where you might get customers, so that a prospect can easily get to the section that speaks to them. You can then put a major effort against tailoring the section for your target segment with all of the messaging and content that they need so that you really nail that segment. You can lightly tailor the other sections of your site so that other prospects that come will also understand that you do sell to them, as well. A somewhat different approach is to create separate websites for each segment, perhaps under different brand names. One of these directions might be more obvious to you and there are pros and cons for each.
8) But the best companies these days are doing inbound marketing, which brings in the entire market. Your approach is different, isn’t it?
No, it isn’t that different. First of all, you need your marketing strategy and marketing tactics to be tuned predominantly toward your target market (I defined 8 pieces to a marketer’s wardrobe in a recent post). I always agree that inbound marketing is a great tactic for all SaaS companies these days, but if you are going to win in a particular segment then the content that you produce and the inbound channels that you use most should be mostly oriented toward your target customer segment. Also, the ideal measurements of your inbound marketing success should be driven by the success of your target prospects rather than the success of all of your prospects.
9) But I am trying to get venture captial funding and they want to invest in companies that attack large markets. Won’t this approach make them walk away?
This is a good question, as well. VCs want large markets, so you will need to convince them that attacking a series of segments is better than attacking one monolithic market. The more that each market is similar and you are able to articulate that, the more convincing you will be. The more that each market has unique product or GTM needs, the less convincing you will be until you have successfully attacked two or three segments. Frankly, this is a tricky issue, and I don’t have a good answer to it at this point. Sometimes I suggest that companies create their market domination strategy after they receive VC funding and I always recommend it to companies that I work with, but you also want to make sure that you are aligned with your investors and board members.
10) But we don’t have the resources to figure this out. What do I do?
All companies have resource issues, but some also have priority issues. It doesn’t take long to get this work done, so prioritize it! If you need help, ask your local business school for some resources, or get one of your bright business analysts to take on the project.
11) But we don’t know how to figure this out. What do I do?
Download OpenView’s ebook on finding your best customers and follow the steps. The basic approach is to do broad marketing to get to the expansion stage, and then examine your resulting customers and segment them. Then pick your best segment. You could call this approach “crowd-sourced segmentation”.
The Importance of Focusing on Customer Segments
A major failure mode that I find with company management and also with board members is that they very easily switch the conversation from one oriented to customers segments to one that is either product oriented or sales-and-marketing-process oriented. They can’t stay customer-segment oriented. They tend to have a very strong focus on either product or sales, and they have a difficult time getting reoriented toward customer segments. The problem is that both product and sales and marketing are designed around specific customer segments, so if you don’t have a great understanding of the customer needs in your target segment, how can you possibly develop the right product or develop the right GTM strategy? Hopefully, this post has convinced you that you need to start your market domination strategy with your target customer segment(s). If I have convinced you and you have your segment focus, your next step is to understand the 12 market targets that will help you develop your strategy. Finally, you can use your understanding and insights from your targets to develop your competitive advantage, business growth strategies, and company development strategy.
What do you think? Why wouldn’t you get a sharp focus on your target customer segments?