Why does a startup fail? Let me tell you of one reason, which I experienced first-hand: targeting too broad of a customer segment.
When people talk about product-market fit, they usually focus to the scope of the product that is being offered. But what’s equally important is the scope of customer that the product is being offered to.
In this post I aim to explain why finding the right customer scope matters, how to know if you’re targeting too broad of a customer scope, and what you can do to get back on track.
Most startups are better off focusing on a narrow target customer segment, and only widening their focus once that segment’s needs are met (or until a pivot). This is not a new idea: the belief is shared by many Product leaders:
“Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it's easier to dominate a small market than a large one. If you think your market might be too big, it almost certainly is.” — Peter Thiel, Zero to One †
Said another way:
“For most types of businesses, I encourage teams to construct product strategy around a series of product-market fits.” — Marty Cagan, Inspired
A compelling product for a narrow segment has potential: it will provide options to grow into a bigger business. But in most SaaS startups, a mediocre product for a wide audience is a house of cards: eventually churn will undermine its ability to grow.
The guidance from these Product leaders are clear:
While the idea of having a narrow customer focus may make sense to many Product Managers and founders, it’s difficult to put into practice. Choosing a narrow target implicitly means going after a smaller slice of the pie. Especially for venture-backed startups, which are rewarded for having grand ambitions, choosing a narrow target might seem to be the opposite of what they are trying to do.
In reality, the concept of a narrow target customer is perfectly compatible with (and even a practical requirement for) having broad ambitions. The only difference is the timeframe that is being referred to. Starting narrow is merely the path to eventually grow larger.
It’s perfectly normal, for even successful startups, to need to question and refocus their target segment. This has been true of each of the startups that I’ve been a part of. At Gusto, we needed to decide between sticking with smaller employers or going after larger businesses. At Zeitgold we needed to decide between offering our product to businesses in multiple industries vs. only a single industry. At Moss, we needed to decide which user role and geographic market to prioritize.
One of the most valuable strategic decisions you can make with an early-stage product or feature is to define a clear and narrow target customer. And here it’s more important to be decisive than to be right. You can and should evaluate this decision regularly through your product discovery work. You may get new insight that causes you to change your target to a different segment (that’s great!), or you may get some more nuanced insight to define your segment more precisely (that’s also great!). The point is it won’t be perfect from the beginning but it’s important to have the focus.
Ideally, we would always start with a narrow-enough target to begin with. But in my experience, startups realize at some point that they have gone too broad (or are at risk of going too broad) and then need to reevaluate their target. So let’s talk about how to assess whether your target customer is sufficiently narrow.
If you have even a loose pulse of your business you can see indications that you may be going too broad. Maybe you have recently started to acquire a different kind of customer than the ones you started with. Or maybe you are starting to see that the customer’s you’ve always gone after have needs that are more nuanced than you originally thought. You might see customers are asking for different features than you’ve heard about previously. Or the cracks in your product are starting to show themselves more clearly./* Find your Google Analytics ID here: https://support.google.com/analytics/answer/9539598?hl=en */