Following my previous TIL post on Chapter 1 of Start Small, Stay Small by Rob Walling, this post covers Chapter 2: Why Niches Are the Name of the Game.
Summary:
- Reiterating the need to find a market before building a product, which is the opposite of many developers’ approach of building a product first.
- If you get lucky, you can find success with building the product first, but the odds aren’t in your favour. It’s a similar story for many VC-backed startups.
- Reasons why people still follow the VC-backed startup: The lottery factor of a massive success / cashing out, and potential personal popularity. If the reason is cashing out, it’s worth thinking what you’d do later. If the goal is to work on projects you enjoy, you can start now without taking VC funding.
- Reasons you must go niche:
- “A niche requires you to narrow your product focus”. For example, you can build the perfect product for a single person you know well. Expanding this to a group of people that you keep happy leads to guaranteed revenue.
- “Niche advertising is more cost-effective”.
- “Niches have less competition”. Big companies don’t bother with products for small markets, e.g., Microsoft wouldn’t build a product for a market that generates an annual revenue of $500,000.
- “Niches have higher profit margins”. This is a result of having less competition.
- “Niche markets are not used to good marketing”.
- “It’s easier for prospects to trust you”. This is because they’re more likely to hear about you multiple times (related to the cost-effectiveness of advertising).
- Warm niches exercise: Write up a table with two columns. Then fill it up with names of people you know (column 1) and their work experiences / hobbies (column 2).
- Common sentiment: All good niches are already taken. People starting out want an indication that the chosen niche is going to work, but it requires a leap of faith. Quoting previous chapter: “things will never be as clear as you want them to be”.
- Approaches to brainstorming niches (warm niches are best to increase your chances of success, but some cold niches can be made warm through networking):
- “Look at all areas of your life”.
- “Look at occupations”.
- “Cheat” by going through lists of existing ideas (the book includes many links such as A Startup A Day, where the last post is from March 2011).
- Evaluating a niche:
- Focus on consumers and/or small businesses as they have purchasing authority, make decisions fast, and search for online solutions (not the case for large companies and government agencies, for example).
- Check that the market is large enough. Rule of thumb: can place an ad in a specific magazine for less than $5,000 (though offline magazine advertising isn’t recommended, and the inexistence of a magazine doesn’t imply that the market isn’t viable). Can also check labour statistics for the number of practitioners in a field. Be wary of markets that don’t have dedicated websites or magazines, and where labour statistics claim less than 10,000 members.
- Check that there’s an inexpensive way to reach customers (typically online) – your niche is unlikely to be people who visit tech sites. The focus should be on where your customers are (e.g., a niche website). Top approaches for micropreneurs: building an audience and search engine optimisation. Secondary approaches include referral traffic, partnerships, article marketing, and cold calling. It’s hard to generate a sustainable stream of prospects without the top approaches.
- It’s better to focus on vertical markets (e.g., single industry or hobby) than on horizontal markets because members of a vertical have similar behaviours, talk to each other, hang out together, and have similar needs. This makes them easier to target, and increases the chances of organic product growth. Horizontal markets are rarely a good idea for micropreneurs because they’re too large and expensive to navigate.
- Measuring market demand without spending money:
- Obtain likely conversion rates for your price point.
- Discover likely traffic volumes through keyword research tools (considering search engine traffic, incoming links, direct traffic, and advertising).
- Example: 5,000 people search for inventory software each month. If you rank #1 for the term and get another 5,000 visitors from other sources, with a 0.5% conversion rate and a $200 product, you’d make $10,000 per month.
- Exercise: Take the top five hobbies and occupations from the warm niche brainstorming, ranked by personal interest. Ask the person you know about their problems to uncover software needs and ideas. Then use keyword research tools to see if there are other ideas that the person didn’t mention.
- Measure demand using free keyword research tools. There are also paid tools that can help, especially with assessing the difficulty of ranking for a term (many free tools are junk). As a rule of thumb, multiply by four the number of searches for generic terms like attorney billing software to get an estimate of traffic if you rank #1 for the generic term (due to traffic from long tail terms and other sources of traffic).
- Check the competition – regardless of what the tools say, if the current top result is well-optimised and has a high PageRank, it’s going to be tough to beat.
- Testing an idea for less than $100 (works for SaaS but not for products that rely on network effects):
- Choose the most interesting idea from your shortlist of product options (following niche & market demand research).
- Set up a mini sales site with 2-3 pages (homepage, pricing / signup, and possibly a product tour).
- Try to get people to click a “buy now” or “free trial” button (depending on the product cost).
- Create an AdWords (now Google Ads) campaign to generate traffic.
- Track clicks to estimate the conversion rate and link it to keywords. Notify users who are interested that the product is still under development.
- If you feel bad about misleading potential customers, include a “Coming Soon” note somewhere.
Key quotes:
- “The product with a sizable market and low competition wins even with bad marketing, a bad aesthetic, and poor functionality.”
- “With luck on your side you don’t need money, good marketing or a solid product. You just need to be lucky.”
- “What matters is finding a group of people who need your something more than they need the money you’re charging for it.”
- “The best niches are reserved for people who do something.”
- “As a self-funded startup you want a market that is already looking for your product, even if it doesn’t exist. This is because creating demand is very, very expensive while filling existing demand is, by comparison, cheap.”
- “If your target market is not online, you have no chance of succeeding using the methodologies you’ll find in this book. This is non-negotiable.”
- “When you receive 50,000 visitors from one of the major media sites you will be lucky to convert five sales.”
- “Unfortunately, great products are often built and launched without a thought given to how the target audience will find out about it. You must have an inexpensive, ongoing source of new customers.”
- “With niche research the problem is not finding new ideas, but narrowing to the most effective strategies that you can implement in a reasonable amount of time.”
- “You only need to master two skills to sell online: human behavior and math.”
My thoughts:
- Despite agreeing with the overall message of focusing on niche markets, I find myself thinking of counter-examples (e.g., of people who got lucky playing the startup or product-first games). I suppose it’s similar to the note towards the end of Thinking, Fast and Slow – being aware of biases isn’t enough to eliminate them. Base rate neglect is one such bias.
- Much of the discussion around market size and the ability to reach customers reminded me of Jason Cohen’s post on the difference between successfully solving a problem and having a viable business model. As the post came out in 2023, it’s likely that people are still making the same mistakes, which is related to it being hard to fight our biases.
- I don’t fully agree with Walling’s note on choosing the micropreneur path as a way of working on enjoyable projects. Starting a business isn’t a good way to guarantee work on things you enjoy, unless you enjoy everything that comes with running a business. That is, I don’t believe that running a VC-funded startup is that different from running a bootstrapped startup when it comes to enjoyment – there will always be unpleasant tasks. In line with my post on Chapter 1, I do believe that with a bootstrapped startup the founders have more control over aligning the work with their values – it’s hard to say no to investors who are essentially your bosses. Theoretically, with a bootstrapped startup it’s easier to say no to certain business activities and forgo the potential market share that comes with them, if pursuing such activities disagrees with your values – micropreneurs don’t have to pursue growth at all costs.
- The book includes outdated references to magazine & newspaper ads, but it’s easy to mentally translate the concepts to today’s tech. I suppose the equivalents today are niche sites / newsletters / online magazines / influencer channels where one can advertise. The underlying principles age slower than specific technologies and tools.
- A trap I hit the last time I read the book in 2014 is having a product idea and then insisting that a niche exists to match the product idea. It’s probably easier to start without a product idea, as we tend to fall in love with our ideas.
- Mentions of Web 2.0 as a shiny new thing bring back memories, and show how little has changed conceptually. The recent hype around blockchain and web3 looked a lot like solutions looking for problems to me.
- It’s hard to learn from the experience and advice of others. Between 2014 and now, I’ve seen multiple examples of failures that are due to not following (or being aware of) key advice from the book. Still, I’m somewhat swayed by misleading media noise and specific founder stories.
- I’m not in the marketing world, so I’m curious to what extent things have changed around specific tooling & approaches. Walling’s newer books might help (and there are a million and one others). But again, principles are key – just like in data science and software engineering where new tools often re-implement old ideas.
- Similarly, I’m curious to what extent website traffic is important these days, as websites aren’t the only way to reach people online (e.g., there are app stores and social media channels). However, thinking about impressions and conversion rates is important regardless of the medium through which they’re obtained.
- The specifics of market demand research seem outdated. It’s probably better to rely on newer focused resources for specifics, though people still use search engines. Free keyword research tools still exist in 2023 and are probably a good way to get started. Following the exact tips from the book too closely would be silly, though.
- A mini sales site makes perfect sense, and is probably still cheap to build and test. It may even be cheaper today given the abundance of templates and tools to build static websites. Further, static sites can be hosted for free, with the only cost being the domain name (that’s the case for my site).
Key action items from this chapter:
- Do the warm niche exercise
- Find niches worth targeting (warmness is important, but alignment with interests and values is key)
- Evaluate niche market size
- Figure out how to reach promising niches
- Interview people in the promising niches
- Measure market demand for specific ideas
- Narrow down the list of ideas
- Build and market a mini sales site to gauge feasibility
That’s plenty of work, so I probably won’t get to the next chapter for a while!
Public comments are closed, but I love hearing from readers. Feel free to contact me with your thoughts.