The Science of Targeting: How Startups Select the Perfect Niche

Sean Murphy and Etienne Garbugli offer tips on selecting the perfect niche for your startups and take questions from a live audience.

The Science of Targeting: How Startups Select the Perfect Niche

Etienne Garbugli: Good morning. Good afternoon. Good evening, everyone. So this is the exciting start of the second season of the Time to Market Podcast, which we are doing a little differently to make it more interactive. We have a live audience and will be taking questions as we go. Please use the Q&A option; we’ll tackle them as we go forward. Our topic today is the science of finding the perfect niche for your new product. We will cover basic definitions, different approaches, and some common misconceptions: what entrepreneurs need to know to get started.

Sean Murphy: It’s a really important topic. We will look at the need to focus on a niche to get started and some common challenges that you may face in executing on that focus.

Etienne Garbugli: It’s an interesting topic that relates to how to define a market, a market segment, and a niche. These concepts are often misunderstood by entrepreneurs which makes crafting a go-to-market plan more challenging. What’s your take on why startups need to focus on a specific set of customers to get some traction?

Sean Murphy: Two primary reasons: it’s more resource efficient and easier to get word of mouth and references. I typically work with teams who are bootstrapping in B2B markets with limited resources. A narrower focus means a smaller market that is less expensive to attack. One definition I like for a market is a set of buyers who reference each other’s buying decisions. Most B2B markets have specialty media that serve them, such as websites, newsletters, and podcasts, as well as dedicated conferences and tradeshows. In smaller or niche markets, it typically takes less effort to attract dedicated media and is less expensive to attend related conferences and trade shows.

In a niche market, you usually target just a few distinct job titles in a single industry or profession. Because these people share common concerns, have similar needs, and tend to be measured on the same criteria, their feature preferences and evaluation criteria for your product tend to converge. This should allow you to reduce the complexity of your initial product.

You can start in a niche and still find a big opportunity

Etienne Garbugli: One thing that can trip up entrepreneurs, or innovators in general, is the need to tell investors about a big opportunity. This product will find a massive market: it will serve any manufacturer or SaaS vendor. But when you are at the point where you need to execute, a narrow focus increases your odds of success. Your product is more likely to provide value or benefit to a specific group of people and, therefore, to resonate with them. The broader your target set of customers, the harder it is to find commonalities that simplify your product. So you want to end with a big opportunity but usually must start with a very narrow target to gain a foothold.

Sean Murphy: You face costs not only to reach customers but also to configure or adapt your product to a particular customer. The more your customers have in common, the less incremental customization you face. A niche focus tends to lower your incremental cost of adding a customer and getting them operational with the product.

Etienne Garbugli: I find there can be confusion around terms like market, persona, Ideal Customer Profile (ICP), and vertical. It’s helpful to agree on standard definitions to enable apples-to-apples comparisons.

Sean Murphy: I think the entrepreneur’s understanding of the ideal customer profile evolves. They start with theory or hypothesis, really it’s a guess. As they close deals, it becomes less fuzzy, and to the extent that their first six customers are similar, it starts to take shape; if their first twenty or thirty share similar characteristics, then they have a lot of evidence. For me, the fundamental question is, who are you targeting for your customers, and who will look at their decision to purchase or license your product and be influenced by it?

Etienne Garbugli: The jobs-to-be-done folks define a market as people or firms who share the same job-to-be-done. Even though people with the same job-to-be-done don’t interact, you can view them as part of the same market if they seek the same outcomes. So you can shape the market by positioning around a job-to-be-done, this can be a good strategy if it allows you to differentiate from other competitors.

Sean Murphy: I think that some founders resist starting small because they fear losing opportunity. They worry that if they are not dreaming big enough, they may trade a big win for a small one. Because we work with bootstrappers, we don’t have a “too small.” We don’t want to see them solve hard, one-of-a-kind problems for a single customer that others won’t reference. Still, if they can identify at least six firms that they can offer a standard product, they can reduce the ratio of development cost to customization cost to an acceptable level. Then, they have a base camp and are on their way. I know you work with larger firms: what’s your definition of a niche that’s too big or too small?

A niche defines opportunities you can win consistently

Etienne Garbugli: I look at it from the perspective of how strong your solution is compared to competitors. What opportunities can you win consistently? Can you be a major player or even aspire to win the sector? Starting out, can you define precise criteria for the opportunities you can win today and how to execute and seize them?

If you have insight into where your relative advantages are and how to leverage the financial resources and other assets at your disposal, then you can define a much broader niche, even initially. I still think it’s better to start with a narrow focus and slowly zoom out as you demonstrate your ability to win other types of deals. For example, you might start out as an add-on to an email marketing tool. You can expand functionality gradually so that your product can solve more customer problems, zooming out to go for a broader market.

Sean Murphy: Another advantage to starting with smaller deals is that they tend to resolve faster. You either close them or lose them quickly. Since you are more in hypothesis-testing mode when you start, you learn faster than you would chasing more significant deals or larger firms with slower decision cycles. That clarity is helpful, even when it’s painful. You realize sooner when something isn’t working. You are not stuck in the “land of hope” waiting for a large deal to close or a large firm to decide.

Larger markets tend to have established incumbents who are often tough competition unless there has been a change in technology or consumer preferences. Or there is a long-standing lack of innovation, which means the incumbent has been harvesting and not investing.

I attended a fantastic talk in 2019 at SaaStr by the founders of Jane Software. Jane offers practice management software for holistic health professionals. The CEO had started out in holistic health and was looking for a tool to help her keep track of her patients. But when all of the tools she was considering asked for her modem speed and fax number, she realized there had been little change in the market for over a decade. She teamed up with a cofounder and went after that as an opportunity.

Etienne Garbugli: When you can find a gap in the value that customers expect, it creates an opportunity. I’ve been researching painting companies, a small vertical served by one software firm, except that independent painting contractors rely on a different tool. I realized this deviation was due to their unique needs for making estimates for proposals. They have a very accurate model for estimating painting jobs, allowing them to win against standard construction bidding software when selling to independent painting contractors.

You can start with a narrowcast instead of a broadcast

Question From Audience Member: A startup can make one first impression per market. What’s a best practice to choose a first market so that, worst case, the downside is minimized if the initial experience is negative?

Sean Murphy: While you only have one chance to make a first impression, you don’t have to start with a broadcast; you can “narrowcast” with personalized outreach or by replying to questions in forums. This allows you to make multiple first impressions and adjust your approach based on early responses or feedback or responses.

You may believe your product will be valuable to more than one–perhaps many–niche. It can be helpful to explore two or three niches in parallel, which will allow you to compare and contrast early feedback more broadly.

Etienne Garbugli: I’m afraid I have to disagree with the premise of the question when I look at it from the perspective of a customer organization. While you can only make a first impression once on a member of a customer organization, there are many situations where you have multiple people you can contact in an organization. You can build support for a deal in different ways.

If you fumble your approach to the CEO of a small firm–say fifty employees–then you are probably locked out for a while. But there are often multiple people you can contact in a larger firm–say with a thousand or ten thousand employees.

Sean Murphy: Great point. There are often multiple doors to enter a mid-size or larger firm: you can contact different people and get different reactions.

Etienne Garbugli: I think you have more than one chance to succeed in most cases. You can start with quiet outreach to individuals without having to position your startup to the entire market. Do smaller tests first. You may have initially misunderstood the boundaries of your niche and can shrink your focus to where you are getting interest and traction.

Sean Murphy: There are four things implicit in the first impression question:

You must act with integrity and make bona fide offers you are prepared to deliver on that you believe will benefit the prospect.
You will discover shortcomings in your product, most often because prospects will raise real objections and point them out to you. I am not saying you can’t get it right the first time, but I’ve never seen it happen. You do your best to research needs, and then you have to start making offers.
The most common reaction is silence or a distinct lack of interest, not a careful and detailed analysis of your product’s shortcomings.
The next most common is an evaluation of your product followed by a decision to live with the current solution.

I learned a lot watching my oldest boy learn to walk. He fell down a lot, much more than I would have tolerated if I had been learning to walk as an adult. But he would pull himself back up and try again. He did not have far to fall, so it rarely hurt. When I fall down these days, it leaves a bruise.

I think that’s what Etienne is getting at when he talks about making small deals: you find out quickly either way, and losing any one of them doesn’t really hurt. When you work on a large deal, you must go up several steps in the customer’s chain of command. It takes a while, and not hearing a “no” can give you unwarranted optimism. Then, when you get a no from a senior manager or executive, you find yourself locked out for a year or two.

Early offers may be poorly formed: refine them as you learn what works

Etienne Garbugli: One thing I explain to startups is that you can incur “value proposition debt.” You are still learning, so your early offers are often poorly formed or incomplete. Even when they are well-formed, it turns out that an early customer who accepted it is an outlier. So, you must continue to make adjustments as you refine your understanding of your ideal customer and their actual needs. Your early customers can each have different expectations because you made different offers each time. Sometimes, you must gracefully disconnect because they are not part of your target niche.

It’s par for the course that it’s never as clean as you would like, and you need to adjust your pitch continually–and your post-sale execution and support, until you are doing an excellent job of addressing their needs. There is often a lot of friction and cleanup in that first year.

Sean Murphy: I agree, but you must remember that people in pain accept partial solutions. Prospects will pay for products that are better than their other alternatives. You don’t have to offer a perfect solution, just a better one, and move forward from there.

My training was in software engineering–although these days I am more of a recovering engineer–so I know that good engineers like to have everything worked out before they start. But you can explore multiple niches in slow motion if you start early. You don’t have to rush in. You can collect essential problems and useful questions. and reflect on what you have seen and heard. Document your experiences and insights and use them to sketch out the possibilities for a product.

My question for you, Etienne: how do you manage the possible products and potential niches? How do you decide who to talk to next?

Etienne Garbugli: Managing your exploration when customers in different niches could use your solution can be challenging. For example, if we are talking about a startup with deep technology, it’s common to see applicability to many different niches. It can be a struggle to prioritize where to focus. I look for where there is the most pain so you can deliver high impact. If you are bootstrapping, you must evaluate who will make a purchase decision quickly and can pay you. You rarely have a long list of criteria and run a complex decision process because you need to get started. You learn more from the sales process and make adjustments as you go. It’s like the Tyson quote, “everyone has a plan until they get punched in the face.” The market always surprises you–sometimes with disappointments, sometimes with serendipity–and forces you to adjust and change your plans. You have to keep steering after you take aim and enter a niche.

B2B niches vs. B2C niches

Question from Audience Member: How different is the management of niche markets in B2B compared to B2C?

Etienne Garbugli: I think B2B tends to support more variety, with more subtle distinctions between niches. You can launch a B2C product, pay attention to the different types of customers attracted to it, and then refine and segment from there. In B2B or Enterprise, there is another layer to parse: the business model for a customer firm and how they are organized. In B2C, I think you need to have a broader focus, while B2B seems to support a wide variety of niches requiring a narrower focus. What’s your take?

Sean Murphy: I am much more of a B2B guy, but I think the critical difference is that the B2B price points can be a thousand or even ten thousand times higher than a product for an individual consumer.

So, the number of customers in a viable B2B niche can be substantially smaller. With consumers, there are fewer products once you get above a $300 price point and very few consumer transactions that are above $1,000. In a sale to a business, price is always a consideration but less of a barrier: you can hit price points in the $10,000 to $100,000 level routinely. You can have fewer customers in a niche, and it’s still viable.

Competitive pressure is a more common consideration in B2B. To build on your example of the software for a painting contractor, no one wants to come in second when they make a proposal. So, a tool that allows me to differentiate my proposal or make a better estimate may be worth quite a bit. If a business believes your product will increase its profitability, whether through increased productivity, lower costs, or incremental revenue, it will pay for it.

Etienne Garbugli: One example I use in “Lean B2B: Build Products Business Want” is the market for Email marketing platforms. There are something like 300 distinct solutions that are not only viable but also profitable and sustainable. I’m not sure you have too many B2C categories with 300 companies selling sustainable variations of the same thing.

Sean Murphy: The production and distribution of physical products can create a lot of geography-based niches. For example, there are many craft beer players who work in small batches with limited distribution. They are regional players or sell in just one city, and it’s part of their appeal.

One the other side of starting in a niche is expanding out of it. After you start to succeed in a niche, I think two things tend to happen naturally. First, if you do a good job for your customers, they will tell their friends and other people they’re working with. So you will get pulled into adjacent niches. Second, you’re going to find other firms that have similar problems. And you may be able to offer a variant or optional features just for them. You alluded to this earlier when you spoke about using jobs-to-be-done as a lens.

One startup we worked with, eMOBUS, did cell phone spend management. They got early traction in construction because cellular service was a substantial part of the IT budget. But as word got out about what they could do, suppliers and customers of those construction firms started to contact the eMOBUS.

Etienne, how have you seen firms expand from their initial niche?

Etienne Garbugli: Your customer base is a source of insight; some customers may want something different from what you’ve shared on your roadmap and give you good reasons for adding features you have yet to consider. You will hear what sound like weird use cases, but if you do some research they can open the door to a new niche. As long as you stay committed to providing value to your customers and keep an open mind, you will uncover new opportunities. Different niches may have the same fundamental pain points but benefit from a variation of your product that is 90% the same as your base offering but with a few tweaks to make it more helpful for their particular needs.

Is a B2B MVP easier to build than a B2C MVP?

Question from an audience member: Is it easier to build an MVP for B2B versus B2C? It seems like more information is exchanged in B2B, what has your experience been?

Etienne Garbugli: I spend about 30% of my time in B2C and 70% in B2B. I think it’s harder to get feedback in B2B, and that trips entrepreneurs up. It takes more work to build velocity in your experimentation in B2B, especially at the enterprise level. I think B2C is used to simpler products that are easier to evaluate, which makes a B2C product easier to build and faster to iterate. In B2B, you can’t just take a prospect’s description of their needs or requirements at face value because they leave things out that they assume you understand.

Sean Murphy: There is more of an expertise barrier in B2B because there is often more jargon or domain-specific terminology, and many conversations are private. It’s rare to see a customer share information under nondisclosure in B2C; it’s relatively common in B2B. I think you can have casual conversations as easily in either B2B or B2C. However, B2B products typically require a more in-depth understanding than B2C, and those deeper conversations require a fair amount of trust-building.

Core competencies define what you can do with distinction

Question from an audience member We’re starting with our core competencies and assessing how they match our initial customer targets, and then refining our ICP.

Sean Murphy: It’s a little tricky because you can know how to do many things and create a long list of core competencies. But the critical question is, “What can you do with distinction?” Where are you well above average, not only in your ability to execute but also in how well you can predict the impact you can have on the customer’s business and how long it will take to deliver that impact? Ultimately, you have to make actual offers that outline the impact you can promise and how long the customer will take to achieve that impact or see it in their business.

Etienne Garbugli: We have talked about market exploration as unlocking a combination lock. The risk is focusing on a particular core competency to address a target customer’s needs, and either may be a helpful place to start, but they won’t work together. You may not prioritize the right competency for the customer’s needs and miss the opportunity. Or you may be talking to the wrong people, and even though they don’t value your competency, others in the niche will. These nuances make it very challenging for an early-stage startup to find a reasonable fit between team competencies and customer needs so that you can build on something sustainable.

Don’t write a value proposition in the future tense: focus on what can you deliver now

Question from Audience Member isn’t the value implied in the value proposition?

Sean Murphy: There is a strong temptation when you are starting out to write your datasheet or product description in the future tense, not the present tense. You describe what it “will do” at some point in the future, not what it can do today. You can fall into the trap of describing possibilities when the customer wants to know:

What do you need from me?
How long will it take?
How much it will cost?
What kind of results will it deliver reliably?

Many first drafts of a value proposition leave out how long it will take to get to that value realization event.

Etienne Garbugli: A value proposition starts as an assumption or a hypothesis that helps you explore the market. It often needs to be better structured. I find the job-to-be-done model offers a better way to find a viable niche. Are customers doing the job today? Can you do it better, faster, cheaper? What’s the impact on their business? If you can compare what the job looks like before and after using your product, you are on the path to validated learning.

Sean Murphy: In the “Mining For Gold” Chapter of your book “Find Your Market,” you have this evocative image of a radar screen where the target customer and target pain point are in the center of the screen as the initial focus. But you can pan up or down to look at adjacent customers with similar pain points or pan left or right to look at nearby pain points for the same customer. How do you decide when to maintain your focus on the current target customer’s target pain point and when you should look at other opportunities?

Etienne Garbugli: There is a recurring challenge I call “Sirens” in “Lean B2B: Build Products Business Want”. An entrepreneur sees something off to the side that they often approach with uninformed optimism. They understand the problems their current product is facing but don’t yet see the pains involved in the new market. They say, “Wow, that looks so much better than the business I’m in.” It’s definitely a challenge; sometimes you should change direction. What I suggest for situations that look particularly alluring is that you kickstart a parallel exploration of the new opportunity but don’t abandon your current product.

Test both through customer interviews and sales efforts so that you collect more data from different companies in both spaces. When you converge on an apples-to-apples comparison you can make a more accurate assessment of “Plan B.” What challenges will I face? What’s going to be easier? What did I learn that allows for a more realistic assessment?

When startups pivot, it’s often because companies in the new niche convert at a higher rate or in less time. They may have a better appreciation of the product’s value. It can be a good idea to pump the brakes a little and explore the other niche in parallel. If you uncover evidence that there is really something better there, then you can decide to pivot based on data.

Sean Murphy: If you find yourself saying, “How hard could it be?” You probably haven’t given it enough thought. If you cannot name at least three challenges you will have to overcome you probably have not investigated enough.

Etienne Garbugli: Could we back up a bit? I want to understand how you would approach finding a product niche worth tackling.

How to find a niche worth tackling

Sean Murphy: I think your suggestion to work from your core competencies is a sound one. You must be careful how you define them, but that’s a strong approach. There’s also the question: where does your team have domain expertise? Have you worked with this kind of customer before? Do you understand their language and terminology? Can you speak to them?

I also agree with your advice that it’s better to explore two or three niches in parallel. You should have a backup plan so that if your first idea doesn’t seem to be working, you have an alternative you can consider. A prioritized list of three to six backups is fine, too.

Without a backup, you can find yourself in a situation where your first idea does not seem to be working, but you have been focused on it long enough that other alternatives are hard to generate. The team says, “We don’t want to give up, so we should stay focused on our idea.” You persist in a niche where you may have been better served to investigate alternatives in parallel. As you come across other “alluring niches,” you can add them to your list of alternatives wherever you feel they rank.

Etienne Garbugli: If you have a product in the market, segmenting your customer base can be very revealing. You can often narrow your focus to a more profitable subset of customers. Good B2B salespeople understand this and focus most of their efforts on a few opportunities likely to convert. As you start to scale out of your niche, you can start selling variations of your product, each tuned to the distinct needs of an adjacent niche.

Sean Murphy: My takeaway is that finding a niche is a hard problem. A niche is a group of customers who will reference each other’s purchase decisions, but you start with early customers scattered in different niches. You must find a way to focus on a niche that resonates with your value proposition, which is written in the present tense and promises to deliver value against a short deadline. Two hours to five working days is ideal; two weeks is OK, and anything more than six to eight weeks is probably too long. You need to run quick experiments that enable rapid learning, for the same reason that geneticists study fruit flies, which take three weeks to reach maturity and reproduce, instead of elephants, which take about 15 years.

Etienne Garbugli: You have to narrow your focus and increase your level of precision until you find you are winning a majority of the proposals you are making. As you zoom in, you shrink the level of competition to the point where your solution is much better for your target customer than theater solutions on the market. To return to the painting contractor example, we started exploring serving construction, narrowed it down to painting contractors, and narrowed it again to painting contractors with fewer than ten employees. We started winning deals consistently because we had the right features, and they did not have other needs we could not satisfy. You need to start winning 60 to 70% of your deals to feel confident about your ICP.

I agree with you that the ICP evolves. I think it’s helpful to think about your ICP “right now” and expect it to change as you build your product. You can consider what your ICP might look like in three and six months with the features you have in the roadmap. You need to track the deals you can win right now and zoom in or out to keep your win rate at 60-70%.

Sean Murphy: I like your definition of winning your unfair share. I remember a marketing briefing where the presenter put up a slide with a picture of an alligator and a picture of a tiger. The title was “Who will win the fight?” The trick to answering the question was first asking, “Where is the fight taking place?” If it’s on the savanna, you should bet on the tiger. But if the tiger has to dive into 12 feet of water to attack the alligator–or gets too close to the lake shore and gets pulled underwater by the alligator, then the tiger is probably in trouble. You need to pick the domain where you have the advantage.

Etienne Garbugli: If you can zoom in enough and find the right levers to differentiate your offering, you can find yourself in a niche with few competitors or even have it to yourself. If you can be precise enough in your targeting, that’s a good niche to start in. Then, you can expand from there.

Sean Murphy: We’ll take questions or suggestions on Twitter: @LeanB2B and @SKMurphy

Etienne Garbugli:Thanks for joining us today. We welcome your questions from listening to this podcast and any suggestions for a topic you would like to see us address.

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The Science of Targeting: How Startups Select the Perfect Niche