The 1% fallacy

http://successfulsoftware.net/2013/03/11/the-1-percent-fallacy/

by aaronbrethorst • 13 years ago

196 54 13 years ago

successfulsoftware.net

revorad• 13 years ago

“He forgot there was a number lower than one percent.”

http://sivers.org/1pct

colomon• 13 years ago

Interesting... my reaction to the OP was "Duh, everyone knows that!" But my reaction to your sivers.org link was "Great story!" Not sure if that says something about me or about the relative writing skills of the two posts.

IanDrake• 13 years ago

> "Duh, everyone knows that!"

I wish. I still hear it a lot.

jbenz• 13 years ago

The sivers.org post tells the story through an anecdote. I'm with you. Who doesn't love a good anecdote?

Mahn3• 13 years ago

On a semi-related note, I always found print advertising to convert extremely poorly no matter what. If your goal is to acquire customers, never invest in offline media, because you may aswell throw the money directly into a trash can (if your goal is branding and image though, print may be fine)

freework• 13 years ago

It depends on your target audience. For instance, print campaigns work extremely well in the aviation market. It turns out the various pilot magazines are still the most penetrated medium to that market. Print campaigns work better than anything else. I agree print campaigns for a social networking site is dumb.

dizzystar• 13 years ago

I've discovered that as well. The only way it really works is if you do brute-force advertising. If you can afford to buy 10% of the available ad-space every month, you can probably do fine. Otherwise, forget about it.

ohwp• 13 years ago

I wouldn't mind getting 0.01% of the CRM market.

tobyjsullivan• 13 years ago

Awesome article. Puts some classic and well established theories to good application. The age-old advice comes through again: focus on a niche.

ghshephard• 13 years ago

I love his closing comment, "Whatever you do, don’t stand in front of investors and pitch them the 1% fallacy. It makes you look an idiot. I should know, because I’ve done it."

SoftwareMaven• 13 years ago

I agree that you should never go into a market thinking, "If I can ply capture X%, we'll be hugely successful." It's putting the cart before the horse.

You go into a market by finding a pain that you solve. You can go into the CRM market if you have a method that, for even just a few companies, solves some significant pain they have. Then, over time, you analgesic grows to soothe more companies' pains. Then you find you captured some percentage of the market. The capture is the result, not the plan.

rgbrgb• 13 years ago

I've been taught that your pitch deck should have a slide on TAM, SAM, SOM [1]. The idea here is that we show that the general market for this product domain is huge and then we drill down to the niche in that market who's pains our initial product addresses. It makes the opportunity much more attractive when there's a huge market that you could potentially become the Salesforce of, even if you're just addressing pains of flower shops right now.

[1] http://upandrunning.bplans.com/2012/06/22/tam-sam-and-som-hu...

binarymax• 13 years ago

Nice explanation and good numbers. Also bonus I'm in a wedding soon and will probably need your software, but this is the first I've heard about it :)

gz52• 13 years ago

When the next person tells you she will get 1% of any market then ask her to identify her top x customer prospects by name, describe how she will reach those customers and why those customers will buy her software instead of her competitors.

schoper2• 13 years ago

That's pretty sexist! There's no reason to think that women are worse than men at evaluating market opportunities.

lnanek2• 13 years ago

I think it is just someone using female for the generic pronoun. Of course maybe you realize and are poking fun, whatever.

gz52• 13 years ago

not sure if that was tongue in cheek but only intent of post was example to show market %s are meaningless if you are going top down.

if he or she can go bottom up - show which customers he or she will win (how and why) - and then show what segment of market that represents then that is more valid.

scott_meade• 13 years ago

Good article. In fact, I'd go a step further and say that any percent is a fallacy. Most business plans and pitch decks include the requisite section on market size, but who cares? The only thing that matters is how many customers are you going to have. That cannot reliably be determined from a top-down assessment. You don’t look at a pie and just say, “I’ll take 1% of that”.

Instead you spell out through which methods you will gain and keep customers and how many you will gain via those methods. For SaaS, that could look like “We have x visitors to our website. We have shown with previous products and experiments a y percent conversion rate. From this, we estimate x * y customers at $d/month. With your funding, we should be able to increase the number of visitors to the product site by z% while maintaining or improving our conversion rate."

These numbers are not a factor of market size.

p.s. The only thing market size can tell you is what the upper bounds are for a product niche. But unless it's a very, very small niche; why does it matter what the upper bound is. If you hit that, you've got a good problem on your hands.

Mahn3• 13 years ago

> You don’t look at a pie and just say, “I’ll take 1% of that”.

Exactly. Pretty much sums up everything that is there to say about the article.

james10712• 13 years ago

100% wrong. Most products are launched into existing markets and estimating a likely market share is essential.

derefr• 13 years ago

> The only thing market size can tell you is what the upper bounds are for a product niche. But unless it's a very, very small niche; why does it matter what the upper bound is.

Presumably that is, in fact, exactly what it's for--to tell you the absolute upper-bound to growth, so investors don't accidentally invest in your "growing" company only to see growth taper off completely when you run out of market to tap.

I would guess that this is actually common for brick-and-mortar businesses, because of locality. Pretty rare when your market is "anyone who can type a credit card number into a web page," though.

001sky• 13 years ago

but who cares?

==It's the level of abstraction that has signalling value.

mbesto• 13 years ago

But unless it's a very, very small niche; why does it matter what the upper bound is. If you hit that, you've got a good problem on your hands.

Totally agree. I have a niche product that can be expanded further once it's gained critical mass. But, given the recent investor pitches I've done, there is some backlash from investors on that concept. They want to know is it possible to turn this into a billion dollar corporation at some point, and the reality is that in my niche market, it's not.

ozgung• 13 years ago

These are inductive and deductive ways of estimating the same unknown. Both ways are valid and more helpful when used combined. They're far from the reality but their purpose is to provide a general idea.

raverbashing• 13 years ago

Saying "We're going for 1% of the market" is a top-down estimative.

And they usually are very off the mark

Rather, try to estimate from the bottom up. Your first realistic estimate should be 0.

Then start adding up, how many lemonades can you sell at a lemonade stand? (apply to your case)

james10712• 13 years ago

Your example ignores the market (i.e. assumes that you are creating a new market, of which you will have 100%).

That is not the typical case, as most products enter existing markets and estimating market share is key.

bornonmars• 13 years ago

Yes, but I wouldn't even go so far as to cite the 100% new market creation - where's the usual timing / major shift argument? If that actually applies for real, forget the fallacy. In all other cases, feel free to keep it in mind.

edanm• 13 years ago

I think you're wrong.

The reason people put it on pitch decks to investors is that investors care. Now, this can be explained by investors being stupid. But there is at least one other explanation:

VCs are trying to hit the 1 in 1000 startup that makes it big. These startups are, necessarily, aiming at a large market. The VC realizes that, if the size of the market is huge, your chances of getting a good chunk of that market is small. But so what? They'd rather fund 100s of startups that will fail, but are all trying to make it big, than fund 100s of successes that are mediocre successes (to them).

Of course, as a founder, this isn't the math you should be doing; not by a long shot. But it is what matters to investors.

ChuckMcM2• 13 years ago

Interesting, I may be wrong but I don't think its a 'fallacy' (after all if you got 1% you would be successful) so much as a 'unsupported argument' which is where you don't say "how" you get that 1%. The Derek Sivers link is also good in this regard.

The mistake is believing that people will randomly try your product. That is true if the threshold for their trying it is below their "don't care" point, but if it's going to cost them more than their "don't Care" point cost they won't try it unless sold on it.

Its perfectly reasonable (in my opinion) to go in with "The market leader here has an $X billion market, with Y customers. All of those customers have pain foo which our product version solves. We're going to reach those customers through the following channels with the goal of converting 1% of them to our product which is functionally identical and less painful."

That is a 'go to market' strategy that, if you are right about the pain, can turn your product into a going concern. But again, it solves a problem you know exists.

However having an identical product, especially one where you don't differentiate, means you have to get out ahead of the market leader in acquiring new customers and that is expensive and difficult. Not a good strategy over all.

hermitcrab2• 13 years ago

It is a fallacy because it is based on the incorrect premise that getting a 1% penetration in a large market is relatively easy. It is quite widespread - over the years I have heard plenty of people come out with it.

ChuckMcM2• 13 years ago

Your probably right, it would be clearer if they said "We can easily get 1% of that market." That would certainly sound fallacious.

I have seen folks actually use 1% as a goal in a reasonable pitch, one where the challenges were laid out and the tactics for mitigating those challenges identified. I guess it just struck a nerve, like people who say "I hate generalizations." :-)

icambron• 13 years ago

I don't disagree with the OP's basic point about not making "get 1% of huge market" your strategy. As SoftwareMaven points out above, getting 1% of a market is not a strategy at all, it's a result, and it's not going to happen just because the number sounds small. But I do want to oppose the more general notion that you shouldn't enter crowded markets.

A market like CRM is not one big homogenous thing; it's got tons of nooks and crannies in it. Maybe you want to be CRM for bakeries, who, let's just say, are largely not using CRMs yet. You'll end up with a different product, but more importantly, you'll have different sales channels and marketing strategies. You go after an untapped niche with special requirements, maybe even one that's too small for giant CRM firms to target. You compete with all of those giant CRM companies by not competing with them.

Will that add up to 1% of the market? Seems doubtful, but ask yourself what percent of $18 billion you can run a company on. It's a lot less than 1%.

jiggy2011• 13 years ago

It would probably be best to target niches with relatively large companies who have very specific requirements.

Over the years I have built about 6 mini CRM systems for small companies. Usually these start off as contact form on a webpage and evolve into something that outputs excel spreadsheets.

Over time though, these things tend to get replaced by mass market packaged or SaaS CRM systems simply because even though they are not bespoke to that business they do the job well enough for the price.

The answer is probably not to make "A CRM for bakeries" but to make a "system to help with the unique problems of large bakeries that might happen to have CRM-like components"

If you want to build a product for a market as opposed to selling consulting by building a system for one specific bakery then the sweet spot is likely to be a very small target area.

notahacker• 13 years ago

The flip side of that argument is that two of the five biggest CRM vendors had single digit market share (2008; Gartner via Wikipedia) and ~40% of the market uses vendors outside the big five. It has high margins, few economies of scale and sales that are more relationship than reputation-based - in other words one of the markets you genuinely could get very rich off being a smaller player with a good sales strategy and a generic solution, power laws be damned.

You won't get anywhere near that mythical 1% without a well-costed and planned strategy, but the same applies to trying to capture a huge chunk of a tiny niche market like bingo card creation. Once you've stopped worrying about phoney percentages, you can afford a lot more false starts in the huge addressable market than with a misjudged niche product.

volandovengo• 13 years ago

This seems to be 37 Signal's model case and point. It's been doing pretty well for them.

josscrowcroft• 13 years ago

The most interesting part of this..

"Whatever you do, don’t stand in front of investors and pitch them the 1% fallacy. It makes you look an idiot. I should know, because I’ve done it."

was the end, and not elaborated on... I for one would love to hear the story of how that turned out, with specifics!

hermitcrab2• 13 years ago

I am the author. As I remember it the pitch (for a .com company I worked for) was going ok until I said "...and if only we can get 1% of this market...". They flinched. I didn't really appreciate what I had said wrong at the time. It was only when I had more experience in marketing and running my own small company that I realized how naive this argument was.

danielweber• 13 years ago

This is also known as failure to segment the market on the old-school list of entrepreneur mistakes.

Maybe there is a $100 B of revenue out there. But 40% of it is locked up in internal markets, and 40% of what's left is locked up in long-term contracts, and 40% of what's left is held in government contracts you can't get, etc etc etc and pretty soon you need to grab something like 25% of the market just to break in.

stevenameyer5• 13 years ago

The biggest issue I have with this 1% fallacy (which is a huge pet peeve of mine) is that it shows completely the wrong mindset needed for success in my opinion. To me it is saying we don't have confidence in our ability so we're going to target such a large market that if we even have a small amount of success we'll still make a lot of money.

Your aim should always be 100% market share. If you don't think that is is possible to create a product that would be appealing enough that everyone in that market should want to use it then narrow that market into a smaller subset and aim to get 100% of that. You should never be ok with only 1% of target users using your product.

kalms• 13 years ago

I agree with this, if only to create the correct mindset from the beginning. Never settle or be prepared to show weakness.

10dpd• 13 years ago

I've heard this described as a top-down versus bottom-up approach. The problem with the top-down approach (i.e. I will capture 1% of the market) is that is doesn't tell us much about how you'll capture this 1%. By going from the bottom-up we can clearly see how you are going to iterate and build your userbase.

ucee0544• 13 years ago

Bollocks. 1% is not a fallacy. It's just a way of mentioning a low-risk target without specifying the strategy.

You don't know the specifics of the strategy because you're a startup - to quote Clayton Christiansen, the needed market research costs much more than making the product, so you can't afford to do it - and to quote Steve Blank, you may need to pivot if you get your hypothesis wrong.

It's called a "fallacy" because idiot VCs don't bother to note these facts, and just want a sure fire winner business plan handed to them so they can fire the founders from their own company.

Similarly, idiot VCs don't get why you'd want a hockey-stick graph or to say "these figures are conservative", for much the same reasons. So these become infamous "fallacies" too.

If you play by the rules of these idiot VCs, you will find that it's impossible to make a business plan that meets their expectations and isn't fraudulent. It's better to walk away than to play their game.

If by any chance you meet a sane VC, they're likely to tell you something useful. Instead of banging on about 1% being a fallacy, they'll say something like "at your stage you need to have a working prototype before seeking investment" or "at your stage you need a more aggressive advertizing plan".

You know, something with content.

stevenameyer5• 13 years ago

But if the whole point is saying there is a lot of money in this space so it's less of a risk then why mention 1%? Mentioning the market size and opportunity is important but I think the issue people (such as myself) have with this specific framing is:

1) It makes it seem like you believe there is no way you could get less then 1% market share. Because 1% is so small that it must be easy to get. 2) It often de-emphasizes why people would choose your product over any others because you only need such a small percentage to be successful 3) It makes it seem like you aiming low. Aiming to get only 1% of a market to me means you ether don't have huge faith in your product.

ucee0544• 13 years ago

Aiming to get only 1% of a market to me means you ether don't have huge faith in your product.

You forget the question of time. Maybe the product is good enough to get 100% eventually. But maybe you'll go bust in the meantime if you have a ridiculous burn rate. "Aiming" for 1% means making your burn rate sustainable on 1% so can live to fight for the 100%. Microsoft wasn't built in a day.

It often de-emphasizes why people would choose your product

No because that's covered in another part of your pitch, which deals with your product characteristics. The 1% part of your pitch deals with your strategy.

By the way, you are not supposed to have faith in your product, you are supposed to have a willingness to deliver whatever product the customer wants. That's what pivots are for. Business is supposed to be a rational process, not based on faith.

tonydiv• 13 years ago

Reminds me of PG's "Deep Well" concept.

saosebastiao• 13 years ago

Great reality check for you and your business...but it may or may not translate to better luck with VCs. Plenty of them buy into this innanity, and plenty more don't care about market size at all and will decided to invest in whatever other VCs are investing in.

pknerd• 13 years ago

Imagine if Steve Jobs would have thought like that, world was not going to experience iPhone.

The 1% fallacy

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