Why it's so hard to move down-market
Great startups pivot. As they build and sell products, they validate and invalidate their assumptions. Most importantly, they learn from this new information and change tact.
The most significant startup pivots regard product-market fit. For example:
- Market — changing your target market.
- Problem — choosing a different problem to solve for your target market.
- Solution — finding a new way to solve the problem you’ve targeted; transforming the product.
Many founders believe they can perform one of these pivots while continuing to focus on their existing market, problem, or solution. So, instead of “let’s do this instead”, they say, “let’s do this as well”. In general, startups should remain focused on one solution to one problem for one market for as long as possible. This focus is the way you can best maximise growth for your business. But today, I want to explore the two most tempting pivots for B2B startup founders.
Almost every founder I have worked with has had the idea to expand their total addressable market by moving down-market. Most markets have many small businesses and fewer larger businesses. So, it’s logical to target the smaller end of town so you can acquire a greater number of customers.
However, if you have already found product-market fit in your current market, it is challenging to move down-market. This is because:
- Large customers require more product complexity. This product complexity causes user experience problems for smaller customers. The implications of this are:
- Smaller customers will be difficult to sell to because they would rather use something that is easy to use. By initially targeting larger customers, what you have built will not meet this requirement.
- Smaller customers will be onerous to support. As they are less prepared for a complex product, you will need to hold their hands more.
- You will need to dedicate significant resources to simplifying your user interfaces before you can effectively sell your product to smaller customers.
- Servicing small businesses is less profitable. This is because they need more support (even when user interfaces are perfectly designed with them in mind) relative to what they can pay you.
- It is difficult to simultaneously build products for these smaller customers and your existing larger customers. Their needs rarely align, so most of the user experience improvements you need to prioritise for your new smaller customers will clash with the more advanced functionality needs of your larger customers. This splits your focus and pulls you in two different directions. Often, you end up neglecting at least one of these cohorts.
In contrast, it’s relatively easy for software startups to move up-market. Or, it’s easier to target new prospects larger than those you traditionally target. This is because:
- The natural momentum of all software products is to move up-market as products become more capable over time. Your existing customers are growing and therefore asking for new features that cater to their now larger businesses. This aligns perfectly with the features that larger prospects need.
- User experience is easier to evolve when you’re adding complexity than when you’re removing it. It’s easy to add new features in a way that ensures additional complexity is only disclosed to users who need it. It’s tough to do this retroactively.
- Moving up-market improves profitability. Larger customers are willing and able to pay more, and while they may require more support, this rarely scales linearly with their software fees. This makes these customers proportionally cheaper to service.
- Larger customers have greater means to overcome product challenges. If a large customer needs a feature you don’t have, they are more likely to be willing to pay a third party to develop something using your APIs. This reduces the need to build everything in-house.
This is why I advise startups with sufficient runway to target their smallest viable customer. The smallest business that they are likely to ever want to target. Starting at the bottom end of town makes it much easier to grow your business and your product while progressively targeting larger customers.
I also recommend the following:
- When you want to expand your addressable market by targeting a new audience, always try to move up-market.
- Don’t move up or down-market too early. Either of these changes can be distracting if you implement them before it is necessary.
The best reason to move down-market is to avoid disruption. Because it is easy to start simple and progressively add complexity, competitors who start down-market from you can catch up to you quickly. They are better positioned to do this than you are to move down-market, which is why I think the best way to move down-market is to create a new product and disrupt yourself. Starting fresh often (though not always) is easier than trying to devolve your existing product. At the same time, this is a massively expensive undertaking — you should only do it when you are large enough to take this on in parallel to the maintenance of your original product.
Note that this is potentially the only time it makes sense to start from scratch. Other motivations for a fresh start (e.g., to improve your technology stack) are often bad ideas, with progressive evolution being the preferred approach.
Solving additional problems through new products
It is logical to think that you can drastically grow the total addressable market for your business by building a second, third, or fourth product. This idea is supported by the fact that most highly successful companies sell more than one product.
I completely agree with this logic. Creating new products to sell to your existing customers makes a tonne of sense. This is a great way to earn more money without having to acquire net-new customers — this cost-effective growth is one of the best things about the SaaS business model.
Timing is where most startup leaders get this wrong, though. By prematurely expanding into additional product lines or trying to sell their existing product to another market with a slightly different use case, they dilute their focus from a product development and customer acquisition perspective. The primary risk here is opportunity cost: by taking on something new, you’re neglecting improvements to your core product which could lead to better outcomes.
The best time to start to build new products is when you are earning enough from your core product that it is beginning to feel like you don’t need as many people as you can afford. A close second is when you’re starting to feel like you’re at risk of exhausting your current target market. If you wait until one of these criteria is met, you can expand your suite without harm to the existing business opportunity.
18 December, 2022
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