Rome wasn’t built in a day, I know it’s cliche but it rings so true. Rome started as an MVP (minimal viable product) with one town and ended up as an empire. This same model can be applied to every notable company out there. They started with a singular basic product and ended with a monolith of a company.
They all share a common thread in the way they started small in the way there product was design but also in the market that it was designed to serve. Everyone started with a niche of some sort but there is an art in selecting the proper niche. If it’s too small you won’t have enough customers and if it’s too large you’ll have too many, defeating the purpose of a niche.
The easiest way to think about your niche is by outlining the group of people who are early adopters and expanding out. Those are the people who will really evangelize your product when it launches. Take Facebook, for instance, they knew the people who to build for first as it was themselves. They built the network to benefit one dorm at Harvard, then the whole college and you know the rest of the story. They did not build the network to service American or even one city. They started small and worked up.
You can apply this same logic when building your minimum viable product for your own startup. You’ll need this sort of information for marketing and pitching purposes anyway so it’s really worthwhile to explore it. It’s also pretty easy but may take you a little to dig through some data.
Let’s work from the top down, generally startup folk (like founders and investors) will classify a market into three chunks or smaller market. And so you can follow along a little easier let use the example of a furniture marketplace that connects furniture purchasers to carpenters that can make it for them, let’s call it Bespoker.
The largest market is called the Total Available Market or TAM for short. It’s the total market demand for a product or service, that is everyone who could possibly ever want it. TAM numbers are the easiest to get because plenty of companies have likely already studied it. Companies like IBISWorld collect and analyze market data like this (find them at http://www.ibisworld.com/ ).
In the example case of Bespoker I’ve had a look around IBISWorld and come up with a report on Home Furnishings Stores in the US. The report tells me that it’s a 34 Billion dollar market. That’s pretty huge because that covers the entire market, from mass produced lamps to handmade deck chairs. But it’s the market my startup will fit into.(http://www.ibisworld.com/industry/default.aspx?indid=1019). So my TAM of “Home Furnishing in the USA” is worth 34 Billion.
Stepping down from that there is the Serviceable Available Market or SAM. This is the segment of the TAM that your products or services can reach within your geography. This is a subset of the larger number and you’ll need to find a way to break it down. Maybe the report could split it up by state, maybe you could assume 20% of the TAM make up your SAM or maybe you could get this data from a government agency or industry body.
So for my Bespoker, I’d say that its “Purchasers of bespoke, hand-made furniture in California”. IBISWorld may tell me that in the state of California this market is worth 400 Million.
Now we get to the important part, your niche. In startup land, we call a niche a Serviceable Obtainable Market or SOM. That is the users in you SAM that you can capture. This may be just the locals in your city, your city block or your apartment tower. There is no perfect answer to what your SOM should be. In the software space, your SOM could easily be Australia or the USA, as opposed to a physical product where it may be just one-half of the bay area.
The SOM for Bespoker would be something like “Purchasers of bespoke, hand-made furniture in the bay area of San Francisco in California”. I’ve drilled down to a region of a city in a state in a country to divide up my SOM. This not only gives me a nice place to start but I’ve hypothetically chosen it because that’s where I live and where I have connections and networks.
That’s the core of how you calculate your niche and move upwards into bigger markets. It’s a great exercise to see who your audience is and plan your growth passage as you scale up. So give it a go with your own startup and assess how much room you’ve got to grow, the sky’s the limit usually.