The Stunning Power of Defining Your Market Right
Most people define their market according to the product or service they sell and the people they sell to. While this may not impede day-to-day operations, it can be disastrous if you’re trying to innovate.
For the purpose of innovation, it’s most effective to define your market as “a group of people and the shared job(s) they’re trying to get done.” If you don’t do this, you will probably miss the market and fail.
Take the case of Shopify, the Canadian multinational e-commerce company co-founded by Tobi Lutke, when he was seeking funding from Venture Capital Firms (VCs) in Silicon Valley:
“Investors passed because they thought the addressable market was too small. At the time, there were about 40,000-50,000 online stores, and even if Shopify captured 50% of the market, that still wouldn’t be a venture-scale business.” – Tobi Lutke, Startup Archive on X (see link in comments)
The “total addressable market” (TAM), also called the “total available market,” is a term used to define the revenue opportunity available for a product or service. The VCs erroneously measured the total market demand for Shopify’ e-commerce services based on the current user base, not based on how many businesses want to take payment online (get the core job done). Consequently, they missed the opportunity to be an early stage investor in a company now valued at about $90B, the third largest in Canada.
Fortunately, Tobi understood his market:
“When Tobi ran into the VC partner a few years ago, the partner asked Tobi what he missed. Tobi explained: “…what you didn’t realize was that Shopify was the solution to the very problem you identified. The reason there was only 40,000 online stores was because it was hard, expensive, and everyone who tried ran into all these brick walls of complexity, which Shopify, one after another, smoothed over and made simple to do.” – Tobi Lutke, Startup Archive on X (see link in comments)
People hire products and services to get their functional, emotional, and social jobs done. That’s why it’s so important to define your market as “a group of people and the shared job(s) they’re trying to get done.” This will prevent you from being constrained by current products and services.
It will also give you a more accurate understanding of the size of your market, your competitors, and substitutes. You don’t just compete with companies in your category; you complete with whatever your target customers use or do to get their job(s) done.
For example, public accounting firms don’t just compete with other public accounting firms; they compete with tax attorneys, internal accountants, and software accounting products.
Here’s a fun simple exercise to redefine your market for innovation. Take Theodore Levitt’s famous quote – “People don’t want to buy a ¼’ drill; they want a ¼” hole” – and use it as a format to redefine your market for innovation. For example:
- People with impaired hearing don’t want to buy an earpiece; they want to improve their hearing.
- Patients with heart disease don’t want to hire a cardiac surgeon; they want to recover from heart disease.
- People who are fatigued don’t want to buy a drink; they want more energy.
This may seem like a “sleight of words” at first, but don’t let that fool you. This can be the difference between huge success and utter failure, as Tobi Lutke (and our clients) can attest.
List all the functional tasks/jobs your customers are trying to get done with your product or service. Then see if you can identify the core task/job, the chief reason they “hire” your solution.
Then do the same thing for all the emotional jobs (how they want to feel or avoid feeling when executing the core functional job) and social jobs (how they want to be perceived or avoid being perceived).
Lastly, talk with current and target customers and ask them:
- What are you trying to accomplish, feel, or experience with our product/service?
- How do you measure success?
- What makes it challenging, frustrating, or difficult?
Let me know how it goes!
