My love affair with large, competitive, fragmented markets

Benedict Evans on Twitter

The Startup Fork: If it doesn’t look like something we already have, the problem doesn’t exist. If it does, the problem’s already solved.

It’s easy to think all the good startup problems in B2B SAAS have already been solved.

In almost any category you can find dozens of companies fighting it out over a (generally) fixed set of customers. There is likely an established market leader with the lions share of the customer logos, deep pockets and deeper moats.

So what’s an entrepreneur to do to find fertile, unsalted ground to sift through?

One counter-intuitive approach is to view large and competitive markets as ripe with opportunity, the more fragmented the better.

For one, the market size has already been proven out. You can quickly guesstimate revenue per company and multiply this by number of companies.

If the market wasn’t large you would be unlikely to see so many companies fighting over the same turf.

Customers are already being educated through the incumbents marketing efforts. Design and sales processes have generally already been defined.

You’re not starting from a completely blank canvas, you just need to find your spin.

It’s easier to see the gaps between offerings to identify new or unserved niches.

And finally I believe there are very few winner takes all markets. Being a runner-up in a big market can still be a big outcome. It all depends on your appetite.

Large markets are not necessarily zero-sum games. In many cases customers will use a combination of products to solve their problems.

“Pioneers get slaughtered, while the settlers prosper”

None of this is to say that large markets loaded with competitors are a guarantee of success.

Even middling success will be difficult and it’s easy to underestimate competitive reaction in the long term.

You still need to innovate, identify a niche and out-maneuver the incumbents on one of the planes of innovation.

Let’s look at the fragmented nature of a few categories of B2B software.

The lists are ranked from estimated revenue downwards, and I’ve included ARR stats where available.

• Social media management tools: Hootsuite ($150m), Buffer ($10m), Meet Edgar ($4m), Schedugram ($4m)…
• Support software: ServiceCloud / Salesforce ($2.8bn), Zendesk ($430m), FreshDesk ($100m), GrooveHQ ($7m), HelpScout, Teamwork Desk…
• Accounting software: QuickBooks/Intuit ($5.1bn), Xero ($260m), MYOB ($300m), FreshBooks ($50m), LessAccounting, Intaact, Netsuite…
• Sales CRM: Salesforce ($8.9bn), PipeDrive ($20m), FreshSales, SalesForce, BaseCRM, HighRise, Nimble, Insightly, NutShell, Stride…
• Project management: Acconex ($150m), Basecamp ($150m), Trello ($10m), Asana, Zoho, Teamwork Projects…
• Agile software management: JIRA, Trello, Asana, PivotalTracker, Aha!, Clubhouse…

While completely copying an existing competitors product, positioning, marketing and price might get you some segment of the market but it’s unlikely to be sustainable.

You need to bring some innovation to the table to allow your path to diverge from the existing players and carve out your own segment.

So how do you find ways to stand out to build a successful company in a crowded market?

• Marketing innovation

Marketing innovation happens in many forms. One way is to create an unconventional brand that sets you apart from competitors. Salesforce famously competed against their on-premise incumbents with their “no more software” positioning. Now their upstart competitors like Drift.com riff on this with “no more forms”.

And they’re creating a brand new category in Conversational Marketing.

2. Product innovation

Where can new technologies be applied to the current solutions to build a better product experience? Many companies are trying to do this with machine learning, but it could also be joining together two previously un-related technologies like A/B testing and email. Australian startup Vero has done just that.

3. Pricing innovation.

How can you dramatically change how the product is priced? Could you make it free, or charge only for value created? Slack approached this by only charging for active users, an unconventional approach in the SAAS space.

4. Service innovation

BuiltWith is a bit of an Australian success story with hundreds of thousands in MRR, all built and run by a single guy who goes surfing every day.

Spotting the opportunity SF-based company Datanyze moved in, copied the product from top to tale, but charged 10X as much.

The difference? Datanyze has a team of 40+ people to help with support, sales and service while BuiltWith is basically one guy who goes surfing every day.

5. Channel innovation

ConvertKit operates in the incredibly competitive email marketing service provider space, competing against Goliaths like MailChimp, Constant Contact and Campaign Monitor. The business was stuck at $5k per month in MRR until they found a channel that helped them stand out.

They pivoted to tailor their product specifically for bloggers and leveraged their customers as a channel through an affiliate program that helped them rocket to $10m ARR.

Starting a new company from scratch is incredibly difficult, and very few succeed.

By finding existing large markets, and identifying a single point of innovation or a niche to service, startup companies can build profitable businesses without the headaches of starting from scratch.

There are no prizes for creating something no one has ever thought of before. There are plenty of prizes for solving old problems in new ways.