Market risk is better than marketing risk

The traditional steps of startups are: find something people want, build it, tell them about it, then charge for it.

The internet has radically changed this. It is now easy enough to churn out experiments, and it’s cheap enough that you don’t need to charge much, if at all.

For a lot of web markets, the steps are now: build it, tell people about it, learn if they want it, then maybe charge for it. 

The hardest step of this is usually telling people about it. The downside of cheap and easy development is that others can do the same, cluttering the web with competitors for attention. It sounds counter-intuitive but it’s usually better to create a product with uncertain demand and killer marketing than a product with certain demand and costly marketing.

Succinctly, on the web, market risk is better than marketing risk. 

Market risk is uncertainty of whether people want your product:

-How many people want your product? 
-How much do they want it? 
-How much will they pay for it?
-How many times or how long?
-How fast is that demand growing?
-Is competition saturating demand? (This could be separated into competitive risk.) 

Marketing risk is uncertainty of whether people will learn about and try your product:

-Where can you reach your target users?
-How much will it cost to acquire a user?
-Is your product inherently viral or word-of-mouth viral? 
-Is it new and sexy or old and boring?
-Is it easy or hard to understand?

While an idea’s risks depend greatly on the details, they tend to fall today into a matrix:

[table id=2 /]

From worst to best types:

High market and marketing risk: these are the worst type of ideas. Not only are you unsure people want the product given alternatives, even if they do, it’s costly to get them using it. For instance, there are a ton of search engines, people are generally happy with their current one, and search isn’t viral. That’s why Microsoft is spending $100 million to market its new shiny toy. This type needs to be really useful and well-funded/well-marketed.

High marketing risk, low market risk: these are typically large and established markets where it’s clear people have a deep demand or like innovation, but they aren’t viral and have a lot of competitors. People will want porn, gambling, and dating until the end of time, but because these ideas monetize well, incumbents are well-funded and targeted marketing is expensive. If a marketplace gets initial users, more come and the network effect takes over, but getting initial users is often tough.

High market risk, low marketing risk: these are experimental ideas that are inherently viral or have strong word-of-mouth. When the Facebook platform launched, developers launched a flood of programs to figure out what would stick.  When Twitter launched, it was unclear people wanted it, but its virality took over once it was clear people did. If your idea is a unique twist of this type and can be created quickly, it’s worth trying.

Low marketing and market risk: this is the promised land. Niche services can often fill an ignored need and are cheaper to market due to fewer competitors and a focused audience. Copyrighted content is in high demand and goes viral, as it did on Youtube, but has high legal risk. 

If your idea has low market and marketing risk, it’s a good candidate to start today.

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2 thoughts on “Market risk is better than marketing risk

  1. Avaz Mano June 2, 2009 / 12:20 am

    Great post. I’ll be bookmarking this.

  2. Brad Platt June 4, 2009 / 6:34 pm

    So far all you advice has been incedibly insightful. Thank you

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