The Easiest Way to Fail In Business: Lack of Market Clarity
I noticed a restaurant went out of business the other day. I looked at the sign for the restaurant. It read, “Market Leading Food Here.” I looked down and saw the entrepreneur soaping the windows of his empty store, so I walked over and had to ask him about the sign.
He told me that the restaurant served the best food, so he thought that the sign was clear on what they offered. I asked him what kind of food he served before he went out of business. He explained that they served all kinds of food. I tried to get more specific.
“Did you serve Italian?” I asked.
“Yes,” he said.
“Did you server French?”
The questioning went on until I ran out of ideas for types of food and it was clear that they covered everything.
I asked him why he served all those different types of food. He pointed next door to the Italian restaurant and said that he needed to compete with them. Then he pointed across the street at the French restaurant and said that he needed to compete with them. He kept pointing at his different “competitors” up and down the street until he finally said “that is why we served so many types of food.”
Then I asked him about his target customer segment: “so, what kinds of people are you targeting,” I asked. He answered, “people who are hungry.” I asked him if there was any single type of customer that he aimed his business at — a customer segment of which he could own a dominant market share. He said that aiming at a particular type of customer would reduce the potential size of his business. (I hear that a lot from entrepreneurs.)
I asked him if he had done any research to determine what kinds of people come to the restaurants on the street to eat, what their interests are, what types of restaurants (including the food, decor, mood, speed, and other attributes) appeal to them, and how much they are looking to spend on food. I also asked him where the hole was in the local restaurant market (the brand position that he could own given the “tastes” of the customers that eat in the area and the positioning of the other restaurants in the area).
He said that they didn’t do any research, but that he copied the menus from the other restaurants and he priced his food at a lower price than the other restaurants. He figured that he would be able to attract everyone to his restaurant given that he offered the same food at a lower price.
Next, I asked him about the interior of his restaurant and his waitstaff. He told me that in order to offer the food at lower prices he needed to purchase low-cost tables, chairs, and artwork and that he needed to pay his waitstaff low rates. He said that the result was fine. He got some complaints about the service, but overall it seemed to work okay. I asked him if he got much referral business and he told me that most of the people came in when the street was busy and the other restaurants were packed.
Finally, I asked him about his economic model. He told me that their margins were lower than the other restaurants, but that his was going to make it up on volume. Ultimately, the volume didn’t come in, so he lost his money and was closing the restaurant.
This story is a fable, of course, but the situation plays itself out in businesses of all types everyday. I won’t give the blow-by-blow of all the things that the guy in this story did wrong in my view, but if you don’t understand your target customers, offer them something that is unique and valuable, have a good way of marketing your offering, and have a good economic model, you are going to either limp along or fail. It is that simple.
If you want to score your company on your market clarity, then take a look at my market clarity score post.