The Easiest Way to Fail In Business: Lack of Market Clarity

November 15, 2011 by

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?”

“Yes.”

“Mexican?”

“Yes.”

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.

Key Point

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.

  • http://profiles.google.com/m.taweechai Taweechai Maklay

    good article

  • http://www.openviewpartners.com Scott Maxwell

    Thanks Taweechai!

  • http://masterful-marketing.com Debra Murphy

    Ah, the “I can’t pick a target because I’ll leave money on the table” argument! Great story that illustrates the challenge most small businesses have!

  • http://www.openviewpartners.com Scott Maxwell

    Debra, I can’t count how many times I have heard that argument!  Thanks for the comment!

  • http://twitter.com/joellessem Joel Lessem

    Nice post!  Though  i would caution on how “unique” you want to be.  As long as you have market traction there will be other players - could be “scarce and valuable”.

  • Greg Gonzalez

    Great post! Although with the additional talent, inventory and associated overhead required to produce so many types of cuisine, I don’t think he was being truthful about lower margins ;-)

  • http://www.openviewpartners.com Scott Maxwell

    Joel, unique and valuable actually creates the scarcity for the offering that only you have!  Think about it and let me know if you agree.

    • http://twitter.com/joellessem Joel Lessem

      Scott,  I think we are dancing around a similar concept.  However,  as a business operator I do find there tends to be an fascination with having a “unique” business model or product - especially by non-business operators and the media.  However what does not get much attention is highly discplined and effective business operations/execution. (mainly because it is not exciting or newsworthy) .   You can be highly effective as a 2nd or 3rd mover if you execution is superior -  even if your offering  is not particularly “unique”.  

      • http://www.openviewpartners.com Scott Maxwell

        Joel, I completely agree that execution is absolutely key, but if you execute with a “me too” strategy it is going to be a lot more difficult than executing with a differentiated strategy.  Just to be clear, I think that you can be unique in a lot of different ways, including offering commodity product using different sales and marketing channels.

        My question for you is why would you execute a “me too” strategy if you could offer something that is uniquely valuable?

  • Lisa Howarth

    Great post – As a small business, trying to be all things to all people will not work. Thanks for the reminder.

  • David A. Rosen

    Scott,
    Really important points.  Nice article.

    You raise another important point, especially for tech companies.  I learned a long time ago that platforms were earned, not born.  I have witnessed, and passed on (for investment), too many companies that built a product to be comprehensive from the start.  They should have focused on one or two areas and distinguished themselves first.

    The best and proven formula is to focus on valuable areas where a different approach or process, application or program, can demonstrate clear distinctive value.  Once a foothold is built in that area, then you can expand and provide additional functionality and tackle other companies and their products. 

    Build a legitimate niche, then provide the platform.  Focus on the needs, goals and problems first.  A great example is the iPod.  It focused on delivering and playing music in a new way, avoiding CDs and providing a great graphical environment…  Now on the iPad and iPod, you can run applications, browse the internet, respond to mail, etc.

    Thoughts?

  • Lauri Poldre

    Great article! And so man entrepreneurs have failed in this.

  • http://www.ipatient.com Dan Munro

    Great article – and in some ways highlights the dilemma we see in Healthcare IT (HIT) – a lot.  I call it trying to “boil the ocean.”  The HIT vendor community has a rich history of trying to solve EVERY known condition, experience, ailment, bureaucratic process with a single “app,” that it solves very few well – if any at all.  Then – when a new form factor (the iPad) makes a big splash – the docs can’t use it because the originating app was so overbuilt – it needed a full 22″ screen to display all of it’s wizardry (and endless tabs) and still manage to be legible.  Seattle Children’s Hospital just experienced this.  The docs all returned their iPads as “unusable.”  The form factor is compelling – the software – not so much!    

    • http://www.openviewpartners.com Scott Maxwell

      Thanks for the comment Dan.  it is amazing to me that companies continue to create such unusable software…

  • http://www.openviewpartners.com Scott Maxwell

    David, I tend to think that your scenario is the most likely for success, so it is a really good strategy.  You could definitely try for a platform strategy from the beginning, but there is a high failure rate with that strategy.  I like your point that platforms are earned, not born (I might even steal it from you!)…I also think that there is some luck to win in the platform game (e.g., luck that other companies don’t compete or compete poorly).  Thanks for the comment!

  • Amelia Rodriguez

    fantastic!!! keep up the good work!

  • Marge

    You have described my situation perfectly. What I need now is a person or method to help me clarify my niche. I can’t seem to narrow this down.