The other day, in one of the TiE sessions, Devita Saraf of Vu Technologies gave a brilliant piece of advice. When someone asked her how an entrepreneur can decide whether to start a particular business, she said, “Ask yourself two questions: (1) is there a gap in the market? and (2) is there enough market in the gap?”
An entrepreneur faces various questions at different phases in the business.
· A start-up needs to decide which business to get into
· A business may need to diversify into related or unrelated lines
· A business might need to decide whether to expand the product line or enter a new geographical market
On all these occasions, the entrepreneur must take a decision since the resources available may be limited. Or, there could be another opportunity to deploy the same resources.
Let us understand how the two questions help take a good decision. What would be the consequences of the decisions taken?
Is there a gap in the market?
If the answer is negative, you will need to wrestle your share from competition. This will be cutthroat. There could be blood bath.
In the cutthroat competition, you lose pricing power and there will always be pressure on the profit margins. Making profits, even after being able to sell you good, would be very tough. In fact, selling your goods itself would be extremely tough in such a situation.
If the answer to the question is positive, you may have pricing power.
At the same time, you now need to consider the next question if there is a gap in the market that you have identified.
Is there enough market in the gap?
If the answer in this case is negative, you do not have a large enough market to service. You cannot grow in size.
You may decide to find a niche and be happy with a small market. Sometimes that also could be a good decision.
If you set up a business, you may want to scale up. However, in certain activities – professions like accountancy, medicine, or architecture – which are skill and knowledge based, one may want to set up a niche practice.
Consider these two questions to understand whether you have pricing power and whether you can grow into a large business. The “gap in the market” is critical for margins; “the market in the gap” is critical for growth.
Set up a large business and make it profitable.
- Amit Trivedi
The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at firstname.lastname@example.org.
This article first appeared on the website of FT Foundation