I have consistently been harping on the fact that you need to find a niche in the market and a market in the niche. Finding a market in the niche is the critical part in determining if the market is even worth looking at. This is not about prioritizing on the different niches. Its about discarding a niche all together. Please understand that B2B buying is generally not impulsive. Which means you need to play this game over a long term.
For priortising of niches we will have a separate discussion.
Criteria for the B2B segmentation / niche viability
- Your average deal size – recurring or one time
- Gross Margin
- Number of addressable prospects in the niche
Lets look at bundles of 100 or 1000 addressable prospects and I will share a simple model to do a quick calculation of the viability of the market.
Lets say you have a B2B prospect base of 100 and each deal is worth $100000/- per annum recurring. Which means the whole market is worth $10m per year and over a 5 year period if you were to be able to pick up 20 clients you can get a revenue of more than $20m cumulative approx. That’s a good market to be in, because with referrals and other things put together this market may actually end up being very large. Even at a 20% gross margin in 5 years you would make about $4m.
On the other hand if your average size deal was only $1000/- per annum recurring, then the market in 5 years may not be more than $200 thousand. Even if you make 50% gross margins, you will make at the end of 5 years about $100K.
So depending on the size of your average revenue you decide if the size of the niche is viable. The same $1000 product in a niche which has 1000 prospects could be worthwhile over a 5 a year period if you were able to pick up an share of 20% of the clients.
I have found that looking at a bundle of less than 100 tends to be scary because you don’t know how many of the clients will actually move away from their incumbent vendors. From a 100 prospects, Dean Jackson’s inevitability principle will lead to around 20 prospects in 5 years coming your way because some incumbent will make errors and if you are in front of the customer on a regular basis they will end up calling you just because they see you as persistent. A lot of time people don’t have the marketing stamina to last that many years.
Try working with this model and let me know if you found this useful.
Till next time then.