Reduce the Cost of Scaling: The Planned Pivot

The planned pivot - knowing you are going to change to plan B

Note: This post is the fifth, and final, part of the larger essay about reducing the cost to sustainability when developing a new product. To read from the beginning click HERE to start with ‘Defining Product/Market Fit’.

I ended my last post ‘The Product Formula‘ asking if it is possible to reduce the quality of the product required to gain product/market fit? Thereby reducing the investment needed to make the business sustainable. I believe you can do this, and still end up in a the market of your choice, using planned pivots.

As per the title, this is very different to the existing understanding of a pivot; a reaction to the initial idea failing. A great example of this is HERE.

Planned pivots are about recognising the relationship between the market and product and to use this as a strategy for reducing the cost of growth. There are two methods to do this; through changing the market in a single planned pivot, or by pivoting both the market and the product in a double planned pivot.

Planned Market Pivots

First I need to explain market competition density. A simple spin off from the term ‘market density’ that has localised boundaries. Market competition density takes into consideration the total addressable market and is the density of the number of competitors for the size of the market.

At present a businesses that enters a market with higher competition density will need better product resonation to achieve product/market fit. As shown in the product formula post, this is very expensive for founder(s) in the long-term. An example is if you tried to build an e-commerce store for commodity goods like electronics. You are immediately competing against a large number of players including the likes of Amazon and Rakuten, aggregators like Google Shopping and all the SME market. Unless you have a marketing wizard that can leverage the quality of your customer cohorts (see the reality of marketing) then you are going to initially struggle to become sustainable.

The concern is the medium to large online markets that can still be exploited, due to low competition density, are pretty much exhausted. Startups, that do not have a disruptive differentiator, are now being forced to concentrate on niche markets as the channel has an ever growing influx of competitors. There are a zillion examples of this within e-commerce, but for the sake of this post, the whisky exchange has successfully targeted a niche market in Whisky (£3.8billion) which is a niche of the alcohol market (£37billion) which, in itself, is a niche of the grocery market (£170billion) This doesn’t even take into consideration the reduction to market size by being exclusively online. It will never be a billion dollar company but with turnovers of £30m+, and profitable, it is certainly successful.

To highlight the theory; below is an example start-up business competing for market share, within market ‘A’ but is struggling to reach product/market fit as there is insufficient product resonation. As explained in the ideal product development journey in combination with the product formula, the business will be unable to scale unless there is large investment to increase product resonation:

early stage business in large competitive market

If the entrepreneur was to instead enter market ‘B’, a niche market within ‘A’, that had lower competition density, and near perfect customer overlap, then with the same product they could have a situation like this:

Pivoted to niche market enabling product market fit

The market may not be sustainable as the profit ceiling may be lower than the administrative costs, but this shouldn’t matter. The business has the ability to reduce losses significantly allowing time to increase product resonation so that it can be pivoted back to the larger target market. In this case market ‘A’.

This is a planned market pivot.

The best example I personally know of this is AppearHere.co.uk. The founder, Ross Bailey (who has the worst jokes in the world) has been brilliant in identifying that entering the market for very short-term commercial leases (pop-ups) has a much lower competition density. He is therefore able to build his product at significantly reduced cost than if he targeted his ultimate target market, the entire commercial property market. The latter he intends to pivot into when the product is sufficiently good enough. The investment thesis from the seed investors explains this in more detail HERE.

The Double Planned Pivot – Product and Market

This is on the fringe of start-up practice, the planned double pivot, I have yet to see it executed although there is every possibility that it has. It is the same methodology as above but using the same customer overlap for not just the market, but the product as well. The following pitch of the idea prompted me to right this essay:

Last month I was pitched an e-commerce idea from someone in the  private equity sector. I was fascinated by their approach, not because of how they were differentiating the merchandise, technology, or found a market with low competition density, but because of their intelligent approach of entry into their chosen market. This is through a planned product and market pivot.

They won’t appreciate me divulging the idea so I have made up an example that suits the purpose:

I want to enter the online channel within the clothing market, it is a multi-billion pound market but has significant competition. Creating a product and scaling it within this channel would be very expensive as highlighted here:

Immature product in large competitive market

So firstly I would look at what niche within the market has less competition density. In this case I am going to target just hats (this is a random example after all):

Pivoting to smaller market with immature product

The problem is that the competition density within this niche is still high, and the cost to achieving scale is still expensive, even if less than targeting the entire clothing market. I am therefore going to pivot the product from e-commerce to a content led aggregator. The new product will allow me to utilise a high viral co-efficiency to create a large customer base very cheaply as shown here:

market after product is pivoted

Thus my planned pivots lead me to create a content led aggregator specialising in hats. The CCM for this product is low as the revenue stream being of aggregator is less than full e-commerce stores for the same scale. This is more than off-set by the dramatic drop in CPA allowing the business to reduce its required initial investment significantly whilst building a customer base that can ultimately be used to pivot the product, and then again the market till achieving the goal of having an e-commerce business in the clothing market.

CONCLUSION

This essay, in all five parts, is to show that an entrepreneurs/product managers  immediate focus should be about achieving sustainability as efficiently as possible. This can only be achieved by scaling the business after achieving product/market fit. If an entrepreneur/product manager does their job well, they will first consider how they can reduce the gap from initial idea to the required product resonation to achieve product/market fit, before pursuing building the product. Planned pivots is one such idea on how to do this. Simply:

Planned pivots can significantly reduce the amount of investment needed for a product to become sustainable. 

Therefore, don’t immediately use the well-trodden route to enter and scale within a market. First consider if there is a cheaper routes to doing so. Chances are, it will improve the probability of you succeeding.

 

This post is part of a larger essay about reducing the cost to sustainability when developing a new product. Total parts are:

  1. Defining Product Market Fit
  2. The Reality of Marketing 
  3. The Ideal Startup Product Development Journey
  4. The Product Formula
  5. Reduce the Cost of Scaling – The Planned Pivot

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