On Sunday morning, I dropped down to 60 feet beneath the Sea of Cortez and swam around a rocky point into a sandy bottomed bay. The dive master leading our group, stopped and pointed off into the distance. I saw a large shadow drift through the haze. Then suddenly a seven foot bull shark glided over the bottom on a slow cruise around our group. Another joined him and a larger bull shark circled overhead. Somewhere between five and ten sharks came to inspect our little group, but fortunately no one was eaten.
Back on the boat, between dives, I talked with another diver who is a co-founder in a drone software company (side bar: if you want to meet interesting entrepreneurs, go diving, sailing, etc. when no one else is). I was curious about his business journey and he told me the broad outlines. He said that they were eventually able to establish the business by focusing on a niche.
Then he told me that he was responsible for growth and felt like his self-funded software company needed to spend $20 – 30k a month on marketing in order to grow to the next level. This made me curious, because it’s an arbitrary investment. I asked him, “Why? Why $20-30k?”
“I think we need to spend that much on ads in order to figure out what works,” he said, “Maybe investigate affiliates.”
It’s an interesting theory. I’m certain that it’s true for many businesses and false for many others. But is it true for his business?
What it got me thinking about was market capture.
If I were in his shoes, I’d first want to know how much of the market we had captured? If he had 90% of the niche, $20k would have a poor return unless the life time value of new customers was super high. On the other hand, if he had 1% of a niche, $20k a month would have a good chance of spurring significant growth.
There are other factors, like market competition and customer behavior, but the available market lays a foundation beneath everything else. One of the things that can make a business easy or harder is how much of the market you need to capture to be successful. If you can win on less than 1%, your customer acquisition efforts might be nearly non-existent. If you have to carve off 20% or 30%, then you might need a good value proposition and $20 – 30k a month.