An ultra niche is a niche within a niche. A minority within a smaller group. The outliers of the pack. The internet makes it possible to cater to such ultra-niches in a viable manner.
A piece of software that solves a particular problem for 100 people. Only 100. They would be ready to pay for the product since it is the only product or the best product that solves their exact problem. The amount they would be willing to pay depends on 2 things. First, how much of a pain the problem is for them. Secondly, how much value can be created for our users by solving this problem. What “potential” is being unlocked by solving this problem and how big of a “potential” is that. It can be in the form of freeing up their time or helping them do something more efficiently.
If the problem is recurring, they would be willing to pay in a recurring way.
Finding the exact 100 people with this problem is the hard part. Maybe forums, reddit, fb groups, twitter all are ways to find people within a niche. Of which to filter again to find the 100 in our ultra-niche.
Startups that rely on data models and AI/data science algorithms for running their business will only get better with time. Moreover, as time passes they have leverage over newcomers. Making it really hard to overthrow a leader in a vertical. In this space I think there can be 2 strategies. Either the company can choose to niche down or expand to other verticals. If they niche down, over time they will collect niche specific data and develop models that are effective in that small space. One way such a company can be overthrown is if there is a new technology that doesn’t require as much data to predict consumer behaviour or whatever. While it sounds possible that still seems quite hard. Even if models get efficient and computers become more powerful and be cloud-first. There is a bottleneck in available data. There is only so much real world data that you can harvest. Out of that only so much that you can label and sanitize it so it can be used for training purposes.
Product studios is a 21st century ecosystem that supports creativity and innovation. They could be the next step for the startup world. With apps available now that makes it easy to build applications, websites and services using intuitive and graphical tools the cost for trying something out has gone down. A product studio formalizes this loop of trying something out from an idea to a product or service delivered to a customer. Studio’s like this will become key in democratizing and spreading the word that it has become so easy to do something on your own now.
Big companies that still innovate on every level of it’s organisation knowingly or unknowingly have built product studios into it. Some companies call this “culture”. Building fast, testing fast, learning fast. When these principles become a part of the company’s DNA, you are not stuck in long meetings trying to convince managers and executives.
API based businesses are a game-changer. They let other business focus on things that differentiate themselves and use more “off-the-shelf” solutions for other parts of the business. APIs have permeated into many verticals like payments(Stripe), e-commerce(Shopify), messaging(Twilio), search(Algolia), automation(Zapier) just to name a few. APIs form an integral part of the SaaS model. This is the glue that holds different pieces of a SaaS software together and yet it can invariably scale. One reason why they can scale so well is that these businesses that provide an API are focused to do one thing right and really well. So well, that their solution has all the bells and whistles to support all kinds of businesses across verticals and geographies. Then the question is can companies like that have a moat around them? What is it that gives them an advantage. Since these API’s are done on a software level, in theory it would be quite easy for a company to switch to another API provider down the line. The friction would be much less compared to changing a hardware supplier and the switching costs would be lower. Then one of the most important deciding factor for customers to stick to an API provider is integrations and network effects. The more a customer uses their product the better it gets. API companies are constantly improving their services and leveraging all the usage data and statistics to build a better product. In effect, the product will only get better and that is the advantage API companies can build and serve as their moat.
Group buying is when a product is offered at a reduced price if the product is bought by a minimum number of buyers. The concept of group buying can be traced back to China. The same idea is taking over e-commerce. Pinduoduo, a Chinese e-commerce platform is bringing this idea to the mobile-first world. The WeChat platform in China is crucial for enabling such a buying experience. Buyers can easily forward good offers to their friends via WeChat and if they ended up buying to together, both would receive an offer. This is takes into account of the use-case where you would like immediate feedback from your friends prior to a purchase. Amazon and other e-commerce platforms do not account for this. This well crafted feature has led to the embedding of virality into the e-commerce buying experience.
Warehouses will become the key to e-commerce growth and dominance. To run an e-commerce company there are a few key things to nail.
- Internet/App Experience : This is not governed by anything that can considered as a moat for any company. New entrants in the market can replicate and even one-up the incumbents.
- Array of products : The variety of products available in the online store. Sites like Shopify make it easier for anyone to start their own store. This aspect has 2 sides to it. Niche and low volume products are maybe better off in it’s own store under it’s own brand. But the vast majority of products sold online can be aggregated into larger platforms like Amazon. So there is a fair chance for new entrants to get this right.
- Delivery network : E-commerce firms can go two ways with this one. They can either rely on existing delivery networks and courier services or they can have their own network. The advantage with the former is that the upfront cost is lower. Startups don’t have to go through hiring and managing a delivery service. But to offer an experience that stands apart, this is crucial. For example, the one-day deliver that comes as part of an Amazon Prime subscription.
- Warehouse : Out of the 4 key elements, this one is the hardest of them all. All the other aspects have options that reduces the advantages of large incumbents in this vertical. No matter how much the internet has made it friction less for someone to make an online purchase, there is still a necessity to have the physical product stored and inventoried. this aspect is hard to scale. There is a need for correctly managing orders, returns etc. Owning warehouses and related infrastructure is going to be the hardest of them all. In addition to this e-commerce firms will have to figure out how products come from their vendor to these warehouses.
- Achieve productivity : A team that can work together and make progress. And all the basic roles of a leader, coordinator, worker etc. are met within the small group.
- Product market fit : The product that the group is building is wanted by a market. And the market is willing to pay for the product in exchange for the value that it gives them. This stage corresponds to the ability of the team to create value in a niche or given product market combination.
- Scaling : As the customer base increases, they would need more recruiting and more throughput in the group to meet customer demands. These demands can change over time and the technology/industry can also evolve over the time.
- Institution building : After reaching a certain size both within the company and market share, most of the business processes needs to be standardized and repeated. For example, creating good legal and finance departments etc. This stage corresponds to the ability of the business to create future value. This is probably also why, VC firms bring in more matured CEO and managers in to the firm after the startup has grown beyond a size.
Of course, this is generalized and over-simplified but it gives a framework on how to think about early stage businesses.
Product-Market fit is a stage during the initial days of a startup when the product and users align. Sam Altman characterizes it as when the user start talking about your product to others on their own. Paul Graham’s definition: Product market fit is when you build something that people want.
Startups take different time to achieve this depending on the problem it is trying to solve and the industry that it’s in. Before a startup reaches product market fit, it will iterate through multiple solutions based on the feedback from different stakeholders. Shorter this feedback loop is, the “leaner” it is. The tricky part of achieving product-market fit is that it is a 2 dimensional problem. Each time you tweak the product, that in turn also shift the market for that new solution.
Peter Thiel in his book Zero to One, listed 7 questions a startup must answer in order to make it big.
- The Engineering Question: Can the technology create a 10x improvement rather than an incremental improvement? Is the superiority in technology going to be obvious to the customer?
- The Timing Question : Why “now” is the right time for your startup and why is the problem you are solving important now? Is it a space that is trending up now? If yes, is it trending up slowly or fast?
- The Monopoly Question : Is the startup going to be a monopoly? Will it have a very very big market share in a small market that is growing? Will it be hard for new entrants to replicate what you have done?
- The People Question : Do you have the right people in your team? A team with a culture and conviction that can drive them to innovate such a solution into existence.
- The Distribution Question : Do you have a way to reach your customers efficiently?
- The Durability Question : How can you dominate the market for the next 20+ years? What can fuel the consistent demand and supply? What will stop new entrants from putting you out of business over a long period of time?
- The Secret Question : Do you know something that others don’t?
TransferWise is an online money transfer service. TransferWise offers transfers at the mid-market rate, i.e. the rate that you would find on Google. Other banks and transfer services usually offer a higher rate and make a profit out of it. TransferWise uses smart matching to match your transaction to another one that is happening the other way round. This avoid currency conversion and enables them to make a profit even at a mid market rate. In addition to that, they have a network of local banks around the world to facilitate these transactions locally.
This is a free-of-charge account that users can use to hold, receive and send money in different currencies. This also works on the network of local bank accounts around the world.
How they make money
Fee on transaction: The markup that they set on each transaction dependent on the amount being transferred.
Borderless Account: Even though the account itself is free-of-charge, the transactions are subject to a fee.
TransferWise for business: Companies can use their account to accept and make payments for their global business. This eliminates the hassle for managing different currencies.
TransferWise for banks: They provide an API for banks to use the TransferWise network to make payments, enabling them to provide cheap rates and faster money transfers.
TransferWise Business Model
How TransferWise works