To create the best business model, you should find a profitable and sufficiently large market segment. However, in order to have a successful and durable business model, you need to find a large market that’s unserved or underserved. Finding this underserved market is paramount.
Anyone can find huge markets to attack. Hey, let’s sell coffee! The market is large and growing, right? However, several large and successful companies already own pieces of this market. In general, it’s unwise to attack an established competitor in the exact same market segment. Traditionally, the first mover or incumbent wins.
If you want to go after the coffee market, you need to find a viable market segment that’s unserved or underserved by Starbucks and similar companies. You can break down the target market into four pieces to make things easier:
How attractive is the industry itself? For instance, software companies tend to be more profitable than construction companies. Professor Scott A. Shane conducted research that offers significant data that some industries are more viable and profitable than others.
Of course, the other areas of the business model have great effect upon the overall profitability; however, if you’re looking for the best model, software development is a better choice than an airline.
How attractive is the niche within the industry? Typically, packaged software developers are more profitable than custom software developers. You want to pick a niche that offers the best potential profitability.
How attractive is the customer segment? The high-end customer targeted by Starbucks is more profitable than the customer targeted by McDonald’s. An attractive customer doesn’t have to be a wealthy customer. An attractive customer is the one who can make your business model work best. For instance, many profitable business models are being created for the unbanked (people without checking accounts).
Is it big enough to provide a good opportunity for you to enter it and sell enough product or services, at a price point that will allow you to create a viable business? Prosthetic limbs for pet dogs may seem like a great idea, but can you sell enough of them at a high enough price to be able to make any money doing it?