Market holes

Asking why some technology or business model does not exist in a specific market is one of the most common but often unfruitful ways to get business ideas. I think of this as trying to fill holes in the market. For the most part, it does not work.

It typically goes like this. You use a service - say dentists, taxis, hotels, banks, etc - and realize it could work much better if they applied a piece of technology or a business model used somewhere else. You find a hole in the market offering, a piece missing in the system, which you believe could be filled and represent a startup opportunity.

You may notice how prevalent faxes are in health care and feel enthusiastic about digitalization, or see the opportunity of machine vision to replace security guards. You notice these and say: other industries have been fully digitalized, the medical market has not: that system has a hole, and I can fill it. Or you say: Google Photos is organizing all my pictures with machine vision, the same technology could be used to replace security guards; the physical security market has a hole, and I can fill it.

Another example is when we see the opportunity to replicate successful models in different industries: Airbnb may lead us to think of a marketplace to provide room and boarding for pets, and Uber may lead us to think of a dog walking service. A more perfect market reveals a hole in another market, and here again, you see an opportunity to fill it.

Market holes don’t necessarily map to business opportunities

This approach rarely works because voids in the market don’t always reveal the need for new products and companies. Some of those voids are there for a good reason. It may not matter enough to change them, or they might not be changeable with a product (they may need public policy changes, for example).

Filling holes in a market is, in a way, an effort to make the world more coherent, to make it more sensical. But building successful companies is not about completing a picture, it is about solving people’s needs.

The goal is to find a burning need from real, specific people. Once you do, finding out where it fits in the larger market will trace the path forward, but is rarely a good place to start.

Market holes are rarely a good place to start because they tell you about how you think the world should be and may blind you from seeing the present clearly enough to build something people will want, today.

Market holes often conflate the interesting with the necessary

Market holes are often conceptually attractive not just to you, but also to your potential customers. Wouldn’t it be cool if all those medical faxes were just a tab on an app? Or if you didn’t need a security guard because the cameras would do all the work?

The customer will likely love those ideas because they describe a more ideal world where all the pieces fit together and everything makes sense, but when the time comes to put dollars and time against it, if they don’t have a burning need for it now, they will kill your company in slow waiting.

It is very easy for potential customers to falsify their preferences when it makes them feel good about themselves. Everyone loves the idea of a more perfect market, but not everyone needs it.

For example, if you have a lot of pilots signed enthusiastically that don’t turn into contracts or have potential customers that tell you they would love to have your app and then never use it (and have no complaints about how it works), your company may suffer from market holeitis.

There is a big gap between a customer who would pay infinite money for a magical solution and a customer who is willing to commit to a solution today.

Selling a market hole makes it easy for people to lie to themselves, and in turn, for them to lie to you.

Weight loss is a good example: A lot of people will pay millions for a magical pill that will make them lose weight immediately and permanently, but few will pay a couple of dollars to make the hard work of losing weight, 10x easier. The reason? 10x better, in this case, would still be hard work. The idea of a magical solution is way more attractive than the commitment needed for the solution to work.

And, as it turns out, in many cases the ice cream in front of the TV is more valuable (is soothing, relaxing, rewarding, and can help me socialize with a partner, etc) than the potential weight loss.

Your product is forcing the real preference to light, which the customer won’t enjoy.

Products that meet strong consumer demand succeed despite requiring some commitment and effort from customers: Twitter was successful despite its fail wale and no edit button, Uber is still incredibly good despite getting ETAs consistently wrong. If the product only works with perfect uptime and perfect ETAs from day one, these products would have not gotten off the ground.

Focus on market holes blindsides you to other opportunities

Another challenge is that, once you focus on market holes, you miss all the opportunities to improve on the existing offerings. For someone looking to fill holes, Zoom or Stripe would have made no sense. These were not filling a hole in the system, but something that already exists, 10X better.

You also miss crazy good ideas like Snapchat or Bitcoin: these could not be found looking at holes in the market. They can only be found by discovering an unmet need.

Finding market holes is fun

One clear value is that it is a really fun activity. It can be intellectually stimulating and help you build models about the world that makes it more intelligible.

Still, I would insist: If you play the find a hole in the market game, remember to think long and hard about why the hole is there in the first place. Poke the hole and see if you can find different, unexpected reasons why it exists.

People who tend to enjoy system thinking (and enjoy finding holes in markets) often fail in a trap of their own making.

Sure, Uber and Airbnb make perfect sense once you look at taxis and hotels, but a ton of other things make sense in this way and are still crappy startup ideas because there is not pressing demand for the product you envision, at the price you can deliver it.

I would even argue that Uber starting with limos and Airbnb starting with couches are signs of being need driven, not filling a hole in the market driven; that comes later.

For all the avid system thinkers out there, it is essential to tell the difference between a customer who likes the idea of what you do, and one who needs what you do, and needs it now.