Should you cover the entire market or double down on your sweet spot? You’re a CEO who just missed the quarterly number for the third time in a row. You know what happens next. You are on the hook to answer to the board and shareholders. Specifically, you know they’ll question the strategic decision you made last year to focus on your market’s sweet spot. Well, why did you do it?
CEO’s routinely face the challenge of balancing short-term requirements with long-term strategic initiatives. Sometimes decisions are made based on gut, data, or a combination of both. You made this particular decision based on what you thought was good market research. You thought your sweet spot provided you with plenty of room for growth and you knew your company could deliver to this segment of the market.
Cover New Markets or Reallocate Resources
So, what went wrong? Well… it depends.
Let’s first consider a few of the questions that you should answer when faced with the dilemma of covering new markets or pointing all of your resources at the portion of the market that has brought you to where you are today.
- How big is the addressable market within your ‘sweet spot’, and what is the growth rate?
- How big is the addressable market for the other segments of the market and what is the growth rate of each?
- Who are your competitors in the addressable market and how effectively can you compete with them?
- What is your customer lifetime value within your sweet spot vs all other segments of the market?
- What is your cost to acquire a new customer within your sweet spot vs. all other segments of the market?
- Is all growth across all segments of the market equally value-creating?
- Are you willing to forgo short-term profits to earn better returns for shareholders over the long-term?
The Viability of Your Sweet Spot
It will often make sense to remain laser-focused on those segments of the market that you’ve proven you can serve well at a healthy margin. On many occasions though, CEOs are hesitant to tackle new areas of the market where the outcome is in question. In choosing not to play in these market segments, they may be missing their greatest opportunities for future revenue growth.
What it really comes down to is this – do you anticipate that your sweet spot will continue to expand at a rate that can drive the growth that you need to consistently create enterprise value? Or, is your growth strategy reliant on you capturing a larger share of the ‘sweet spot’?
The Answer Varies
Great CEOs ensure that they are placing their company’s boats over the most fish. If you happen to have your boat positioned directly over a fish population that is exploding with growth, then keeping your focus here could very well be the best decision you can make.
In any other case though, a strategy that is heavily reliant on market share growth in existing markets is unlikely to take you where you need to go. If your sweet spot is not growing faster than the market as a whole, you need to change your exposure to the rest of the market, specifically focusing on those segments that are growing.
Do this without throwing your acquisition costs out of whack, and your next conversation with the board will be an easier one.