Why is Market Expansion So Important?

Startups are always built with a mission to capture a huge market. However, as Peter Theil writes in his famous book ’Zero to One’, every startup should start with a niche market, dominate it, and then scale up and gradually expand into related and slightly broader markets.

Expanding your company’s target market, whether through a broader offering or increasing the potential customer base, is how you achieve additional revenue growth opportunities and accelerate the growth rates. But more importantly, the ability to expand the market is a defining indicator of longevity and long-term success, allowing startups to stride towards becoming substantial players in their relevant sectors.

We all know that a meaningful market is a must-have in order to build a public company, but how large should it be?

To go public, companies should have at least $100-150M revenues/ARR, with a real potential to increase their revenue significantly in the next few years – up to $300M at least. A decent market share for a great company is 5% of the market, which means the company should have a potential market of at least $6B according to the assumptions above.

With these numbers in mind, it’s pretty clear why companies need to expand their footprint and are eyeing ways to expand their market.

How do you do that? Let’s dive into 4 tried and true strategies.

Market Expansion – 4 Strategic Methods

In theory, the market expansion is pretty simple: It all goes back to either expanding your potential customer base or increasing the average contract price per customer. The market expansion phase usually starts as a vision when the company raises a growth round and executes right after. At Viola Growth, we are big believers in this, and here are the 4 main methods we’ve identified. Each of these methods will have a different impact on your company’s operations and go-to-market (GTM) and will pose different challenges.

#1: Go Up-Market with Enterprise Offering

In some categories, it’s hard to build a big company without eventually selling to enterprise customers (or as we call it “Elephant hunting”). But, getting traction from enterprise customers is not easy, (especially for an early-stage startup), before there are customer testimonials and evidence for the product performance. Therefore, many startups start to sell to small companies or individuals inside companies, before they approach enterprises, and it’s highly common in the DevOps space.

RapidAPI started out as a marketplace helping developers to find and manage APIs. A few years ago, when +1M developers were already using the marketplace, the company expanded their offering with a designated solution for enterprises (RapidAPI Enterprise Hub). They developed additional functionality and features for enterprise, hired enterprise sales team and leaders, and built supporting operations. RapidAPI Enterprise Hub is now being used by companies like SAP and Cisco, as well as more traditional corporates like Hyatt.

Important things to consider when going up-market:

1. Be Patient – Selling to enterprise companies takes time and a long sales cycle. It’s recommended to measure the KPIs separately.

2. It’s expensive – Selling to enterprises can result in big contracts but it doesn’t happen without a considerable investment from your side. It requires the hiring of an expensive enterprise sales team and adjusting the product to enterprise requirements, such as security and governance.

3. Culture fit – You may need to adjust your company’s DNA, so proceed cautiously.

Iddo Gino, Founder & CEO of RapidAPI:

#2: Go Down-Market – Hello SMBs

A less common market expansion strategy is targeting smaller clients, and thus significantly expanding the potential number of customers. This method is commonly used by vertical software companies, which aim to offer their solution to all customers in their market.

Guesty, a short-term rental property management software, executed the go-down method in 2021. While the company’s core product serves professional property managers with 4 listings or more, Guesty has recently launched a new product for small property managers with up to 3 listings – ‘Guesty For Hosts’. The product expansion was executed through M&A, and Guesty transformed their product to be the solution for small customers. Guesty for Hosts is easy to use, affordable, includes the relevant modules for hosts and they can start a free 14 days trial through Guesty’s website (no-touch solution). This strategy enabled Guesty to serve the entire alternative accommodation ecosystem, from small family-run businesses to enterprises.

Important things to consider when going down market:

1. Simplify the product – Because smaller customers pay less, you’ll need to simplify the product in order to reduce the onboarding and ongoing support costs.

2. Shift from sales to marketing – For the same reason, you’ll need to reduce the CAC per customer, which means less human involvement in the sales process and more marketing materials and online acquisition channels.

3. Focus on Retention – Targeting small customers may result in higher churn rates.

Amiad Soto, Co-Founder & CEO of Guesty :

#3 Multi-Market Approach

Increasing the size of your market through leveraging existing technology and product base, and tailoring the offering to a new segment of customers may have the most significant impact on your market size, and sometimes it can even double it or more.

Verbit, an AI-powered transcription and captioning company, used to focus primarily on the legal and education fields, though they quickly identified new opportunities to leverage their AI-transcription expertise. In 2021, Verbit acquired VITAC, the largest provider of captioning products and solutions in North America. Through this acquisition, Verbit entered the media production and enterprise space, shifted their customers to use Veribt’s platform, and built a new GTM team with domain expertise.

Important things to consider when expanding to new markets:

1. Learn your audience – A new market means new customers, users, decision-makers, and budgets.

2. Adjust your product – Implement what you learn about your new audiences into your product.

3. Build vertical GTM – Adjust your GTM strategy to the new vertical’s marketing, channels, pricing. Consider hiring a sales team with a relevant background.

Tom Livne, Co-Founder & CEO of Verbit:

#4 Multi-Product Approach

Platform players often choose to expand their market by expanding their offering with additional solutions for their existing audience in order to increase the revenue per customer. This strategy was implemented successfully by Wix continuously over the years, and contributed significantly to growing their revenues to >$1B . This strategy is definitely relevant at scale as well!

Wix expanded their offering over the years from a website builder/editor to a comprehensive online marketing and branding platform, including growth tools such as client management and email marketing, payments, data & analytics, and many other features. The results speak for themselves, with the average revenue per user (ARPU) has increased from $133 in Q4/2016 to $179 in Q4/2019.

Important things to consider when building a primary solution:

1. Learn the competitive landscape of the new product – Your customers may be using other solutions at the moment.

2. Test your limits – Get familiar with markt limitations, and understand if the customers are willing to pay more if you add additional services.

3. Focus on customer success – make sure that your customers are aware of the new solutions, and help them to learn how to use them.

Are you at the point between product-market fit and growth?

Now is a good time to review which of the above methods are the best fit for your company. Depending on your vertical and stage, you may find that a few (or even all) of them can be helpful. As growth investors, we’re always on the lookout for the big dreamers, so if you’re looking at ways to expand your market we would love to hear from you.

Tomer Meridor, Principal at Viola Growth.