The Market Wedge: How to Pick Your Initial Market
How and why early-stage startups sacrifice growth for power
It’s 2011. You’re a New Yorker visiting San Francisco, and your friend tells you about this magic new app called “UberCab.” You press a button, and a driver shows up within minutes. Amazing! A few days later, you’re back in New York. You open the UberCab app and... it doesn’t work! You become the physical embodiment of take-my-money.jpeg. Why won’t they take your money??
The same pattern repeats itself over and over:
- Facebook started only at Harvard
- Airbnb started only in San Francisco
- Opendoor started only in Phoenix
- DoorDash started only in Palo Alto
- The Athletic started by only covering the Cubs
This strategy—solely focusing on serving the needs of one niche first before expanding to others—is a market wedge. And although it might seem simple (“gotta start somewhere!”) getting your market wedge right is anything but.
Although startups have been using market wedge strategies since the beginning of time, the term “wedge” was first made popular by Chris Dixon’s article “The ‘thin edge of the wedge’ strategy.” As a whole, wedges are under-theorized, underutilized, and yet are vital for startup founders to understand.
A wedge is a method for spending limited resources strategically. You pick one thing, do it well, then use that momentum to expand later. In our first post on wedges, we focus on “product wedges,” where you make your initial product as easy to adopt as possible—even to the point where you sacrifice profitability and defensibility. A good example is TikTok, which got its initial traction in part by allowing users to add music to videos and export them to share with their friends elsewhere (come for the tool), and later developed staying power by focusing on the “For You” page experience (stay for the network).
A market wedge, on the other hand, is basically the inverse of a product wedge. Instead of sacrificing power for growth, you sacrifice growth for power, and focus on a small niche within the larger market you’d eventually like to reach. By limiting who you aim to serve, you have a better chance of developing some power within that market early, like network effects, brand, economies of scale, etc.
For example, in order to get a local marketplace like Uber to work, it was critical that they launched in a constrained area to start. Imagine Uber had launched globally on day one: 99% of people would not have been able to successfully hail a ride. Picking a wedge is about making a promise you know you can actually deliver on. But that constrained start wasn’t the only benefit to Uber. It also allowed them to:
- Learn from early mistakes in a relatively easy-to-fix environment.
- Take the time they need to prepare for later expansion.
- Create a pool of drivers (this is vitally important, I’ll get into this later).
- Build up their brand and drum up investor interest.
Two years later, Uber had only expanded to five other markets: New York, Chicago, Paris, Toronto, and London. Two years after that, Uber was in over 100 cities well on its way to becoming the behemoth it is today.
Many companies like Uber have followed the market wedge strategy and have seen great success (we’ll go through 17 more in this article, but I’m sure you’ll be able to think of plenty others). However, just as with the product wedge, the market wedge isn’t for everyone. It’s simply another tool in the toolkit for building momentum around your idea. We aim to help you understand how and why a market wedge works so you can use its principles as you grow.
The roadmap for this post is:
- List the main types of market wedges (geography, topic, product category, community, demographic) with a few good examples for each—and some counter-examples.
- Explain the key mechanics that make market wedges work.
- Explore what makes a good initial niche to choose.
Ready? Let’s dive in!
The types of market wedges
A geographic market wedge focuses on one physical area first, like a city, before expanding to other areas.
- Opendoor, a home-buying startup, launched in Phoenix in 2014, then expanded to Dallas in 2015, and now is available in 44 markets in the US. By concentrating their resources on just one market to start, Opendoor was able to more easily educate potential home sellers and build local brand power and economies of scale.
- Uber started in San Francisco, focusing on making the experience as seamless as possible for a group that was more likely to buy into their new idea. Once established in that market, they expanded to other cities like New York, Paris, and Toronto. They added cities steadily until they reached 100 total cities in 2014, four years after their initial limited launch.
- Doordash started in Palo Alto, delivering to Stanford students. This allowed them to work out the kinks in their process (they began as Palo Alto Delivery and took actual phone calls to place orders) and expanded once they had the funding and means to do so.
- Airbnb started in San Francisco and eventually expanded worldwide. This constrained start was critical, because it was difficult to get people to become hosts, and it took everything they had to make even one city have enough inventory to satisfy guests.
Topic-based market wedge companies host one specific content topic, and expand once they have a decent audience base.
- The Athletic is a subscription-based sports publication (no ads) that covers local sports in 47 cities. But they got their start by covering only Chicago sports teams. Once they built up a supply of great, local sports journalism and a rabid fan community of their own, they started expanding to other cities starting with Toronto and Cleveland.
- Twitch started as the live streaming platform JustinTV. To grow, they decided to pivot to streaming games and renamed themselves Twitch. They believed in this singular focus so much that they turned down a $1.25 billion acquisition from Yahoo, which didn’t share that vision. By sticking to their guns, they were able to attract the content creators they were after and the audience of those creators. Later, they expanded to politics, vlogging, art, education, and (most infamously) hot tubs.
- StackOverflow started as a question-and-answer forum for any and all programming questions, later expanding to the Stack Exchange Network. Now, you can find question-and-answer forums on everything from history to tabletop roleplaying to grammar.
- Product Hunt is an example of a rocky market wedge execution, though it did end up okay for them in the end. They started by hosting a list of the latest tech startups and set their eyes on expanding to books, games, podcasts, and more. Eventually you could imagine Product Hunt expanding to movies, whiskey, motorcycles, and gardening equipment. But when they tried to expand, the initial focus audience had a way of dominating new topics: books were dominated by startup books, and the same happened to podcasts. Topic-based wedges can be tricky to pull off! In the end they decided to stick with startup enthusiasts and offer different types of products and services.
- Hardbound was Nathan’s previous startup, which had a unique visual format for reading. At first they focused on developing the reading experience, but did not focus on picking a specific topic or audience to develop content for. This was a mistake!
3- Product Category
A product category market wedge is where you start by focusing on one kind of product, and expand to other types of products as you grow.
- Amazon famously started by selling books online and now sells just about everything under the sun. Their true innovation was creating a new way of selling things on the internet, but books were a good place to start because they’re easy to ship, the buyer doesn’t need to try it on, and the buyer knows they want the exact book they’re looking for. Bezos started with a product he knew he could follow through on and tackled the harder stuff later.
- Robinhood started with stocks, then expanded to options and cryptocurrencies.
- Apple started with PCs, then expanded to laptops, music players, smartphones, tablets, watches, and more.
- Zaarly is a good example of not picking a wedge initially, and backing into one later out of necessity. They launched as a “reverse craigslist” where anyone could request anything. You can’t deliver every possibility, though. So they later switched to focus solely on contracting and remodeling work.
Community-based market wedges focus on a specific online community, like venture capitalists or gamers, and expand to other communities later.
- Clubhouse focused on “Silicon Valley Twitter,” providing invites to influential people within that community to experience this new concept of “drop-in” audio. Because they gave out a limited amount of invites, you had to know somebody to get into the app. Clubhouse has since gained a global footprint and adoption by many different communities, but it all started with one tiny slice of Twitter.
- Discord, similar to Twitch, focused first on gamers, providing an easy way to voice chat with your friends as you play. From there, it’s become a tool for all types of communities to gather, including our own.
- Facebook famously started at Harvard About a month later, they expanded to other schools like Yale and Stanford. A year after that, they expanded from college students to high school students, then took off from there.
Demographic market wedges focus on one population characteristic, like gender, income level, or education, and expand to other demographics later.
- Tesla started as a very high-end luxury brand with their first model, the Roadster, costing $80,000-$120,000. Starting at this price range limited the number of cars they’d need to produce while proving that electric cars are not only viable, but also drool-worthy. Later, they introduced their Model 3 starting at $35,000 and ended up with a years-long waitlist.
- Madewell was a workwear brand at first, which you might be able to tell from its name, but in the early 2000s pivoted to e-commerce. They found their jeans were popular among young women, so they went all-in on women’s clothing for a while. Later, they expanded their line to include casual clothing for just about anyone, but they got their fresh start by focusing on one demographic group.
- Lululemon only made high-quality women’s yoga clothing in the mid-2000s. It’s a fairly safe bet that people into yoga are also into things like running and cycling. So, once they built out a fanbase of women who loved their yoga products, they expanded to other hobbies and added men’s and children’s clothing.
The mechanics of a market wedge
The most important part of a wedge is its edge, which is the point at which it concentrates all of its force. When you use a market wedge, your edge is your initial market niche. By concentrating your resources into serving the needs of this initial niche, you gain a foothold from which you can start to expand niche by niche.
There are four ways starting small with a market wedge creates a mechanical advantage, but all of them come back to the simple principle of concentrating resources. Every startup has a relatively fixed (and small) amount of money, time, and talent. You can either spread yourself thin, or focus and win.
Here are the four ways focus creates results:
1- It’s easier to teach a smaller group how your product works
If you scroll back up to the list of market wedge examples above, you find a characteristic many of them share: it’s kind of hard to describe why they’re good.
- Why Facebook when we already have MySpace?
- Why would I want to pay to ride in some rando’s car?
- What the hell is “drop-in audio?”
One famous example of this skepticism is when Jeff Bezos gave a guest lecture to a graduate-level Harvard business class. The students were convinced stores like Sears and Barnes & Noble were about to eat Amazon’s lunch, with one student telling Bezos:
“You seem like a really nice guy, so don’t take this the wrong way, but you really need to sell to Barnes & Noble and get out now.”
There are a lot of reasons for Amazon’s success other than the market wedge, but the company’s initial focus on books did allow Bezos to introduce more people to the idea of buying things online. Uber’s growth worked the same way.
Once people understand what you’re trying to do with your product, you can start selling to your early adopters and building momentum. It’s easier to communicate with a smaller group at first. You can reach them more easily and explain your product in terms specifically meant to appeal to them. You can learn from them what to say to help them understand. Then when they get it, and start using the product, others will follow more easily. And you’ll have more refined language that is tried and true.
2- It’s easier to balance supply and demand
At a base level, you need to make sure you have enough of what you’re selling to meet demand, especially when you’re getting started. Uber had to attract drivers as well as riders. Limiting their scope geographically helped make sure they always had a driver relatively close by when a potential rider came on.
The same goes for Facebook, which needed to supply user-generated content relevant to users’ interests (e.g., “Where are all the cool Harvard parties at?”). Amazon couldn’t start by selling everything under the sun, so they focused on books. And so on.
Ensuring you have the supply liquidity needed to serve the potential demand lays the foundation for later expansion without over-stretching your resources.
This is actually a subtler and more important point than it seems. All businesses—not just marketplaces—involve matching supply and demand. They spend resources gathering raw components of value, and then perform some operations on those things, and then deliver the finished product to customers in exchange for cash. When you’re first getting started it can be fatal to spend all your energy gathering the wrong supply, or applying the wrong transformations to that supply. By starting in a limited market you can more intelligently see what people need and spend the time, energy, and money necessary to give it to them.
3- It’s easier to kickstart network effects
A market wedge, in some ways, adopts an existing network rather than creating one from scratch. And, as has been covered and studied ad nauseam, the network effect is key to growth in the modern tech economy.
The right niche (we’ll get into how to identify one in the next section) has both potential supply and demand waiting to be connected. All it needs is your product to connect the dots, and you’ve got a network effect on your hands. For example, there are people who need an easier way to get a ride in San Francisco, and there are people willing to provide those rides to make some money. There are Harvard students looking for parties on a Friday night and Harvard students looking to get the word out about the party they’re hosting. When you start with a small niche, it’s easier to become the “shelling point”—the place everyone goes to find everyone else.
In contrast, a product wedge has to limit the scope of its product to create a network effect. TikTok didn’t initially sell itself on the “For You” page but rather “create and share your own music videos.” This strategy eventually created a strong network effect, but at the cost of not initially delivering on their full product vision. If they stuck to just the “add music to videos” value proposition, it would have been easy to copy.
4- It’s easier to learn quickly and iterate
With a market wedge, you can test things out, apply lessons learned, and start building brand awareness in a smaller, safer environment. Investments you make in this environment will have compounding effects as you scale, turning a small optimization early on into a massive impact later.
Airbnb, for example, spent time with their early hosts in New York and realized their most successful ones had high-quality photos of their apartments. So they hired photographers to take better photos and saw bookings double. It was much easier to learn and apply this lesson with a smaller base of hosts—whose example later hosts would follow.
One way of thinking about it: it’s easier to do things that don’t scale if you’re not prematurely trying to scale.
The point is that lessons learned and experiments you run in your initial market niche will compound as you expand. Later on, these lessons might outlive their usefulness — connecting riders to drivers in San Francisco is very different from connecting them in Lincoln, Nebraska — but they’ll serve as a solid foundation as you use your momentum to expand to those first few new niches. When those more complex problems arise later on, you can focus all your energy on addressing them because you’ll have solved the simpler problems long ago.
Finding a good market niche is half the challenge
We’ve been talking a lot about niches in this article because they’re vitally important to your market wedge. Your initial niche is the edge of your market wedge — it’s what you put your resources and energy into in order to gain momentum. After all, a wedge is only as effective as its edge.
But what constitutes a good niche? How small is small enough, and how small is too small? These questions are extremely difficult to answer in the abstract. Ultimately it depends on your business. But there are some general principles that cause some niches to be more advantageous than others, that can help you figure out what kind of initial niche makes most sense for you.
1- A good niche connects people who already want to transact
Your niche needs to be a source of both supply and demand, to which your product can play middle-man. Successful market wedge products typically connect these sources of supply and demand so they can transact in a new way.
Facebook exchanged user-generated content among college students. Uber exchanged rides via an app, Amazon exchanged books between publishers and buyers over the internet, and so on. When choosing a niche, think about which groups your product can connect in new and interesting ways.
2- A good niche is self-contained
A self-contained niche clearly divides itself from other niches through geographic, cultural, or economic lines. This limitation will help maintain the strict focus the edge of your wedge needs to function properly.
For example, by focusing on the gaming community, Twitch could maintain its focus on building the features gaming streamers needed, therefore attracting a vast supply of content for gamers to consume. Other types of streamers then see this huge audience of gamers and come knocking. The snowball network effect takes it from there.
To identify a self-contained niche, look for clusters of people that want the same types of things delivered in the same types of ways, for roughly the same price.
3- A good niche has transferable lessons
The point of starting with a market wedge is to eventually expand to many, many other niches. The lessons you learn with this first niche need to apply to these new niches.
Discord also started with the gaming community and learned a lot about all the complexities involved with running communities as they’ve expanded to professional communities (like ours), classrooms, and crypto-art projects, many of the lessons around moderation, automation, and engagement transfer.
Conquering the great fear: getting stuck in the niche
Let’s be honest. The hardest part about picking an initial niche isn’t always choosing niche A vs niche B. It’s about committing to an initial niche at all.
As entrepreneurs, we want to build things that could have a large impact. Many of us are not motivated to build something small. So it can feel uncomfortable taking a big idea and shaving off 99% of it to make it fit into a tiny little box. We’re afraid if we do so, we’ll never grow out of the initial niche. We’re afraid of getting stuck.
The best thing to do if you’re worried about this is to try and think it through rationally. Sure, some businesses do get stuck in their initial niche. But that doesn’t mean if they didn’t pick a niche in the first place that it would have worked in a bigger way. In fact it probably means the opposite: the only way this business works is in that particular niche.
It helps to recognize this is a really common thing for founders to be anxious about. Talk to a mentor, meditate, read a book about cognitive behavioral therapy, which is an incredible tool for seeing reality more clearly. Whatever works!
Most of all, try to enjoy the journey. Enjoy the people you’re building with. At the end of the day that’s what will give you the energy to carry on.
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