It’s surprisingly easy to kill a promising business.

To nurture early wins into mainstream success, a company (usually) needs to pick a market and then pour energy and effort into dominating that market. A cliche, sure. But also true.

Like the need to get regular exercise, this is something everyone knows but almost nobody does. The reason why is something that puzzles even business guru Geoffrey Moore: “Why so hard? I don’t know, but nobody seems to do it very well.”

One reason it’s hard is something called the tyranny of choice. If you haven’t heard of it, you’ve almost certainly experienced it.

The tyranny of choice

Here’s a paradox for you: Citizens in affluent countries have more options and live healthier lives than anyone in history. They have every reason to be happy. But they aren’t. Robert Lane of Yale University found that increased abundance is correlated with decreased happiness overall.

Researcher Barry Schwartz describes why. He points out that when we shop for a car, or choose a movie to rent, or select from a restaurant menu, we’re also choosing against something. Multiple somethings, in fact. With every decision, we reject the aggregate positive qualities of the alternative choices.

With every decision, we reject the aggregate positive qualities of the alternative choices.

This rejection is lost opportunity, and that loss is painful. In fact, studies by Amos Tversky and Daniel Kahneman (and many subsequent) show that we feel the pain of loss much more acutely than we do the pleasure from gain.

The aversion to loss has been exploited by marketers for years. Amazon.com relies on it when the site notes there is “only two copies left” of a particular book. Similar when an infomercial urges viewers to “call within the next 10 minutes for a special bonus.” The anxiety of loss makes a purchase decision more likely.

To add insult to injury, the feeling of loss grows over time because we adapt to the positive qualities of the choice we make. We get used to stuff. That great new Mercedes becomes more mundane every day. In the meantime, the aggregate positive qualities of the rejected cars remain painful. We notice BMWs on the road. Regret sets in.

Schwartz writes

The consequences of unlimited choice may go far beyond mild disappointment, to suffering. […] when we make decisions and find that they do not live up to expectations, we blame ourselves. Disappointing outcomes constitute a personal failure that could and should have been avoided if only we had made a better choice.

This situation can hurt our quality of life. It can hurt business as well, especially a business looking to grow into a mainstream market.

Start ups moving into growth stage need to make a difficult choice

In the early stages of the technology adoption life cycle, all sorts of innovators and early adopters from all sorts of different market segments seek out innovative products. Companies with early stage success have made inroads into multiple market segments.

Early market success positions a company for the next phase of growth. It drives investment in the company, attracts high quality talent, and creates an energized work environment full of committed people.

The next step is to grow into the mainstream. To do that, a company first selects a market segment on which to focus all its energy.

If you don’t, everything gets harder. Sales gets harder because the value proposition is dilute across multiple markets. Support is harder because they need to build a knowledge base that spans multiple markets. Product management is harder because they are asked to accommodate conflicting priorities. And so on.

This isn’t any great secret. But it’s one thing to know that it’s important to do something, and another thing entirely to actually do it.

Organizations faced with choice can freeze with indecision

Organizations faced with this choice can freeze with indecision, and avoid commitment to any one market segment. This happens for two reasons. First, loss aversion is magnified within an organization. Second, regret is magnified because we hear criticism as insightful and wise.

Loss aversion is magnified within an organization

Making decisions in day to day life can be tough, but the stakes are relatively low. In business the stakes are high. Choose the wrong market and the consequences can impact the equity of the company as well as the livelihood of the employees.

To grow beyond the early markets into the mainstream market, a company has to choose which market segment to focus on. More to the point, the company has to choose which market segments to ignore. There’s the rub.

The dynamics around the tyranny of choice play very strongly here. Loss aversion is felt by many stakeholders throughout the company, and that feeling is focused and projected onto the CEO.

• A sales team will have relationships across many markets and will push back if any market gets excluded from focus. They will argue for the huge revenue associated with a particular market, and will darkly mumble about a decision to focus elsewhere;
• A board will feel the weight of market opportunities not pursued and may contribute a lot of pressure to explain why money is being left on the table;
• An engineering team and product management team will have pet features that apply to various different markets. They will grumble darkly about a decision to focus elsewhere.
• A marketing team will have worked to build pipeline and train sales across various different markets. They will grumble darkly about a decision to focus elsewhere.

All together this combines into a loud voice saying “I can’t believe you are IGNORING this huge opportunity! What is wrong with you?!”

This is one of the times being a leader becomes hard. We second guess ourselves, and even fear for our job. It’s why so many companies fail to choose and focus on a market segment. The opportunity cost of the ignored markets seems too high.

Not helping matters any, the darkly grumbling critics seem very wise and insightful.

Critics seem wise and insightful, even when they aren’t

Organizations are full of people eager to predict that a plan will fail. Take any proposal, in any context, and inevitably someone will turn up saying the idea is unworkable, untenable, ill conceived.

Stanford professors Jeffery Pfeffer and Robert Sutton sum it up nicely:

People in many organizations are remarkably skilled at making excuses about why something can’t be done, why something won’t work, and, therefore, why the present, albeit imperfect, condition is better than trying something new and actually implementing new knowledge or ideas…These are dangerous people. They are smart enough to stop things from happening, but not action oriented enough to find ways of overcoming the problems they have identified.

The really nasty bit is that we are hardwired to think that pessimistic people make a lot of sense.

Research by Harvard professor Teresa Amabile found that pessimistic views are seen as more intelligent, competent and expert than optimistic ones. This was true even when the content of the optimism is higher quality and more forceful. She summarized that “…only pessimism sounds profound. Optimism sounds superficial.”

Only pessimism sounds profound. Optimism sounds superficial.

Like the feeling of loss aversion, the impact of the nattering nabobs of negativity is magnified within an organization. Important stakeholders will feel the pessimistic view is more intelligent, and will begin to echo it.

Second guessing sets in, and the organization is even more likely to freeze with indecision.

Some suggestions

There’s no silver bullet. There’s no avoiding that toughness of the situation. But there are some things we can do to make it easier.

Commit. Recognize that the stakes are high and the consequences of choosing poorly are high. Commit to making a choice anyway because the alternative is much riskier. Write down what you want to accomplish and why; the act of writing will help clarify your mind. Identify a date by which you will make a decision, and work backward from that date to create an agenda. Make a list of all the stakeholders that need to understand what you are doing, and set up meetings with them to go over the plan and the schedule.

Get clear on the process. Geoffrey Moore’s process for choosing a market segment is tested and well documented:

• Identify the team that will help you do this. A good mix includes sales, marketing, product management, UX, and engineering.
• Don’t make the team much bigger than a half dozen.
• With your team, build a list of market segments to evaluate. A market segment consists of customers that have common needs and that reference one another during buying decisions. A software developer in embedded systems is not in the same market as a software developer in video games because they are unlikely to travel in the same communication circles.
• Have each member of the team rank each segment from 1 (worst) to 5 (best) against the following criteria: identifiable customer who will buy our product, compelling need to solve a problem we can address, can we deliver a complete product to the customer, has the problem been addressed by a competitor?
• Roll up all the scores and eliminate any segments that have a 1 or 2 in any category.
• Re-evaluate the remaining segments against the following criteria: do we have partners and allies that will help with the segment, do we have a channel in place, does our pricing make sense, are we credible in the market, does the segment have strong adjacent segments to move into?
• Rank order the segments by score. Commit to one.

Insist that criticism be productive. It’s a good practice to establish ground rules in your organization about criticism. Insist that criticism be couched as a problem to be solved, and that a possible solution be proposed.

Default to action Selecting a market segment to go after is only the first step. It’s remarkably common for an organization to make a decision and then consider the action complete. Such organizations can develop two distinct dimensions – the one that is presented, discussed and debated in meetings, and the one that is actually executed in the field.