Venture capitalists believe a company can’t grow fast enough or reach sufficient sales volume without a large potential market, somewhere in the billion-dollar range.

VC funds need to capitalize on their investments by either selling their portfolio companies or taking them public. In both cases, a company must grow quickly to reach a sales volume large enough for a significant exit.

But does the same logic apply to a company whose primary goal is profitability, rather than growth at any cost?

Companies built on the principle of profitability must be efficient and focused. They can, and should reach profitability at sales volumes of $3 to $5 million, and sometimes even less. To reach $5 million in sales, a potential market size of around $100 million is often more than enough.

Big Markets vs. Small Markets: Understanding Market Segmentation

Every big market is made up of smaller segments, and every small market is a gateway to many other related markets.

So what actually defines a market or market segment?

The most straightforward definition is that a market is a collection of customers who need a product or service. For a B2B company, a market segment can be thought of as a list of all potential customers for a given offering. That large market, with its hundreds of thousands or even millions of potential clients, can be broken down into much smaller groups with more in common.

Take a company that develops payroll management software as an example.

Every country has different wage, labor, and tax laws, multiple tax brackets, and other unique characteristics embedded in its employment sector. Making each country a distinct market segment with its own pool of potential customers. How the product is developed and presented to each market matters too. If the Israeli version is fundamentally different from the French version, it makes sense for one to be in Hebrew and the other in French.

Even within the American market alone, the complexity quickly becomes apparent. Calculating salaries for doctors and nurses in hospitals, with shifts, weekend hours, and overtime, looks completely different from calculating salaries for manufacturing workers on set hours, or for salespeople with complicated commission structures.

Each of these variations is a market in its own right, with its own product requirements.

This holds true even when a market appears uniform on the surface but is actually made up of distinct segments. Take wristwatches as an example.

The functional purpose of a watch is simply to tell time, and that’s where the similarity ends. There are watches designed for men, women, children, and everyone in between. Some are purely functional, like a Casio. Some are fashionable and trendy, like a Swatch. Some are investment pieces used to signal wealth, like a Rolex. And then there are collector’s watches that sell for $100,000, like Cartier or Patek Philippe, alongside watches you can pick up for $10.

Some watches simply tell time, while others, like the Apple Watch, are essentially miniature computers.

Each of these market segments is designed for different people and serves a different purpose. How a new watch company approaches these markets depends entirely on their product and the customers they’re trying to reach.

Maximizing the Market: Profitability vs. Marketing

To be profitable, a company needs to sell its products efficiently without spending heavily on marketing.

When measuring efficiency, one of the most important metrics is Customer Acquisition Cost relative to revenue from that customer over a period of no more than one year.

If a company spends $1,000 on advertising to bring in a customer who only spends $500, it’s clearly losing money, and that loss compounds as the company spends more to bring in more customers. On the other hand, if a company spends $1,000 to acquire a customer who spends $10,000, it has a real chance of being profitable, provided it attracts enough customers.

The cost of acquiring a customer includes all marketing activities, from marketer salaries and advertising spend to conference participation, public relations, and the like. The broader the market a company targets, the more diverse it is and the more resources it demands. The narrower and more focused the market, the easier it is to reach the right people with sharp, accurate, and compelling messages.

Take the payroll software example. Instead of trying to sell to any US company with employees, what if you focused only on US companies with salespeople? That already seems like a more targeted segment, but it’s still too broad. There are B2B salespeople who work from an office and sell relatively high-ticket products and services, and there are millions of retail salespeople working in stores and chains who also earn commissions. These are very different audiences with very different needs.

The difference in the software itself might be minimal, but the difference in customer type is significant. There is almost no overlap between B2B companies like Salesforce, Marketo, IBM, and Boeing and large retail chains like Macy’s, Best Buy, or Home Depot.

You rarely see a VP of Sales from a large retail chain move into a VP role at a major B2B company. These are two very different professions. As a result, the marketing channels needed to reach them are completely different, which drives the segmentation of the “salespeople” market and the subsequent marketing efforts for payroll software.

To map the market accurately, you could use a tool like ZoomInfo to build a list of all US B2B companies with more than 10 salespeople, likely producing a list of several tens of thousands of potential customers.

Even within a B2B company, different roles further split the target market: frontline staff like salespeople and sales managers, payroll accountants, and those responsible for designing commission plans, C-suite executives like the COO and CFO.

Once we have detailed lists of emails and phone numbers for both target audiences, we can start crafting marketing messages tailored to each.

Narrowing the market down to a focused pool of potential customers is a critical step toward building a profitable company, because it directly lowers the cost of acquiring each one.

Final Thoughts

When identifying the initial market for a product, it helps to think of it as a “bridgehead” or “beachhead.”

These military terms describe a strategic point, often the head of a bridge or a coastal position, where an attacker breaks through an opponent’s defenses by concentrating force in a narrow area.

Once that position is taken, the rest of the attacking force can pour through and spread out. The most famous example of a beachhead is the Allied landing in Normandy on D-Day, June 6, 1944.

Once a bridgehead has been established, the real expansion begins.

In a future article, we’ll explore the processes by which a company breaks into its target market and grows its activities in the most profitable way.