Hey everyone 👋,

A quick note to let you know this will be the last newsletter of 2021! I'll be taking a break over the Christmas period.

Hope you all get to spend time with loved ones and have a happy holiday!

Much love

💜

Now let's get onto the newsletter.

The Wedge Strategy 🧀

Picture this. You've launched your startup and have reached product market fit. Now you want to grow market share. What do you do?

Acquire more customers with the same product, or attract a wider audience by building more product?

The first approach to market penetration is the wedge strategy. Where you go deep into a market with a narrow product focus. You can't appeal to everyone, but those who like you love you.

The second approach to market penetration leverages a wide product strategy, which "should" appeal to more people. Notion is an example of going wide with a product that has thousands of use-cases and could appeal to almost anyone.

If a wedge splits through the market with focus, then a wide product strategy is like chopping down a tree with sand paper. Slow, painful and resource intensive.

So, you have two options. Which should you choose?

Why Wedges Work

Razor sharp product market fit

Leveraging a narrow product strategy enables you to focus all your resources in one place, making it easier to create a product people love. It may not be useful to everyone, but those who like it will love it.

Most startups have limited resources, making it challenging to build a wide product that everyone will love. If you're going wide then you've got to have strong assumptions that lots of basic functionality is the route to PMF.

Selling to existing customers is cheaper than acquiring new ones

If you can penetrate the market with a razor sharp PMF that means you now have customers. And existing customers are much easier to sell to than new ones.

Did you know that $1 of new revenue costs:

• $1.18 from a new customer

• $0.28 from an up-sell to an existing customer

• $0.13 from renewing an existing customer

if you can acquire a large market cheaply and easily with a narrow product offering then it can make the "land and expand" strategy a powerful one.

A simple value proposition is easier to sell

A simple value proposition is creates less cognitive friction. A simple value proposition usually means a lower risk purchase. If your product is simple and low risk customers will commit more easily.

Wide means shallow

"When you're building a product that's 9 inches wide, in reality it's only going to be 2 inches deep" - Dharmesh Shah Co-Founder of HubSpot

All-in-one strategies usually fail because they don't solve any one problem well enough compared to the incumbents, making it harder to rip out existing tools.

In the case of HubSpot however, having multiple marketing tools in one place was exactly what the market wanted. Each individual product was no better than the incumbents, but the incremental value of having it all in one place outweighed the value lost from subpar functionality.

Foregoing functionality rarely works in an enterprise sale, the simplicity card is more likely to work in an SME segment.

If you're going to go wide, then ship quick, and don't over complicate the product. Speed-to-breadth must be your core focus.

The worst thing you can do is go wide and try to go deep at the same time.

You must choose between them.

Examples of successful wedges

Below is a list of examples taken from Lenny's newsletter (highly recommend you subscribe if you haven't already).

More examples

Three other companies who've executed the wedge strategy well are Gong, Brex, and Toast.

Gong.io

Gong wedged their way into the large and oversaturated sales enablement market with a simple call recording product. The early product of Gong was equivalent to a simple Zoom recording feature. Nothing revolutionary. But the product solved a unique pain so well that it was adopted in the masses.

Gong then went from basic call recording to creating a brand new category, Revenue Intelligence.

They built a suite of tools that gave full visibility into the sales pipeline, and enabled sales managers to more accurately forecast pipeline.

As their market share grew, they had a larger customer base to expand into. Now they've raised over $548 million they can tackle the sales enablement head on with a platform approach.

If they started off trying to win the market based on "Revenue Intelligence" they'd likely had a very different result.

Brex

Brex started out with a simple value proposition for startup founders. A credit card that didn't require a personal guarantee.

The hyper focused value proposition enabled Brex to penetrate the spend management market. Now they've penetrated the market and have a large enough customer base they have pivoted to a wider product strategy.

Instead of "credit cards for startups" they are now selling a full blown "Financial Operating System".

Toast POS systems

Toast, the $17bn POS system for restaurants, created a wedge in a hyper competitive space by offering the booking and reservation terminal to restaurants for free. They made their money back on transaction fees later down the line.

Toast took away the risk for restaurant owners and made installation easy.

This type of wedge strategy has been used by many companies. Gillette often give away free razor handles so they can make money back on the blades. Coffee machines may be given away so money can be made on the disposable pods.

Waiving significant upfront costs can help lock customers into a recurring revenue stream later.

Scissors ✂️ - Rock 🏔- Paper 📄

Wedges help startups take over well established markets by avoiding competing with incumbents head on.

I like the scissor - rock - paper analogy to think about the natural cycle of startup domination.

Scissors are startups who cut through the market with focus (a wedge). Scissors beats paper (the incumbent behemoths) because of ingenuity and focus. They can move more quickly and solve unique problems that their stiff, slow counterparts can't.

Scissors are great, but they get beaten by rocks. Rock's are slightly larger, and more well funded. They have a larger market share, and can bully their younger counterparts around with their resources like marketing spend. If you're a series A scissor, rocks are your Series D big brother.

Rocks might bully scissors but they're easily dominated by paper, the large entrenched behemoths who have a wide grip over the market.

They dominate with their sheer size and availability of resources. They can crush rocks but are susceptible to scissor attacks since they lack focus, and only target new products which can significantly impact their bottom line. No easy feat when you're already a multi billion dollar company.

Wrapping it up 🌯

All-in-one offerings work best when the synergetic value of multiple products in one place outweighs the loss in functionality compared to best-in-breed incumbents. In other words, all-in-one works best when simplicity is more important than functionality.

Wedges on the other hand work when you have a significant, but isolated problem that is simple and low risk to solve.

If the all-in-one approach is like boiling the ocean, then the wedge strategy is like boiling a kettle. Focus on a singular and highly constrained problem to dominate market penetration.

Both strategies can work, but sitting in the middle leads startups to die in no man's land.