Many inventors dream of putting their products in major stores such as Wal-Mart and Sears. But small markets are often the surest road to big profits. Small markets have less competition, distribution channels that need innovative products, and lower start-up costs.
Deborah Dolman markets a voice-activated video system that replaces a court reporter. The traditional court reporter uses a stenograph machine to record spoken words during a trial. The records are sent to a computer-aided transcription system and translated to hard copy. Dolman's system includes five videocameras, microphones and VCRs. Each camera focuses on a different area in the courtroom. Voice-activated cameras are triggered by a signal from the microphone nearest the person talking. Dolman has a patent on the electronic circuitry that controls the voice-activated switching.
With Dolman's system, a complete video of court proceedings can be taped and given to a transcriber, who prepares a typed report. The system costs $40,000 to $50,000. Its benefits are lower costs (the cost of a court reporter is eliminated, and transcribers don't need to be specially trained); greater convenience (courts don't have to schedule around a court reporter's eight-hour day); and greater reliability (observers can see body language and hear nuances of speech that add meaning to the words).
Dolman, a former court reporter, started a court reporting service, Dolman and Associates, in 1979, before she invented her video system. In 1992, she put her first three systems in the field for testing, and in 1997, her Lansing, Michigan, company, Dolman Technologies, sold $3 million worth of products.
Part of the secret of her success was choosing a small market. Here's a closer look at how the four advantages of small markets benefited Dolman . . . and how they can work for you, too.
1. Market information is easily accessible. Dolman's target customers are court systems nationwide. She conducted interviews and market research in Lansing with judges, lawyers, court reporters and transcribers. Courtrooms have many more similarities than differences; when Dolman started developing her product, she knew her research in Michigan would translate to the entire market.
Dolman also sells her product as a videoconferencing tool. Corporations are a large target market. The situations they want videoconferencing systems for vary widely and can include sales meetings, training, interviews and conferences. Companies may pay anywhere from $5,000 to $100,000 for videoconferencing equipment.
Inventors have trouble getting accurate market intelligence in large markets because their target customers have different needs, require different product features and are willing to pay a wide range of prices. Even established marketers have trouble introducing products that meet the needs of most potential customers in a large market.
2. Marketing costs are low. Courts are easy to locate, don't have many new products to evaluate, try to control costs and absolutely must have either a court reporter or a video system. In a small market, prospects typically know each other. This contributes to word-of-mouth advertising and testimonials that have a strong impact on prospects. All these factors helped lower Dolman's marketing costs.
The keys to low marketing costs are identifying prospects, reaching them easily and effectively, and communicating a solution to a need. Dolman's market has all these characteristics. Courts have a clear identity, are easy to find through legal magazines or direct-mail lists, and understand the benefits of Dolman's product: saving money and allowing court to be held for longer hours.
The corporate videoconferencing market doesn't meet these criteria. True, some corporations are willing to pay $40,000 to $50,000 for a videoconferencing system. But which ones are they? Most companies aren't prospects, and it's difficult to find the ones that are without marketing to a large number of companies. Another problem with a large market: Prospects buy for a wide range of reasons, making it more difficult to focus your marketing materials on specific customer needs. The result: More sales calls are required to make a sale.
3. Distribution channels are easily established. Distribution networks are set up to provide a variety of products to a certain type of customer. A distribution system might concentrate on courtrooms, large advertising agencies or individual muffler shops. If you have a small market, it's easy to find a distribution system specializing in that market, and often the distribution channel is seeking additional products. Dolman, for example, could have sold her products through transcribing services, which sell their services to courts already. Instead, she decided to sell directly to courts because they were readily accessible.
The corporate videoconferencing market is more difficult to access. Corporations buy a variety of products, and distribution channels often can't handle any additional products. In addition, distribution networks targeting large markets don't like to carry products aimed at a small percentage of customers because they don't make enough money.
4. Profit margins are high. Inventors typically produce their initial products in small volumes, at a high price, because they lack the financial resources to produce larger quantities. (Dolman produced just three systems her first year.) Fortunately, most suppliers to small markets produce small quantities of products at fairly high prices. Consumers in small markets expect that, because they know the suppliers are basically producing custom units. Dolman was able to custom-assemble her first three systems, sell them for $40,000 to $50,000 apiece, and still make a fair profit. Most small-market suppliers I've worked with had pre-tax profit margins of 15 percent to 25 percent.
In the large corporate market, buyers are accustomed to low-priced electronics products. Selling a $40,000 to $50,000 item is tough; corporate buyers will push for a reduced price. Even if you survive the initial price pressure and start to sell successfully, you'll soon find competitors eager to enter the market. Many will be established companies with low-cost manufacturing procedures that you can't match.
Inventors like Dolman, who compete in small markets, typically receive little press coverage because their products aren't exciting to most people. But I've found these are the inventors still in business after 10 years, still producing tidy profits and still growing their businesses. Inventors in large markets often have trouble sustaining their market presence for more than two or three years. Don't ignore small markets: They're the gateway to long-term business success.
Don Debelak, author of Bringing Your Product to Market (John Wiley & Sons, $19.95, 800-225-5945), is a marketing consultant specializing in bringing new products to market.