Jerry: Oh… You mean… shrinkage.

George: Yes. Significant shrinkage!

So how do you enter a mature, well understood market?  The naive answer is: “well if we can just get 3% of this multi-billion dollar market then we’ll be doing okay”.  In practice, that doesn’t work – the market will eat you.  The rules of an established market are always stacked against newcomers, and in favor of the incumbents.

Well, how about destroying the market?  Shrinking it until the market leaders die?

Sounds harsh.  But this can be one of the more effective tools for a start-up trying to break in.  Instead of trying to carve out a space by following the existing rules of the marketplace, the start-up just lets all the air out of the balloon.  The incumbent giants asphyxiate from lack of oxygen (meaning money) and the startup is the only one left standing.  (Did I get enough imagery in there?)

Classic example: Craigslist.  Apparently there once was this profitable part of the newspaper business called “classifieds”.  Ostensibly, (and I know this may be hard to believe), people paid actual money to place their posts, er, ads, into the newspaper for other people to see.

Craig Newmark made short work of that.  Craigslist monetizes only a tiny portion of their posting traffic – recruitment ads primarily – posted by companies, not individuals.  Everything else is free.  It’s hard to compete with free (as the music industry found out), so most of the air has gone out of the classified balloon.  Craigslist snatched up the tiny amount of air that was left.  By shrinking the market, Craigslist successfully competed against the big guys.

If you think about it, it’s a brilliant application of lateral thinking to the business problem.  Problem: the market is too big for me to compete.  Solution: shrink the market down until it’s a size I can handle.

The Web 1.0 shrinkage story was Ebay, who let the wind out of every auction house in the world.  More recently there’s stubhub, who’s wiping out the lucrative event ticket aftermarket (also known as scalpers).

The ingredients of effective market shrinkage seem to be:

1. Identify a cash-rich market built on inefficiencies – artificial scarcity, a massive imbalance of power etc.
2. Enter the market, replacing the basic business transaction.
3. Give 90%+ of the service away for free.
4. Watch the big guys asphyxiate.
5. Build your business on the remaining 10%- left over.

Presto – a market where you’re now the leader, at a managable size for you.  Mind the pile of bodies.