Shifting Your Thinking – The Revenue Pie Theory

Throughout my career of working with startup businesses and entrepreneurial thinkers I have found several common lines of beliefs shared by many of my clients. One of the most common shared beliefs that I have observed is one that I call “The Revenue Pie Theory”. Yes, I know – it is not a terribly clever name.

The Revenue Pie Theory starts with the thinking of many business owners and solopreneurs during the startup phases of their company or career. Commonly, these individuals have explicitly identified, at minimum, an industry segment and geography in which they plan to focus and the estimated size of the revenue “pie” in which their business resides. For instance, let’s say Jim performs residential remodeling in suburbs on the Missouri side. Based on his research Jim estimates that there is approximately $100 million dollars of possible annual revenue in this pie given the industry segment and geography. With this information Jim creates the following belief system:

“All I need to do is get one-tenth of one percent (.001) of that market and I will make $100,000”

This belief establishes a false sense of optimism in the mind of the business owner, “how hard could it be to get one-tenth of one percent?” Well, harder than you might think. What most startups don’t realize is that when you enter into an existing market you have virtually every variable working against you. Market leaders are investing millions of dollars into marketing, advertising, research and development and they are creating barriers of entry through technology, municipal legislation, and they have already established economies of scale. Basically, they are doing everything they can to make sure that people like Jim can’t just open up shop and take market share away from them.

Instead I would recommend a more radical approach. Create your own pie. A fundamental shift from competing for someone else’s pie to creating your own has virtually no down side in both the short and long term. The most challenging element of this shift is the fear associated with entering into a market that does not explicitly exist and that has no money in the pie. Interestingly, I have found this process of shifting pies is in direct violation of how the typical business mind operates. The traditional way of thinking involves viewing everyone as a potential customer and claiming you can do everything which will seemingly diversify your risk. However, the inverse is actually true.

Virtually every market leader you can think of has made this shift. Initial market research performed by Starbucks said people weren’t going to drink a $6 cup of coffee. The category hadn’t been created yet. If 15 years ago I said to you “Hey, lets get together for some expensive coffee.” You wouldn’t have known what I was talking about; “What? Are we going to go buy a bunch of Folgers and drink it somewhere?” Instead of entering into the pie with Folgers and Maxwell House, a battle it would have certainly lost, Starbucks created its own category and its own revenue pie. A pie it owns almost all of even given the countless copy cats that have emerged throughout the years.

Don’t compete for someone else’s pie, create your own. Jim should narrow his scope and create his own pie which could be only remodeling garage spaces in single-family homes in Raytown or remodeling decks on apartment complex’s in Jackson County that are greater than 4 stories. Create a category that is unique and you will maintain focus, build a meaningful and powerful brand and most importantly, own the entire pie.