Mike Michalowicz, the author of the book “The Toilet Paper Entrepreneur”, has developed a strategy entitled “Five equations focusing”. This strategy allows you to focus narrowly enough to dominate a particular niche, but broad enough to provide a large revenue.
The goal of “Five equations focus” is to find the optimal combination of the least strong direct competition and the largest market potential. In the search for an optimal combination you need to continue to narrow the focus to the point in which you have confidence (and confirming its market research) that in five years you will reach the revenue of five million dollars and you will have not more than five direct competitors.
Mike proposes to use the following equation to find compromise and balance in your business focus.
Narrow focus = Higher chance to be the best
Narrow focus = Less competition
Narrow focus = Less customer base
Narrow focus = Less potential revenue
Narrow focus = Slower growth
At the heart of “Five equations focus” is the idea that you need to know about all the advantages and disadvantages associated with narrow focus. Looking at the equation, you will notice, for example, that as soon as narrowing the coverage, you increase your ability to be the best and reduce the number of direct competitors, but also receive a smaller customer base, smaller potential to generate revenues, and eventually your business will grow more slowly.
If you are unable realistic to assume that in five years will reach revenues of five million dollars, your focus is too narrow in order to grow a scalable business. Not being able to provide revenues at least five million dollars, you will be wasting time on the current activity of the company performing the work and/or serving customers. What you really want is to get the business that you can grow to the scale, that allows you to manage and constantly improve the internal system and not to serve the customers himself. You want to build a business, over which, not in which you will constantly work.
Another variable is competition. If your niche already has five or more direct competitors, you will have to start a serious fight. But if competitors are few (or no), you will create a foothold much faster.
When you occupy the niche is narrow, but not too much, and you use five million dollars as the goal, position your business safe enough from the point of view of large players that could enter the market, but do not do it. Compared with the giants of the industry, the company receives five million dollars is a trifle. They will wait until you build your business and become dominate in your niche, and then make you an offer to sell. And that, my friends, a very happy day.
Perhaps you are waiting for the other. You can choose a goal of a million dollars, and it will change the formula. Or rely on quite different figures. It is important to find a balance between focus and potential to achieve your goals.