Updated: Apr 11
Smart entrepreneurs always pick business that are fat - that is, with high volume and high frequency. Here is why.
Business with high volume and frequency, such as restaurant business, phone plan business, and office consumables business have large demands. The products have short cycles and are consumed and must be renewed.
WIth high volume, a company can afford to build automation and scaling. with automation, the company specialize in that product and have high efficiency of building high quality products at lower per unit costs. The value added consists both quality (due to specialization) and cost (again, due to specialization).
A company enters the market through a niche. For example, Intel provide CPUs for computers. It is highly specialized and becomes the world leader in this critical part. However, when Intel first started, it specialized in calculator and electronics watch chips. The Nvidia company makes graphics GPUs. It started as a gamer niche and gradually expanded.
Price: Price is a function of a company's product quality, volume, and ability to handle competitor pressure (through continued innovation).
Volume: Volume is critical to achieving pricing control and quality control. Without volume, no companies can be profitable because its price would have to be sky high, hence causing low cost competitors to rush in.
Frequency: frequency of sales is important because it is how a company's employees keeps busy. If employees are not busy, they would quickly get bored.
Fat: the volume of a product is large, for example products demanded by everyone. Coca-cola, Amazon, Microsoft, Apple all handle large volume of orders everyday. Musk's SpaceX and Tesla, although still in the niche, would eventually be demanded by everyone. They are niche company but fat.
A fat sector can be a consumer sector or a business sector. If it is a consumer sector, the sector has a lot of direct end consumers. If it is a business section, then the business is CONNECTED to a fat consumer sector - for example military technology is concerned by everyone in a country.
With a fat market, the competition is tough but the ELASTICITY of quality, price and margin increased for a company, paving a path for scaling and growth.
A company addressing a fat market is called "thinking big" and "high ceiling". A high ceiling company can attract ventures who can build "deeper moat".
Niche: the opposite of fat market. In a niche market a startup can start more easily, because you can slowly grow. However, it is important that a company can grow out of a niche rather than staying a niche.
Even giant companies like Amazon and Google trys to get into cloud computer and SaaS business, because then convert from a 2B company to a 2C company and the user basic increases.
Scaling and growth:
A company does not grow by hard work alone. It grows through metamorphosis, mergers and acquisition, and niche-to-bigger market scaling.
If a company tailors to a particular niche people group, it can not scale. (Example: Forever21 clothing). If a company tailors to one particular product, say gas sensor, it cannot scale.
However, if a company is a store or market place, it can grow by including more products and opening more branches (franchising). Facebook was a social network platform - it focused on college students and then was fortunate to move to young people and eventually everyone - it is high risk though.
Barrier: whatever the market is, a computer must be able to build barrier and keep building barriers, because the better your business, the more determined your competitors are to unseat you. Automation such as Amazon's purchase of Kiva robot in 2012 (for 775 million dollars), was key in making sure that Amazon can handle large volume with low cost and high efficiency, hence stopping competitors from even trying to compete. (Link). The purchase of Kiva allows Amazon to trim click-to-ship time from 60 min to 15 min. It is the unfair advantage that Amazon was able to buy.
It is very easy to look at historical stock price chart of Amazon how the Kiva automation acquisition helps. Kiva was the brainchild of Mountz, an inventor in California who could not find money to support his venture and moved to the east coat in 2003.