Deciding which market or markets to compete in is one of the most important business strategy decisions. Unfortunately, if you’re a small business owner, there’s not much out there to guide you. There’s a wealth of corporate strategy literature for MBA students and senior managers in large firms, but it’s dense and requires a lot of translation for smaller businesses.

What is a market?

Too many small business owners don’t even think about their market. They start with one of their current skills or interests and try to build a business around it selling to anyone who wants that thing or something similar. If you’re persistent and willing to learn from your mistakes, you can make that work. Just realize that you’re choosing to play the game on hard mode.

The smarter path is to look for a problem that a lot of people or businesses have. Your first pass at it will probably be too generic: “Every business needs to show up in AI searches” or “Most people need their house cleaned”. Push harder to find clusters of potential customers that share common traits.

Frequently, these are easily observable traits like geography and language. For individual consumers, demographic traits like marital status, career, and income bracket are also commonly used. Similar traits in business, such as revenue, number of employees, and industry, are called firmographic traits.

These can help you narrow “every business” down to “plumbers in north Georgia who have 1,000 customers or less.” You can’t craft messaging and get it in front of “every business” without Fortune 500-level resources. You can reach those plumbers with a few hours and a few hundred dollars every week.

But demographics and firmographics are only a starting point. Two customers that look nearly identical on paper may have very different problems. And two customers that look quite different may be facing almost exactly the same problem. The objective isn't simply to find customers who look alike. It's to find customers who have enough in common that you can reach them efficiently, understand their problems, and build a business around solving those problems.

What makes a market good?

Once you have a definition of a potential market, how do you decide if it’s a good market for you? A good market has underlying conditions that make it easier for a capable firm to earn attention, charge enough to have decent margins, and grow. Slightly better than average skills in a good market usually beat business genius in a bad market.

Here are six questions that can help you make that decision. They're simpler than what you'd find in a corporate strategy textbook, but they'll help you identify some of the forces that make a market attractive or unattractive.

To make them more concrete, let's imagine a small digital marketing agency that's struggling to grow. The agency has a handful of employees, some satisfied customers, and a respectable track record. But its customers are all over the place. It's done work for retailers, restaurants, dentists, contractors, and professional services firms.

The owners are considering two directions. One is to specialize in helping local businesses appear in AI-powered searches. The other is to specialize in helping established dental practices attract and retain patients.

Both are plausible opportunities. The agency has capability and credibility it could apply to either one. It doesn’t have enough scale and marketing budget to be a dominant player in both at the same time. Which is the better market for them?

1. Is demand growing, stable, or shrinking?

It's easier to grow your business when the market is growing. When more customers need what you sell, you can win new business without necessarily taking it away from someone else. But don't assume growth in a customer's industry will automatically drive growth for your products or services.

Suppose the number of restaurants in your city is growing by 10% per year. That's potentially good news if you sell restaurant equipment. Every new restaurant needs a kitchen, even if they inherit some equipment from a previous tenant.

But what if you sell bookkeeping services? Every restaurant needs to keep its books, but not every restaurant hires a bookkeeper. Some owners do it themselves, some use inexpensive software, and some get help from a family member. Even if the number of restaurants is growing, demand for outsourced bookkeeping could remain flat or decline if more owners decide to handle it themselves.

Our hypothetical marketing agency has good reasons to be interested in AI search. More consumers are using AI tools to research purchases and find service providers. Businesses are beginning to wonder whether their existing marketing investments will still reach those customers. That suggests a growing pool of potential demand, although it's far from clear how much of that demand will translate into paying customers for a specialized service.

The dental opportunity is less exciting at first glance. Dentistry is a mature industry, and nobody expects the number of dental practices to double in the next few years. But the Atlanta metropolitan area has been adding roughly 60,000 residents a year. Those people need dentists. Some existing practices will expand to accommodate them, some new practices will open, and other practices will change hands as older dentists retire.

That's encouraging, but it raises another question. How many new or expanding independent practices will there actually be each year? Population growth doesn't automatically translate into new practices. Existing dentists may have room for more patients, and larger dental groups may absorb much of the growth.

Then one of the agency's owners asks an interesting question. Why limit the opportunity to new practices? Imagine two dentists in a growing Atlanta suburb. One opened her practice six months ago. The other has been in business for 20 years and recently added a second dentist. Their businesses look very different on paper, but both need patients to fill available appointments.

More importantly, both are competing for the same new residents. Someone who moved to the neighborhood last month probably doesn't have a relationship with either dentist. The established practice may have a stronger reputation, more reviews, and better referral relationships, but it still has to turn that into new neighbors becoming aware of them and considering them as their new provider.

Suddenly, the agency has a potentially larger market than it originally imagined. Instead of limiting itself to new practices, it might target independent dentists in growing communities who have the capacity and motivation to attract new patients. It still needs to figure out how many practices match that description and how their numbers are changing. But it's a much more useful hypothesis than simply counting new business registrations.

The key point is that it’s not enough for the market to be big enough for your ambitions. You want a growing market that reduces how much you have to fight for every customer.

2. Is the problem becoming more urgent and better funded?

Just because more customers have a problem doesn’t mean more of them are willing to pay to solve it. You probably have a long list of improvements that would make your own business more productive, more profitable, or less risky. How many of those have you actually budgeted money for? Your prospects have their own version of that list.

Something has to move a problem from the "we should probably do something about that" category to "we need to fix this now." It could be a new regulation, a change in cost structure, a competitor taking market share, or any other problem that has finally become too painful to ignore.

Consider the AI search option. A local business owner might become genuinely alarmed to discover that ChatGPT recommends three competitors but doesn't mention her company. That could turn a vague concern about AI into an urgent marketing worry. But worry isn't the same thing as budget. If the owner isn't convinced that paying an agency will improve the situation, she may decide to wait.

Now consider a dentist who has just invested hundreds of thousands of dollars to open a practice in a growing Atlanta suburb. She has equipment, staff, rent, and loan payments to cover. What she doesn't have is an established patient base. Getting patients through the door isn't an optional improvement. It's essential to keeping the business alive.

The established dentist who just added another provider faces a similar problem. The investment only pays off if enough additional patients come in to use that capacity. But not every established practice has that need. Some dentists are already turning new patients away. Others may have unused capacity but feel little urgency to fill it.

The dental market is growing more slowly, but for the right practices, the problem is familiar, measurable, and already funded. Our agency's revised market definition is beginning to take shape. Geography and industry still matter, but so do available capacity, growth ambitions, and the financial consequences of failing to attract patients.

A growing problem is attractive. A growing problem that customers are increasingly willing to pay to solve is much better.

3. What can customers do instead?

When you think about the customer’s problem, you probably see your solution and solutions from direct competitors as the obvious way to solve it. Customers take a broader perspective. They also look at completely different ways to accomplish their goal, or even for a different goal that fills the same underlying need. Instead of a competitor, they consider a substitute. It might not look like anything you sell.

If you operate a restaurant, a competing restaurant isn't your only competition. Customers can cook at home, pick up something at the grocery store, or order a meal kit. Those are all substitutes for some of the occasions when they might otherwise eat at your restaurant. If you’re in a services business, “We’re going to try to do it in house” is probably one of the two most common substitutes. The other is to live with a current solution, even if it’s not entirely satisfactory.

For our marketing agency’s customers, the alternatives to an AI search service are numerous. They might hire another agency, assign the problem to an existing marketing employee, buy a software tool, or simply follow some free advice found online. Even if the agency doesn’t see any competitor offering an AI discoverability service like the one it's considering, that doesn't mean it has little competition for the customer's money.

Dental practices also have substitutes for the agency’s proposed patient acquisition services. They can rely on patient referrals, hire their own marketing person, use a general-purpose marketing agency, or spend more money on existing advertising.

Customers don't care whether their alternatives fit neatly into your definition of the market. They care whether those alternatives solve their problem well enough.

4. Is the market getting crowded?

Growing markets attract competitors. That's actually a good thing, up to a point. New competitors can help educate customers, legitimize an unfamiliar service, and expand the overall market. The trouble starts when the number of businesses chasing the opportunity grows faster than the number of customers willing to pay for it.

We've seen versions of this with craft breweries, escape rooms, frozen yogurt shops, and plenty of other businesses. Early entrants demonstrate that there's money to be made. Others notice. Then a lot of people with roughly the same idea open businesses at roughly the same time. Eventually there's more capacity than the market can support.

Some businesses survive by being better, cheaper, or more efficient. Others survive because they have enough capital to endure the shakeout. A good but undercapitalized business can fail while waiting for weaker competitors to disappear.

AI search services have some of the ingredients for a similar problem. They're new and attracting attention. The apparent barriers to entry are low. Existing marketing agencies can add the service to their menus, and new specialists can start selling it without a major investment in physical assets. Its very newness means that none of the competitors have a brand advantage to scare others away from the market.

If hundreds of agencies start offering what customers perceive as essentially the same service, prices could come under pressure well before anyone knows how much revenue the market can sustain.

Dental marketing isn't immune to competition. There are already agencies specializing in it. But that's also useful information. The market has had time to develop, customers have experience buying the service, and some agencies have demonstrated that they can build durable businesses around it.

Don't assume an established market with lots of competitors is less attractive than a new one with very few. Sometimes the new market just hasn't had enough time to become crowded yet.

5. Who has the power to dictate your economics?

It's tempting to think that if you can provide a valuable service at a reasonable cost, you'll be able to earn a reasonable profit. Unfortunately, your suppliers and customers get a vote.

Suppliers can raise prices, restrict availability, or impose conditions that make your business less profitable. Large buyers can demand discounts, favorable payment terms, or expensive concessions. Even scarce employees can have substantial bargaining power when the skills you need are in short supply.

Our hypothetical marketing agency has relatively little supplier dependency. Its biggest expenses are people and software. But those costs still matter. If delivering an AI search service requires specialized talent that's difficult to hire, the agency may find that employee compensation consumes much of the premium it hoped to charge.

On the customer side, both options present the agency with a broad, fragmented customer base. The main customer bargaining power threat to a firm that provides broadly needed services comes less from the market than from the firm’s own choices about customer concentration. An agency with 30 independent dental clients is in a very different position from one that earns half its revenue from a single national dental group.

You don’t get to set your margins in a vacuum. The player with the most leverage sets the ceiling.

6. Who controls access to your customers?

Sometimes the most powerful player in a market isn't the customer or a supplier. It's a gatekeeper who decides which businesses customers get to consider. Think about a restaurant that depends on DoorDash for a large portion of its orders, a product manufacturer that sells primarily through Amazon, or an orthodontist who relies on referrals from general dentists.

These relationships are quite different. DoorDash and Amazon participate directly in transactions, while referring dentists generally don't. But all three can have enormous influence over whether a business gets new customers.

That influence can be an advantage. An orthodontist who has developed strong relationships with dozens of independent dentists may have a steady stream of patients without spending heavily on advertising. But it can also create a dangerous dependency. What happens if those referrals dry up? What if a platform changes its fees or starts promoting competitors? What if a business that generated most of your leads decides to bring the service in-house?

Our marketing agency faces an interesting version of this problem. For its AI search offering, it depends on search platforms it doesn't control. Those platforms can change how they select recommendations, display results, or allow businesses to influence visibility. The agency could invest heavily in developing an approach that stops working after a platform update.

Dental marketing is also affected by Google and other advertising platforms. But the agency has more ways to reach its customers and help them reach patients. It can combine advertising, websites, local search, patient communications, and referral programs.

The important distinction isn't whether intermediaries exist. Nearly every business depends on someone else for at least part of its customer acquisition. It's how concentrated that dependency is, how easily the rules can change, and how difficult it would be to find another way to reach customers.

A market where you have multiple direct routes to your customers will always be safer than one where your relationship depends on a third party.

So which market should the agency choose?

You shouldn't treat these questions as a scorecard where four favorable answers beat three. One serious structural problem can outweigh several advantages. Nor should you expect to know every answer with certainty. Some things can be established with research; others will require informed judgment and testing.

The goal is to understand what makes a market attractive, what could make it less attractive, and what you still need to learn before committing your resources. To further complicate the matter, it’s often the case that the market that offers the biggest rewards comes with the highest risk.

AI search could turn into an enormous opportunity. The agency might find an underserved niche, develop a genuinely effective approach, and establish itself before larger competitors arrive. It might earn substantial profits while the market is still developing. But there are a lot of others making the same bet.

On a first pass, my inclination would be to go the dental marketing route. There is plenty of opportunity, and relatively little uncertainty about how the market will evolve. Before making a commitment, they would want to do a deeper dive on all the questions. The agency might discover that local practices are locked into long-term relationships with their current agencies, that another agency specializing in dental marketing is targeting the same customers, or that acquiring new clients costs more than it can reasonably earn from them.

In the end, the specific choice matters less than the clarity gained by asking the questions. You’re not usually going to be choosing between an obviously good option and an obviously bad option. You’ll be choosing between several potentially good options. Knowing where you have leverage and where you are vulnerable prepares you to enter your chosen market with a clear view of what it will take to succeed.

Choosing a market doesn't eliminate the need to execute well. You still have to build an offer customers want, earn their trust, deliver consistently, and manage your business. Those jobs are hard enough without choosing a market that makes every one of them harder.