Summary:
- Market creators often confront a struggle shared by more people than any young company can initially serve.
- A traditional beachhead is chosen because it is reachable, defensible and capable of producing early sales. For a market creator, those qualities are not enough. Early customers must also reveal what wider consumption will require.
- Amadeo Giannini began with San Francisco’s Italian immigrant community, whose experience concentrated a broader struggle with financial exclusion. Serving them exposed the barriers keeping working people from banking and helped the Bank of Italy develop capabilities it could carry into new communities.
- A strong market-creation beachhead concentrates a widespread struggle, exposes the barriers sustaining nonconsumption and builds capabilities that can transfer outward. Its value lies not only in the sales it produces, but in what it teaches the entrepreneur about expanding consumption.
Learning to Create Markets, Part 1
I recently had the privilege of leading a market-creating innovation workshop with founders participating in the African Impact Challenge (AIC). Their questions carried the ambition behind what they were building and the weight of doing so in an environment where so much of what a business needs is missing. This blog series was inspired by them.
In growth economies, a useful solution is only part of the challenge. The struggle may be widespread, but young companies can’t address it all at once. So where should market-creating entrepreneurs begin? Which gaps must they address? How should they respond when adoption doesn’t follow? Each decision is made under uncertainty, and what they learn from one shapes the next.
In this three-part blog series we examine how market-creating companies answered these questions and what their experiences can teach us about building markets where none yet exist.
Market-creating entrepreneurs are often drawn to the struggles of millions of people, such as limited access to healthcare, finance, education, energy or transportation. And although this struggle is often widespread, the entrepreneur’s resources are not. No young company can begin by serving everyone, and even many old ones struggle to.
The conventional response is to select a beachhead market: a narrow group of customers who expect similar value, buy in similar ways and offer the business a commercially viable starting point from which to expand. At the onset, this focus is essential. But for an entrepreneur hoping to transform nonconsumption into a new market, there is another question:
Which first customers provide the strongest starting point for creating the wider market?
First, customers matter because they do more than generate revenue or validate solutions. They also shape the product the company builds, the costs it assumes, the distribution system it creates, and the capabilities it develops.
A company may win early customers in an existing market yet learn little about reaching nonconsumers. Existing customers don’t reveal the barriers that keep others from consuming. A market creator’s first customers, therefore, must not only provide initial sales but also teach the entrepreneur how to expand consumption to nonconsumers.
Amadeo Giannini’s founding of the Bank of Italy shows what this looks like.
Begin close to the struggle
Giannini understood the financial exclusion facing San Francisco’s Italian immigrants. He lived and worked among them in North Beach, where people saved and built small businesses. But banks serving wealthy customers and large firms considered their modest deposits, small loans, and limited collateral risky and unattractive.
His proximity to the community’s struggle made the barriers to banking visible. Language kept people away, conventional banking hours excluded laborers, and collateral-based lending requirements failed to recognize character, reputation and viable businesses.
Giannini believed the problem wasn’t that these people were unbankable, but that banking hadn’t been designed for them. In 1904, he opened the Bank of Italy in a converted North Beach saloon to serve the overlooked working people he called the “little fellow.”
He went door to door explaining banking in Italian, stayed open into the evening for laborers, welcomed small deposits, made modest loans and used local relationships to evaluate customers whose character and businesses revealed more than their collateral. Within a year, deposits exceeded $700,000.
Learn what is transferable
The Bank of Italy’s experience in North Beach produced two kinds of learning. Speaking Italian was community-specific; building trust among people excluded from banking wasn’t. Giannini’s personal knowledge couldn’t scale, but evaluating modest-income customers through local relationships and reputation could become an organizational practice.
Proximity to customers revealed the barriers, but whether the responses developed in North Beach would work in other communities remained unproven. That test came two years later, when the 1906 San Francisco earthquake and resulting fires destroyed 28,000 buildings and left 225,000 people homeless. The Bank of Italy was the first to resume operations, extending credit from a makeshift location to residents and businesses rebuilding.
The use of local knowledge, trusted relationships and confidence in working people developed in North Beach now helped it serve customers across San Francisco.
Build the wider market
After California authorized branch banking in 1909, Giannini began acquiring local banks and converting them into branches. The Bank of Italy grew to 24 branches, becoming the country’s first statewide branch-banking system, and within fifteen years served 400,000 depositors, more than any other bank in the nation.
Through this network, the Bank of Italy brought Giannini’s model into local communities, extending the North Beach practice of using relationships, reputation and local knowledge to serve farmers, workers and small businesses across the state. In 1930, with close to 300 branches and more than $1 billion in assets, it merged to become Bank of America.
In addition to being the bank’s first market, North Beach was also where the bank learned how to create a much larger one.
Start narrow and learn outward
Giannini’s story suggests a principle for market creators choosing a beachhead: their first customers need not resemble everyone the company eventually hopes to serve. They must, however, represent the struggle those people share.
Representing the wider struggle doesn’t require serving the entire market at once. Market creators should therefore be patient for growth but impatient for profit. Their first market, although narrow and focused, should still offer a viable path to profitability even if wider expansion takes time.
Three questions can help market creators identify the right group to serve first:
- Is a widespread struggle concentrated within this group?
- Will serving this group reveal the barriers that sustain nonconsumption?
- Could addressing those barriers build capabilities the company can use to expand consumption?
North Beach met all three tests. It concentrated a struggle shared by working people across California, made the barriers to banking visible and helped the Bank of Italy build capabilities it could apply statewide.
A focused beginning can become the foundation for widespread consumption. A strong beachhead gives a young company customers it can serve profitably today and prepares it to reach many more tomorrow.
