I coined the 5% Rule for startups a few years ago.
I was tired of seeing startups make the same mistake over and over when building and marketing their new product (or service). So I created a rule to help founders think correctly about just what it takes to build and launch a successful startup.
The 5% Rule is quite simple, but unfortunately the vast majority of startup founders just don’t understand it. Those that do understand are way ahead of everyone else.
I know this because I’ve worked with more than 500 startup founders to field market research surveys and launch new products. Those who grasp this basic concept are more than twice as likely, in my experience, to be successful.
What is the 5% Rule for startups?
The 5% Rule for startups goes like this:
In order to be wildly successful, your new product (or service) doesn’t need to be 10 times better than your competition. It doesn’t even need to be 2 times better.
You just need to be 5% better.
The fact is, consumers only have so many choices. When they go to buy whatever it is they’re looking for, they don’t have an infinite set of options. They only have a few options. The only thing you need to do is be 5% better than your top competitor.
Now, what happens if you can achieve this?
If your product is the best by just 5%, you’re not just going to capture 5% more of the market. You’re probably going to capture close to 100% of that market!
When consumers choose a product from a set of options, they are playing a zero-sum game. They pick one product—not bits and pieces of different alternatives. In other words, buying one product means not buying another.
No one buys 95% of one bottle of ketchup and 5% of a different bottle.
This means that the bottle of ketchup that is just 5% better than all the others is going to be the #1 brand on the shelf. It won’t be bought 5% more often. It will be bought probably 95% more often.
How do startups get the 5% Rule wrong?
The biggest way startups get the 5% Rule wrong (or, rather, ignore the rule altogether) is by entering a market thinking they will disrupt the entire thing all at once by creating a completely new and original product (or service).
By creating a new category altogether, they say, they can blow their competition out of the water. “Forget what our competitors are doing right—we’re just going to be 10 times better all around!”
Talk about an impossibly high bar. 🙄
The fact is, it’s just never going to happen. No product in the world that is 10 times better than all existing alternatives. And by refusing to carefully study and mimic their competition, these kinds of startups end up groping around in the dark. They build and build, then hope their product just “catches on” without them latching onto existing demand in their space. They think they’re too good to be called copycats, and so they try to “go it alone” and expect consumers to understand (let alone believe) that their product is 10 times better than anything they’ve ever seen.
On the other hand, a would-be Founder with all the passion and grit needed to be a successful entrepreneur ignores the 5% Rule by deciding against entering a new market with her idea. Existing alternatives are just so strong, she thinks, that she could never build something much better than what already exists.
But note the key word in that sentence (hint: it’s “much”). Sure, existing alternatives might be great products! But is there any way to improve on them to make them just 5% better?
The answer to that question is always YES. No product is perfect. There may not be a way to build something much better than what already exists. But there’s always a way to make something 5% better.
And making something 5% better is all it takes to get a new product off the ground.
How can startups get the 5% Rule right?
If you want to actually disrupt a market, copy your competition 95% of the way, but then improve by 5% on one single feature. Then fashion your marketing and messaging around that one improvement, and you’ll find a niche fast.
Creating a video conferencing tool? Copy Zoom. Make it as similar as you can. Then fix Zoom’s notoriously clunky user interface and market your tool as a more intuitive, user-friendly video conferencing tool.
Building a new social network for professionals? Copy LinkedIn. Make it look almost identical. Then pick one thing to fix—say, ban mass DMs that have just about rendered everyone’s LinkedIn inbox a big, cluttered mess of irrelevant messages from strangers. Market your product as LinkedIn without spam.
Setting up a new daycare in your town? Copy the most popular daycare within 10 miles, then add one extra feature they don’t have—say, an evening shift for second-shift workers. Then tell everyone you’re exactly like the best daycare in town—same policies, rules, etc.—except you’ve added an evening shift for the thousands of parents who need childcare during that time and just never even consider somewhere that doesn’t offer it.
You get the picture. And the fact is, this is how even the biggest-and-best products in the world thought about their product when they got started.
Having lofty goals is great. But successful companies and entrepreneurs don’t set out to change the entire world on day one.
Successful companies set out to be 5% better than their competition. And it’s by doing that, and doing it well, that they end up changing the world.
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