Best(er): Make something YOU need and are willing to pay for now.
If you solve your own problem, you're guaranteed to understand the problem, execute well, and be surprised how many other people have the same problem.
If there's lot's of competition in a particular area then I think it might be a better plan to focus on a niche part of that larger market. Remember facebook was only for college kids to start with.
Better: connect your knowledge of creating , with the knowledge of a domain expert who knows the problem well.
(Think of the drugs you see advertised on late-night TV for syndromes you never heard of. :-)
I'm glad not everyone listen to this advice, otherwise we wouldn't have Twitter, Facebook, or even Google.
The meaning is: build something good, and people will naturally come to it. As opposed to: build a monster no one needs then spend millions on marketing.
As far as I know, Facebook and Google are both examples of following this advice. They both didn't reply on marketing to grow. They grew organically; people started to use them because they were actually good products.
I always thought this mantra originally came from Google.
Good: Make something people want.
Better: Make something people need.
Even better: Make something people need and know that they need. If they don't already know, someone will have to help them know. That someone might be you and helping them will take sales and marketing, a significant consideration.
Even better: Make something people need, know they need, and are willing to pay for now. Competing against "we're not ready, maybe next year" is tougher that competing against any competitor.
Best: Make something people need, know they need, are willing to pay for now, and has their hair on fire. Leapfrogging to "let's just solve this problem now" is often the best (and most fun) way to deploy.
[EDIT: In response to some of the replies to this thread: This is not about "guessing what people need", worrying about competition, or assuming "if I need it, others must too". This is about getting up off your butt, talking to people, finding out what they must have, and building it for them. There are people everywhere desperate for solutions to their problems, and I promise you, they're not finding them. Sure, you may scratch your own itch and hope that someone else needs it, but this is a lottery approach. Most start-ups fail because they built something no one else wanted or was willing to pay for.
There is absolutely no better way to find out what to build than finding customers first. Please don't be like me and learn that the hard way. There are great apps everywhere that nobody uses while people suffer because no one is building what they want.]