Assessing Market Opportunities for Your Startup

Accessing Market Opportunities

Many entrepreneurs have billion-dollar ideas on their hands, but they are not sure how to turn their dreams into successful startup.

As we learned in the previous chapter of my post, customer discovery is the first stage of the customer development process.

Your first goal as a potential startup founder during the stage of ideation is to translate your vision of the company into business model hypotheses. But where to start?

Determine Size of Market Opportunity

You first need to determine the size of your market opportunity—that is, what type of market you will pursue, and whether it is large enough to be profitable.

Nothing is worse than spending several years trying to bring a product to market, only to find out that not many people want it!

Although big companies can afford to pay someone to do the legwork for them, startups are often on a tighter budget.

You will need to conduct primary research—new research that you conduct yourself—and obtain secondary research, which you get from other sources which include but not limited to, government sources, industry trade associations, Google and public libraries.

Determine Your TAM

To estimate the size of your market opportunity, the first value you will need to calculate is the total addressable market (TAM), or the maximum market demand for a product or service. This number assumes that everyone who can use your product buys it, ad there is no competition.

Let’s say you are into car wash service. Your TAM would be the amount all car owners annually spend on washing their cars.

Narrow Down To SAM

Next, you will narrow the TAM down to arrive at an estimate of your served addressable market (SAM): the portion of the TAM targeted by your product that is feasible within reach of your company’s sales channels.

If your TAM is ₦30 billion, and you estimate that only 10% of that market is reachable (Lagos, Nigeria) for a service like car wash, then your SAM is ₦3 billion.

Startup market

Estimate Your Target Market

Finally, you will estimate the size of your target market, or a particular group of consumers at which a product or service is aimed.

As an online car wash service, your target market will be busy office workers with access to internet.

Top-Down Vs Bottom-Up Analysis

To calculate your estimates, your will either use a top-down or bottom-up analysis.

In a top-down analysis, you will start with an estimate of the total market and narrow it down to your predicted share of that market.

In a bottom-up analysis, you will start with an estimation of one component of your business, and see how large it could scale up.

A top-down estimate is usually simpler to calculate than a bottom-up one, but may be too optimistic when the data is not narrowed down enough.

Examples of top-down and bottom-up analysis of the market for an ice cream delivery service in Lagos, Nigeria.

Top-down Analysis		Bottom-up Analysis
Total expenditure per year on ice cream in Nigeria	₦20B	Price per ice cream cone	₦500
2.6% Nigeria population live in Lagos	₦515M	average Nigerian eats 15 cones per year	₦7,500
30% desire delivery	₦154.5M	4.3 average members per household in Lagos	₦32,300
+9% market growth expected	₦168.4M	500,000 estimated Lagos households regularly use delivery	₦161.5M

For top-down, up are starting with the size of the entire ice cream market for Nigeria and then narrowing it down. While for bottom-up analysis, you are beginning with the price per ice cream cone and then estimating sales with available demographic data.

Examples of questions you should ask in a bottom-up analysis can be put in the following order:

1.    How much will the average Lagosian pay for one cone of ice cream? We could assume 20% of Lagosians will buy a cone of ice for ₦500—so your target market will average ₦100 each.

2.    How many households does the average Lagos ice cream outlet serve? Here, you multiply ₦100 per customer times the number of households—let’s say 1,000 customers for a total market of ₦100,000 at one store.

3.    How many ice cream outlets are in Lagos? Now we multiply the market at one outlet by the number of outlets in the area. If we say there’s 30 outlets, then you have a total target market of ₦100,000 x 30 = ₦3,000,000!

T    Type of Market and Entry Method

It’s not just size that matters—you will also need to assess how the type of market impacts your product’s viability and overall strategy. Generally, you bring a product to market by:

·       Entering an existing market;

·       Creating a new market;

·       Re-segmenting an existing market—targeting only a small portion of the market, such as by providing a low-cost or niche product;

·       Or recreating a successful model in another region.

Example of an existing market is the online streaming service Hulu founded as a joint venture by Disney, Fox, and NBC (among others) in order to compete head-on with Netflix.

Zalando is a German online retailer that initially only offered shoes online, inspired by its American counterpart Zappos. Hence, Zalando is an international clone of Zappos.

An example of new market is SpaceX which was launched with the intention of making space travel accessible to the masses.

Ryanair became one of the largest European airlines by offering no-frills flights for lower prices—re-segmented market (low-cost).

While an example of re-segmented market (niche) is Shake Shack, founded by restaurateur Danny Meyer. Shake Shack offers elevated fast food at over 160 locations worldwide.

In an existing, mature market where there are many players vying for market share, it can be easier to penetrate and outperform competitors. But if an existing market is dominated by one or two players, it’s usually best to avoid head-on competition (In fact, according to the New Lanchester Theory,if you want to attack the market leader in a monopoly, you will need to have three times more resources than your competitor.) and re-segment or even create a new market to snatch market share away.

Of course, there are always exceptions. Some fragmented markets cannot be penetrated easily: automotive manufacturing is very resource and capital intensive, so barriers to entry in that industry are high.

Conversely, markets with one or two dominant players that are still evolving are sensitive to the introduction of innovations and new technology (When Casper was launched in 2014, its novel business model garnered $1 million in sales within 28 days. Now, it’s trying to use product innovation to stand out from the herd of copycats that have since entered the market).

Introducing Your Product into the Market

To enter certain markets dominated by one or two players, you will need to re-segment or go rogue, or  create a new market and not compete head-on. Example include: Internet search engine market, dominated by Google; the large passenger airplane manufacturing market, in which Boeing and Airbus vie over the lion’s share of customers.

Some of the market to compete head-on with include: The European health club industry, in which top 30 players combined only have 23.5% market share; the book publishing market which is overrun by publishers both large and small.

Granted, accurate market estimations may not always be possible (read more here), especially when creating new markets.

Although you will ultimately decide how you introduce your product at a later stage, it’s still important to have a working market hypothesis you can use to frame the rest of your model.

Importance of Market Research

Want an illustration of how important market research is? Check out this case!

Before founding Amazon, Jeff Bezos carefully researched the top 20 mail-order businesses in the US.

What do you think he did with the information he collected?

He identified which industry was struggling and could be fixed. He discovered that the mail-order book industry was failing due to high cataloging costs, and identified that technology could easily solve this problem.

And what happens if you don’t do your research?

Well, the bookstore Borders invested heavily in the CDs and DVDs, just as the industry was going digital. Failing to research the growing role of digital media led to the decline of the business in 2011 (read more here).

Their competitor Barnes & Noble, on the other hand, dis their research and invested heavily in their online sales and e-reader, enabling them to survive.

CONCLUSION

Let’s review! Your co-worker, Aisha is researching her idea for a software company that provides secure online health records for veterinary patients.

Can you answer the following questions about her process for assessing the marketing opportunity?

1.    Aisha interviews office managers at local vet clinics to learn more about their current health record management systems. What kind of research is she conducting?

2.    Aisha wants to know how big her business could theoretically get, if she sold her software to every veterinarian on the planet. What is she looking for?

3.    Aisha estimates the size of her market by starting with the revenue she’d make at one clinic, then working her way up. What kind of analysis is this?

4.    Aisha finds that there are dozens of software service for managing pet health records, but none has a dominant share of the market. How should she proceed?

The answers to the above questions are: Primary research, TAM, bottom-up analysis and “Go ahead and enter the market!” respectively.

You entering a brave new market with your devise—although you won’t have to outspend competitors, you will have to invest heavily in customer education and marketing to get the word out about your online ice cream delivery service.