On evaluating market size – Part 2

Last post I discussed a number of methods we had used to try and discover market size, some more successful than others. While our attempts seemed logical enough, there didn’t seem to be a lot of information on the web to steer an aspiring entrepreneur in the right direction.

What is the lesson here?

“The lesson is, never try”.
Homer Simpson

Well, not quite. A better lesson is probably:

“When in doubt, ask someone who has already solved the problem”.
Wise man with white hair and long goatee

So that is what I did, emailing a range of experts, entrepreneurs and C-level executives with the question:

“When you started your company, how did you estimate market size prior to commencing trading?”

Eight emails sent, with three great replies received. I have shared them below, because each answer has a few gems in it that will assist people out there looking to start a business.

Martin Wells, CEO and Founder of Tangler

Tangler Logo

Sizing a market is a tough one, and sometimes how you get to the result is dependent on what you’re trying to achieve. I guess since you mentioned VCs then you’re likely doing it for investment.

The two ways I use to estimate markets are:

  1. Hire a marketing consultant
  2. Guess (and plug in as many facts as I can) – You’ve listed a bunch of good ways to accumulate facts in your article. I think the only one you missed was to track down analysts in your sector and talk to them. Sometimes you can swap knowledge with them, but you want to build a relationship early.

Since you’re a startup you can’t really be expected to have detailed market knowledge, so at this point investors are really looking for market size to evaluate the high level potential of the business. Who cares about making a better blade for lawnmowers if it’s a $1m market?

Sizing a market is done by making a series of high level assumptions based on known values. For example, you could get to online ticket spending by doing:

  • Number of people in market (20 million for Aus)
  • % people attending events
  • Total $’s they spend
  • % people online
  • % people who buy tickets online
  • Total $’s spent in online ticketing

Then you plug in whatever facts you have now, and then whatever you discover along the way. I know this seems like a bunch of guesses, but that’s ok, investors will look at your assumptions to see if they are reasonable; they won’t expect exact numbers.

The other thing to look for in your market evaluation is the trends that are changing that market – trends are the core of your market assumption; what’s changing in the market that makes your product an opportunity – internet usage, acceptance of online purchasing, new web technology. I find investors like to hear about those more.

Andrew Pearce, CEO of New Water

New Water logoI think it very much depends on the nature of what you are attempting to put into the market, but I would suggest the following practical approach.

This is in part what we have done.

Define who you think your target customer group(s) are

In our case it is people who fall into the “Do-it-for-me” category of home owners – ie people who are the opposite to DIY. We are obviously a business to consumer type of company. In a business to business type of operation it might be an industry segment or a functional segment or a size segment or a combination of all three (eg medium sized companies in the telco. sector)

Validation of your target group

This is the hard part – especially if you have a new product or service which people/organisations do not understand (we have this challenge with our grey water treatment system as people do not readily understand what it is). You need to basically be able to go and speak to a representative sample of what you think are your target customers, explain what you do and ask them if they see a need for it.

Also try to find out how they value it (this will enable you to determine if your price points are correct). Market research firms will set this up for you (via focus groups) if you have the money to pay for it. The alternative is to arrange one to one interviews yourself or ask people at networking functions – this is much more cost effective. The good thing about this approach is it also helps you develop your sales pitch for use later – ie what are the customers “hot-buttons” etc. and how do you appeal to them?

Quantify

Assuming you have validated the above, then basically you need to quantify how many people/organisations (or whatever measure is appropriate) are in your target customer group? If it is people then the ABS (and equivalent in other countries) provides heaps of statistics. If it is businesses then you can use business directories – there are various ones, some from the ASX and others from organisations like Dun and Bradstreet. Again by way of example we know there are approximately 766,000 homes in our target market so if we can achieve a penetration of only 5% that is 38,300 sales.

For international sizing, you will find the US distorts any analysis you do because it is so large but with VC’s they look for rigour in one market and then extrapolation for others.

Ben Richardson, Co-Founder of Freshview

Freshview Logo

When we were looking at the potential market size for our first product, Campaign Monitor, we had 2 key areas to look at. Firstly, we had to make sure there we a need for the service our product offered – email marketing.

A quick Google search showed a bunch of stats produced by companies such as Jupiter Research showing that “email marketing spending will reach $1.1 billion in 2010” etc etc.

Is it just me or does it seem like there are stats just like this by one research company or another for pretty much every industry? For me the best validation that there was a decent market for email marketing was the amount of competition out there, and the fact that quite a few of them were reporting very impressive profits.

The second market of interest to us was Web Designers, since our product is built specifically for this market. We were a web design company before we moved into product development, and after watching the industry grow over the 5 years we’d been in business, we had a good feel for the number of web designers worldwide. We didn’t bother looking for exact numbers of how many designers there were, but we knew there would be more than enough to make our product worth developing. And since we bootstrapped our product, we didn’t need to come up with a figure to satisfy a VC’s checklist.

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