If you haven’t been following along, at the end of last year we published our version of a critical path to startup. In that, we defined 10 steps that an entrepreneur needs to take in anticipation creating a successful business. If you have made it past step 1 & 2 of our guide you may now be on step 3. So, lets take a deeper dive into how you might quantify the size of your market.
Starting with the big picture
If you have a problem you are going to solve and you know your target customer’s attributes then you can begin estimating how many target customers there potentially are. It is often good to understand just how big your market actually is. Some articles may refer to this as your total addressable market or TAM. Depending on your product, service, and ambition, this TAM could encompass the globe, a whole continent, your country, or region of the world. If you were going to be manufacturing exercise equipment in the United States, then maybe you would want to define your TAM as North America.
Narrow down to those you can reach
With your total addressable market in mind, now we need to define your served available market or SAM. These are your target customers that can be reached via your planned sales channels. So for example if you are planning to sell your exercise equipment door to door, your SAM might only be your current and a a few surrounding cities. So you might be able to imagine how your vast TAM quickly was drastically whittled down. Using this example, to increase your served available market, you might want to come up with a different or more sales channels.
Back to your target market
Wait… didn’t we already identify our target market in step 2 of our critical path to startup? Yes, so use that research and work to help you here too. Keep in mind that your target market are those most likely to buy your product within your served available market. As a startup, this is the most important market you need to define.
Quantify the size of your market
Now that we have some background and common language to talk in, let’s put it to use using our example from before. As we approach estimating the size of our market, we want to try and define it in terms of value and volume. So, with our exercise equipment manufacturer’s total addressable market being north america, we may want to start with finding answers to questions like; how many health clubs are there in North America? What is the size of the North American exercise equipment market? How many home gym systems are sold in North America per year?
To find these answers, the easiest place to start is google. Type those questions in and see what information you can find from reputable and credible sources. Depending on what you find and what you may be lacking, you could next turn to services like IBISWorld. Doing a quick search on there we were able to determine two great sets of data points that could aid in our research. First, GYM, HEALTH & FITNESS CLUBS in the US.
Second, GYM AND EXERCISE EQUIPMENT MANUFACTURING in the US.
With the number of businesses and value of the industry we can start to objectively define our total addressable market.
Quantify your Served Available Market
After the defining the big picture, your TAM now we can focus in our the size of the market that is reached through your sales channels. If you are going to purse the door to door approach, look up how many gyms, fitness centers or health clubs there are in your surrounding area. Next, if you are going to purse home gyms too, gather some data on how many homes there are in your surrounding area. Find some credible research on how many house holds have home gyms. Then do the math; if there are 300,000 homes in your surrounding area and you find research that suggests 15% of U.S. households have a home gym, then your served available market is approximated at 45,000 homes (300,000 x .15). If the average price tag on home gyms is $500 then the value of this market is $22,500,000 dollars. Whoa! That is a big number, don’t get too excited though as we made up some of the numbers to illustrate the point of our example. You will have to do the research to figure out a credible market size.
Quantify your target market
Lastly, you need to quantify your target market size. Again in terms of volume and value. Continuing along with our fitness equipment example, imagine that your target market was identified as a “busy professional who prefers to work out at home for convenience and comes from an affluent household that is making $200,000 or more”. Take a look back at your served available market date. This might reduce your number of households to only 2,500. Going through the math again we could determine the size of the market in terms of value as $1,250,000. That would not be bad if everyone bought from you. However, keep in mind that there are competing products that your target market could purchase and home gym’s are likely not something purchased every year or even every 2 or 3 years. Only proper market research can tell you for sure though.
You can utilize the concepts described above to help you quantify the size of your market. Hopefully the examples provided illustrate the different approaches you could take. Just remember to document all of your assumptions and sources, that would be critical for sharing your research with others like partners or investors.
If you are in need of assistance of quantifying the size of your market or if you would like a second opinion on some of your assumptions we would be happy to help. Market research one area where the Ace NEO team has lots of experience and expertise to draw upon.
If you were able to define the problem you want to solve you are on your way to creating a successful business. Don’t think all of the fun is over just yet though, there is lots left to do. Next on your journey is to identify your target customer. This step is critical. Being able to identify your target customer will allow you to proceed to quantifying the size of your market.
Where to start
Think of the problem you want to solve. Now, who is most likely to encounter that same problem? For example, maybe the problem you want to solve is “choosing the right college to attend”. Who is most likely to face this problem? Our guess would be young adults aged between 17 and 20 years old. Yes, we have begun to identify our target customer. It’s not over yet though.
Lets go deep, not just broad
If you were able to narrow down your target customer to a specific age range, like in the example above, that is just the first step in the process. To truly identify your customer you have to go deeper than just a general demographic. Even though “choosing the right college to attend” is a problem that is most likely faced by 17 to 20 year old young adults, not all of them would be an ideal target customer for you.
Some of the people that fall into that age range might not be planning on attending college, and others might already have their school picked out. While those people fell into your general demographic range, they clearly would not need help solving the problem of “choosing where to go”.
You might be thinking that if we exclude the cases discussed earlier we have identified your target customer. Not quite just yet. Although we technically would be left with young people who are still trying to decide where to go to school, we still have not identified which of them are most likely to pay for a solution to their problem.
Most people are unwilling to pay for a solution to their problem unless their problem is causing them a lot of pain, or if they have a lot to gain. Now lets consider our example again. Young folks who are trying to decide between staying in state to go to college or travel out of state have a bigger decision to make then someone trying to decide between two local schools. That bigger decision is likely going to be viewed by them as a bigger problem. They might be more willing to pay for some advice on helping them choose where to go to college. This is just a hypothesis that needs to be tested with actual customers though.
Although we just illustrated our point of identifying your customer with a simple example, the same thought process can be applied to any problem you are trying to solve. Who else is facing this problem? Make a list of these potential people. From that list, who is most likely experiencing the most pain from that problem? Or, who has the most to gain from solving it. These are going to be the folks most likely to pay for a solution.
If you are able to identify those groups then you are near to identifying your target customer. To take it even deeper again, write down the common traits that those most likely to purchase share. For example, do they share sociological or psychographic traits among each other? This might help you narrow down your target customer even further. Remember though, even if you think you have the right answer, you have to test your hypothesis and keep an open mind to the fact that your early notions might be incorrect.
It is fun identifying your target customer and testing your hypothesis. You never know what you are going to learn. Keep an open mind and the right attitude and you are half way there.
You may be wondering, how do I define my customer’s problem? To answer that question, let’s go through a quick example:
Imagine that you’ve come up with a great business idea. You share the idea with your friends and they reassure you that it’s a great idea. Everyone’s excited about it and they want to be a part of it, so you decide to start a company. You immediately begin working on building the product and building your business around it. You and your friends all chip in some of your savings and start paying for the product to be developed. Everyone you talk to tells you its a good idea, so you keep moving forward building your product. Once this product is built, you’re going to make a lot of money! Right?
Everything seems great, except you don’t yet realize there’s one big problem: you haven’t asked any of your potential customers what their biggest problem is that they want solved. This is one of the most common mistakes that inexperienced entrepreneurs make. It is also one of the most critical mistakes that sinks thousands of startups each year before they can even launch. I should know: this was the mistake that ended up sinking my first startup company. We spent over a year developing an app that we thought was absolutely brilliant, but when it came time to see if customers would pay for our app, we were stunned to find out that nobody would. They thought our idea was cool, but it didn’t solve their biggest pain point(s) and thus was not worth paying for.
In the end, we’d spent hundreds of thousands of dollars building a product that nobody would pay to use. We tried to pivot with the remaining money we had, but it was too late and we had to shut the company down. I will always feel guilty for that mistake because now that I’ve learned the lesson, it seems so logical. But alas, we can’t do anything about it now, and I now know never to make that mistake again. Now I want to help other people avoid making the same mistake I did. So, here are my top tips for defining the problem you’re trying to solve:
Put Yourself in Your (Potential) Customer’s Shoes
The first step to defining what problem you’re trying to solve is to decide who you’re trying to solve it for. All solutions are ultimately used by people, so you have to understand who would benefit from it. Do some research and try to understand who they are, what their life (or job) is like, and what they value. What makes them happy? What helps them do their job better? How much control do they have over spending decisions? At this stage, you can simply do some online searching and have some conversations with some of these people. All you’re trying to do is understand what makes them tick, so you can imagine how to solve a problem for them. Making a purchase is an emotion-based decision, so you need to know how you want them to feel.
Try to Articulate Your Value Proposition
The next step to defining the problem you’re trying to solve is to try to articulate your value proposition. Too often we have a vague idea of what we are trying to create, and it causes sloppy decision making. Accurate market research is essential to defining your problem, so you have to be able to ask the right questions. If potential customers don’t actually understand what you’re imagining in your mind, their opinion may be about a different solution than the one you’re imagining. So if you can at least attempt to articulate what you think your value proposition is, then you can find out if potential customers agree that the solution has enough value towards their problem that they would pay for it.
Wondering how to articulate your value proposition? When we work with our clients, we use a tool that one of my MBA professors, Brandon Cornuke, created. It’s called the Value Proposition Square, and can be found here: Value Proposition Template.
Create a Survey
At this point, you should have articulated your hypothesis about your customer’s problem. The next step is to go out and prove or disprove that hypothesis. The easiest way to do that is by creating a survey to share with potential customers. There are lots of good tools out there for creating surveys, but we like to use free ones like Survey Monkey or Typeform. Both allow you to create up to 10 questions for free, and track the responses for when you’re ready to assess the data. This is ultimately the purpose of your survey: to collect data points that can help inform your decision-making.
I can’t over-emphasize how important it is to create questions that aren’t leading the respondents to answer in a certain way. If you allow your preconceived biases to leak into the questions, then you may receive some inaccurate responses and will have defeated the purpose of collecting the data in the first place. Remember, this data is to give you the cold-hard truth to allow you objectively make an informed decision. You cannot let your ego get in the way, no matter how bad you want your original idea to be the one that succeeds.
Rank and Stack the Data
Once you’ve collected enough responses, you need to analyze the data. This is not an easy thing to do if you’ve never done it before, so it’s important that you ask for help if you don’t feel comfortable doing so. You’re looking for the answers to two key questions: (1) what things do your customers consider a problem? (2) how much would they value a solution to each problem? If you can answer this, you have defined the problem that you are trying to solve. From now on, you can focus on building a solution to solve the problem(s) that your customers consider painful. This will give you a much higher chance of succeeding, and will make it much easier to raise money to build the product.
For more information about defining the problem, articulating your value proposition, or conducting market research, contact us and we’ll be happy to help!
Talk is cheap and ideas are a dime a dozen. What makes your vision a reality is the execution of it. Startups are increasingly in need of project management skills which is why we can find other prominent sites also writing about the topic. As an example, look at StartupNation, Forbes and Projectmanagement.com. Every entrepreneur at one time or another will need to define the critical path to startup in which they plan to take in order to realize their vision.
The Critical Path to Startup
While there are probably many different ways to define the path one needs to take in order to create a business, from our experience we define the critical path to startup as follows:
Assumptions: this post assumes the entrepreneur has already performed sufficient due diligence and market validation research to determine validity of Business Plan
This post contains an outline for five critical legal considerations as well as some action items that every entrepreneur should think through when starting a new business.
Our whole team has a passion for Northeast Ohio because we grew up here. While we may have ventured off to experience the world and expand our knowledge, we all came back to the place we call home. The Northeast Ohio entrepreneur community is vibrant and growing. As a result, we are most passionate about serving this community because we know the benefits it stands to bring to our region, our home.
America has one of the most successful and envied entrepreneurial economies. There are many factors that have accumulated over time that position our society ahead of others in terms of breeding and supporting entrepreneurs and small business growth. This is vitally important for securing our economic way of life. For a more in-depth review of the American entrepreneurial landscape check out our report: Ace NEO – The United States of Entrepreneurship. Read on for a short overview and discussion.
A widely accepted fact is that entrepreneurship is a major driver of economic growth and change in every nation’s economic landscape. Technology has given the modern entrepreneur access to more opportunities than ever before. Technological advancement and innovation will continue to change business when compared with the past. Every day, the personal computer, the internet and the smartphone bring people closer together from all over the world. Consequently, today’s entrepreneurs increasingly need to think globally to survive and remain competitive.
If you are an entrepreneur, you have to take some calculated risks in an effort to earn money. The potential for financial gains is the primary motivator for the vast majority of entrepreneurs to start a business. As a result, many outside of the business world may perceive entrepreneurs as greedy, caring only about money. However, there are more benefits of being an entrepreneur than just making money. Those entrepreneurs who succeed can actually create many more benefits to the world than just giving profits to their company. Below we list our top 3 benefits of entrepreneurship for non-entrepreneurs:
What do you think of when you think of an entrepreneur? Many people think about the founders of famous software companies like Facebook, Apple or Google. Others may think of somebody they know who started a company. Regardless, most entrepreneurs have one thing in common: they had to take risk to get where they are today. So why would a person decide to take on that risk without knowing whether they would succeed? Let’s take a look at some of the key benefits of being an entrepreneur: