The Entrepreneur’s Guide To Estimating Market Size For It’s Startup

Note: Before I begin, I would like to clarify the difference between market potential and revenue estimate. I have often seen entrepreneurs use the two terms interchangeably.

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Market Potential

Market Potential is about estimating the size of the overall market opportunity. It is a sum total of the potential revenues of all players who are addressing that opportunity, if all the potential customers were to buy. I.e. If you were selling ‘affordable’ golf kits for first-time golfers, then you could estimate market potential as follows (all numbers are indicative for illustration and do not represent actual market) :

  • There are about 20 millon golfers across the top 10 golfing markets in the world. Additionally, about 100,000 new people take up golf every year across the top 10 golfing markets in the world.
  • About 25% of these find the cost of golf kits expensive. If you take this as the addressable market at USD 400 a kit for 5 million buyers, we are addressing a USD 2 bn market opportunity, even if you look at only those who find the price of current golf kits too high.
  • Additionally, the ‘high-quality at lower price’ value proposition is likely to attract regular and casual golfers too i.e. 20 million golfers. This opens up a USD 8 billion market among existing golfers. And that’s a market growing at 15% pa.
  • However, given that most people who want to play golf do not take it up because the current kits cost upwards of USD 1500, we believe that a USD 400 kit will explode the market and we would be able to encourage 10 times the number of people to start playing golf. I.e. by redefining the price-point, we can create an additional market potential worth over USD 500 mn.
  • i.e. with an ‘affordable and high-quality golf kit’, we will be playing into a market that’s roughly USD 8 – 10 billion in the top 10 golfing markets of the world.

Revenue Estimate

Continue reading “The Entrepreneur’s Guide To Estimating Market Size For It’s Startup”

Is there merit in starting e-commerce ventures now?

That online commerce has a strong value proposition is proven. For urban consumers, the biggest value proposition is convenience followed by choice. For consumers in tier 3 cities and below, access to choice is the biggest value proposition.

Given the size and scale of the country, and given that internet penetration still has significant headroom for growth, that online commerce will only grow is a given.

Therefore, on the face of it, it appears that there is indeed merit in starting e-commerce ventures, especially in categories that have not been dominated by someone and where newer brands could have an opportunity to establish leadership positions.

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However, e-commerce is not a game of just making products available on a nice looking website. The business case of e-commerce depends on being able to maximize the lifetime value of a customer. Let me explain further… Continue reading “Is there merit in starting e-commerce ventures now?”

How do you validate a new business idea?

There is only one way to validate a concept. Talk to potential users and customers (customers could be different than users). Speak to as many as you can. Ask them if they find the value proposition meaningful. But first define your value proposition well and articulate it in a nice, crisp sentence.

If the intended users like the concept, do some research to see if there are enough number of such users/buyers for you to make this venture commercially viable. (In all concepts, users need not be the ones who pay. E.g. ad supported models… but in those make sure you speak to someone from the media buying industry to assess what the revenue potential could be).

Is it okay to be a leader in a niche segment?

Targeting a niche segment almost always seems like a winning strategy. There is always a temptation to carve out a niche when a category matures or seems to be growing well.

However, just because you have identified a good niche does NOT mean that it makes a good business case, no matter how sharply defined that niche is.

Often entrepreneurs make the mistake of getting excited about playing in a niche, and assuming that they can be leaders in that niche simply because they are super-focused ONLY on that segment. The truth however is that just because you focus on a niche does not mean that others who service broader segments are not at least as good as you, at servicing that niche as well.

Focusing on a niche makes sense only if that niche represents a fairly large market. Also, if servicing the niche helps you build competencies which can be leveraged across a broader segment, there is really no merit in building a ‘business case’ around that niche. Although, you could have multiple brands targeting different niche segments, with the common competencies deployed across all the segments.

What is the right revenue estimate?

Well, there is obviously no right or wrong revenue estimate. It is often a reflection of the vision and aspiration of the entrepreneurs

However, among the many mistakes that many entrepreneurs make while estimating revenue, the two top ones clearly are:

  1. Estimating too little
  2. Estimating too much

Here’s an oversimplification of how you could think about the revenue targets that you aim for. Obviously, this is an oversimplification but it does give you a good view of what you could potentially aim for.

The hypothesis of this oversimplification is that investors like to back potential market leaders. If so, assuming the market potential for the concept you are pursuing is around INR 1000 cr., and given that in most categories the market leaders will have anywhere between 25 – 40% market share, it will be good for you to at least aim to be a Rs.250 – Rs.300 cr. company in a reasonable time frame.

This at least gives you a good shot at being among the top 3-4 players in that category.

On the other hand, if in a market with a potential of Rs.1000 cr revenue, your startup aims to have a revenue of Rs.50 cr in the next 4-5 years, you are most likely to be a marginal player and hence will not be exciting for investors.

Do also remember that in some categories there is a ‘winner takes all’ scenario. E-commerce in some categories, especially in generic / multi-category retail, is a one-horse-game in many markets.

What are some important questions to ask, in a focus group research for evaluating an idea?

(This was my answer to a question on Quora)

In a focus group, for evaluating the potential of an idea, your goal should be to test all the assumptions that you have for your venture. Apart from the concept itself, there will be several assumptions on the ‘business’ around that idea that you will need to validate (e.g. pricing, availability, brand personality, etc.)

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Here are a few things that come to mind, that you could consider testing (of course the more you share your idea, the more specific our answers can be).
  1. How deeply does the consumer/customer feel about  the problem that your idea is solving : The more pressing the problem, the more relevant your idea is likely to be for consumers.
  2. The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer?
  3. Do people like the way your idea delivers the solution: I.e. does the product work for the consumers/customers as you had expected it to?
  4. Look for insights: Listen to what people are telling you about the problem that your idea is solving. See if your product does a good job or a great job at delivering the solution. See if the response is a ‘nice’ or a ‘wow’ as these subtle differences will determine factors like conversion rates, adoption rates, usage patterns, etc.
  5. The business model: A business model is about ‘who will pay how much and to whom’. Each element of this should be tested in the concept test. i.e. are the consumers/customers seeing the value proposition as you meant it to be, how much are they willing to pay – is there price sensitivity, and if so, how much. (In the case of fremium products, this may not be relevant.)
Concept tests help you validate your assumptions with qualitative inputs from the conversations with relevant groups. (You have to be super careful to ensure that your group selection is accurate. Else you may get an inaccurate reading. E.g. if a particular profile of respondents do not respond well to the concept, should you try the concept with another segment –  is a call that you may need to take depending on what you are doing.)
But when you want to quantify the concept and potential, you will have to rely on a broader quantitative research that covers a larger sample that is representative of the audience you eventually intend to address.

What is the important distinction between listening to what focus groups say and watching what your customers do?

Listening to focus groups is like watching a recipe being demonstrated on a TV show. Watching customers is tasting the food so you know what went into it. (When you watch a cooking show on TV, you usually try to do exactly how they tell you to. However, if you were to taste the food, then you will make the adjustments according to what you know your guests / family will prefer).

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In my view, while focus groups and other forms of qualitative and quantitative research are perhaps relevant for larger organizations who are looking at directional inputs, for startups and early-stage companies, it is important for the founders to be immersed in the user/customer’s life to understand the things that even they may not be able to articulate.

Startups usually redefine a market or sector. They usually think (or should think) of things that will do things differently than currently being done. Hence, users/consumers may or may not have a good handle on the subject as they would not have the vision of the future that the entrepreneur has painted for himself/herself.

Research is good to validate hypothesis and assumptions. e.g. to check what you think is a need gap or pain point that is really true for users/customers. Not to find if they need or want the stuff you intend to put out.

How do you do market research for a startup?

  • Talk to customers. Lots of them. Ask them about the need, the concept, the value proposition, the pricing, ease of use, etc.
  • Talk to potential investors – ask them about business case, interest in such concepts, etc.
  •  Talk to experienced entrepreneurs – ask them about challenges, watch outs, learnings from their experiences, etc.
  •  Talk to potential employees – ask them if they would join, if yes what would be a meaningful compensation (salary, equity or salary + equity)
  •  Talk to a couple of lawyers – they often can give you interesting insights about challenges or watch outs
  •  Talk to some accelerators/incubators/mentors – ask them if your plans look practical, is your assumptions look plausible

In short… talk to anyone whose perspective on the concept or the business around the concept will help you make a better informed decision 

Is it advisable to proceed if there’s already a venture based on a similar idea that you have?

Well, as with most aspects of entrepreneurship, there isn’t one right answer to your question.

 

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Whether it is worth starting another venture in an area that already has other players will depend on a number of aspects about the environment that you are going to operate in. I have tried to outline a few thoughts, but there will be many, many more aspects that others will have a perspective on.

Size and nature of the market opportunity
Is the market large enough to support multiple players? Is the nature of the industry predominantly fragmented (e.g. restaurants – many can co-exist) or is the industry dominated by a few large brands (e.g. e-commerce).

Do you have experience or competence that makes you particularly suitable to lead a venture in that space
Even in a market with some established brand leaders, it may be possible for an entrepreneur with deep industry experience to create a successful brand. E.g. in a crowded space of organizing/aggregating healthcare in India, someone with deep healthcare industry experience with an existing network and understanding of the challenges and opportunities can create a very successful venture, even if the existing players are dominant in the market. In fact, because of the person’s understanding of the industry’s challenges and opportunities, and BECAUSE there are a few large brands whose market share the venture can snap at, it may be an easier task for this experienced entrepreneur to consider a venture in that space.

Doing it differently
Even with existing players in the market, it is possible to create a distinct identity for the brand. Either on a service differentiator (same product, better service) or on a concept/value proposition differentiator (same concept, differently positioned) or a price differentiator (lower price/higher value or even higher price/premium positioning) or targeting a different target audience (younger or older or different income bracket, etc.) even a brand personality differentiator.

How satisfied are customers with existing options
If there is a serious level of dissatisfaction among customers/consumers, and complacency among established players, there will be good opportunities for newer ventures to capture that market.

Where do you do it?
Let me illustrate with an example. In India, there are 100s of companies that have attempted to do ERP for doctors or Clinic Management Systems (CMS). Almost everyone failed. Most attempted these in either Delhi NCR or Mumbai and a few in Bangalore and Hyderabad. Clinics in these cities are fed up with startups coming to them to be beta customers and are unlikely to entertain them as most past experiences have been a waste of time – either the product was bad or the startup shut shop.

However, there is a large untapped market in tier 2 cities across India where no one has approached those clinics with a CMS. If you target that market, despite it being a product already available, you could have an opportunity.

What should you think about before starting a new venture (especially an e-commerce venture).

But when you are starting a new venture, you need to assess various risks. I have listed some below, but each business and each person’s circumstances will throw up different aspects that you would need to consider.

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Concept risk: Is the value proposition relevant for the intended target audience? (To assess this, you first need to clearly articulate what your value proposition is. ‘What you do’ is NOT the value proposition. What the users/buyers will get out of what you do is the value proposition. Check with your intended target audience if they feel that this is meaningful for them. If it is not, then evaluate if you need to adjust your value proposition (and therefore sometimes your product/service/concept itself) or you need to check if the value proposition is relevant to a different set of audiences (perhaps different age or income bracket or in a different geography or people  in different circumstances than originally intended).

Revenue streams, business model and business case: You have to evaluate if your revenue streams and business model makes a business case that makes the venture worth your while. This is a critical process  in your entrepreneurial journey and you need to take a realistic view of the costs and potential revenues.

In e-commerce businesses, you often have a disproportionately higher spend in acquiring the customer and you make monies on that customer only after a number of repeat purchases (or visits if the customer is not going to pay for services and you have alternate ways of making money – e.g. advertising or referrals)

Operational aspects: Evaluate the challenges around procurement, warehousing, logistics, etc. that you will have to deal with, and evaluate whether it is practical for you to overcome those challenges given your resources and circumstances.

People resources: Hiring people in startups is a challenge. You need to have some thoughts on how you are going to assemble your core team and your initial employees. Evaluate whether you will have some of the important functions in-house or outsource or use existing platforms (e.g. technology)

Marketing and customer acquisition costs: Quite often entrepreneurs do not spend enough time to understand the dynamics of customer acquisition. Especially in e-commerce ventures, you need to be able to get a clear sense of what activities you would do, how much they would cost and what conversions you could expect…. and therefore how much it will cost you to acquire customers.

And remember, the cost of customer acquisition is NOT just the cost of marketing. But the cost of all the direct resources that are involved in the marketing process + cost of marketing itself + a portion of cost of the central office and operations.

Understand the ‘unit economics’ and Capital required: While the ‘business as a whole may not be profitable’ for a while due to the overheads of managing the operations (and that is perfectly OK in most cases), you need to evaluate if your per unit economics are healthy. Are you going to make money on each sale. And how much will you make. And therefore, how many units do you need to sell to cover the cost of operations. And how much time will it take for you to ramp up to that scale. Is that possible? And is it possible within your given resources?

E.g. if your ‘central office’ costs (founders salaries, salaries of central office staff, rent, electricity, etc.) is USD 10,000 per month (using simplistic assumptions for easy of discussion). And your revenue per unit (product or service) is USD 20. And your gross margin is 40%. In this case, you are making USD 8 on each order.

Assume that your cost of customer acquisition was USD 50, and that each customer is likely to buy 4 times in a year (when you assume your numbers, make sure you have it validated with some research or understanding of the market… and is not a random number that is assumed based on your own expectations on how the market will behave), in which case your cost of customer acquisition itself is going to be recovered when the customer buys 6 – 7 times from you.

Now, given your view of the numbers you could ramp up this business to, you need to work out whether the USD 8 that you make from each order is sufficient to sustain you through your initial phase when the costs of USD 10,000 will be there every month + you will have to invest in marketing. (In many cases, the low ticket size of the product/service makes the business unviable. If you are going to make a few dollars from each customer, you need a LOT of customers to make the business case meaningful.).

Evaluate how much money you are going to require to startup. In estimating capital required, I urge you to overestimate costs and underestimate revenues. Do not let your enthusiasm guide your excel sheets. Do not assume that you wil multi-task and therefore save costs. (Even if that is possible for you, it cannot be sustained as you scale up when you need to move from ‘doing’ to ‘managing’). Also, many entrepreneurs make the mistake of assuming that they are smarter than others and therefore would be able to do it for a lesser investment than others before them have attempted (and even if that is true, keep that as a buffer rather than assuming that your smartness will be THE reason for you to do it better, faster, cheaper than others).

When you have a view of what kind of capital is required, evaluate different funding options. (Many entrepreneurs make the mistake of assuming that VCs are the first choice of funding for startups. And that need not be so. Understand what parameters VCs use for evaluating deals they invest in. See if you are ready for VC funding. Most likely, you may not be. In which case evaluate alternate ways of funding – boot strapping, family & friends round, advances from customers, debt, etc.).

 

 

In your pitch deck do you talk about future markets that can be addressed by the product?

Yes. Your business case is based on what the potential for your concept/product/core competencies are for the future. You may have a focus on a particular segment/geography/opportunity/problem at the beginning of your journey, however, the if the possibilities of multiple revenue streams and adjacent or parallel opportunities exist, that should be included in the pitch deck.

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This can be added in the slide about ‘size of the opportunity’, where you can given an overview of what possible opportunities, including new markets and new customer segments, exist for the concept you are currently proposing.

Remember, the market opportunity is different from your plan for your venture. Think of it this way… if you were working in Accenture or Mckinsey and were to present a report on the size of the opportunity to a large multi national company, what would you say? The opportunity is open to all… the MNC may have a better chance of addressing that opportunity, and your plans may be different. But the opportunity is the same, whether you address it or not.

What should startups focus on in pilot phase?

A ‘pilot program’ is an activity planned as a test or a trial. In the context of startups, a pilot is done to test the untested dynamics of the business.

In any business, especially in a startup stage, entrepreneurs have to start with certain assumptions. These assumptions could be about percentage conversations, cost of customer acquisition, repeat purchase rates, etc. They could be about processes and competencies e.g. ‘one person can handle 25 transactions in an hour’. Or the assumptions could be about the business case. E.g. We will make a gross margin of 35%. The objective of a pilot phase is to test and validate some of these assumptions, so that the final go-to-market business plan can be adjusted on the basis of validated assumptions.

Below are a few things that are tested in a concept test stage/pilot phase:

  1. The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer? 
  2. The business model: A business model is about ‘who will pay how much and to whom’. Each element of this should be tested in the pilot phase. i.e. are the consumers/customers seeing the value proposition as you meant it to be, how much are they willing to pay – is there price sensitivity, and if so, how much.
  3. The assumptions for your business case: As mentioned above, list all the possible assumptions you have made in your business plan and see if there is a way to validate those in your pilot. In a pilot, some of the operational outcomes may NOT be as per your plan. However, it is expected that in the initial phase your operations will be inefficient and that cost and operational efficiencies will improve as your business matures.
  4. Understanding operational challenges: Entrepreneurs often tend to underestimate the operational complexities and challenges of managing a business. While startups often manage operations with a limited number of people who are stretching themselves beyond practical limits, it is often not sustainable in the long run. A long-term business case cannot be made on the basis of the enthusiasm and give-it-all commitment of the founding team. A business case has to be based on what is practical and sustainable with an average set of people managing your larger teams.
  5. Testing processes and operational capabilities: Processes help organizations scale up. Processes are nothing but just a set of guidelines on managing activity and handling situations. Processes are usually centrally planned and locally implemented. Processes. They reduce the dependence of individual brilliance, and instill a discipline that results in operational efficiencies and consistency of experience. It also allows individuals to be clear on how a certain activity/situation is to be handled. The quality of processes can make or break an organization. Not only should processes be implemented, but they should also be measured and evaluated periodically to ensure that inefficiencies and redundancies are eliminated. In a startup, it is critical to define some processes, but yet be flexible to adjust processes quickly as soon as you see some processes becoming bottlenecks or inefficient. It is therefore important for startups to test these in the pilot phase.

How to judge whether your business idea is worth implementing?

Whether you should implement an idea should depend on whether that idea has the potential to meet what YOUR objectives are. If your goal is wealth creation, you will have to check if the business case is strong and if this is what will create wealth for you. If not, you will evaluate other opportunities.

On the other hand, if your goal is NOT wealth creation but ‘social impact’, then you will evaluate if this idea is providing the scale of impact that you wish to create.

And if your goal is to ‘enjoy what I do’, then you have to evaluate if this idea is what will give you the greatest joy.

If your goal is wealth creation, you will have to evaluate things like what is the scale of the opportunity, what is the competitive environment, why do I have an opportunity to be a dominant player, what is the scale that I can reach with this venture, what are the resources that I will need and can I gather the, what are the competencies that I will need and do I have them or do I have the ability to engage others who have those competencies, what are my exit options, etc.

 

Estimating potential for Facebook apps

Revenue projections for a Facebook app should be done like you would for any product, say a refrigerator, or service. Here are a few steps you could consider:

  1. You need to first define your target audience, then estimate how many people from your target audience are there on the platform [in this case Facebook] and in the geography you are targeting [i.e. the markets you are addressing].
  2. Once you have the number, you calculate how many people you CAN reach through your media spends and the activities that you within your control e.g. ads in the press or online and your distribution channels e.g. if the product/app is bundled with another existing brand or sold through app stores, etc. Remember, just because your app is on Facebook does not  mean that your marketing & advertising channel should also be Facebook. E.g. you could put efforts on PR – get a few TV interviews, press articles, etc. – and you could probably reach a much larger audience with your limited budgets.
  3. Then you make some assumptions on how many additional people in your target audience can be reached through means like PR, viral effect, etc.
  4. Once you have these numbers, you make assumptions on the % of people who are likely to buy/download your app.

If your revenue is based on buying/subscriptions, you estimate how many people x how much per download. If your revenue is advertising, you estimate how many impressions, and use existing media rates to estimate your revenues.

Now, to extrapolate this to the future, you make various assumptions on the base target audience size. You can use various media reports on where the target audience numbers are likely to go on the platforms you choose to be on.

Facebook apps: How do you estimate market potential?

Revenue projections for a Facebook app should be done like you would for any product, say a refrigerator, or service. Here are a few steps you could consider:

  1. You need to first define your target audience, then estimate how many people from your target audience are there on the platform [in this case Facebook] and in the geography you are targeting [i.e. the markets you are addressing].
  2. Once you have the number, you calculate how many people you CAN reach through your media spends and the activities that you within your control e.g. ads in the press or online and your distribution channels e.g. if the product/app is bundled with another existing brand or sold through app stores, etc. Remember, just because your app is on Facebook does not  mean that your marketing & advertising channel should also be Facebook. E.g. you could put efforts on PR – get a few TV interviews, press articles, etc. – and you could probably reach a much larger audience with your limited budgets.
  3. Then you make some assumptions on how many additional people in your target audience can be reached through means like PR, viral effect, etc.
  4. Once you have these numbers, you make assumptions on the % of people who are likely to buy/download your app.

If your revenue is based on buying/subscriptions, you estimate how many people x how much per download. If your revenue is advertising, you estimate how many impressions, and use existing media rates to estimate your revenues.

 

Now, to extrapolate this to the future, you make various assumptions on the base target audience size. You can use various media reports on where the target audience numbers are likely to go on the platforms you choose to be on.

 

 

How to Calculate Market Size

Kristina Tomaz-Young  is VC-TV’s CEO, Founder & on the go Strategic Partnerships Wrangler.  She has a passion for igniting unconventional ideas and creating new media opportunities to connect smart technology startups with idea backers. Having led strategic initiatives for large corporations as well as growth strategies for startups & mid sized technology companies alike in North America, Asia and Europe, she’s a hybrid combining big business experience with an entrepreneurial spirit. More on Kristina athttp://www.linkedin.com/in/kristinatomazyoung or connect with her atkristina@vc-tv.biz / kristina@venturecaptv.com

Understanding pricing or revenue models

How much to charge your customers is a critical decision for entrepreneurs. I.e. pricing is a critical component of your business strategy. While getting your pricing strategy right is no guarantee of success, getting is wrong is one sure shot route for failure. Obviously, how much consumers are willing to pay is dependent on the value they see in the solution you offer, be it a product or a service.

 

There are quite a few Revenue Models available for startups to consider:

 

Cost Plus mode: where the seller decides the price of the product based on the cost of the product. This is usually done for physical goods e.g. shoes, garments, computers, pens, etc. Doing this model for online services is not feasible because there is no real cost of the physical goods. How much premium you can charge over the cost is dependent on a number of factors including competition, alternate options, the overall value-proposition that the customers see in your offering, and often, also the personality & equity of the brand.

Value based model: For products or services that do not have an individual unit price [e.g. Microsoft Office software], the seller decides the price based on what they believe is possible to be charged from the consumer. This is the toughest part and may require some experimentation and in-market tests to arrive at the price point that you could charge.

Distribute the product free but customers pay for services: In some markets telecom companies follow this model where they give away the telephone instrument for free, and people pay for the usage. In some cases, e.g. printers, the base product is not given free but is offered at a very low price, often lower than the cost price, with the hope of recovering it through sale of related products and services e.g. cartridges and printer servicing.

Free for consumers – ad supported model: E.g. Angry Birds

Freemium: Free for basic, paid for premium services. E.g. sugarsync.com, linkedin, gmail, etc.

Portfolio pricing or package price: This strategy is applicable when the seller has a range of products and/or services and may want to engage the consumer for the entire portfolio. E.g. Insurance companies which offer for corporates a portfolio comprising of life insurance + car insurance + fire insurance + health insurance

Subscription model i.e. users pay a per month/per year e.g. book libraries, dropbox and other online storage sites, SAAS platforms, etc.

Pay-per-use model i.e. users pay as they use it e.g. Platforms like Webex have a pay per use model

One-time payment i.e. users buy a license to use e.g. Microsoft Office

Tiered or volume pricing: Typically used to group buying benefits. E.g. an enterprise software where the license fee per user reduces as more licenses get bought. The pricing in this model is often defined in slabs as relevant to the category.

 

Market sizing and estimating revenue and growth

Estimating the size of the market, and then predicting how much revenue the startup can achieve and at what growth rate is indeed a tricky exercise. But going wrong on this could either kill your company, or if in a rare case you have underestimated your revenues, you may end up diluting more equity at a funding round than would have been necessary.

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It is therefore very, very critical that entrepreneurs focus on working and reworking on the market size and revenue potential based on sound assumptions and with minute detailing.

Many startups make the mistake of taking broad brush reports from large consulting or research firms, and estimate the size of their market on the basis of those reports. Often we hear entrepreneurs mention “According to Gartner, healthcare is a 80 bn USD industry with a 23% growth rate”. Now, while this could be broadly true, for an investor, and even for the startups, these figures have little relevance. Here’s why…

In most market segments, the investors would be broadly aware of the scale potential. At a startup stage, investors will most likely invite a startup for a meeting only AFTER they have assessed that the concept does have a potential to address a large market. Hence, stating the obvious, especially in segments that are very obviously large does not add any value. E.g. For a education domain startup, highlighting in minute details the number of number of schools, number of students and growth rate in India is wasting precious time in the first meeting with investors. Assume that investors who are meeting a startup in the education space know the potential of the opportunities in the domain.

How then do you estimate the market potential? Simply, by being specific about your segment and making some assumptions on the specific segments and the revenues per customer/consumer. E.g. Instead of saying education in India is a USD 18 billion market, for a premium ‘home tuitions startups’ it will be prudent to state “With over 250,000 students in the top 10 cities in schools with fees above Rs.10,000 a month, at Rs.2500 per student, the market potential is roughly over Rs.500 – Rs.600 cr. P.a. At an all India level, the same translates to a market potential of well over Rs.1000 cr.

 

Some points to consider when estimating market potential

  • Clearly define what problem you are solving… and for whom – this will give you a good idea of the number of customers with that problem in the geographies that you plan to be available in.
  • Estimate the practical reach e.g. while there may be a 100,000 people in your target audience spread across 50 cities, you may want to take the top 5 or top 10 cities and see how many people you have within your target audience. This of course gives you the total market potential IF 100% of potential customers were to buy.
  • Now, apply some filters i.e. ability to pay, ability to reach via media, etc. E.g. while there may be 60,000 potential customers in the top 10 cities you identified, and you may be panning to use a combination of media, if the total reach of these media vehicles is 50%, the total potential of the market is really 30,000 customers.

You could also apply some price filters to test the elasticity of the demand in comparison to price. I.e. work up alternate scenarios to reflect the increase / decrease in demand in case the price were to be moved up or down… and then evaluate which scenario makes a better business case. [Note: For different situations you may have very different parameters for a good business case. In some cases, rapidly acquiring customers, even if margins are lower, would be a key criteria… often relevant in new concept that make sense for the first mover to ‘land grab’ and lock in potential customers on whom profitability can be increased later.

  • Now, if the product is of a repeat purchase nature, you would need to make some assumptions on the number of times the customers would buy the product / service in a year. In doing this, it is critical to map the reality or in case of new product categories, to do some qualitative and/or qualitative research to validate your assumptions on the number of repeat purchases within a year.
  • All the above, and perhaps some more as relevant to your category/product/service, will need to be worked and reworked often to arrive at what seems like a practical market estimation.

 

How do you estimate your revenue and growth? This is a rather tough part, and the accuracy of these guestimates is largely dependent on how accurate your assumptions are.

Many entrepreneurs make the mistake of projecting revenues as a % of the market potential. Often we hear entrepreneurs state “Even if we were to capture just 2.5% of a Rs.1000 cr market, we are targeting a revenue of Rs.25cr in year 2”. This is obviously an oversimplification and without any basis for how the sales plan will be implemented.

To prudent way of arriving at a estimation of revenue is to build a business case ground up. I.e. how much revenue are you expecting per customer, how many customers can you get, how much does it cost to get each customer, etc. At the startup stage, it is important to do a month-by-month detailing of how you see the customer base increase based on what specifically you plan to do in your marketing & sales plan. Needless to say that this is not a one-time exercise, and you will keep reworking on this till the business case starts making sense.

While doing month-by-month revenue estimation, if you have multiple revenue streams, then make the revenue estimates for all the revenue streams, which then total up to make the overall revenue for the company. E.g. if you are starting a chain of restaurants, you may want to break up the revenue by breakfast, lunch, snacks and dinner as these would cover different dynamics of your restaurant business. Similarly, if you were doing an ad-supported Freemium product online, you would like to estimate separately your revenues from ads on the free downloads and the subscription from the paid downloads.

Do remember that this is just a guestimate… i.e. a well-thought-out estimate. This is just a reflection of how YOU expect the market and the world around it to behave. And because there are no guarantees that the world will behave as you predict it to, it is prudent to be very, very conservative with the revenue estimates. If you are too optimistic, you are likely to allocate a proportionate marketing investments behind the revenue growth… and if for whatever reason the revenues do not happen as you have predicted, you will have a sufficiently fierce problem on hand.

Note:In many a startup scenarios, revenues may NOT be the key parameter of progress. E.g. in a startup which is establishing a new technology, proving the concept and the business model may be the main objectives in the startup stage.

Do remember that your growth and revenue numbers should be mapped to the marketing plans and marketing investments, and should be rooted in reality. “We are smarter and we know social media marketing really well and hence our customer acquisition cost is much lower than others” is not a statement that investors would be keen to bet on [though if you state that they would be keen that you demonstrate your skills in lower cost customer acquisition 🙂 ].

As one of my mentors had said “See the film in your mind… for a startup, it is critical to be very clear on what specifically is going to happen on the marketing front, product front and sales front in which month and therefore what revenue and customer numbers that will likely translate into”.

 

Some advice:

  • Try to achieve higher conversions than comparable others in the market, but estimate much lower conversion. This way, even if you do not do better than market average, your plans don’t go awry.
  • Validate your assumptions – validate your assumptions – validate your assumptions…. Again and again and with multiple sources. Going wrong in assumptions can be disastrous, even if the rest of the components of your business do well. E.g. if you assume a 0.5% conversion, but it actually turns out to get 0.3% conversions, you may be off by a considerable margin in your profitability and may also run out of cash sooner.
  • Identify the key ratios that you need to measure. E.g. Gross margins, cost of customer acquisition, headcount per ‘unit’ [i.e. could be a set of customers], etc.

Key points to remember

  1. Be conservative in revenue estimates
  2. Validate your assumptions
  3. Detail out the revenue plan on a month-by-month basis, and separately for each revenue stream

Facebook apps: How do you estimate the market potential?

Revenue projections for a Facebook app should be done like you would for any product, say a refrigerator, or service. Here are a few steps you could consider:
  • You need to first define your target audience, then estimate how many people from your target audience are already active on the platform [e.g. Facebook] and in the geography you are targeting [i.e. the markets you are addressing].
  • Once you have the number, you need to calculate the number of people you CAN reach through your media spends and the activities that are within your control ( e.g – ads in the press or online) and your distribution channels (e.g. if the product/app is bundled with another existing brand or sold through app stores, etc). Remember, just because your app is on Facebook does not  mean that your marketing & advertising channel should also be Facebook. E.g. you could put efforts on PR – get a few TV interviews, press articles, etc. – and you could probably reach a much larger audience with your limited budgets.
  • Then you make some assumptions on how many additional people in your target audience can be reached through means like PR, viral effect, etc.
  • Once you have these numbers, you make assumptions on the percentage of people who are likely to buy/download your app.
  • If your revenue is based on buying/subscriptions, you estimate how many people X how much per download. If your revenue is advertising, you estimate how many impressions, and use existing media rates to estimate your revenues.

Now, to extrapolate this to the future, you make various assumptions on the base target audience size. You can use various media reports on where the target audience numbers are likely to go on the platforms you choose to be on.