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.
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.
Continue reading “The Entrepreneur’s Guide To Estimating Market Size For It’s Startup”
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).
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.
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:
- Estimating too little
- 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.
(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.)
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).
- 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.
- The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer?
- 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?
- 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.
- 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.
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).
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.