Some Lean practitioners have abandoned planning altogether – citing, research and planning is a form of waste and doing is better than planning. In many cases doing is better than planning; however, in this case, planning is better than doing. Before you take the leap of launching a new business or product, your first step should be a simple market analysis.
In the startup world, there have been countless debates as to whether it is “team”, “product” or “market”. In one of the most-quoted blogs posts on the topic, Marc Andreessen says:
In a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.
You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.
Andreessen goes on to quote Andy Rachleff’s Law of Startup Success:
The #1 company-killer is lack of market.
When a great team meets a lousy market, market wins.
When a lousy team meets a great market, market wins.
When a great team meets a great market, something special happens.
The point is this, the most important thing you can do is to pick a great market, so do some simple market research before you start working on your “great idea”.
Unfortunately, there is no single tried and true method for researching every market – markets are unique, replete with their own nuances and attributes. However, at a minimum, your market analysis should include a few simple attributes: market size and growth rate, competition, and market trends.
How to Evaluate the Market
For those of you who are looking for more practical advice, there is a great post on Ultra Light Startups that outlines multiple methods of how to size a potential market.
In The Four Steps to the Epiphany, Steve Blank provides an easy-to-follow method of creating a top-down and bottom-up approach market size hypothesis.
A top-down estimate starts with a total market size number then assumes your company can sell-to a percentage (usually) of that market. Here is an example from Deviantbits:
- We want to sell internet access in China
- There are 1.3 billion people
- 1 percent want internet access
- We’ll get 10 percent of that potential audience
- Each account will yield $240 per year
- 1.3 billion people × 1% addressable market × 10% success rate ×$240/customer = $312 million
Where can you find the information to compile a top-down estimate? You can find market statistics in: industry-analyst reports, market
research reports, competitors’ press releases, university libraries, and government statistical reports.
While top-down has its place, a bottom-up estimate is more appropriate for a small startup company/venture because it is based on sales/performance data specific to your situation – such as your marketing budget, how many customers you can serve, etc.
In other words, a bottom-up approach makes assumptions about what you can achieve using your specific sales/marketing tactics.
Again, another example from Deviantbits:
- Each salesperson can make ten phone sales calls a day that get through to a prospect
- There are 240 working days per year
- Five percent of the sales calls will convert within six months
- Each successful sale will bring $240 worth of business
- We can bring on board five salespeople
- Ten calls/day × 240 days/year × 5% success rate × $240/sale × 5 salespeople = $144,000 in sales in the first year
What if you don’t have a sales team? Google Adwords keyword tool is a great source of bottom-up forecasting. For example, you could estimate how many visits you can drive to your website x conversion rate x average order value.
The side benefit of the bottom-up approach – in good ole’ lean fashion – is that your assumptions are testable.
Now that you’ve sized your market, you need to look at the market growth rate. Understanding the growth rate will help you understand the potential of the business as well as the lifecycle stage of the business – more on that to come.
Depending on the market you’ve selected, you can typically find a growth rate through research reports, blogs, press releases, etc. In other words, start with google.
In some cases you’ll find a growth rate percentage. In other cases you may need to calculate it based on size statistics. The following is a simple example of how to calculate growth rate:
- In 2012, the market size was 200mm
- In 2013, the market size was 240mm
- The market growth rate is: [(240-200)/200] x 100 = 20%
How does this relate to the potential? You can use this to forecast the growth in revenue:
- Year 1: you might expect sales at 200mm
- Year 2: 240mm (200 x 1.20)
- Year 3: 288mm (240 x 1.2)
Caveat: in Lean fashion, this is an assumption, not a “given”, this is a benchmark to help you understand the scale and scope of the business.
In addition to using the growth rate for forecasting, you can also use it as a health benchmark. For instance, if your sales growth is greater than or equal to market growth, your firm is comparatively healthy. If, however, your company’s growth in sales is less than market growth, it is very likely your firm is in competitive trouble, especially if this is not your strategy (Frost & Sullivan).
The market growth rate is a key indication of the product’s stage in the product life cycle. A high growth rate will usually indicate the market is in the growth phase, where growth is high and saturation is low. A lower, more-stable growth rate indicates product maturation and, of course, a negative market growth rate indicates the product decline stage (Frost & Sullivan).
As a startup company, your goal is to focus on introduction and early growth phase markets/products.
- Growth: A low growth rate, small market size
- Market potential: Uncertain
- Competition: Few competitors/little competition
- Barriers to entry: low
- Growth: dramatic/increasing growth (size/no. of customers)
- Market potential: Strong
- Competition: Moderate, increasing competitors/competition
- Barriers to entry: increasing
- Growth: Positive but decreasing growth rate (size/no. of customers)
- Market potential: moderate
- Competition: High, many competitors, consolidation starts occurring
- Barriers to entry: high
- Growth: Negative, declining growth rate
- Market potential: low
- Competition: Decreases, firms exit market
- Barriers to entry: high
Tip: Ideally, focus on the first stages: introduction and growth.
Market trends is the first of the two more-subjective analysis criteria. In terms of trends, research the trends in the market – you will want to identify the top 2-3 trends that are likely to impact your market.
For the sake of simplicity, look at products and markets (see the Ansoff Matrix and focus on macro and micro trends.
- Markets: (customers) what are the big trends that will affect your customers – changes in how people buy, economic trends, etc.
- Products: what are the big trends that affect your products – competitors actions, changing technologies, etc.
- Macro: broad changes – you can read these on blogs, in the mainstream news, etc.
- Micro: talk to “real people” – what are customers saying, how do people interact with products, etc.
Finally, you will want to research the top competitors – which includes alternatives and substitutes – to your product or service. To illustrate the difference between competitor and substitute, consider the example of a Nikon digital camera:
- Alternative: Canon digital camera, same product/category
- Substitute: iPhone, same feature/benefits/different category
You should be familiar with:
- Who is the competitor
- What do they offer (features/benefits)
- Their core value proposition – in other words, why do customers chose their product over the alternatives
The following is an example competitor analysis:
|Nikon Digital Camera
||Main Value Proposition
||Quality compact digital camera at a competitive price.
||Lenses – faster, better for “action” shots
||Quality compact digital camera at a competitive price. Comparable features to Nikon.
||Lenses – better for capturing detail (people/scenery)
||8 megapixel camera, multi-functional device
||Multi-functional device, music, camera, phone, entertainment in a single device
This analysis will inform your competitive advantage and differentiation strategy.
Note: I have limited expertise in Canon vs Nikon, so this is more illustrative than accurate.
In conclusion, your final market analysis should posses the following details:
- Size: target above 100mm size
- Growth rate (Compare the market growth rate to the economic growth rate. If your category is growing faster than the overall economy, you’re on the right track. Identify where you’re at in the product life cycle )
- What phase of lifecycle (should be first half)
- Top 3-5 trends affecting your product/market – positive or negative
- Competition: list your top competitors and/or main substitutes
Sources: Medium.com, Frost and Sullivan