Effective market research really comes down to how accurately you’re able to predict the size of your target market. Without this information, you could be setting your sights on a market that’s far too small to accommodate your plans for the business, or to crowded to ever expect any return on your investment.
Trend Perspective is Key
Knowing your market and where it’s going is the only way to enter into a new business or to shift an existing business into new market opportunities. Markets are either rising or falling or, to put it another way, growing or shrinking.
How big or small a given market is can tell you a lot about what trends are taking place in that market, and whether your product/service has a place in it.
Trends are so important to watch after you’ve accurately assessed market size. What if a market is seeing unheralded growth, but your business model doesn’t fit?
Say the market wants high end and are willing to pay for it, yet you’ve spent two years figuring out the cheapest way to turn out something “reliable” or “accessible”.
Here’s a couple of examples:
- Have you ever seen those cheap Hipstreet thumb drive Mp3 players at Walmart for $10? What if the market wants a quality lossless player like a $150 Fiio DAC player?
- Here’s another one: If you want to open a specialty coffee shop targeting the Starbucks-like market, you may think that $0.95 cuppa sounds great, but what if the market want the specially-brewed-for-you coffee a la Starbucks and pay $5-6 for it, instead of your value-for-money brew?
Not only are you screwed because the market doesn’t want you right now, you’ve wasted all that time on creating entirely the wrong product, for entirely the wrong demographic.
Figuring Out the True Size of a Potential Market
Anyhow, let that information simmer in your brain for a little while. Before we start looking for the trends, let’s determine just how big the market is first. Keep in mind these tips assume you have some basic numbers to start out with.
In fact, the tips below will help you determine the actual size of the market, not the perceived size that so many entrepreneurs write down in their business plan.
Don’t be a fool! Some entrepreneurs dare to pitch investors like those on the Shark Tank boasting about the millions in sales that await them even there isn’t even a proof of concept yet!
Wait for 2:20 and you’ll see how important proof of concept is to an investor:
1. Determine your entry point
I’m talking about your entry point. Not where you see yourself in five years time. Monopolies are rare and they favor existing brands with a reputation backing them. Airbnb made their first major market entry in 2008 during a massive hotel shortage in Denver in light of the potential first black president being nominated.
The business Airbnb received at this time taught them much about the national reach they had and just how quickly they could grow their business if trends were monitored (even predicted) and the right marketing strategies were employed.
Figure out your entry point. Don’t be greedy. Don’t overestimate growth when you have no reference points yet (ie., you have no idea what your true market share potential is yet).
2. What’s your true market share?
Likelihood is that your current market share is a big fat zero if you’re still in the planning stages. However, if you have sales or reliable projection data for your product or service (ie., someone has bought or vigorously professed they will buy) that will only help to determine how big your slice of the pie will be.
Sadly, the only way to determine your market share is by weighing the need for your product versus your competition and their current sales. Hopefully, at this point, you know you can definitely offer your product at a price point that makes the product largely available to your ideal consumer.
3. Zip ahead and look at your sales in five years, then backtrack to the present
This one is simple, as you can allow for some less than deductive reasoning. Dream a little. Where will your products be sold and how many competing products do you see alongside them?
This will help to start to lay the groundwork for just how much growth potential the market can offer if you’re strategic in your marketing and development. If you’re lucky enough to be the first, really be objective about how easy your product is to replicate.
Aim for one to five percent market share and you’re on the right path.
4. Assess the competition
Now you really want to key in on the competition. Is the industry crowded? Is it spread out, allowing for multiple competitors to still profit by niche-ing down or going hyper-local?
Say you’re the only lumber chain for a thousand miles around. You can easily expect fifty or even a hundred percent market share, so long as customers can’t ship in competitor’s wood cheaper than you’re selling it. If your market is flooded already, assessing competition and finding where you’ll stand is much harder – try starting an airline out of Pearson International Airport and the future is very hard (and likely expensive) to predict.
5. What does your static market look like – and where’s it going?
For those who don’t know already. Your static market is where you’re going to make the most reliable paycheck. Once you’ve acquired them, this segment of customers will always be there. Regardless the acquisition cost, they won’t cost much to keep them coming back again and again.
If you have to spend thousands or millions you don’t have to keep the Benjamins rolling in, you’ll need to factor that into your budget, right?
Also look at the market’s household financials at this stage too, to see what trends are now and will later shape your price-point in years to come. Do they make enough money to grow with your company, or will you have to continue to reach outside that static comfort zone in order to stay afloat?
Your static market keeps tires on the car and gas in your company’s growth engine. Without it, you better prepare to beat on a lot more doors until you’re an established brand.
A takeaway, before you go: Be Realistic
Dare to dream, but don’t be a dunce. Accurate projections in order to determine the size of a market requires nothing more than objectivity and a little outside information. Most entrepreneurs let their big dreams get in the way when formulating a business and marketing plan. When in reality, market size projections require a very impartial eye and steady hand.
Fail to guess correctly and you’ll never make it to the Four Percent Club!