Customer Development

with Steve Blank

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Market Size

Determine the potential size of your market opportunity.

Steve Blank

8x Entrepreneur, Author, Customer Development Expert

Lessons Learned

How many people would want or need this product?

Market research is reflective of the past, not indicative of the future.

Cross validate market research with intensive customer input.


Lesson: Customer Development with Steve Blank

Step #4 Market Size: Determine the potential size of your market opportunity

One of the things we keep asking our startups to think about is, how big is this opportunity? That's just a fancy word for saying is, "When you're all done and you're spending the next couple of years on the startup, are you going to make like a million or are you going to make a billion?" That is, how potentially large is the opportunity?

What we really want to do is do what we call a Market and Opportunity Analysis. What you've already put together is a business model canvas with your hypothesis that says, "Look, we're really passionate about this product or service and we think there's a set of customers out there.

"We've put together a revenue model with our first hypothesis, and saying we're going to make a lot of money," and that's great. But, there's really kind of a method to this madness. There's not only one way to do this, but this is the way we kind of think of it.

You want to identify who your customers and markets are, and you have, but you need to now want to size and the market, look at competitors and figure out whether this market could grow.

The first word we want to think about is something called Total Available Market. I like to think of Total Available Market as a pie. It's the entire pie. Total Available market says, "Look, how many people, or companies, or whatever your unit of sale is, would want or need this product, and how large is the market in dollars or units if they all bought?"

That's just a pretty nice calculation. The question is, "Okay, how would I find out?" In different industries, there are analysts that specialize in vertical markets and enterprise software, it's Gartner and Forrester, in the videogames is the NPD group.

In consumer research is Nielsen, if you want to understand how many webs and mobile startups are, you go to the Startup Genome Project, etc.

So you need to ask some questions is which industry analyst kind of follow your specific domain. And then also, Wall Street analysts follow competitors in this business, that is, they follow who's ever public. In fact, some of them write very nice research reports.

If you have access to a university library or a friendly broker you could get a great free industry analyst report. I would be asking others as well, and Google is your best friend here. I truly would be spending time trying to understand, "Is this a billion dollar market?"

And by the way, if you threw out those numbers, the first thing I'm going to ask you is, "Well that's nice, but break it down for me. You know, help me understand, how many users, who are the players, what are the competitors," et cetera.

You need to understand this Total Available Market pie in some detail before I'll let you get to the next step. The next step is, "How big is my slice?" We tend to use a fancy word for that. It's, what's the "Served Available Market?"

The Served Available Market means, "Okay, well, instead of the theory that there are 7 billion people in the world, how many people really can use a, you know, mobile app?" "Oh, well, a mobile app is kind of dependent on how many people have mobile smartphones."

And, "Gee, if I'm making the mobile app for, let's say an android platform, then the first question is, 'How many theoretical people are going to be using you know android platforms in this year and the next five?" Now I could start estimating what's my served available market.

So, how many people have the money to buy the product? That is, are you a $0.99 product, or are you a $99.00 product? Now you're narrowing the market based on pricing or availability. You want to do some thought experiments, like how large would the market be in dollars if they all bought, if everybody in the served available market bought, how large would this be?

This is kind of your first test to say, "Oh", or, "Wow." You want to understand this, both for dollars and units. And how do you find out? Well, this is one when you're really out of the building and talking to customers.

Then I think of this again, using the pie analogy, the first step was trying to understand the number of people in the world, but now we can narrow it down, if I have an android app, the number of android phones, or capable phones, and then down to how many would buy at my price.

Now we really want to get pretty specific. Who exactly am I going to sell in years one, two and three? How many customers is that? How large is the market if they all bought? That is, what we now are coming up with is the total number of dollars. If you had a 100% market share, your revenue isn't going to exceed this number and how many units would that be? Again, how do I find out?

Boy, this is really about getting out of the building and talking to customers, and talking to potential channel partners and talking to competitors, et cetera. You're really at the end of this exercise now have a first pass hypothesis about, is this business model canvas worth executing for the next couple of years?

In summary, the questions you want to ask, or how big can this be? How much of it can we get? What's the growth rate of the market? Is the market itself declining? Or is it in flux? Or is it going to start taking off? Most importantly here is talk to customers in the sales channel.

Next important is you could get some pretty good market size estimates by competitor approximation if it's an existing or re-segmented market, or even if you're going to clone the market outside the US.

Next important is Wall Street analyst reports are great, market research firms like Forrester and Gartner are great, but something to keep in mind about market research forecast going forward. Market research data is wonderful on the size of markets and the past.

But if market researchers were rated predicting the future they'd actually be running hedge funds. So one of the things I don't accept from my students is, "And it's going to be a $40 billion business in the next seven years." "What's its size now?" "Zero."

Therefore, I just don't accept guesses from a market research firm unless you've actually cross validated that with some really heavy customer input from outside the building.

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