What is the market?
What’s the market size and opportunity? What’s the potential scale of the positive social and environmental impact?
Over the past few months I’ve been researching these questions a lot. Both on client projects as part of exploring new social enterprise products and services… and on how to position Dynamic4 v9.0 offerings.
When I wrote the Market Research chapter of my book Solve Problems That Matter four years ago, I talked about the importance of understanding how your ideal customers currently solve their problem, the market dynamics, and the market size and opportunity.
It’s still something I remind myself to dig into before getting excited and rushing into detailed solution design.
Why do market research?
According to research by CB Insights, the top three reasons startups fail are: “ran out of cash”, “no market need”, and “got outcompeted”. No market need and getting outcompeted relate directly to market risk – and both are often the cause of running out of money.
My experience in established organisations is that this is just as true when designing, building, and launching new products – or even just new product features.
In simple terms, this means people don’t actually want to buy and use what’s being sold – or that the market isn’t big enough for the idea to be financially viable.
Market research – along with customer research – gives us the best chance of identifying a problem that really matters to our ideal customers. A problem that’s a priority for enough people – who are willing to pay to do something about it.
It means we can answer critical questions like these with evidence, insight, and meaningful empathy:
- What do customers want?
- Where is demand increasing or shrinking? Is there unmet demand?
- What options do customers compare when seeking to solve their problem?
- Who’s already in the market?
- How do they approach the problem? Are they successful?
- What’s their business model? How do they price things?
- What’s the market size and opportunity?
Market research starts looking at the intersection of the desirable and viable lenses of the three lenses model.
Remember:
- If it’s not desirable, we end up with a solution that no one wants
- If it’s not viable, we can’t afford to make it happen – and we’ll run out of money
Existing Alternatives
To get started, let’s talk about “the market”.
A market is where people buy and sell products and services. You might picture a small local market when I say that. That’s a good tangible place to start. In that context, it’s a physical meeting place where people who have things to sell meet people who want to buy something.
A sale is only made when the customer sees something they want at a price they’re willing to pay.
A florist in this market might think they’re in the floristry business – but the customer is looking to buy a gift – not necessarily flowers. They’re choosing between buying some crafts, a book, or maybe even a potted plant.
Flowers aren’t their only option. They might not even be their preferred option.
A seller in this small local market is trying to get noticed, and they hopefully have something customers want to buy at a price that works for both. They’re also being compared to other options – often in ways that aren’t obvious.
Take all of these elements and scale them up. There are now maybe millions of potential customers and thousands of sellers – each offering alternative ways for customers to spend their money, time, and attention.
We can sometimes feel pretty confident about the market we’re in. The danger is, we might think one thing, when our ideal customers think something different. They might be comparing us to a very different category of solution.
Your Competitors
You’ll definitely have direct and indirect competitors. If you tell people you don’t have any competitors, they won’t believe you. And they shouldn’t. You might feel that you can be different and better, but that’s not the same thing as your customers not having other choices.
Think laterally about what your customers’ other choices might be.
Using the video streaming service Netflix as an example, they have very direct video streaming competitors – but in 2017, Reed Hastings, the Netflix CEO, said that sleep is actually their biggest competitor. Their customers have the choice of going to sleep or to keep watching.
Customer interviews are a key way to explore how they currently solve the problem, the options they considered, and how they made the decision. This is often the source of a lot of meaningful insight about the market – as your ideal customers see it.
I find the Business Model Environment tool is a great framework to identify, deeply research, and map the key external forces and trends of the market dynamics – using AI to dig into different angles, checking sources, and trying to resolve apparent contradictions.
It both builds on and guides my primary customer research. It helps me build nuanced understanding and empathy with their desires, expectations, priorities, how they make decisions, and their actual behaviours.
It can look like a linear process, but the reality is just like customer research, market research is never finished. It’s an ongoing process of research and adapting to find product/market fit… and then continuing to evolve to stay relevant over the years.
Bring all of these elements together and build on them. This will help you identify your customers’ existing alternatives. This will likely include direct and indirect competitors, as well as some workarounds and do-it-yourself solutions.
In reality, you might find some of the organisations which provide an alternative solution are actually potential partners and collaborators. I recommend starting with that perspective rather than taking a combative approach.
Satisficed
If you’re being really honest with what the reality is, you’ll identify other ways your customers choose to spend their money, time, and attention – rather than on the optimal solution.
In behavioural economics, there’s the concept of “satisfice” – a portmanteau of satisfy and suffice. The term was introduced in 1956 by Herbert Simon, a winner of the Nobel Prize in Economic Sciences. His primary field of research was decision making in organisations.
Herbert Simon said, “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world”.
The concept is simple, and I’m sure it’s a behaviour you’ve observed in yourself and others.
A common example is when we choose things that “will do”, but they don’t really meet our expectations. When something is only just good enough, but it would take too much effort and money to find or change to a better solution. Or it’s just not a high priority.
What I’m saying here is, don’t dismiss what appear to be inferior alternatives or workarounds. They might just turn out to be your biggest competitors.
When my business model and solution ideas rely on people doing what they “should” rather than what they “want”… I see nothing but red flags and risk. Decades of scars have taught me this the hard way. Again and again.
Competitors Slide
If you’ve got a pitch deck, there’s usually a slide on the competition. There are different ways to communicate this information. Some common ways are the 2×2 market/competitor matrix (or magic quadrant), Steve Blank’s petal diagram, and a comparison table.
If you decide to use the 2×2 format, remember to always put your solution in the top right quadrant. It’s a rigged slide, and everyone knows it because you’re choosing the axis, but it’s still one of the most common formats of this slide.
I like Steve Blank’s petal diagram in many cases because it communicates a broader view of the market landscape and adjacent markets. Purpose-driven ideas are often multidimensional and bring together hybrid models to address gaps in the market.
I won’t go into detail here, but I find the petal diagram does a better job of communicating this than the standard 2×2.
Some coaching questions I ask when thinking about the competitive landscape include:
- Who are the incumbents or the de facto standard?
- Who are the insurgents?
- What market do they identify as or communicate that they’re in?
- What market or category do your customers see them as?
- What’s their value proposition, business model, and pricing?
Size Up the Market
Market sizing estimates how big the opportunity is. A key focus is to see if the market is big enough for the idea to be financially viable. It looks at questions like:
- How big is the problem?
- Are there enough people willing to pay to do something about this problem?
- Who will pay?
- How much do your customers already spend each year on this?
Social & Environmental Impact
Traditionally, this has only included the financial opportunity. For purpose-driven ideas, or if you want to embed impact in your business model, I also like to see a social and environmental lens on these calculations. This works best as a combination of financials and key insights:
- Who is impacted?
- How many people are impacted?
- How much money is currently spent to address the problem?
- How much of this money could be saved? Who would make these savings? What would they do with the money saved?
- What’s the waste created and the carbon impact of the current situation? How much of this could be reduced?
- What’s the cost of this problem not being adequately addressed?
This works best when it’s deeply integrated with your strategy, theory of change, and outcome measures.
TAM, SAM & SOM
Evaluating your market size is important at this stage. It will require more market research, and you’ll have plenty of assumptions as you calculate this – which is fine. With all of these assumptions, the important thing is to make them explicit and test the riskiest ones.
You’ll probably hear about TAM, SAM, and SOM as you do your market research. The numbers put to these sizes are generally the annual spend. Here’s a very brief explanation:
- TAM is the Total Addressable Market. It’s the big number – the entire potential market
- SAM is the Serviceable Addressable Market. This is the financial value of the market you believe you can actually serve with your solution
- SOM is the Serviceable Obtainable Market. This is the financial value of the market you can serve realistically in the short term
There are two major ways to calculate the market size, especially your SOM. Top-down and bottom-up.
Top-down is common, but usually very inaccurate. The rationale and assumptions used for this approach generally aren’t very useful. Because market size numbers tend to be fiction, the most valuable part of the exercise is to have solid rationale and assumptions to test.
Unfortunately, it’s common to see founders make up a big number for TAM, based on questionable research, and then arbitrarily say that they’ll capture 1% of that very large market. Which results in a big number. A big number that no one believes and actually damages the credibility of the founder making the claim. I recommend not doing that.
The other way is to do a bottom-up calculation. I prefer this approach because it ties into pricing and financial modelling. With the bottom-up approach, you make some assumptions on the price of your solution, and multiply that by the number of paying customers each year to get your SOM.
These numbers are going to be dependent on what your solution is, the price, and the volume of sales you expect to achieve. Start with assumptions but be rigorous about testing them. As you get better information from your testing, you’ll refine your market size calculations.
It’s very rare that a single source will provide you with a relevant and reliable market size number. You’ll normally need to bring together data from a few sources.
There are endless methods and techniques for market sizing, and it’s another area where AI is really useful – as long as you keep track of the sources, rationale, and assumptions being made to the aggregate numbers to arrive at your conclusion.
Customer Lifetime Value (CLV)
CLV can be another useful metric when calculating the market opportunity and pricing. It predicts how much a customer will spend with your organisation from first purchase until they stop purchasing from you.
The formula to calculate CLV is simple:
(annual revenue per customer x customer relationship in years) – customer acquisition cost
If you’re retaining customers, you don’t need to acquire as many new ones to achieve the SOM calculation. If you have a high customer turnover (churn), you need to acquire a lot of new customers each year to achieve your SOM.
This can drive some key decisions in your business model and the solution you provide.
Some coaching questions I ask when thinking about the market size include:
- How big is the market?
- Are there enough people willing to pay to do something about this problem?
- How do you know? What’s the research and evidence to support your position?
- Is the market growing or shrinking? At what rate?
- What are the unique attributes of your market?
- What’s the size of the social and environmental problem?
- What has been the most surprising insight from your market research?
Your market research will give you a clearer picture of the market. You’ll have deeper empathy and insight on how your customers currently solve the problem, the alternatives that already exist, and the size of the opportunity.
It helps reduce risk and direct the investment of your time and money in a direction with a higher likelihood of working… but you never really know until you test and refine your value proposition and start getting your first paying customers.
Solve Problems That Matter
This is an excerpt from my book Solve Problems That Matter, where I go into a lot more detail on all of the things I’ve covered in this post… and plenty more.
It’s a playbook with actions and worksheets to help you take a human-centred design and living systems approach to design, build, and launch your idea. Ideas that customers love, make money, and do great things for people and our planet… all while increasing wellbeing.
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