As stated previously, any investor will look at four key variables when evaluating an investment: team, market, idea and product. Let’s address the market.
Estimating market is crucial since it will provide key and all-important data points, essential to make the right decisions to grow the business.
There are several approaches to evaluate market size, I prefer and encourage to use the following variables:
Strategy
In determining the right strategy to grow your business, market size has a most dramatic effect. Based on the market size you will decide on some key components of your business such as human resources, valuation, pricing, fundraising, product development.
Competitive Advantage
Every startup needs a competitive advantage. Estimating market size before making any big moves helps that advantage become apparent.
When considering the potential market, due attention must be placed on the difference among addressable market, capturable market and serviceable market. While your product or service has a wide potential market, realistically, your business can only capture a small percentage of that market. Once you’ve identified that percentage — through estimating market size — you can determine what features and what value-adds will give your startup a competitive advantage over all the other startups vying for the same market share, which is your capturable market.
Trends
The business market as a whole is a big place. But after estimating your market size, you’ll get a much clearer picture of your target, which allows you to:
- Identify trends in consumer behavior
- See whether your industry is growing or declining
Armed with that knowledge, you can begin to formulate your business strategy and gain your own competitive advantage.
Profitability
The ultimate goal of every startup, any enterprise, really! Identifying your market size makes profitability much more likely.
Estimating your market size reveals whether or not there are enough potential customers who will actually buy your product or service. With that number, you can find out if the price you’ve set will move your business into profit.
In estimating your market size, here are 6 easy steps.
1. What problem do you solve? How much value does your product or service generate?
It seems simple, almost banal, but most startups neglect to address these two key questions.
2. Have you calculated your capturable market size?
Apart from the knowing that in the world there are billions of people who may need your product, do delve deep to understand your true addressable market.
3. Identify your market and define your target customer.
Your target may not be your only market, however, it is key to have a target avatar to whom you address your marketing and sales strategy.
4. Define what percentage of the addressable market you can capture.
A rule of thumb is to realistically expect to capture between 1 and 5 percent of your addressable market.
5. Calculate Your Market Volume
Number of target customers x Penetration rate = Market volume
Once you have your market volume, you can calculate our potential market value.
6. Calculate Your Potential Market Value
Market volume x number of products to sell = Market Value
Market value can be calculated based on the price we charge or on the profit we make. Both should be used in order to gain a clearer picture.
You have the tools, you know your why is needed, let’s calculate your market, your investors will love the approach!
