Congratulations, you’ve probably come up with a bunch of great ideas for new businesses by asking yourself questions like those in the prior post here. Some of the ideas may be pretty off the wall, some may not be feasible, and some might not be worth the effort, and some might be really good ideas. The question becomes which ideas would be good ones to pursue and the answer to me lies at the intersection of (i) who’s buying, (ii) for how much, and (ii) what’s it going to cost. This post will deal with the first; the latter two will be addressed in later posts.
Take an example at one extreme: you’ve created a product for a very technical computer program aimed at people over 100 years old. Just thinking about it, this is probably a very small market – firstly, because there aren’t that many living people who have celebrated their 100th birthday, and secondly, because the market is further reduced by the need for your customers to be very technical and computer savvy. Probably not going to be big seller.
This conceptually is market sizing. Many very smart people have addressed market sizing and (I’m summarizing here) the most important part of marked sizing isn’t the exact size of the market but rather knowing conceptually what the market includes and the macro-economic trends impacting that market (see well know investors Brad Feld here, Fred Wilson here and Chris Dixon here). I generally agree with this, in markets where (i) the market is still being defined and (ii) where the market is rapidly changing. This is particularly relevant for new web/technology based services. For a more defined and mature market, more exact figures can be found and should be used in the analysis of a business idea.
So, let’s start with a few basic questions to ask about some of your business ideas:
- Is it directed at consumers, businesses, governments, or other group?
- Is it directed at a particular geography?
- Is it directed at a group of a particular age?
- Is it directed at a group of a particular gender?
- Is it directed at a group with a particular skill set?
- Is it directed at a group with a particular problem, issue, or concern?
- Is it directed towards consumers of another service or product?
- Who are the major competitors?
You can find a lot of information from publicly available sources, which can help to define a particular market. Some great sources for ball park figures include:
- Census data: US here and UK here
- Magazine subscription data (for particular interests): Writer’s Market here and Standard Rate and Data Services here
- Annual reports of public companies in the industry: SEC/Edgar here and major financial websites here and here
- Public company transcripts: Seeking Alpha here
- Specific trade or industry websites, usually starting with your favorite search engine
Think broadly in trying to determine the size of a market. Sometimes it’s easier to find data for complementary products and then make an assumption about how that impacts your business idea. As an example, maybe you have a new jelly and can’t find the size of the market (though, starting with the Smuckers and Welch’s websites might be a good place to start). An alternative would be to look at the market for peanut butter and infer that the jelly market would be a little bigger or smaller than the peanut butter market.
I recently was approached by an entrepreneur who thought he had a >$1 billion idea for the US outdoor, above ground, pool chemical market. I did a quick back of the napkin market sizing analysis. Total number of pools in the United States? About 9 million according to marketresearch.com and 10 million according to the USA Swimming association. Total pool and equipment market in $? About $4 billion according to the same study market research study. If half the pools and half the spending related to above ground pools, this would have to be one heck of a market changing product to take over 50% of the US outdoor, above ground, pool market. It wasn’t.
There isn’t a right or wrong answer for market size. Having a very large market (such as all US men and women) isn’t necessarily a good thing. Similarly, having a very small market, such as US billionaires, may not be a bad one either. The important part is understanding the market and then determining how that market will change going forward. Some rules of thumb:
- If your idea is in a small, declining market, you’ll need to rapidly capture the market and find new markets to expand.
- If your idea is in a small, growing market, you may be able to capture market share and ride the growth of the industry, and protecting your idea may be very important and increasingly difficult as others try to enter your market
- If your idea is in a large, declining market, you still need to capture a niche market, but may have time to expand within the larger market
- If your idea is in a large, growing market, it may be difficult to secure a foothold against existing competitors
Now the question is… how much are they going to pay for it???