I spend much of my time working with businesses to help them understand their market better. In the case of new product developments and start-ups I often have to help them understand the importance of knowing their market as well.
Although we are constantly reminded that a good appreciation of the size and characteristics of a market are fundamental to the development of an achievable business plan, I find that the following scenario remains all too common.
You – or your company – are developing a new product or service that you are convinced will sell really well, and for a good price. You know it will be a success. You don’t need any market research to tell you that.
But you need more money to complete development, and to take it to market. And the lenders and investors (or your managers) that you have approached want to see a business plan supported by sound market data.
What should you do?
You could generate some numbers yourself that would support the business plan, or if you want them to have greater credibility, you could engage a well-known consultancy to come up with the numbers you need. That approach might get you the funds, but it would not prepare you for the time when the product or service is launched into the market – and doesn’t sell as you expected.
Or you could take the opportunity to find out something more about the market you plan to address, and use that information to modify the product or service to increase its chances of success.
An estimate of market size can often be obtained from analysis of publically available data. It is worth estimating the size by using both bottom-up as well as top-down calculations, as it’s easy to miss an important factor when only using one approach. One client showed me a report compiled for her by one of the world’s largest consultancies, based on extensive field research, that showed that the market for fixed business telecoms services exceeded the total revenues of all telecoms operators in that country. Unsurprisingly she threw the entire report – good and bad –into the waste bin.
So do carry out a sanity check. Have you just worked out that the market for your product is ten times as large as the number of people or businesses that could buy it? This is a mistake that any person or organisation can make. I have sat through an investment pitch by a major US corporation that had calculated that the then current addressable market for its proposed satellite data communications services was greater than all of the world’s data traffic, both local and long-distance, put together. My client did not invest.
It is also worth asking some simple questions. A successful product or service tends to fulfil certain criteria. For example, if it doesn’t fit with a likely purchaser’s life-style, or make it easier to do something they already do – perhaps in a completely different way, as for example email replaced letters – then it is unlikely to be a success.
The next step is to undertake some market research, to find out if the intended purchasers are interested and likely to buy, and in what quantities.
To do this, it is very important to ask the right questions – it is very easy to get misleading answers from surveys. Unless you are very clear about what questions you need to ask, you can get what Americans might call a ‘motherhood and apple pie answer’. I’ve wasted money in the past on a survey which told me, in essence, that the service I was researching ‘sounded like a nice idea’, but gave me no real idea how many people might actually buy it, if any, or at what price.
In all these cases it’s worth asking someone else to check to see what you may have missed in your enthusiasm. Sometimes an external objective view can be of great help.