Researching New Market Opportunities
No start-up entrepreneur in his right mind would do a top-down forecast by calculating how much of a market one needs to be successful so researching market opportunities is an important approach in forecasting. The top-down forecasting approach is where – typically – an entrepreneur starts with a large number (e.g. “the global market for widgets is $100 billion”) and work down to extrapolate projected sales from that figure.
For example, let’s say you want to crack the internet access market in China. Here’ how the top-down model works:
• There are 1.4 billion people
• 20 percent want internet access
• We will secure 10 percent of that potential audience
• Each account will yield $240 a year
• Size of the market is $1.4bil x 10% addressable market x 20% success rate
x $240/customer = $67 mil/annum. Not bad!
Of course, that’s not the way things should be done when researching market opportunities. No business start-up can aim for that without at least having proven that customers will buy from them at all. Some investors may swallow this story, but most experienced investors (especially venture capital managers and angel investors or successful entrepreneurs) know that this is simply hype. Bootstrappers don’t build top-down models. Instead, they build bottom-up models starting with real-world variables. For example:
• The number of prospecting phone calls a telemarketer can make in one day (30)
• The number of prospects that qualify as a potential customer of the business (30%)
• There are 240 business days in a year
• A salesperson can close sales on 10 percent of qualified prospects
• Each sale is worth $240/year
• 30 calls/day x 30 percent sales prospects x 240 Days/year x $240/customer
A team of 10 sales people can thus produce $5 mil in revenues according to this bottom-up model. The conversions and the assumptions can be argued but eventually can be proven. The model thus offers the entrepreneur a real-world projection of cash flow and projection of costs (number of prospects, number of salespeople etc.)
Use prototypes for researching market opportunities
As an illustration of the prototyping principle, consider Pierre Omidyar, founder of eBay. He believed that money could be made by connecting people who had items to sell with people who were looking for items to buy, over the Web. For sure, this already existed in bricks and mortar in flea markets, garage sales even newspaper classifieds. But Omidyar modernized the idea, conceiving of an online auction where these transactions could take place anywhere in the world by anyone with an Internet connection.
In 1995 he prototyped his idea for a direct person-to-person auction on his own computer and launched his new business using free web space and operating out of his apartment. Every time a transaction took place, Omidyar, collected a small fee. The design was uncomplicated and allowed him to scale from the original prototype. The business was simple too:
• Find a strategy that brings buyers and sellers together with a common purpose.
• Create a method generating a revenue stream from transactions between the buyers and sellers
• Create operational features that enable buyers and sellers to readily commit without fear of security.
“Operating sales in 2007 of eBay were in excess of US$7 billion.”
In the early days of an enterprise & researching market opportunities, there is high uncertainty about exactly what you should create and exactly what customers want. In these times, traditional market research is useless – there is no survey or focus group that can predict customers’ acceptance for a product or service that you may barely able to describe. Would you buy a new computer with no software, no hard discs, and no colour that simulates the real world?
The wisest course to take is to take your best shot with a prototype, immediately get to market, and iterate quickly with customer feedback (good and bad!). If you plan, wait, cogitate, and look for ideal circumstances in which you have all the information you need (which is impossible), the market opportunity will pass you by.
The expected outcome of this “get going” principle is the first release of product or service. It will not be perfect: but revision based on customer feedback will mean that the next round of customers will have a better experience than the first. Speak to any successful entrepreneurs and they will almost all tell that their biggest mistakes were not getting product or service into customers’ hands sooner.