A correct assessment of target market size allows an entrepreneur to quickly understand if, in fact, their business idea is worth pursuing. A Google search revealing headline numbers from third-party market reports will not provide an answer to this query. These numbers are usually dated, over-arching, and can only serve as a proxy to what the real market size is.
A top-down and bottom-up approach should be taken to fully assess market size. For a top-down approach it is important to use detailed third-party reports from reputable sources. Consulting a number of these reports to compare and contrast the data is also key. Relevant numbers can only be extracted if a sufficient number of sources are providing similar information.
The bottom-up approach is what will really allow entrepreneurs make decisions about their market. This approach uses the profile of the customer that the entrepreneurs feel is most like their target.
From there, the entrepreneur should look to ascertain how many people with this profile there are in the geographical regions that they wish to service. For this, it is best to start with locations that the business can easily access. Many new ventures start in their own country and work outwards from that region. This makes sense in that they will be most familiar with this market and adjacent geographical markets. With time, a business is likely to expand into additional markets so these should be identified and included.
This bottom-up process provides the venture with a real sense of what is achievable and in what timeframe. This realism, and going through the bottom-up process, gives the venture more accurate information from which decisions can be made.
Start-up businesses do not have the resources to gain traction immediately, and market conversion to what they offer will take time. Market segmentation is critical so that a business can identify which area or people it can best service, and thus, gain market share.
Segmentation can be carried out in various ways but one of the most effective methods is by going back to the target customer profile and looking at where these customers reside. For example, your target customer may be a qualified accountant with 20-years experience, who has decision-making power in his or her employer organisation. He or she may be innovative and interested in implementing technology to increase efficiency.
Like how a new employee with knowledge in their sector helps them to hit the ground running, businesses have a much better chance of success if they know their market well
A venture could decide to target all of these individuals but, in fact, they may all work in different-sized companies: a 5-person company, a 500-person company, or a 50,000-person company. The ability to access the right accountant in the smaller companies will likely be easier, but their budget may be too small. If access is gained in the larger organisations, the sales process is likely to be long, causing a cash-flow issue. Being smart about what exact segment makes sense to pursue is critical.
Targeting the correct market segment will ensure that the product/market fit is right. This aids strategic marketing and messaging to enable customer engagement and sales. For new ventures it is important, not only for your business reputation, that you succeed in one segment. But, demonstration of an ability to execute is something that potential customers and investors look for.
As business progresses it is likely that additional funding will be required and investors looking for a particular return will want to see a market opportunity that has the potential to provide that return e.g. a venture capital investor will want to see a potential for 10x return.
Much like an employer seeking an employee with knowledge in their sector because it will help them to hit the ground running, a business has a much better chance of success if they know their market well. Some of the factors that allow a business to succeed include:
- Real understanding of customers’ problems, perspectives, norms, and how they make decisions
- A deep understanding of the market nuances
- Complete knowledge of the competitive landscape, including direct and indirect competition
- Knowing what is required to really differentiate what you have to offer from what is already in place or available
- Having contacts and networks that allow you conduct customer and market research quickly, but also lead to product trials, and eventually sales.
Proven execution in a specifically targeted market segment provides a baseline from which to expand the business into other verticals. It also earns the confidence of others, customers, investors etc. which the business needs to scale.