by Cynthia Kirkeby of ClassBrain’s Startupmanship
A look at how to do a realistic market analysis…
Once you figure out the pain that you are solving for in a particular market, (assuming that you’ve done this crucial step instead of just saying “I have a cool idea”), then you have to decide whether there is enough going on in your niche to support a business, and if so, how large a business it will support.
Founders need to assess the overall market they’re planning to enter, then look at the specific market segment they will attack, and finally they have to estimate how much market traction they can gain within a certain period of time (usually 3-5 years). One thing I’ve noticed in startup pitches is a lack of basic research and an understanding of these segments. Let’s look at the following example:
A Typical Market Analysis
You’re planning to sell dog toys. Many founders will come back and say:
- The pet industry in 2014 is a $58.5 Billion Industry.
- Pet Supplies are $13.72 Billion per year
- And they can claim at least 1% or 2% of the market in the first 3 years: $137.20 – $274.4 million.
Sorry.. but the entire calculation is faulty.
A More Realistic Market Analysis
- The $58.5 Billion is for the entire pet industry: dogs, cat, gerbils, fish. Your primary market is only dogs. Dogs account for 56.7% of the market or roughly $33.17 Billion (although this might be lower, since it is based on the number of animals not necessarily the spending per animal). So your market is $33.17 (or if you’re conservative you might take 80% of that number).
- Then the “pet supply” category is much too broad for your segmented market, which is specifically dog toys. Dog toys account for 2.88% of dog expenses paid by dog owners each year, which makes your target market approximately $955.29 Million per year.
- There are hundreds of U.S. dog toy manufacturers, and even more sending toys to the U.S. from overseas. So if you are able to capture an equal share of the market based on the number of participants in this area, you might capture 1/400th or 0.25% of the market in the first three years: $2.39 Million. If you have a plan to be a dominant player in that area and can support it, you might be able to increase that up to 10 times, or $23.9 million per year, but you would have to come up with a true justification for your ability to capture that much of the market.
|Typical Market Size Calculation||More Realistic Market Size Calculation|
|Overall Market||$58.5 Billion||$33.17 Billion|
|Target Market||$13.72 Billion||$955.29 Million|
|Estimated Captured Market||$137.2 Million||$2.39 MIllion|
|Optimistic Captured Market||$274.4 Million||$23.9 MIllion|
As you can see, doing a realistic calculation gives you a substantially different look at your niche. Doing the first calculation will show you as a rookie, who hasn’t done their homework. Don’t make that mistake. Do your homework.
Another look at your niche is shown in the following set of guidelines that I based on rules that were sent out by Sid Kemp of Firepole Marketing in his recent newsletter:
How does your niche size compare with the number of providers?
If you see the niche, and no one else is in it at all, it could be great (fresh territory) or it could be a disaster (no real interest at all); are you sure you are solving a real pain in the market?
If there are between 1 and 5 people making a living serving your niche, that is great news. They are part of your proof of concept. There’s room for one more, especially is you have a unique twist on the concept.
If there are between 5 & 12 direct competitors, you need a strong angle, a strong brand identity, and high credibility and or unique credentials that distinguish you within the market.
If there are more than 12 direct competitors, then your niche is either poorly defined, too big, or oversaturated and a bad choice.
Between proper market calculations and the niche guidelines shown above, you’ll have a better look at whether your enterprise has a good chance of success in your niche. Now, go out and conquer your market!
A great place to find market statistics is on Google’s Image Search with part of your search term as: infographic.