What to Look for When Analyzing Markets


First, let us start off by stating that no matter how good your market analysis is, the chance of it being even remotely right is extraordinarily low. From the time you think about all of this, gather all of the information, analyze the information, create the slides, present the slides, get your funding and hit the market…it’s likely that your product will change, economic conditions will change, market dynamics will change, pricing strategy will change, the competitive landscape will change, etc…

Don’t, however, let this discourage you. Here are the two primary reasons why:

1) Conducting this analysis will help you better understand the market, determine where your product really fits, and offer insight into your go-to-market strategy.

2) This analysis will provide investors insight into your analytical abilities and just how business-savvy you really are.

Man analyzing financial data and charts on com...

Market Analysis Photo credit: (SalFalko)

Understand that the basic premise of a market analysis is the same no matter which market you target (individual consumers, private companies, government entities, etc.): we really just want to know how big the market is and how much of it can we capture.

Although not all inclusive, these are the topics you should be thinking about:

  • Market Size (think about the absolute size of the market; let’s say you’re looking to sell a product to women between the ages 18 and 44 in the United States; 2010 US Census tells us that there are approximately 112.8 million woman in this category representing 36.5% of the total US population; this group has grown 0.6% in the last 10 years; http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf)
  • Regulatory Considerations (for the sake of this over-simplified exercise, let’s assume that there are no regulatory considerations for your company; examples could include: Cyber Intelligence Sharing and Protection Act, Stop Online Piracy Act, Protect Intellectual Property Act, Digital Millennium Copyright Act; this is only going to get more complicated)
  • Geopolitical Considerations (let’s assume that there are no geopolitical considerations for your company; this will, however, become more and more important for start-ups to look at, especially if they intend to launch globally; examples could include: product or service intersection with foreign policies or trade in the form of encryption, greenhouse gases, digital currencies, tax optimization, etc.)
  • Distribution Channel (think about how you’re going to reach these customers; let’s say you intend to use the internet; 2009 Census tells us that 76.7% of the population has internet access; roughly speaking, your market is now 86.5 million; this clearly is not an exact science, but you get the picture; http://www.census.gov/hhes/computer/publications/files/2009/tab01.xls)
  • Distribution Limitations (maybe your website is English only or it requires broadband internet access; 2007 US Census tells us that roughly 7% of this population speaks English “less than very well”; we’re down to 80.4 million; http://www.census.gov/hhes/socdemo/language/data/acs/ACS-12.pdf)
  • Effectual Demand (everyone might want your product, but can everyone afford it; let’s say your target customer has a household income of $100k+; this is approximately 21% of all US households; we’re now around 16.8 million; http://www.census.gov/hhes/www/cpstables/032011/hhinc/new06_000.htm)
  • Total Addressable Market or TAM (there are a number of additional ways to narrow down your market, but once all the “narrowing down” has been done, you’ll be left with your total addressable market; for the sake of this little exercise, we’ll use 16.8 million people; let’s also assume that the average unit price for comparable products to yours is ~$200; the current total addressable market is $3.36 billion; if you didn’t follow that, all we did was multiply the 16.8 million people by $200)
  • Serviced Addressable Market or SAM (these are the people within the total addressable market that have already been serviced by your competitors solutions; after doing some research on competitive products and services, you’ve found that 22%, or 3.7 million people, are already being serviced; of the $3.36 billion total addressable market, $740 million is already being served; If you didn’t follow that, all we did was multiply the 3.7 million people by $200 arriving at $740 million)
  • Service Obtainable Market or SOM (this is the segment of the market that you can capture with your product; this is the remaining 13.1 million people valued at $2.62 billion; all we did was subtract the $740 million from the $3.36 billion; of course this assumes that your product is ready and you’ve already hit the streets with your sales team; if not, to arrive at this number you need to consider issues such as the rate at which your competition is capturing market share, the amount of time that it will take for your product or service to be ready, your new product introduction strategy, your expected market capture rate, etc.)
  • Target Market (based on your development schedule and all of the market research, you’ve determined that you can realistically capture 10% of the SAM because customers are unhappy with their existing products and have already expressed interest in yours – this represents 370,000 people and ~$74 million; you’ve also determined that you can capture 35% of the SOM based on projected adoption and growth rates over the next 3 years – this represents ~4.6 million people and $917 million; your target market is ~5 million people and is worth ~$1 billion; clearly this assumes the same price structure of $200; if you change the cost structure, the number of people and the market size will likely change)
  • Targeted Early Adopters (think about the people who have the most influence over your target market and have interest in your product or service; be creative and find a way to turn them into evangelists; these highly influential evangelists may be able to help you shorten sales cycles and gain market share; this strategy may not be right for everyone but it is worth considering)
  • Go to Market Strategy (how and when you’ll launch your product or service; creatively use social media- Blogs, Facebook, Linked-In, Twitter, Foursquare, etc.; determine whether you need a classical marketing campaign; determine whether your sales organization needs to be structured geographically, by product line, by customer type, etc.; prioritize your sales efforts to “get the most bang for your buck”; think about “beach head customers” or “marquee customers” and how they can be landed and leveraged; think about how these decisions will scale as your business grows; leverage your network as extensively as possible)
  • Competitive Landscape (claiming that you have no competition is usually a big red flag stating that you don’t understand your market; if you really don’t have any competition, the next question is whether or not the market really exists or why nobody else is going after it; if you do have competition, how do you stack up, what are your differentiators, how will you compete, how will your competitors react)
  • Financial Analysis (a complete breakdown of the cost associated with your product or service as well as all of the associated costs required to run the business; determine how your finances will stack up against your competition: sales price for product or service, product or service cost structure, gross margin, operations costs, operating margin, profit margin, assets, liabilities, cash flows, etc.; this will help you understand what is required to become financially viable and competitive in the marketplace)
  • Key Trends & Expectations (is the wind at your back or is the wind in your face; include historical, current and future data as well as context for as many of the attributes listed above as you can; look 3 to 5 years into the past as well as 2 years into the future; understanding that history may not be a good indicator of the future, do you have expectations that any of these trends will change; if not, why not and what could be the catalyst for the change; if so, why do you think the time is now or whenever you’re predicting)
  • Assumptions (assumptions are typically given a bad rap, but the reality is we all need to make assumptions when markets are immature or when products haven’t been fully tested; it’s really the basis of an assumption that make it poor; when you do make an assumption, it’s best to list the assumption as well as the foundation which it was built upon; this will enhance your credibility as well as open up dialog)

Keep in mind, the example above is an extreme over-simplification and is meant to provide some basic guidance. Think these items through and provide a solid, realistic analysis backed up by credible source data. Provided you have a great team and a great product, your investors will be spending time working all of these angles with you anyway.

This piece originally appeared on Visible Arbitrage.

About the author: Dr. Jim Brinksma

Prior to founding Visible Arbitrage, Dr. Jim Brinksma launched Business Information Technology Solutions, Shellback Research, and Shellback Labs. He also held positions as Vice President at Goldman Sachs & Co., Sr. Director of Systems Engineering at Ciena Corporation, Sr. Systems Engineer at Cyras Systems, Network Engineer at Enkido, and served in the United States Navy during Operation Desert Shield/Desert Storm.

Jim’s doctoral dissertation at University of Maryland covered “Public Market Signals as a Guide for Entrepreneurs Seeking Venture Capital Investment”. He also earned a bachelor’s degree in Information Systems Management from University of Maryland, completed the Strategy and Innovation Program at MIT’s Sloan School of Management, and completed the Non-Profit Board Leadership Program at Harvard Business School.

Jim has global experience and has provided a range of services to entrepreneurs, venture capital firms, hedge funds, institutional banks, service providers, equipment manufacturers, and non-profits.

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