Steve Blank - How big is my market?
I can't tell if my business model will work for the next few years by consulting the oracle. The overall available market is an important indicator for any hypothesis and relevant for future decisions, developments or even pricing. Who needs or wants your product at all? The more thorough the preliminary work, the more likely it is to be successful.
It sounds very complicated when I ask my team to calculate the price and the market. Basically, however, you can follow a fixed pattern for it. For this purpose, there are a number of, sometimes very valid, sources and numbers to obtain, which are necessary for my analysis. An interesting source is stock market analysts. Financial analysts are busy every day taking a close look at listed companies. They look at how, why and when companies generate sales, where they make losses, how much they invest in research and development, what products are planned, etc. … So it's always good to have one - or more - competitors, it makes it easier to align yourself with the market and get useful metrics.
If you look at the pitches of companies like UBER or AirBnB today, you will quickly see that the homework has been done there. How big is the market you want to tap, what competing products are there and what are the growth rates? If you think that your product / idea can open up a billion-dollar market, then break the information down to the essentials, such as: How many users are there on the market? Who currently serves these? Who are your competitors? This results in a very important rule for you:
Understand the exact distribution of the total available market.
Once you understand that, decide for yourself how big your piece of cake can be. Often people like to throw numbers around, which makes me dizzy. An example of this is from our alugha project. We can reach 1.4 billion people in India, there are 24 official languages spoken and everyone is a potential user of our multilingual videos. An unbelievable market for us, isn't it? With such information you will certainly make an impression at your class reunion, but in the real world you should take as real numbers as possible. Of the 1.4 billion Indians, less than 50% have access to computers, from which you can deduct another 50% because they do not consume the videos we provide. Take out another 50% because not every video is available in every language. These are just rough numbers, but they are meant to show you how quickly an incredible 1,400 million users can become 175 million. And even then, you'll end up happy if you reach about 10%. Why? Who has fast Internet? Is the operating system on the smartphone the right one? Is the topic you are looking for available? Can you afford alugha? Is it worth the possible cost to the user? These are just a few thoughts.
The good thing about this "bad-calculating" is that you can calculate with numbers. You can use it to calculate possible sales and thus a possible marketing budget, developer costs, the price of promotions or possibly the monthly price for your users. To become even more specific, I should go out with my calculated numbers and address my potential customers. With a little intuition I can find out which functions are very relevant, which you would like to have and which you neither understand nor need. From this I can now make projections for the first financial years.
So now I know how much sales I could generate if I could get 100% of the customers interested in my product. In addition, I provide the revenue I have determined, this can never exceed the total sales. To be able to determine all this - and here I repeat myself once more! - it is imperative for you, as a founder, to proactively engage with your customers and the market. You have to recognize and understand how far your project can survive on the market or how long it takes until you can make sales. You have an investor, he will want to know that from you. Only then can he, as well as you, assess the risk and the costs. Basically this is one of your most important tasks ever!
If you agree with the size and the price of the cake, step on the gas. If not, optimize and analyze and make a decision. It is not always worth going on and giving in to wishful thinking. The world is full of possibilities and it is looking for people with intrinsic motivation.
This article is written by our CEO, Bernd Korz. With his experience as an entrepreneur, he shares his vision about the lessons provided by Steve Blank. Join us every week for a new article on Steve Blank’s lectures.
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