So, your brilliant idea is shaping up, and you’re ready to go all steam ahead – get some funding, quit your day job, and move into your mom’s garage. One key question you kept asking yourself was “what is the potential of this business?”
Your typical market sizing goes like this: “20 million target customers; with target penetration of just 1%, we should have 200K clients, each bringing in $50, so our target sales for us are $50*200K = $10M.”
This is all nice and great, except that this model is just full of crap. You have no idea whether clients will pay $50 for your service. You have no idea whether 1% penetration will be even remotely achievable.
Let me offer an alternate model – a model summarized by “what are your prospective clients paying for this today?” It’s based on a fundamental idea that if you have to convince your clients that they have a need, you’ve lost already.
Here’s how it works:
- Pose the problem that your business solves.
- Find the ways that customers are solving that problem today. If they aren’t solving it today – through some clunky or inefficient means, hopefully – go back 3 spaces and come up with a better idea.
- Find out what the customers are paying for this problem. This will be the cap of what you’ll be able to charge for your improved solution.
- Find out how many customers are paying to solve this problem. This will be your target market size, the one you’ll multiply by the imaginary “market penetration target.”
Let’s try going through this on some of the businesses / ideas that are close to my heart.
- CocktailBuilder.com. Motto: find drinks you can make from ingredients in your bar. Do customers have this pain? Yes. Do they PAY for somebody/something to solve it? Nope. Result: complete fail as a business.
- FindTouch.com. Motto: help create quick job connections in the Health and Beauty industry. Do customers have this pain? Yes. Do they PAY for it now? Yes. What are the existing solutions? Use Craigslist. How much are they paying? $25 per job posting. How many are there? A hundred postings per month per metropolitan area. Result: sales potential of $25 * 100 * number of major cities. Much lower than you’d get through other forecasting approaches, and MUCH more realistic in hindsight.
- kCura, a company built by a talented gentleman I met recently. Motto: help companies save money on the e-discovery part of litigation. Do customers have this pain today? Yes. Do they PAY for it now? Yes, $400/hour to lawyers reviewing thousands of documents. WOW, now we’re talking. Give them a 20% efficiency gain over existing methods, and you’ll save them a TON of cash. Result: fantastic growth and a very promising business.
- Cloud computing. Motto: help ride the usage curve without investing into infrastructure. Do customers have this pain? Heck yes. Do they pay for it now? Of course, through all of that hardware that just sits there most of the time. You get the drill.
Apply that same model to your business before leaping forward.