Natural Entrepreneur: Market Research: A Must for the Entrepreneur

this is a layer

Home

About us

sponsored by:

Important:
Our Privacy Policy

Marketing

Market Research: A Must for the Entrepreneur

Quantify the assumptions about your market

by Anand Joshi, ASC Inc, Windham, NH

So you’ve got a great idea…. you know you have the best solution in the world, and you believe it's just a matter of time before you start counting millions… so you set up a business and approach investors for funding only to be turned down for lack of market… you feel dejected and depressed, but slowly accept the reality and then eventually get on with your life.

This is a trap that quite a few entrepreneurs fall into. As an entrepreneur you want to be optimistic and believe in your product idea, but entrepreneurs often overlook one important aspect of their business: market research. The fundamental questions to consider before you start a business include: Is there a buyer for your product? If there is, then how many buyers are there? What is the ultimate maximum number of buyers in the market today? In 5 years? 10 years? And most importantly, how much revenue you could generate from these buyers?

Investigating these questions is called market research, and is something every entrepreneur must do to substantiate their product idea before starting the venture. Use a common-sense approach. Part of the process is a description of the marketplace, or market model, which includes actual customer spending dollars, today and projected for the future. Certainly buying market research from a market research firm is an option, but often their research does not relate you a new product idea, and could even be useless if the market for new product does not exist yet. Besides, it costs money!

The key questions that any investor will ask you is, What is the total available market (TAM)? How much of this market can your product address? and How much you can gain over the period of five years? They want a justification for the amount of money that they are putting in and will calculate how much return they might get.

Who is the buyer?

You can start by asking yourself a question: Who is going to buy my product? Suppose you have an idea of making invisible glasses for people wearing eyeglasses. Sounds like a great idea to me. But then the next natural question for an investor is: Why would people buy invisible glasses? Well because it saves them trouble of carrying them around their visible glasses. Fair enough. So the buyer is the person who currently wears an eyeglass- not everyone would buy invisible glasses because it is neither hip like putting on sunglasses, nor is it required. So the total available market for this product will never exceed the number of people wearing eyeglasses today. Under an ultimate best business scenario, only people wearing eyeglasses will buy your product.

Then the next question is: What is the maximum number of people who will buy your invisible glasses? And how will the number grow over the period of, say, the next five years?

You need to develop a market model for this. You can start with publicly available information, and then make logical assumptions to arrive at a substantiated number. In our example, let's start with the population of the United States. You then need an estimate of the number of people wearing glasses. Try Google. Or other sources, like the websites of top eyeglass manufacturers-- you might be able to find the number of eyeglasses sold by them in their annual report or financial disclosure forms. You would be surprised at the amount of information that is available. Figures such as population, number of houses in USA, number of people living in cities, number of people above $100K income etc can be easily found by doing basic web searches.

Estimate your market

To build a market model is to estimate the number of potential buyers, and then take a best guess at how many of them will buy your product. In our example, not everyone will buy your invisible glasses right away- some will be skeptical, some will simply ignore, and some will wait to hear from others. So may be only 0.1% of the total buyers will buy your product in first year. So if you multiply 0.1% by total number of eyeglass wearing population (which is estimated as percentage of total population), well, now you have total number of invisible eyeglasses that you’ll be able to sell. The number now is logically justified. And given unlimited sales and marketing resources, may even be achievable! To get your projected sales figures, you can simply multiply that number by your average selling price and - you have your total sales figure for the first year. Now you can play with numbers, change your price, and certainly come up with a market model that is very well supported by numbers.

In some instances, you might be able to come up with multiple market models. You could compare all of them and see how closely they compare to each other. If all of them are logically correct, and follow similar assumptions, they should be reasonably close to one another. Otherwise you are not doing something right, your source figures are conflicting, or perhaps your model is incorrect.

Backing your business idea with a market model is an important exercise and deserves as much attention as you would spend developing the product itself. As an entrepreneur, you should go through the rigorous exercise of identifying your market and potential customers to arrive at a total available market. A fruitful exercise can not only increase chances of funding from potential investors, but also teach you new aspects of your business that you may not have thought of before.

Anand Joshi is Product Manager at Alternative System Concepts Inc. in Windham, NH, developing products for design of power efficient ICs for consumer and wireless market. Prior to that Anand was a co-founder and director of marketing at Poseidon Design Systems where his team successfully raised capital and grew the company to 40 people. Anand held various product marketing and engineering positions at LSI Logic and Synopsys before founding Poseidon. Anand has an MBA from University of California, Irvine, and MS from Virginia Tech.

Upcoming Events

Feb 21 (8-9:30a): NH Forum on the Future, NHHTC, CR Sparks, Bedford, NH

March 1 (6:30-8:30p): Women's Business Center and MicroCredit-NH Networking Event, Bank of America, Portsmouth, NH

March 6 (10a-noon): Growth Capital Resources in New Hampshire, City of Nashua, Office of Economic Development, Daniel Webster College, Nashua, NH

March 8: (12pm -1pm) Break the Rules and Close More Sales, Amoskeag Business Incubator, Manchester, NH

March 16: Peak Pitch (pitch your plan to invstors on the chairlift), Mt. Sunapee, NH ($)

March 22: Breaking Trends in Web Develoment, UVCIA, Hanover, NH ($)

View Ads