How To Avoid a Blind, Shoot-from-the-Hip Market Estimation to Keep Your Business Case Credible to Investors

Sabrina Kiefer looks at how entrepreneurs can obtain market segmentation information to back up their business case, without access to a big-company budget.

We’ve heard this type of argument many times: ‘The potential global market for this product amounts to 100 million customers, for a total value of £2 billion. All we have to do is capture 2 per cent of this market, and we can realise sales of £100 million. So, even with this conservative estimate, the market for our product is attractive.’

The exact numbers may change from case to case, but the premise is the same: blind, shoot-from-the-hip market estimation; the untested belief that a random, unspecified 2 per cent of the market (‘surely not an unreasonable target,’ thinks the entrepreneur) will buy the venture’s product or service. Many novice entrepreneurs present their opportunity in this way, perhaps citing a collection of high-level market reports to show that they’ve done some homework. But any seasoned investor who may be listening is likely to switch off at this point.

Let’s assume that this 2 per cent figure chances to be accurate, even if it’s been plucked from the air. Which 2 per cent of the market are we talking about? What characterises this 2 per cent of potential customers from the other 98 per cent and prompts them, specifically, to buy your product? And why might the other 98 per cent not buy your product?

If you don’t know who your customers are and can’t identify their defining characteristics, you won’t know how to reach them, whether you’re creating a product that’s adequately tailored to their needs or through what channel you can sell it to them.

And, more importantly at this stage, you cannot begin to quantify the realistic size of your market to make a credible business case.

The question, in the typical parlance of venture investors and experienced entrepreneurs, is: what is your addressable market? Or, more simply, how have you segmented the broader potential market, and which market segment do you expect your business to serve? An addressable segment usually possesses a combination of characteristics that fit a given product; these may vary in complexity, from simple differentiators, such as age or geographic location, to more complex ones, such as a particular lifestyle, taste or unsolved problem.

If you want to do your homework, market reports and newspaper articles can only provide a starting point for qualifying and quantifying your market. They won’t provide sufficient information about your addressable market because they usually offer only bird’s eye views of broad markets. In the case of an innovative new venture, with which you’re aiming to address an unmet and sometimes unrecognised market need, you’re unlikely to find a market report from Mintel, Datamonitor or the like that analyses the unusual or novel customer group that you’re hoping to serve.

On the other hand, if you’re building a business case to start a new venture, you won’t have access to the fully-fledged research team or budget that large companies use to conduct extensive research on customer samples.

How, then, can you obtain some credible information about your addressable market segments?

Enter the ‘preferred witness’. Put simply, she’s a person who has enough experience and knowledge of a market or industry to be able to give you an insider’s view of what concerns, motivates or deters a potential customer or partner. Conducting a series of preferred witness interviews should help you determine what your most promising customer group will be, estimate the size of this group to some extent, and predict their needs and how they’ll react to your offering. Once you gather this qualitative information, you can review the quantitative data in the conventional market research reports, and make some informed and intelligent guesses about your specific market area.

Preferred witnesses aren’t just useful for customer and market research – you can and should find preferred witnesses who can inform other areas by offering insights on the industry, competitive landscape and technology issues.

The more your business case is based on ground-level information rather than high-level assumptions, the more credible it will be.

This is an excerpt from Sabrina Kiefer's book, The Smart Entrepreneur, which she co-authored with Prof. Bart Clarysse.

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