!market!and!opportunity! analysis!

Market and Opportunity Analysis

So#ware Economics, University of Tartu, Dec 2013 Georg Singer

Email: [email protected] TwiBer: @Georg_Singer, Linkedin: linkedin.com/in/gecko,

Facebook: facebook.com/georg.singer

Agenda

•  Market types •  Opportunity analysis •  Customer types •  Group exercise/case study

What is a market?

Market

•  Market refers to the group of consumers or organizaSons that is interested in the product, that has resources to purchase the product, and is permiBed by law and other regulaSons to acquire the product.

hBp://www.netmba.com/markeSng/market/definiSon/

What is a start-up? is a startup?

•  A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.

•  Nothing to do with size of company, sector of the economy, or industry

•  In order to survive and grow, it needs to find a viable business model (defined business model last time)

hBp://www.slideshare.net/startuplessonslearned/2010-‐04-‐28-‐the-‐lean-‐startup-‐webinar-‐for-‐the-‐lean-‐enterprise-‐insStute

Selected startups


3 years later


Many start-‐ups fail, not because....

• Lack of energy • Lack effort • Lack of passion • Lack of product

Steve Blank

They amongst other fail because..

•  They don´t understand there are four types of start-‐ups – Start-‐ups entering an exisSng marekt – Start-‐ups creaSng a new market – Start-‐ups wanSng to resegment an exisSng market as a low cost entrant

– Start-‐ups wanSng to resegment and exisSng market as a niche player

Steve Blank

Example

•  It´s October 1999 •  You are Donna Dublinsky, CEO of Handspring •  Handspring is a start-‐up in the billion dollar PDA market

•  Other companies in that market – Palm (original innovator) – Microso# – HP

Handspring‘s mission

•  Donna told her VP Sales – „I need you to take end user demand away from our compeStors and drive it into our sales channel“

•  VP Sales looked at the other PDA´s on the market and – DifferenSated Handspring´s product by emphasizing expandability and performance

End result

•  A#er 12 months – Hanspring´s revenue was $170 million.

– This was possible because in 1999 Donna and Handspring were in an exisEng market

Go back 3 years to 1996

In 1996

•  Before Handspring, Donna and her team had founded Palm CompuSng – Pioneer in Personal Digital Assistants (PDA)

•  Before Palm arrived on the scene, the PDA market did not exist

•  A few failed science experiments like Apple´s Newton had come and gone

What would have happened, if in 1996 Donna had have said to her VP sales „I want you to get 20% of the PDA market by the end of

the first year“???

•  The VP sales might have said to the VP markeSng – „I want you to drive end user demand from our compeStors into our sales channel“

•  The VP of MarkeSng might have said – „let´s tell everyone about how fast the PDA is“

Outcome

?

Desaster

•  If they had done this • There would have been $0 in sales

• Why?

In 1996

•  No potenSal customer had even heard of a PDA

•  No one knew what a PDA could do •  There was no latent demand from end users

•  Emphasizing its technical features would have been irrelevant

Palm in 1996 needed to

• Educate potenEal customers – What a PDA could do for them

DefiniEon A product that allows users to do something they couldn´t do before Is a new market

– Palm in 1996 created a new market – Handspring in 1999 was in an exisSng market

Lesson

•  Even with essenSally idenScal products and team – Handspring would have failed –  If it had used the same sales and – MarkeSng strategy – Previously used successfully at – Palm

And the converse is also true: Palm would have failed, burning through all their cash, using Handspring´s strategy!

Market types

Who cares?

Type of market changes everything

•  Market – Market size – Cost of entry – Launch type – CompeSSve barriers

– PosiSoning

ExisEng market Resegmented market

New market

•  Sales – DistribuSon channel

– Margins – Sales cycle

•  Customers –  Need –  AdopSon –  Problem recogniSon –  PosiSon

•  Finance –  Ongoing capital –  Time to profitability

hBp://www.slideshare.net/venturehacks/customer-‐development-‐three-‐types-‐of-‐markets-‐1045186#btnNext

DefiniEons: Three types of Markets

•  ExisEng market –  Faster/beBer=high end

•  Resegmented market –  Niche=markeSng/branding driven –  Cheaper=low end

•  New market –  Cheaper/good enough can create a new class of product/customer

–  InnovaSve/never existed before

ExisEng market Resegmented market

New market


ExisEng market definiSon

•  Are there current customers, who would… – Need the most performance possible?

•  Is there a scalable business model at this point?

•  Is there a defensible business model ? – Are there sufficient barriers to compeSSon from incumbents?


ExisEng market


Can compeEEon catch up?


ExisEng market risks

•  „beBer/faster“ is an engineering driven concept

•  Incumbents defend high-‐end, high-‐margin businesses

•  Factor in: – Network effect of incumbent – Sustaining innovaSon of incumbent –  Industry (or your own) „standards“

•  Established companies almost always win hBp://www.slideshare.net/venturehacks/customer-‐development-‐three-‐types-‐of-‐markets-‐1045186#btnNext

Examples

•  Yet another LCD TV producer •  100th pizzaria around the corner •  Antother TV channel, newspaper, radio staSon

•  ….. •  ……

Resegmented market definiSon (1)

•  Are there customers at the low end of the market who would: – Buy less (but good enough) performance –  If they could get it at a lower price

•  Is there a business profitable at this low-‐end? •  Are there sufficient barriers to compeSSon from incumbents?


Low-‐end ResegmentaSon „good enough“ performance


Resegmented market definiSon (2) Niche

•  Are there customers in the current market who would: – Buy if it addressed their specific needs –  If it was the same price –  It it cost more?

•  Is there a densible business model at this point?

•  Are there barriers to compeSSon from incumbents?


Niche ResegmentaSon „ Branding“ has its palce


Resegmented market risks

•  „Cheaper“ is a sales-‐driven concept •  Incumbents abandon low-‐end, low-‐margin businesses – For someSmes the right reasons

•  Low-‐end must be coupled with a profitable business model – Maybe margins are too small to sustain a business


Examples

•  iPhone (niche), overall market mobile pones •  iPad (niche), overall market notebooks •  Red Bull (niche, Energy drinks), overall market beverages

•  Android phones (low cost), overall market mobile phones

•  Nokia/Microso# smart phones (low cost) •  Ryanair and e.g. Lu#hansa

New market definiSon

•  Is there a large customer base who couldn´t do this before? – Because of cost, availability, skill....?

•  Did they have to go to an inconvenient, centralized locaSon?

•  Are there barriers to compeSSon from incumbents?


New Market


New Market •  Good news

– Product features are irrelevant at first •  No compeStors •  Only pesky start-‐ups

•  Bad news – Users unknown – Market undefined and unknown


New Market characterisScs •  Not about compeSng with other companies about product features

•  But to convince a a set of customers your vision is not a hallucinaEon

•  Understanding whether there is a large enough customer base who could not do this before

•  If the can be convinced the want or need your product

•  Whether customer adopEon occurs in your lifeEme •  Financing: how do you manage the cash burng rate during the adopEon phase?


New market risks

•  New is a market-‐driven concept •  New has to be unique enough that:

– There is a large customer base who could not do this before

– They want/need/can be convinced •  Company manages adopSon burn rates

–  Investors are paSent and have deep pockets


New market examples

•  Compaq: first portable computers for business execuSve

•  Quicken: home accounSng market •  Skype: VoIP •  Sony: first portable music devie (walkmen) •  Sony: first digital music media (CD)

Hybrid Markets

•  Some products fall into Hybrid markets •  Combine characterisScs of both a new market and a low-‐end resegmentaSon – SouthWest Airlines – Dell Computers – Cell Phones – Apple iPhone?


ExisEng Market Resegmented market New Market

Customers ExisSng ExisSng New/new usage

Customer Neeeds Performance 1.  Cost 2.  Perceived need

Simplicity & convenience

Performance BeBer/faster 1.  Good enough at the low end

2.  Good enough for new niche

Low in „tradiSonal aBributed“ Improved by new customer metrics

CompeSSon ExisSng incumbents ExisSng incumbents Non-‐consupiton/other start-‐ups

Risks ExisSng incumbents 1.  ExisSng incumbents

2.  Nicht strategy fails

Market adopSon

New Lanchester Strategy to analyze and exisEng market Market Share Cost of Entry (vs.

Leader´s Sale/MarkeEng Budget)

Entry strategy

Monopoly >75% 3x Resegment/new

Duopoly >75% (combined) 3x Resegment/new

Market leader >41%, 1.7 x market share of next largest company

3x Resegment/new

Unstable Market >26% (biggest player)

1.7x EsSsSng/resegment

Open Market <26% 1.7x ExisSng/resegment

The four steps to the Epiphany – Steve Blank

Example exisEng market

•  Market: Office so#ware •  Company: Microso#, MS >90% •  Products: Excel, Word, Powerpoint •  Monopoly

Exercise (30 minutes)

Take Paul Graham‘s blog arScle „How to get good startup ideas“ (hBp://www.paulgraham.com/startupideas.html) and prepare one slide that summarizes the content and that you present in class -‐  Give 5 examples for good startup ideas and type of market and

-‐  5 examples for bad startup ideas and types of market

Market/Opportunity Analysis

How Big is It?: Market/Opportunity Analysis –  IdenSfy a Customer and Market Need – Size the Market – CompeStors – Growth PotenSal

hBp://www.slideshare.net/sblank/class-‐1-‐course-‐overview-‐berkeleycolumbia-‐lean-‐launchpad-‐xmba-‐296t

How Big is the Pie? Total Available Market

Total Available Market

•  How many people want/need

the product?

•  How large would the market be (in $’s) if they all bought?

•  How many units would that be?

How Do I Find Out?

•  Industry Analysts – Gartner, Forrester

•  Wall Street Analysts – Goldman, Morgan


How Big is My Slice? Served Available Market

•  How many people?

•  How many people have the money to buy the product

•  How large would the market be (in $’s) if they all bought?


How Do I Find Out? •  Talk to potential customers

Served Available Market



How Much Can I Eat? Target Market

•  Who am I going to sell to in year 1, 2 & 3?

•  How many customers is that?

•  How large is the market be (in $’s) if they all bought?


How Do I Find Out? •  Talk to potential customers

•  Identify and talk to channel partners

•  Identify and talk to competitors

Total Available Market Target

Market




SegmentaEon Identification of groups most likely to buy


Target Market

•  Geographic"•  Demographic"•  Psychographic variables"•  Behavioral variables"•  Channel"•  etc…"


Total available Market, Served Available Market, Target Market

hBp://www.slideshare.net/sblank/business-‐model-‐for-‐startups

Rent out your parking space

hBp://www.slideshare.net/sblank/xoom-‐park-‐bmcinternaSonalnewsp-‐autosaved

Exercise (15’ in groups)

•  Consider you are developing a new product/service for an exisSng market, such as TESLA’s electric cars

•  Analyze – Total available market (TAM) – Served available market (SAM) – Target market

How to esEmate Sales?

2 approaches

• Top – down forecast • BoBom – up forecast

Top – down Example

•  Company selling Internet access in China – 1.3 billion people – 1% want Internet access – We´ll get 10% of the audience – Each account yields $240 per year – 1.3 billion people X 1% addressable market X 10% success rate X $240/customer= $ 312 million!!

– Very conservaSve numbers!!!!!

Guy Kawasaki „The Art of the Start“ pp. 81

Bo^om – up example •  BoBom–up is approach used by bootstappers •  Each sales person can make ten phone sales calls a day that get through to a prospect

•  There are 240 working days per year •  5% of the sales calls will convert within six months •  Each successful sale will bring in $240 worth of business

•  We can brin on board five sales people •  10 calls/day X 240 days/year X 5% success rate X $ 240 /sale X 5 salespeople= $ 144.000 in sales in the first year

Guy Kawasaki „The Art of the Start“ pp. 81

Where to start??

Customer types

Types of customers

earlyevangelists

Customer discovery


Earlyevangelists

•  Special breed of customers – Willing to take the risk on your startup´s product/service

– Envision its potenSal to solve a criScal and immediate problem

– Have the budget to purchse it – Unfortunately most customers don´t fit that profile

Example for late adopter •  Imagine a bank with a line around the block on Fridays as

customers wait an hour or more to get in and cash their paychecks (problem in the US)

•  You are one of the founders of a so#ware company –  Whose product could help the bank reduce the customers´ waiSng

Sme to ten minutes –  You go into the bank and tell the president: –  „I have a product that can solve your problem“ –  What problem? Customer who does not recognize he has a pressing

need you can help him with

No Sme in the first two years of a start-‐up he will be a customer -‐> late adopter

Any feedback from him about product needs is useless

Example for pragmaEst •  Another response from the president:

–  „Yes, we have a terrible problem. I feel very bad about it and I hand out cups of water to our customers waiSng in th line during hot days.“

He recognizes the problem and does something about it

Has not been moSvated to do more than pu|ng paper over the symptoms

He might provide useful feedback about the types of problems

Likely not to be the amongst the fist customers but maybe later

Example for earlyevangeslist

•  It´s a good day and you run into a president who says

•  „ Yes this is a heck of a problem. In fact we are losing over $500.000 a year in business. –  I have been looking for a so#ware soluSon that will cut down our check cashing and processing Sme by 70%.

–  The so#ware has to integrate with our bank´s Oracle backend, and it has to cost less than $150.000.

– And I need it to be delivered in less than six months.“

Even be^er

•  „ I haven´t seen a single sotware package that solves our problem, so I wrote a request for our IT department to develop one.

•  They´ve cobbled togther a soluSon, but it keeps crashing on my tellers and my CIO is having fits keeping it running“

You are almost there

•  You have found a customer – Who has such a deperate problem – He has started to build a homegrown soluSon – He is willing to pay a proper price (and also menSoned it to you)

– And wants it now

Earlyevangeslist CharacterisScs Has or can acquire a budget

Has put together a soluSon out of piece

parts

Has been acSvely looking for a soluSon

Is aware of having a problem

Has a problem

hBp://remediesforremedy.com/wp-‐content/uploads/2012/10/ideas.jpg

Paul Graham, CEO Y-‐Combinator

Try to think of startup ideas. Look for problems, preferably problems you have yourself.

hBp://www.paulgraham.com/startupideas.html

Technical vs. Market knowledge

Problems vs. Needs Solving problems certainly has a market CreaSng needs bigger but more expensive

•  Red Bull

Focus, focus, focus

•  LocaSon, locaSon, locaSon •  MVP •  Look at everyday processes that are broken –finding free images

Why should people go through the pain of switching to your product

Eat your own dogfood

Why should it be your problem?

•  Ensures the problem really exists. •  It sounds obvious to say you should only work on problems that exist.

•  most common startup mistake is solving problems no one has


Best startup ideas have three things in common

•  something the founders themselves want

•  they themselves can build, •  few others realize are worth doing. • Microso#, Apple, Yahoo, Google, and Facebook all began this way


Why do many founders build things no one wants?

•  They try to think of startup ideas – Yields bad ideas that sound plausible enough to get you work on them

– At YC „made-‐up“ or „ sitcom“ startup ideas


hBp://paulhorton.wordpress.com/2012/03/27/a-‐good-‐lesson-‐from-‐a-‐bad-‐example/

Social network for pet owners

•  Not oviously mistaken – Millions of people have pets – They care a lot and spend money on them –  If you only got 2-‐3% you had millions of users – Serve targeted offers and charge for premium features


What do you think?


Danger

•  Run it by your friends with pets – They do not say „I would never use this“ – They say „Yeah, maybe I could see using something like that“

– Even at launch a lot of people say „I do not want to use it myself, at least not right now, but I think other people might be wanSng it“

– Across the enSre populaSon = 0 users!


Important

•  At launch at least some users who really need what they are making

•  Not just people who could see themselves using it one day but who do not want it urgently

•  Usually inSal group of users is small


Important

•  you can either build something a large number of people want a small amount, or

•  something a small number of people want a large amount -‐> second opSon is much beBer

•  Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.


Image curtesy of hBp://www.seobook.com/link-‐building-‐ideas-‐small-‐business

Good examples

•  Microso# was a well when they made Altair Basic. There were only a couple thousand Altair owners, but without this so#ware they were programming in machine language

•  Thirty years later Facebook had the same shape. Their first site was exclusively for Harvard students, of which there are only a few thousand, but those few thousand users wanted it a lot.


How to find good ideas •  The place to start looking for ideas is things you need •  Why doesn‘t someone make x? If someone made x we‘d buy it in a second.“ •  A parScularly promising way to be unusual is to be young. Some of the most

valuable new ideas take root first among people in their teens and early twenSes •  The next best thing to an unmet need of your own is an unmet need of someone

else –  Try talking to everyone you can about the gaps they find in the world; What would they like to

do they can‘t? What is tedious or annoying, parScularly in their work? •  Don‘t look for the next TwiBer. Look for somethings that is so unsexy and boring

that people pay you for. •  What would you pay other people for if the developed it? •  Look for industries that are dying and think what could replace them? E.g

journalism is dying. But would there be a way to replace journalism and make money?

•  Are there groups of sophisScated uses like the earl y “microcomputer hobyists” that are currently being ignored by the big players?


Image courtesy of hBp://butchontap.com/2012/04/03/how-‐to-‐be-‐butch/

Group exercise – Idea finding (10‘)

•  Gather in groups of 4-‐5 •  Find 5 good ideas according to Graham

– What is the problem? – What is the soluSon?

•  Find 5 bad ideas according to Graham – What is the problem? – What is the soluSon?

•  Each group presents the best and worst idea Image courtesy of hBp://www.brainathlete.com/jog-‐memory-‐exercise/

What about compeSSon •  A crowded market usually is a good sign •  It means both that there is demand and none of the exisSng soluSons are good enough

•  Startups are seldomly killed by compeStors •  Unless you discover (use Google) compeStor with „lock-‐in“ (patents, etc) prevenSng users from choosing you, don‘t discard the idea

•  QuesSon really is if opportunity is big enough; –  e.g soluSong different from compeSSon because it only works on the latest smart phones,

–  probably is a big enough opportunity


Ideas -‐ conclusion •  Finding startup ideas is a subtle business, and that's why

most people who try fail so miserably. It doesn't work well simply to try to think of startup ideas.

•  If you do that, you get bad ones that sound dangerously plausible.

•  The best approach is more indirect: if you have the right sort of background, good startup ideas will seem obvious to you. But even then, not immediately. It takes Sme to come across situaSons where you noSce something missing.

•  And o#en these gaps won't seem to be ideas for companies, just things that would be interesSng to build. Which is why it's good to have the Sme and the inclinaSon to build things just because they're interesSng.


Case study – Chegg – in Groups (45 mins)

•  What is the service the founders started up with? •  What were the problems? •  What market niche did they discover? •  What players were in that market? •  What was the size of the market? •  What was their value proposiSon? •  Which had beBer margins, new or used books? •  What assumpSons did they have to test? •  What iniSal problems did they face? •  What is their business model? •  How did they create iniSal demand to test the market? •  What green markeSng technique did they apply? •  What outbound markeSng techniques did he try?

–  How did they work? •  What inbound markeSng techniques did he try?

–  How did they work? •  How did they set their pricing at the beginning? •  What was their most successful markeSng tool? Why? •  How do they see product management?

–  What did they do to improve conversion rates? Lower bounce rates? •  How did they fight compeSSon coming from online booksellers? Who did they partner up with? What was

their parters´advantages? What did they get?

Acknowledgment

•  This presentaSon is based on Steve Blank´s presentaSon „Lecture 2 – Business model and customer development, accessible at hBp://www.slideshare.net/sblank/lecture-‐1-‐business-‐model-‐customer-‐development

•  And Customer Development Classes 1 and 2, accessible at hBp://www.slideshare.net/sblank/090409-‐class-‐1-‐and-‐2

Q&A

Georg Singer

Email: [email protected] TwiBer: @Georg_Singer, Linkedin: linkedin.com/in/gecko,

Facebook: facebook.com/georg.singer

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