Know who you seek to serve
A useful exercise when vetting your latest product idea is to determine the overall size of the market and the financial potential of that market. Let’s be clear; these are, by nature, ‘fuzzy’ metrics, sometimes based on gut feel, out-of-date census data, assumptions made by analogy, and other questionable sources. Despite the inherent lack of accuracy, this gross simplification can give you the confidence to pursue or disregard the idea. In other words, you can work towards answering the question: “Is my idea worth pursuing?”
To answer this question you really only need to know 3 things:
- How many people exist in the world that could be interested in your product?
- Taking the costs of acquiring them into account, what is each customer worth?
- What share of the market would you need to capture to make this a viable idea?
HOW BIG IS THE OPPORTUNITY?
(POTENTIAL AUDIENCE) x (EXPECTED CUSTOMER VALUE) x (MARKET SHARE)
For example, let’s imagine that we have product targeted to the elderly. At the time of this writing, the population of the US is around 329 million, with 15.41% age 65 and older. So, the size of the potential audience is 50.7M. The average annual value of each customer is $7, so the market potential is about $355M annually.
How much market share is needed to make this idea worthwhile?
.5% market share – $1.775M / yr.
1% market share – $3.55M / yr.
2% market share – $7.1M / yr.
TOTAL AVAILABLE MARKET
This is the number of potential customers in your market. In some consumer products, the total available market is the same as the world population. Everyone in the world can drink a Coke. Most products, even those with broad appeal, have limits. Toddlers don’t buy tires. The boundaries of TAM is defined by your core market segmentation.
SERVICEABLE / SERVED AVAILABLE MARKET
This value represents how much of the total available market you reach, or could reach, with your sales and marketing budgets. Essentially, these are the customers you can afford to reach through your defined channels as the size of your serviceable available market is always tied to reach as enabled by budget. With infinite budget, you could sell to every person on Earth. This audience may not know they have a problem, or may not believe your solution will work. You have to spend to acquire these customers.
TARGET MARKET (SEGMENT)
Your target market segment is the portion of the serviceable available market that’s a natural fit for your product. They’re aware of the problem you seek to solve and may be actively looking for your solution. They don’t have to be convinced. They are buying what you’re supplying. Connecting with your target market is primarily about awareness; once they know about you, you’ll be able to convert them.
Segmentation uses one or more attributes to describe and classify a subset of your available market. Think of segmentation as a matrix using these attributes to describe the variance between your target market segment (100% relevance) and the edge of your total serviceable market (1% relevance). Sometimes this variance will be binary, meaning there is no grey area in the appeal of your product–they might want it, or they never will. However, in most cases, some portion of the audience could find it appealing.
Every audience has some (however little) alignment with your product’s core appeal, segmented by your defined attributes. Though sometimes tricky, it’s generally a good strategy to broaden your appeal as much as possible without diluting your appeal to your target audience(s). Keep in mind that customer acquisition costs generally increase as the appeal of your product decreases.
Example: A consumer product positioned for ages 35-44: In this case, we see a product that is perfectly targeted for people aged 35-44 years, with every person here a possible customer. Additionally, the product remains quite interesting to people up to age 59, with 75% of that demographic still reachable, and some portion of 25-34 is addressable as well.
Examples of commonly used market segmentations
- Marital status
- Household income
- Educational level
- Size of household
- Town size
- Population density
- Personality traits