Whatever your motivations are for building a company or product, you always want it to have an impact on the largest amount of people. While you may be entering a market with millions of potential customers it is highly unlikely that they will all become your customers. There are virtually no businesses in the entire world (please challenge me in the comments if you know one) that can capture every single potential customer in their market.
Therefore, when you want to correctly size a market, it is important to determine who will actually use your product or service. To illustrate this challenge in an example, think of the real estate market. If you were to build a new office tower, you are entering a market that has millions of potential customers and trillions of dollars in transactions per year; however, in reality 99.99% of these people have no possibility of ever becoming your customer. In order to determine how to develop and market the new building you need to size your exact market who might actually buy/lease the office space from you.
There are a handful of ways to determine your market size, but the best low cost method is simply to ask people if they are interested in your product. (You can’t simply ask your friends and family because that might give you biased data; you need to use a representative sample from your potential customer base. More on sample sizes in a future post) This research can be conducted via in-person interviews, but it is significantly easier to just use an online survey. (Depending on how many people you need to survey, you might even be able to do this fro free with SurveyMonkey.) Whether you choose to do in-person interviews or an online survey, the best practices are the same.
- For determining market size, focus on quantitative data vs qualitative data. You want to ask people binary (yes vs no, true vs false) or scale (likelihood, levels of satisfaction) questions about their behavior and likely adoption. Open ended free form questions are better suited for product research and will only distract you in your market size calculations.
- Ask very specific demographic and segmentation questions. A person’s income or job status influences their ability to afford your offering and this can determine whether they are a potential customer or not. Their usage of required technology devices will matter if you are launching a technology product. For example, if you are building an Android app, it is inefficient to build an app that can work on every device as the Android market has a wide range of capabilities, screen sizes, and there are even people still on Android versions that are obsolete. You may even wonder which programming language to use when building the product.
- Do not allow biased or leading questions to creep into your research. An example of a leading question is: “Would you buy a smartphone that makes you feel smarter?” Everyone always to be smarter, so you are prompting them to say yes. The right way to ask this question is “Would you buy a new smartphone” and then follow it up with “Why would you buy a new smartphone”. If a question is really two questions in one, it must be split it into two questions.
If you have used the right representative sample, you should have a pretty good idea of who your potential customers might be. In this stage of your development it isn’t critical to determine precisely who your customers are at the granular persona level, but you should still have a general idea of what percentage of the total market will adopt your product. You may still want to use the biggest most shocking numbers in conversations with external parties like investors and your family, but you should always know the real number within the company. Remember, Uber might claim to be disrupting the entire multi-billion dollar ground transportation industry, but their real market size is maxed out in the far smaller pool of people that have smartphones and live in major cities.