6 Questions You Need to Answer Before You Enter a Market With Your Product
The right product is the product people are willing to buy, hire, and use in a way to solve their pain points, needs, wishes. But it should work not only for customers and users. The right product should benefit a business. In most cases, the product is created to generate revenue and return of investments. Thus it is crucial to understand how much benefit it can potentially bring.
As long as customers, users, and business take advantage, we can safely say that a product is successful. Typically, product companies measure success by definition of expected outcomes.
Imagine you wish to get 1000 paying customers, grow revenue to $10,000 per month, and gain 1% of market share. How are you supposed to know whether these objectives are achievable?
First of all, you need to make sure that a target group of customers consists of more than 1000 people who are willing to pay 10$ monthly. Secondly, you need to have resources to understand a market, prioritize its needs, create a product to address these needs, enter a market, and succeed.
For this purpose, you need to answer the following questions.
- What is my target market? Whom do I plan to target?
- Which needs does the market have? Which needs do I want to address?
- What value can I offer? What does make my product better than competing ones?
- How much money is a potential customer willing to pay?
- How many people may be willing to pay for my solution?
- How many of them can I serve in the short and long term?
I would like to share how I would be looking for answers if I decided to roll out a new product to benefit a business. Before I do that, I don’t want to miss a chance to emphasize the importance of not making one mistake that can prevent you from a deep understanding of a market.
I think that one of the most common mistakes among companies is creating products around an idea that seems to be brilliant. People are sitting in their buildings, brainstorm ideas, and proceed immediately to their implementation without attempts to reduce the risk of failure far before the first line of code is written. Those people think that an intensive marketing campaign will help to create a market around a product and achieve business outcomes. However, good marketing kills bad products faster.
Instead, get out of your building and start observing. With what people struggle the most? What problems, needs, wishes do they have? Don’t think about any solution yet, just observe. If you have a chance, talk to potential customers. The best ideas come from a deep understanding of people whom you want to sell your product. If you see an opportunity, employ market research methods to answer the questions given above.
What is My Target Market? Whom do I Plan to Target?
A market consists of target customers and users: the people who are likely to hire your product. Imagine you realize that a lot of people are struggling with losing their weight. These people have a common job to be done: reduce weight. Thus you need to learn more about the loss weight industry and figure out who are those people. Most likely, you can learn that market consists of people who have a medical condition, sportsmen, singles who are looking for a partner, women after pregnancy, etc. It is essential to know whom you plan to target to define needs appropriately.
Also, I would learn about the market itself, e.g its growth rate, available solutions, size, and other statistics. For instance, I was able to learn that “MarketsandMarkets forecasts the weight loss and weight management market to grow from USD 175.94 billion in 2017 to USD 245.51 billion by 2022”. Also, I learned that “the prevalence of childhood obesity is increasing across the globe owing to factors such as the lack of physical activity and unhealthy eating habits.” I would consider that information as an opportunity to target this specific segment that will likely grow, according to the forecast.
There should be a clear distinction between customers and users. Users are people who use your product. Customers are people who buy your product. In our case, parents who want their children to reduce weight are customers, and parents and overweight children may be users. Thus it is important to define the needs of parents and children.
Which Needs Does the Market Have? Which Needs Do I Want to Address?
You need to define as many as possible needs of your target customers and users. It can be done by means of qualitative research, e.g. in-depth interview.
Imagine you decide to focus on parents who want their child to lose weight. You need to reach out to those people and try to figure out what they worry about. For example, parents and children may have the following needs.
I put the needs in the Opportunity Solution Tree to demonstrate which needs can be addressed to achieve the outcome. For example, you may figure out which diet can help to reduce the risk of diabetes. It shouldn’t exclude sweets. It should remain delicious. Otherwise, a child needs to be rewarded for her effort towards eating healthy and tasteless food.
What Value Can I Offer? What Does Make my Product Better than Competing Ones?
Since you know which needs are likely to be fulfilled, come up with a solution. You may want to create an app to enable parents to control a diet and reward children. Or you may wish to write a book to teach parents. In any case, figure out whether similar solutions exist in the market and try to offer something better in terms of value or price. For example, you may
- get a job done better for a higher price if a segment is underserved (differentiated strategy);
- get a job done better for a lower price if there are competitors with the worse product and higher price (dominant strategy);
- get a job done worse for a lower price if a segment is overserved (disruptive strategy).
How Much Money is a Potential Customer Willing to Pay?
You need to get the right price for your product to calculate your growth potential. In other words, you need to know how much money your product can bring at different stages of the product life cycle taking into account the market size.
You may come back to parents and ask them if they are willing to pay for your solution and how much.
How Many People May be Willing to Pay for My Solution?
An answer to this question will help to make a final decision on whether to enter a market with your product or not. If a few people may be willing to pay for your solution, does it worth the effort?
You need to understand the market size, the total amount of sales or customers in a given industry over a given period of time. There are three categories:
- Total Addressable Market (TAM);
- Served Available Market (SAM);
- Serviceable Obtainable Market (SOM).
Total Addressable Market
TAM is the overall revenue opportunity that is available to a product. It is an excellent metric to understand the growth potential. There are two options for calculating TAM: top-down and bottom-up.
Top-down TAM calculations are often based on existing work by market-research firms. For example, I learned that TAM of the weight loss and weight management market was around $200 billion in 2019.
Since many sources don’t recommend using the top-down analysis, let me get to the bottom-up one that gives more accurate numbers.
The bottom-up TAM analysis helps to figure out a target market by researching the type of customers that you think to buy your products.
It is calculated by the following formula:
TAM = (number of customers) x (price per year)
According to the World Health Organization, over 340 million children and adolescents aged 5–19 were overweight or obese in 2016.
Imagine you want to target all of these people. Every child has to have an account that costs $10 a month. Then your TAM would be $40,1 billion that is around 20% of the global market.
Served Available Market
SAM is the segment of the TAM targeted by your product which is within your geographical reach. Let’s say you want to target the U.S. segment only.
According to the CDC National Center for Health Statistics, in 2016 in the U.S. prevalence of obesity affected 13.7 million children and adolescents aged 2–19 years. Then your SAM would be $1,6 billion that is around 1% of the global market.
Serviceable Obtainable Market
SOM is the portion of SAM that you can realistically capture. You may create a new segment by narrowing down the U.S. one.
For example, in New York State, there are about 2,5 million children aged 5–14 years. According to the CDC National Center for Health Statistics, in 2016 14.4% of them were overweight that is around 360 thousand children.
Assume that parents of 2,500 children visit a special centre that supports parents to deal with this kind of problems. Imagine you are allowed to promote your app during lectures for parents. In this case, SOM is $300,000.
Realistically you can achieve 2,500 customers if every child from your target segment is a paid subscriber to your app.
How Many of Them Can I Serve in the Short and Long Term?
Even though the size of SOM seems to be not big, you need to have resources to serve all of your potential customers.
Imagine you attract 1,000 paid subscribers during the first month. Most likely, your customers will report problems and ask questions since they are new to your solution. You need to have the capability to support them. Otherwise, you may start losing your customers. That may kill your product even before it starts bringing business benefits.
Ensure that you launch a production-quality product. If you don’t have resources to serve some number of customers, reduce your SOM. For example, you may approach a few groups of parents only.
At this point, you can set achievable business goals. For instance, let’s say that you afford to target SOM, size of which is $120,000 (1000 customers). If at least 40% of SOM is reached (400 customers), you may say that the product-market fit is achieved. Imagine you want to have 400 customers by the end of a quarter.
Thus, you may set the following business objectives: get 400 customers and grow revenue to $12,000 by the end of Q4/2020.
Once these figures are achieved and you know that the market needs your product, you can start scaling the solution. You can target other segments, e.g. New York State and then the U.S.
The picture below demonstrates how your product can grow over time.
You need to fulfil customer’s and users’ need by delivering a solution that makes happy both the consumers and business.
Business expectations should be achievable. If you want to enter a market with your product, make sure that you know your target audience, their needs, your competitors, and market size. Moreover, you need to ensure that you have enough resources to attract and retain a target number of potential customers. Otherwise, you may fail before a product starts generating business value.