How big is your opportunity?
If you’re building a narrative about why your idea is a good business opportunity, you’ll need to know how big your market is.
Welcome to part two of our three-part, Business Planning blog series. In part one, I explored value propositions: what they are, why they’re important, and how we create them. In this post, I’m going to dive into another key element of our Venture Validation Program (VVP): sizing your market.
The VVP is all about building a business case for your own idea. If you’re building a narrative about why your idea is a good business opportunity, you’ll need to know how big your market is. Whether your business case is to secure a loan, attract an investor, or to convince your significant other that this is a good idea, you should be able to describe the size of your market at a high level.
What is market sizing? It’s the process of gathering information to quantify the size of your opportunity. When you size a market, you determine how many potential customers there are for your business. This allows you to describe the opportunity in terms of revenue potential. Common terms like Total Addressable Market, Serviced Addressed Market, and Target Market are used to understand market sizing. Understanding all three is essential for having a holistic story about the size of opportunity.
The Total Addressable Market (TAM)
The TAM is about understanding the full potential of your business. The TAM reflects every possible customer in your industry. If your business realized its full potential and continued to grow over a decade, this is the size of the market opportunity for your business at full scale.
The Serviced Addressed Market (SAM)
The SAM is a slightly smaller, more focused view of your market opportunity. The SAM reflects the potential customers that your initial value proposition is most attractive too. Your value proposition won’t apply directly to every potential customer. That’s okay, but you want your value proposition to apply to a reasonably large number of customers.
The Target Market (TM)
The TM is the smallest segment of your market. The TM reflects the size of your opportunity based on your sales and marketing plan. Your sales and marketing agenda will be limited by the amount of cash you have to spend. You’ll want to be strategic to penetrate the best possible target market for your value proposition.
After you’ve gone through with the research required to define your TAM, SAM, and TM, it makes sense to set a first-year sales forecast. This is done by selecting a percentage of market share for your target market. This could be 1% or 20%, this number is usually a guess, supported by the strength of your value proposition and sales and marketing plan.
If you’ve never sized a market before this probably sounds like a lot of work. It’s not that bad and it’s certainly not harder than running a business. A solid business plan is essential for securing funding. Funders want to know that you’ve investigated the opportunity in a meaningful way. As a founder you should want to know this too. You’re about to take on risk, you should know how much you stand to benefit should everything work out.
In our program, we do market sizing more comprehensively. We utilize the traditional top down approach, but we also explore a bottom up approach. The bottom up approach to market sizing aims to answer the question, does this make sense?
To begin the bottom up, we first examine our value proposition and competitive advantages. Do we have an attractive value proposition? Do we have any compelling competitive advantages? Secondly, we define our sales and marketing plan at a high level. The purpose is to explain how you plan to get customers. Finally, we divide the first-year sales forecast by the price per unit, to determine how many daily, weekly, or monthly sales units are required to achieve our target. Then we can ask the simple question “does this make sense”?
If you’re starting a coffee shop and your first-year sales target is $750,000, and you sell coffees for $2.50, you’re going to have to sell 300,000 units. That’s 822 units per day or 102 per hour in an 8-hour work day. Anybody can look at this and determine that it doesn’t make sense. The goal of the market sizing exercise is to examine your idea through this concept. If done properly anybody can logically examine the opportunity and determine if it makes sense.
One of the greatest benefits of the Venture Validation Program is the collaborative environment. We’re not going to spend 30 minutes explaining market sizing and expect you to come back with a perfect perspective of your market size. We’re going to work as a team to help you secure the data you need to define the size of your market. We’re going to challenge your assumptions on your sales forecast. We’re going to share our ideas about the sales and marketing plan you’ll need to achieve your targets.
Ultimately, we’re in the business of helping you look at your idea and say, does this make sense?
For more information on VVP, how to join, or what other learning is involved, contact Dakota@EDGSJ.com or check our website,https://edgsj.com/en/entrepreneur-development#starting-a-business