Powerful new ideas often start with a spark insight: “Carpooling sucks! How can we fix it?” Or “Wow, these new smartphones might allow me to disrupt the entire taxi industry in a way never before possible!”
Lean is great, but before you jump ahead with customer development, experiments and MVPs, it is worth taking two preliminary steps: 1. examine the competititive landscape; 2. ask the question, “does this feel big enough to work on?”
I want to focus on the latter here. It’s not about defining a market size in Excel. That can be straightforward if you entering an established market, but very hard if you are trying to create a new market (see Blank). But it is worth taking an educated guess on the addressable market, and examining if you, as the entrepreneur, can connect the dots from today to a huge opportunity.
Part of this process, which feeds directly into customer development work, is to segment the market. You want to get as specific as possible and work your way down.
For example, “We want to create a SaaS time tracking application for small and medium businesses” (think Harvest). Is there a real business there?
Small and medium businesses is too vague. Let’s go one level deeper:
1. SMBs that pay their people based on hours worked (restaurants, building contractors, florists, etc)
2. SMBs that charge their customers based on hours worked (law firms, building contractors, childcare agencies, etc)
Already we can ask interesting questions — can one product eventually serve both segments or are we talking separate products or even businesses? Is one of those a better first market for us? Can we see a path to jump from one segment to the next? The answers will just be guesses, but take your best guess.
Next you want to look at your segment and do the same thing with the subsegments. Segment #2 has two big buckets:
2.1 knowledge worker services such as law, engineering, creative/design, accounting, strategy, and others.
2.2 more “blue collar” services such as construction, handyman services, childcare agencies, and others
Do they have enough in common that we can view them as one segment? In this case, we feel that the business models, sales cycles, etc might differ dramatically between the two, and we should focus on knowledge workers.
Again, ask if we can view our “knowledge worker” segment as one group that can be reasonably addressed by one company, or does it need to be segmented again?
Let’s make the assumption that we can group knowledge workers together as a single addressable market. Oh sure, there will be some differences — for example you’ll have a different sales cycle and more entrenched competitors in law firms — but for the purposes of a swag, we can group them together.
If we look at NAICS codes 54 (Professional, Scientific, and Technical Services) we see that there are over 1.1 million establishments in the USA and over 8.5 million employees. We don’t know how many of those are time-and-materials vs fixed cost business models, but let’s swag and say 50% (550K). If you can get roughly $70 a month on average from each firm (obviously an assumption to test), you are getting close to a $500M-a-year total opportunity for the US market (if you had 100% of the available market, which of course would not happen).
This might tell me that it has the potential to be a decent but not earth-shattering business. As conceived, it is probably not one that a typical VC would invest in, but it could be a good and sustainable business. Whether that is good or bad depends on the my (as the entrepreneur) context and desires. And maybe we would come up with ideas that could crack open new value to take it to an entirely new level. Google certainly did.
By taking a look at realistic segments, you can take a slightly more informed swing at market size which would then inform questions like: is this worth my time? what kind of financing could I, or should I, get for this kind of idea? how should I balance growth versus sustainability?
It’s also a very important thing to be able to answer when you are fundraising, although as Bryce writes, it’s probably more important that you have a thoughtful answer than whether you can convince anyone with data.
With this work behind you, you can now take your segments and start digging into customer needs and their associated risks, and get off and running with customer development, more specific personas (especially around early adopters), lean experiments, and creative product thinking.