How to determine if there is a market for your startup product?
Having determined the direction of the company and highlighted the problem that your startup will solve, it is important that there is a market for your solution.
Calculate the market size
Before starting a startup, analyze if there is a market for your product, calculate the potential sales volume for the year:
- Multiply the total number of potential buyers per year by the cost of the product.
- For a high annual revenue (say, $1 billion in sales), you either need a large number of customers, or a high price, or both.
Entrepreneur, investor and software engineer
The market is the most important factor in the success or failure of a startup. Why? When there are many real buyers, the market itself pulls the product out of the startup. The market is hungry for content and will be saturated with the first viable product that is offered to it.
It doesn’t have to be a huge product. It just needs to work. The market doesn’t care how well your team performs, as long as it produces a viable product.
Want to get an idea of the size of the market? Do the following:
Do a press review about the market. Try to find articles that cite research from reputable market research agencies such as Gartner or IBIS.
Sketch out the approximate size of the market, collect statistics and figures as necessary (you can use Google).
Gather additional proof of your score with state-of-the-art analytics tools including Google Trends, Google’s Keyword Planner, and Facebook’s Advertiser Tools. Using these applications, you will be able to determine the level of demand for the proposed solution.
In order to correctly calculate the size of your particular market, make sure you avoid unreasonable generalizations of statistical data. For example, if you run an online women’s clothing store and there are 80 million women in Russia, you need to understand that the market size will not be equal to this figure. Determine how many women (of your desired age category) buy clothes on the Internet, how many are interested in the styles that you offer, etc. Thoroughly understand the preferences and habits of your target audience.
Another example of specific market calculations for a startup
Suppose you are developing a tool for futures traders that allows them to program trading algorithms.
There are 10 million traders in the market, but as we just saw above, their number does not represent the entire market. After doing your research, you find out that out of 10 million, only 2.5 million are active traders, and the remaining 7.5 million make less than one trade per month.
So you have 2.5 million potential customers. Additional research shows that only 1 million of them have sufficient programming skills to use your product. Obviously, in order to get this figure, you have to survey traders, for example, through Google’s survey forms.
By researching similar products on the market, you understand the pricing mechanism in your segment. Let’s say an annual license for a product costs $500. Let’s calculate: $500×1M users = $500M. This is the maximum profit you can make if you cover 100% of the market (ambitious goal).
To get to know the market even better, conduct a focus group survey similar to the one we discussed in the Problem section. You will receive information about how many traders recognize the existence of the problem for which you created your tool and are interested in solving it.