When meeting with entrepreneurs and evaluating the market size for the opportunity they are pursuing, I often see the same mistake: a confusion of the accessible market with the potential market. How many times have I come across this lie (as well as others….): “our market will give us $50,000 million in 2017 – look at the last report from McKinsey / Gartner / BCG… it’s a huge opportunity… if we can capture just 0.01% of the market… this venture is going to be so profitable”.
The mistake here is to fail to understand that the number one criterion that shapes the market size of a startup is the current resources available for growth.
Let me give you a very straightforward example:
- We launch a women’s shoes shop in Barcelona.
- We target women, between 25 and 49, able to spend a minimum of €80 on a pair of shoes once a year.
- Most business plans would use the following rational: 1 million women in the urban area of Barcelona; half of them are between 25 and 49; based on whatever market study; 60% is spending an average of €80 on a pair of shoes at least once a year.
- Conclusion: market size is 1M/2 = 500,000 – 500,000 x 60% = 300,000
The problem here is that the formula does not take into account the current resources of the venture.
Typically, you will start in a tiny shop, let’s say 45m2 (15m2 of stock, 5m2 of shelves), which has 25m2 available for the sales floor:
- How many customers can you hold in 25m2?
- How long will they stay?
- How many hours are we open a day?
- How many days a week?
- How many weeks a year?
These are the questions that an entrepreneur should ask… because the answers to those questions will shape the real market you can access.
In this case, industry standards and retails metrics can help us:
- How many customers can you hold in 25m2? 25
- How long will they stay? An average of 30 minutes
- How many hours are we open a day? 8
- How many days a week? 6
- How many weeks a year? 48
- 25 x 2 x 8 x 6 x 48= 172,800
Assuming that the shop is full all the time (from Monday 10am to Saturday 8pm), our maximum accessible market is 172,800 customers, not 300,000 – it is just over half of it.
As an aside, this example is also applicable to online business. Products and services do not become viral instantly. The cost of customer / user acquisition and the marketing / sales budget attached to it will be a very important (if not the number one) driver of growth and market accessibility in the early stage of the company.
Posts of the series:
#4 Confusing an Accessible Market with a Potential One
#5 and #6: Launching too Early… or too Late
I agree. Scalability is a major factor.