Chapter 2: Market Analysis
Authors: Carlo Alberto Zucca
Estimated reading time: 7 min
A detailed market analysis is one of the most relevant parts when it comes to understanding the potential of a new idea.
It allows founders to develop a proper market-entry strategy for their startup and helps them to understand which market share they can reach through their value proposition. Starting from the product or service offered, the founders should assess the segmentation of the industry and identify the specific target market the startup will tackle.
A proper market analysis needs to be supported by detailed research on the product, the competitive scenario and the target, in order to develop a sound go-to-market strategy for the business.
The product or service you will offer is the first thing that consumers and investors will look at: thus, it is particularly relevant that the product’s features are clearly depicted and its strengths are stressed. The product is at the core of the market analysis since it would be impossible to assess the target market or the competitors without having a precise idea of what the startup wants to offer, how it differentiates from what is already on the market and how it can add value to the customers.
Particularly relevant is to present the key features and the additional improvements that can be implemented in the near future: in this way, the founders are able not only to delineate a roadmap with all the product milestones, giving proof of the possible developments of the company, but also to better understand the segments they will be targeting over the years.
As follows, it is beneficial to highlight which features differentiate the company’s offer from competitors, since these are the characteristics that will allow the product to obtain market traction and steal market share from the existing companies.
Finally, yet importantly, the value proposition needs to be taken into account since this will drive the customer generation process. In order to make the presentation of the product more impactful, it can be beneficial to support written descriptions with images or short videos, thus capturing people’s attention and enhancing the comprehension of features that can be difficult to comprehend if only explained in written form.
2. Competitive Landscape
Market and competition analyses need to be thoroughly conducted and then presented to the most suitable business partners. Only after having assessed the competitive scenario, it is possible to define which will be the targeted segment and how the company will position itself in the selected niche.
Therefore, one essential step is the definition of the overall market in which the company wants to operate: this involves the definition of the relevant market, the segmentation, the assessment of the potential size, volume and growth. However, before computing this calculation, the company needs to understand by whom the market is composed of and which will be the main competitors of the company, thus determining the chances that the new company will be successful in the long term.
The competitors’ analysis involves a broad assessment of the overall landscape, in which all the potential contenders are identified, and then an evaluation of the direct ones is done through instruments like SWOT analyses or Performance Matrixes. This in order to correctly identify the strengths and weaknesses of the competitors.
Once the market and competition analysis are completed, the company needs to have an idea about the potential impact that the product might have on the market and the amount of traction it might be able to generate.
3. Market Evaluation
A very common way of conducting market analyses is by dividing the targeted market into three different categories, named respectively TAM, SAM and SOM.
TAM – Total Addressable Market
The Total Addressable Market (TAM) is the overall revenue opportunity that is available to a product if 100% market share is achieved. Even though It is unlikely for a startup to achieve a monopolistic position, TAM still retains considerable usefulness because it helps determine the total market size of the proposed product, the possible business growth, the competitiveness of the product, the untapped customer segments and ideally the revenue a company can achieve when it is in full swing. This market can be estimated in two different ways:
With a top-down approach, which starts from the maximum spending or the highest volumes reported by the target sector and then filters for different assumptions, such as geography, demography and economic factors. This process would allow the founders to narrow down to the maximum size of the targeted segment.
Using a bottom-up strategy, which can be more reliable because it lies on primary market research. The analysis starts from the economic units of your product: price and quantity. Price can be derived from competitors’ or market data (such as commodity prices). Quantity is usually a variable that is defined by market-wide surveys which can be used as a sample to estimate market demand. After defining the economic marginal, the scalability of the product is assessed.
The TAM is eventually obtained after running scenario analysis on expansion, marketing traction and other variables that influence the product’s growth.
SAM – Serviceable Addressable Market
The Serviceable Addressable Market (SAM) represents the part of the TAM that can be potentially reached.
SAM represents the total sales volume of a particular product that can be sold by all vendors on the market within a specific territory that your company serve. It basically carves the TAM up into sub-markets that cater towards different types of customers with quality, price or functionality being the main drivers of this selection. As for the top-down approach, in TAM estimation, founders need to take into account geographical, cultural, regulatory and product cannibalization factors when narrowing the TAM to SAM.
SOM – Serviceable Obtainable Market
Realistically, it will be difficult for a startup to reach the whole SAM. Therefore, it is possible to further narrow it down to a subset that is likely to be achieved during the first few years of operations of the company: the so-called Serviceable Obtainable Market (SOM).
It might be the most relevant market measure in the short term since it represents the potential market that the firm can reach by exploiting the current gap into the competitive forces in the market and their own resources. Moreover, it is the measure that investors will probably look at in case of funding rounds. To estimate the SOM it is possible to restrict the SAM, basing on geographical or economic factors, and even consider endogenous competitive forces in the market, assessing them by leveraging on models like Porter’s Five Forces framework.
4. Go-To-Market Strategy
The next phase regards the preparation of an action plan aimed at entering the targeted market and obtaining the desired position. This scheme is known as go-to-market strategy (GTM strategy), i.e. a tactical plan on how the company will release and promote its product and ultimately sell it to the targeted customer base.
GTM strategy allows to establish a timeline for milestones and outcomes that needs to be respected by all the stakeholders, thus enhancing the likelihood of achieving a sustainable growth path. Generally speaking, a GTM strategy often includes four core components:
Offerings (the “what”), which comprises all the previously conducted analysis regarding the minimum specifications of the product and the target market;
Customers (the “who”), which involves the selection of the most appropriate marketing instruments to position the product with the main focus on target customer’s needs and behaviour;
Channels (the “how”), which is about the decision on the distribution channels that will be used to reach the target customers;
Pricing, which concerns the setting of the pricing strategy based on the customers’ perceived value, willingness to pay, competition, production and delivery costs.
The offering identifies the target market, which should be both specific and consistent with profitability objectives. On the other hand, this core component also involves defining the key features of the product or service, creating a value proposition that goes beyond the purchasing cost, and differentiating it from the competitors.
The customers component takes the information and research gathered to define the target customer, and uses it to improve the determination of the product’s target audience. It also involves understanding how the target client will be made aware of the product, how leads will be generated, how the product can answer to specific needs and why customers should believe that it fulfils these needs.
The distribution component defines which are the most suitable distribution channels to reach the end customer. Even indirect channels need to be considered, i.e. channels of distribution involving the product passing through extra steps between the manufacturer and the customer.
The final component, pricing, should not be based exclusively on the production or development costs, but it should also take into account the value proposition, the competitors’ strategy and the market segment that the firm wants to achieve by relying on its product.
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