Market Analysis

What is this?

Markets are made of buyers. The key question to be solved in your market analyses is for which customers can we create value and how many of those customers can we serve? When performing a market analysis, it is important to use both a top-down approach and a bottom-up approach. In the top-down market analysis you will typically start with an STP analysis (Segment, Target, Position). Using these insights, in a top-down market forecast you try to estimate the overall size of your market
segment, looking at what might be feasible in terms of market share and customer
adoption and doing the math.

One major problem, however, with this top-down approach is that it doesn't tell you anything about your first 'real' customer and it fails to provide more qualitative insights on how customer really think. Therefore, you also need a bottom-up market analysis, where you start to identify a first potential customer and based on the initial feedback, you adapt your products or services in order to develop your initial customer base. Following Steve Blank, we call this process the Customer Development proces. Bottom-up market forecasts look at things in a more micro fashion. What customers can you actually reach this year, by name? How many customers can you currently keep in your sales process simultaneously?Can you name the list of prospects that you need to hit for each year you're forecasting in order to make those numbers real? What are the bottlenecks keeping you from doubling your sales over the next 12 months? Can they be eliminated such that your sales forecast is legitimate? These types of forecasts are consistently lower than a typical top-down approach and, therefore, are much more convincing to investors.

How?

Bottom-up market research: Steve Blank's Customer Development framework

Bottom-up market research is qualitative research performed on small groups of respondents which are representative for the target group or market segment, but without statistical significance. Its purpose is to learn more about what intrinsically drives possible buyer types. These insights will help you to test and refine your value proposition and identify your first real customers. Steve Blank, a succesful serial technology entrepreneur, developed the Customer Development roadmap to guide a bottom-up market analysis.

Steve Blank explains you why customer development is important in this video. In his book, "The Four Steps to the Epiphany", Steve Blank explains his customer development process in depth. This is a link to the first 3 chapters. A summary of the customer development process can be found on slideshare. You can also find most of it explained in this Stanford University course wrap-up by Steve Blank. This is the video. On the following link, you find a combination of Steve Blank's framework with Alex Osterwalder's framework! Great stuff!

Customer Development is a four-step framework to discover and validate what you have identified as a market for your product or service, whether your have built the right product or service features that solve customers' needs or problems, whether you have found the right strategy for acquiring and converting customers, and whether you have the necessary resources to scale the business. At an abstract level, customer development is about questioning your core business assumptions. The Customer Development model consists of four steps: customer discovery, customer validation, customer creation and company building. This process is used to discover and validate the following information (Cooper & Vlaskovits, 2010):

Customer discovery: Does your product or service solve a problem for an identifiable group of users?
Customer validation: Is the market saleable and large enough that a viable business might be built?
Company creation: Is the business model scalable through a repeatable sales and marketing roadmap?
Company building: Can we build different departments and operational processes to support scale?

Customer discovery is essential in this part of the tool. Customer discovery means finding out who the customers for your product are, and whether the problem you are solving is important to them. Customer discovery consists of four phases:

Phase 1: "State Hypothesis", is a rigorous process of writing a series of briefs that capture the hypothesis embodied in your company's vision.
Phase 2: "Test Problem Hypothesis", means testing your previously made assumptions with potential customers. This means very little talking and a lot of listening.
Phase 3: "Test product concept", you take your revised product concept and test it with your customers.
Phase 4: "Verify", you stop and verify that you understand customers' problems, that your product solves those problems, that customers will pay for your product and that your revenues will result in a profitable business model.

It is key to write down all your initial assumptions regarding the product or service you will be selling. Getting your assumptions down on paper is essential because you will refer, test and update them as you gradually build your business. You can use the following document to help you list your set of assumptions. Again: get out of the building and talk to people. Talk to people who are representative for the market(s) or market segment(s) you want to target to test your assumptions. Discover what not to do, where not to go. When you know where the possible target market is, proceed with further in-depth testing and quantification. Finding experts in this process might involve a lot of telephone calls. The following pdf gives you some tips and tricks on how to convince someone on the phone to collaborate with you.

The following tools provide additional guidance in your customer development efforts:

Lead user method

To develop (breakthrough) products or services, you should look into the lead user method. This means you identify users who will potentially benefit most from your product or service. Once you've identified them, interview, co-create, have them running tests. If you've found the right lead users, they will love it. Note that the lead users don't necessarily have to be your main customer group, or even customers at all. An example: If you want to make the best flashlight ever, you probably want to talk to night guards, police officers and so on. But night guards only, will probably not be much of a market.

Eric von Hippel clearly explains the concept in this movie. Seth Godin on the other hand, a marketing and entrepreneurship guru calls lead users "tribes", watch this video on TED.com or read his book (see references), to get some practical advice

Prototyping and experimentation

This one is key. A prototype (to be interpreted in the broad sense! E.g. 2D, 3D rapid prototyping, sketch, movie, role game, mock-up, ...) can do wonders when trying to assess market interest. Until people have seen, touched or otherwise experienced your value proposition or solution, you will not really receive accurate feedback. Iteration is important of course. An extreme form of this approach is to actually try to 'make your first sale'. This will of course not always be possible. The following pdf gives somre more details on prototyping.

Check out this Tim brown's blog on design thinking.This video of an IDEO employee clearly summarizes why prototyping is important. On the following video you can find some tips for prototyping websites. For those who are really interested in prototyping, the following video from Steven Dow from Google digs more into some details.

Empathy Map

This technique designed by the design firm XPlane helps you to put yourself in the skin of your stakeholders. What does the customer hear, feel, see, say or do? The following video explains the technique. One caveat: an empathy map is only a good tool in combination with real observation. Otherwise the danger exists you will strand in wishful thinking. This is a pdf of the empathy map.

Top-down market analysis

A new venture cannot appeal to all potential buyers in the marketplace. Buyers are too numerous, too widely scattered and too varied in their needs and buying practices. Target marketing - identifying market segments, targeting one or more of them, and positioning your products or services in these segments - is a much more focused approach. This approach consist of four different steps (Kotler et al., 2008):

Segmentation involves dividing the market into distinct groups of buyers with different needs, characteristics or behaviors who might require separate products or services
Targeting consists of evaluating each market segment's attractiveness and selecting one or more market segments to enter.
Positioning consists of defining the market offering within the chosen segment to occupy a clear, distinctive and desirable place relative to competing product or services.

Clearly defining the market segment you want to focus will help you to quantify the overall market size and calculate your attainable market share. This is necessary to calculate your potential sales volume. However, if you have limited means or limited information, it can be difficult to perform state-of-the-art quantitative market research. In this situation, you will have to rely mostly on the bottom-up approach. Note that the bottom-up approach will be very useful in order to come up with segmentation parameters and elements on which you can differentiate your products or services vis-a-vis competitors. Without a good bottom-up analysis, an STP analysis is often too theoretical.

For more information to the concept of target marketing, we refer to the Principles of Marketing Handbook (Chapter 9) written by Kotler et al. (2008). One useful source for quantitative and qualitative data on markets is Euromonitor's Global Market Information Database. Other relevant information can be found on the internet in industry papers, white papers, consulting reports, ...

More insights from practitioners

KPCB's Randy Komisar points out that while customer feedback is a good idea, it should not be the de facto driver for products and solutions. Check out Komisar in this video. Watching both video's is highly recommended!
Serial entrepreneur and venture capitalist Mark Suster urges entrepreneurs not to be lazy when it comes to doing necessary market research.This includes having a basic understanding of who will pay for your product or service. He explain it in this video.
On the following link you can find a number of entrepreneurial insights on market research broadcasted by Stanford Entrepreneurship Corner

Want to know more?

REFERENCES

Churchill, J., Von Hippel, E., Sonnack, M., 2009, Lead Users Project Handbook: A Practical Guide for Lead Users Project Teams. The book can be downloaded for free on this link.
Godin, S., Tribes: We Need You to Lead Us, 2008. A short presentation can be found here.
Blank, S.G., 2007, The Four Steps to the Epiphany. This is the link to the first three chapters.
Cooper, B, Vlaskovits, P., 2010, The Entrepreneur's Guide to Customer Development: A Cheat Sheet to the Four Steps to the Epiphany. More info on the following link.
Kotler, P., Armstrong, G., Wong, V., Saunders, J., 2008, Principles of Marketing.