What You Should Do Before Building Out an MVP
As Steve Bank said in his book Startup owner’s manual, Estimating market size helps determine whether the payoff from your new venture is worth the toil, or whether you’re about to do your first pivot.
In my experience, I have seen many cases where product managers were putting more emphasis on product vision and strategy and made a central part of their discovery process rather than assessing how big is the potential market opportunity.
But because there’s nothing worse than spending years in a startup only to discover that it can never grow to more than a few million dollars in revenue, the assessment of the market size should be the first step that needs to be done to size the opportunity of your startup market.
So here are steps to be done by every business to assess and research the market opportunity before processing to the next phase.
Step 1: Measuring Total Addressable Market (TAM)
When we refer to market sizing, usually we talk about the total addressable market (TAM). All things need to be considered equal, but we like big markets rather than small markets. Of course, they’re not equal. If the largest market would require two years of product work, yet several of the somewhat smaller but still significant markets are much closer in terms of time to market, most likely everyone in your company from the CEO and head of sales on down would prefer you to deliver on a smaller market sooner.
Step 2: Calculate Serviceable Addressable Market (SAM)
As there will be limitations of your business model (let’s say industry or geographic limitations), you will not likely be able to service your total addressable market.
A serviceable addressable market is most useful for businesses to objectively estimate the portion of the market they can acquire to determine their targets.
Step 3: Define Serviceable Obtainable Market (SOM)
Now that you have defined a clear size of your SAM, it’s time to see which part of it you can obtain. It’s where you need to consider competition and their share in the market. But even if you only have one competitor, it would still be extremely difficult to convince an entire market to only buy your product or service. That’s why it’s crucial to measure your serviceable obtainable market to determine how many customers would realistically benefit from buying your product or service.
One of the simplest examples to explain all this would be the following scenario. So the TAM for makers of a new smartphone app might be the 7.2 billion total smartphone owners worldwide, but if the app is available only in English or works only on an iPhone, the SAM or potential market served is far smaller. Going deeper into the research your next step would be to estimate what percentage of those shoppers might buy your product from the available options. So you would see that each estimate further narrows the target market and will define your SOM.
Step 4: Figure out the compound annual growth rate (CAGR)
Sizing the market is one of the most important tasks we should do as product people, but the next but not least important thing is the compound annual growth rate of that market. So CAGR is the speed at which the market is growing.
This value might be represented as a market percentage or in a dollar value.
Step 5: Research on Market Type
Assessing the market type is the next important thing, that helps to understand the competitive landscape and market realities that you will face.
Startups adopt or pursue one of four market types. Here you need to answer the following question — is your company entering an existing market, re-segmenting an existing market, creating a new market, or cloning a market?
Step 6: Plan on Go-to-Market (GTM)
The next factor concerns distribution usually referred to as go-to-market (GTM). Different markets may require different sales channels and go-to-market strategies. GTM strategy generally identifies target customers, and their journey, and outlines a sales strategy. While each product and market will differ, a GTM strategy should identify a market problem and position the product as a solution.
Step 7: Estimate Time to market (TTM)
The final but another important this is a very rough estimation of how long it will take to bring your product to the market, which is known as the time to market (TTM). TTM matters because it is fundamental to competitive advantage. You can take advantage of market opportunities by improving TTM to beat your direct competitors.
At the end of the day, before making any move to the next step in your startup journey, these measures are there to indicate clear market opportunities. Those are things that need to be always with you, whether you are at a very early stage of growth, or you are assessing the opportunity of building a new feature for your customers.