Market size is almost a necessary element on every startup pitch. There is an interesting post on @BenedictEvans‘ blog called ‘Ways to think about market size’. I am outlining the key ideas of the post. I strongly recommend reading the entire post for detailed explanations and more examples.
When you try to work out the market potential for something fundamentally new, you’re actually trying to resolve two, linked problems.
- First, you have to look past what it is now, and see how much better and cheaper it might become
- Second, you need to think about who would buy it now, and who else would buy it once it is better and cheaper, and how it might be used.
The second problem is actually the hard one. Anyone with a sense of history ought to have been able to look at a phone the size of a brick and say ‘well, this could come down to the size of a pack of cards and cost $100, given time”, just as anyone should have been able to look at the Krieger electric landaulet above and see that it would get much better and much cheaper, just as trains and steamships had done. If you understood technology, that much was pretty easy. But if automobiles had only replaced existing horse-drawn carriages and carts then the market would have been much smaller. The hard part was to forecast Wal-Mart, and Los Angeles.
That is, it’s easier to predict ‘cheaper and better’ than to predict the changes in behavior that will come from that. And pricing is only one dynamic – once the price falls below a certain level it stops mattering. Cheaper and better is necessary but insufficient: if billions of people can afford it, it doesn’t follow that billions of people will buy it. You need to have a theory as to why more and more people will care.
First, at one end of the scale, there are those people who are entering an existing, fairly mature market, with a superior product or price, expecting to take market share. In that case you already know how the market size works – you know why and how people use these things. So annual sales in the overall market (for the sake of argument) are outside your control, but you can take share. You can get people to buy yours, but not to buy more than they did before, so the question is how much market share you can take with a better operating model.
Second, at the other end of the scale, there are companies that are creating something entirely new. The personal computer was an example: imagine trying to forecast this in 1980. You know what typewriter sales are, you know how many middle class households there are and you can assume that only corporations and middle-class households will be able to afford one for the next few decades. But you don’t know about the internet as the key driver for consumer PC adoption, and you don’t know how many office typewriters will become PCs, nor that typing pools will disappear and every executive will write his own emails instead of dictating letters to his PA.
Third, you have companies that sit somewhere in the middle – companies that are entering a market in which the top line dynamics are mostly fixed but there remains plenty of scope to change things. This is where the iPhone and Android came in. The global mobile phone market has somewhere between 3.5bn and 4bn users, growing steadily as a function of macroeconomics and increasing distribution. Apple and Google didn’t change that – they couldn’t. By reinventing what a phone was, Apple did not change how many people bought a phone, or even (really) how often, but it did change what they paid. It converted $200 phone sales to $500 iPhone sales (only partly helped by operator subsidies), and Android followed at lower prices, such that together they now make up about 70% of unit sales. As a result, the average selling price of a mobile phone more than doubled from 2007 to 2014, from $80 to around $185.
In that light it’s worth comparing these two mobile phone ads from the early days of the industry in the UK. The first, perfectly rationally, starts from the mentality ‘how many people will need this?’ This is the ’10-15%’ argument. The second, from Orange, assumes that everyone will want one and it’s our job to get it to them, because we’re changing the world. Phones don’t have specific use cases – they’re a universal product. Hence, the CEO at the time, Hans Snook, went around saying that the UK would go to 150% penetration and most people thought he was mad (note that the Cellnet ad was made two years later).
akasina9 