Subsets of market
- TAM(Total Available Market)
- The total market demand for a product or service.
- It would be effectively impossible to capture the entire TAM, but this is theoretical.
- (The population who uses hair care products) x (how often they purchase) x (average price of that purchase) = $1bn
- SAM(Serviceable Available Market)
- The segment of the TAM that can be realistically targeted by your products and services which is within your geographical reach.
- (Global Gen-Z population who uses hair care products and can afford yours) x (purchase frequency) x (avg price) = $500mn
- SOM(Serviceable Obtainable Market/Share of Market)
- The portion of SAM that you can capture/own.
- Your SOM can only really be determined after adoption, although you can try to estimate what share of a new market you could take.
- If your SAM is $10B and your product makes $1B, then your SOM of $1B represents 10% of the market.
All about validating that a market exists for your intended product/service.
How to conduct market validation research
How to use the research
- Use all of this information to validate that the market exists. Also use this research to refine your company, product, service, strategies, etc.
- If you have a successful competitor who gives the same exact offering like you are planning to. The competition has already validated the idea for you.
- This is all about proving that the market wants YOUR product.
- The goal of Product Validation is reaching Product/Market Fit.
- It doesn’t mean much to simply validate the market exists.
- It in no way validates that the market wants your product.
- It only validates the market wants what other established players are offering.
What is Product Validation
- Phase1: People in the market simply committing(buying/using) to your product
- Phase2: Collect hard data on usage and repeat purchases. (requires time)
- Phase3: Finding P/M Fit. Market loves your product so much they are highly engaged, frequent buyers, buyers become evangelists
- You can lose P/M Fit after achieving it.
- You must continually iterate your product and company to give your customers a great experience, benefits, and value.
How to conduct product validation research
- You can get creative with it and the process can differ from product to product.
- You basically need to run tests to validate the market wants your product.
- You need to prove people are willing to buy your product at the price point you set.
- Collecting their email address is a bonus.
A basic example:
Customer Segmentation and User Personas
There are two ways(customer seg, user personas) we can approach understanding our users(marketing+ux). Sometimes, the user and customer can be different.
- Case of children’s cereal. Parent is customer, child is user.
- Case of a free app, where the source of revenue is advertisers
The real kicker is combining the two if you have a chance. Segmentation studies will give you a more rigorous view of what your customer base is. Persona creation will elaborate on why/how behaviors occur. Both will “touch” on the others area, but it’s really just about the level of detail each is capable of going into.
- Guides marketing decisions
- Macro, Generic, Demographic Data, Large dataset
See this post on how PMs can make use of segmentation.
Segments are generally developed through big-data analysis and are defined using a mix of these:
- Geographic Segmentation: based on geographic boundaries
- Demographic Segmentation: based on gender, age, household income, education and etc.
- Psychographic Segmentation: based on lifestyle, values, and beliefs
- Behavioral Segmentation: based on shopping and purchase behaviors.
When coming up with segments without any data-backing, you should only focus on attributes that are meaningful for what you’re developing. More of an art in a way. Some prompts could be such as, what magazines do they read? What trade shows do they go to? Where do they get their news? etc.
Knowing your segments is valuable when you’ll make different experiences or prioritization calls based on the segments.
- Guides design/UX decisions
- Micro, Contexual, Fictional, Qualitative, Small dataset
A customer persona is a fictional but fact-based archetype that represents the key traits of some of those customers, based on qualitative data collected through primary research with real people. It’ll have personality of each archetype.
They do not have to representative of all customers but rather represent the indicative emotional and behavioural traits of Some customers.
Determining market size
It’s basically figuring out TAM, SAM and SOM. Results might not be accurate but as a solo builder, it’s nice if you have some idea about the market you’re building for. These can be time based, geography based etc, eg. TAM on an yearly basis, India TAM, Rest of the world TAM.
When determining it, we can either go top-down or bottom up:
- Top-down analysis: We got data from some research firms that read that they estimate the ridesharing market to be say $100B.
- Bottom-up analysis: Based on data from this and this article or data source, we estimate there are 1M cars doing ridesharing every year in the US. We will sell each of them a gadget for $10 so our market is $10M if we capture all of it. This is similar to first principles thinking.
# people on the internet suggested few formulas:
- Price x Customer Base = Market Size (if price is 0, customerbase not matter)
- Price x Customer Base x Frequency of Purchase = Market Size
Two primary steps:
- Decide what you want to calculate for. Eg. Do we want to calculate the number of cups sold per year? Or how much money is spent by consumers on takeaway coffee? Are we interested in only India or the whole world etc.
- Calculate bottom up. Map out the calculation steps.
- Do not do top-down. Okay, the industry is $100bn, this industry probably will be willing to spend 2% on software products. That makes our TAM is $2bn. Wrong approach. 🚫
- Don’t use someone else’s market size. Car(
₹1L), accessory for Car(
₹20). If TAM for Car is
1Cr(1Lx100 Customers), your TAM is