The Defining Dozen: #5 – How big is the market and how big will you grow?

Learn how to answer the fifth of the "Defining Dozen" questions – How big is the market and how big will you grow? – so you can write an effective business plan.

In Step 3 of "10 Steps to Open for Business," answering the “Defining Dozen” questions is vital to writing a good business plan. The Sloan brothers describe them in detail in StartupNation: Open for Business, their book. Here is the fifth of those questions, in a special book excerpt:

How big is the market and how big will you grow? Exploring the market and understanding the growth potential for your idea is essential. To get a handle on this, you have to understand the demographics of people in your target market. Distill those people into categories of low level of need, medium level of need, and high level of need for your offering. You can actually construct a target, like the archery target you may have tried to hit as a kid (the one with the concentric circles). Except the “bull’s-eye” in this case is your sweet spot—the target market that will be the focus of your initial marketing and sales efforts. Once you’ve penetrated that inner circle, you can grow bigger by broadening your offerings and your marketing and sales efforts to include the people with a medium level of need and so on.

To get a fix on the degree of need that may exist for what you’re going to offer, try to figure out which market is easiest to penetrate. Is the market growing? If so, by how much? Can you figure out if the market is already saturated, mature, or shrinking? We find that a great deal of the information you’ll need can be readily gathered over the Internet. The information you’ll find there comes free in some cases, but there are also studies online that have been performed by major consulting firms. These studies are often purchasable and can be really helpful in facilitating a deeper understanding of a market and your opportunity within it. When a company really understands its markets, it can tackle them methodically.

Researching your growth potential will give you a sense of how big your company can be as well as help you set targets for rolling out new products.

A note of caution: Don’t get caught using “Chinese math.” It’s all too easy to pile up grandiose numbers for your market size. The phrase “Chinese math” was used back in the 1990s during an era when consumer product companies were eyeing the billions of consumers in China. But eyeing was about all they could really do. Even though there were billions of potential consumers there, they remained just that—potential, not real. This was largely because there was no viable way to get access to them.

Let’s say you wanted to market water purifiers to remote Chinese peasants. Their need was certainly extreme. But they lived down dusty roads in villages, crowded into bare-bones homes without TVs, magazines, or billboards. And since they commuted to work on bicycles, radio advertising was also out of the question. Not to mention that China was still mired in a strict form of communism; freedom of information and disposable income were hard to come by. Even though the market was vast, the obstacles for selling water purifiers to those potential customers would have been insurmountable.

Avoid using “Chinese math” in your market estimates. Get real about how many people there are in your market—and about whether you can reach them effectively.

Excerpted from StartupNation: Open for Business Copyright© 2005 by Jeff Sloan and Rich Sloan. Excerpted by permission of Doubleday, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Learn more about the Sloan brothers’ secrets to business success – buy the book StartupNation: Open for Business now.

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