Customers are not all equal: In fact, understanding how valuable and attractive your market segments are, is crucial for setting a winning strategy and choosing where to play.
Managers of small and large companies face this decision on a regular basis. Choosing which market opportunities to focus on, with no doubt, is one of the most critical decisions you will make in your business. It is crucial not only because this choice is key for creating value and generating sales, but also because it has a long-term impact on the DNA of your venture. The market choice influences the venture’s identity, culture, structure, brand name, and many other aspects which are difficult to change down the road, or might even be irreversible.
So, when you set your strategy, you must thoroughly investigate your options, and understand the pros and cons of each market opportunity on your table, so that you can choose a promising path. Whether you foresee only one single market opportunity, or have a set of possible opportunities to choose from, take the time to carefully evaluate the attractiveness of your option(s), or else you may find yourself running in the opposite direction. In other words, you must look before you leap.
But what makes a market opportunity more or less attractive? Research on motivation and goal setting clearly emphasizes the importance of setting goals which are both desirable and achievable at the same time. Hence, an attractive market opportunity for you to focus on is one that is likely to produce significant potential for value creation (i.e. desirable) and that poses relatively few challenges in capturing that value (i.e. achievable). Here are few tips on how to assess these two dimensions:
Assessing the potential of a market opportunity
Estimating the potential of a market opportunity is critical to your evaluation process. It looks at how BIG this opportunity is and if it is worth pursuing. And if so, how much value can we create if we choose this path. To evaluate the potential of any market opportunity, you will need to understand three key factors:
1. Compelling reason to buy
If no one wants to buy it, it isn't worth anything. The first thing you need to learn about a market opportunity is whether someone will really want what you have to offer. If the compelling reason to buy is low - it’s simply a ‘No-Go’, because demand will not fly.
Note that the only way to assess this factor is to look through the eyes of your customers. It’s not what you think, it’s what they think that counts - what they say, or even more importantly, what they do. So, go out of the building and talk with as many potential customers as possible, to validate your believes.
2. Market volume
Satisfying a real need is an important condition for creating value. Yet, it is the market volume that will determine to what extent you can sell your product and, thus, to what extent you will create that potential value!
Try to estimate how many customers actually face this need – now and in the near future- and how much they will be willing to pay for what you plan to offer them. Objective answers to these questions are the basis for estimating the volume of the market.
3. Economic viability
The last factor for assessing the potential of a market opportunity estimates the economic benefit of this customer segment for you. Without getting into a detailed profit-and-loss calculation, it refers to the basic elements that influence the economic value of a market opportunity, by estimating the size of your margins, and the customers' ability to pay the price. In any case, make sure to talk with your ‘economic buyers’ to understand their perspective.
Once you have thoroughly gone through these three key factors, you can estimate the overall potential of your market opportunity.
Assessing the challenge of a market opportunity
Assessing the challenge of a market opportunity is just as important to your evaluation process. While the potential measure is assessed in and of itself, this parameter examines your own capabilities to succeed in the market, given the resources and capabilities that you already possess. It looks at which obstacles lie ahead if you decide to pursue it, what will be your main risks, and how difficult will it be for you to overcome them and conquer this market. To systematically evaluate the challenge of any market opportunity, you will again need to assess three key factors:
1. Implementation obstacles
On your way to a successful market launch, you will face challenges in creating and delivering the product. Assessing these difficulties, and the additional resources that you will need to develop or acquire in order to face them, is critical for your evaluation. Remember that while innovators often give much thought to the challenges of creating the offering, they often tend to neglect the challenges of bringing it to the market, which may sometimes be much more difficult. So, give it careful attention.
2. Time to revenues
Your clock is ticking and money is usually burned quickly, so the speed in which you can generate cash flow through sales is definitely a major consideration. Think about how long will it take you to bring the product to the market, and if the market is ready for it. Of course, this time element is tightly related to the obstacles that you assessed above. However, they emphasize two different perspectives that are both important when seeking to understand the underlying challenges of a market opportunity.
3. External risks
Lastly, since you are not playing in a vacuum, your success can be put at risk by many companies and players in your business environment. Although you probably cannot control this risk, it still must be taken into account when assessing how difficult it will be to succeed in any specific market. Think how threatened you are by competition and how dependent you are on other companies or players to estimate your risk level.
Once you have thoroughly gone through these three key factors, the overall challenge of a market opportunity becomes more apparent.
To perform this evaluation step by step, and find out if you have a winning market at hand, you can apply a new business tool - the Market Opportunity Navigator - that will guide you through this process. It offers a dedicated worksheet to evaluate the potential and the challenge of each option, and clear guidelines on how to assess each factor.
Overall, using such a structured process will help you to perform a comprehensive evaluation, and to make sure that you have not missed any important consideration. It will also enable you to compare different market opportunities, and to make a more informed strategic choice on which markets to play in.
By Dr Sharon Tal and Prof Marc Gruber, co-authors of Where to Play, 3 steps for discovering your most valuable market opportunities, published by FT publishing, out now on amazon, priced £16.99. For more information go to www.wheretoplay.co