New business ideas – how to market forecast and research – and how not to
If you’re new to business you probably find yourself attracted to lots of different opportunities. And that’s a good thing, because it shows your entrepreneurial side. But when you come up with an idea or across an opportunity – how do you take advantage without burning up cash – and get investors interested? Get a realistic of your potential market share and find out if your target market really want what you’re offering.
Why ‘top-down’ forecasting is dangerous
Firstly, lets talk about what you shouldn’t do – ‘top-down’ forecasting. In other words, calculating how much of a market eg “the global market for widgets is $100 billion” you need to be successful.
For example, let’s say you want to open up as an Internet Service Provider for China. Here’s how the top-down model works:
- There are 1.4 billion people
- 20 per cent want Internet access
- We will secure 10 per cent of that potential audience
- Each account will yield $240 a year
- Size of the market is $1.4bil x 10% addressable market x 20% success rate x $240/customer = $67 mil/annum.
But that’s not the way things would pan out
Why? Because no business can aim for those sort of figures without at least having proven that customers will buy from them.
Some investors might swallow this story (and plenty have, just watch A Current Affair), but most experienced investors (especially venture capital managers and angel investors or successful entrepreneurs) know that this is simply hype.
Instead, forecast ‘bottom-up’
Bottom-up forecasting models start with real-world variables. For example:
- The number of prospecting phone calls a telemarketer can make in one day (30)
- The number of prospects that qualify as a potential customer of the business (30%)
- There are 240 business days in a year
- A salesperson can close sales on 10 percent of qualified prospects
- Each sale is worth $240/year
- 30 calls/day x 30 percent sales prospects x 240 Days/year x $240/customer = $500,000/annum/salesperson
What can we realistically argue from here?
Using the figures in this model shows that a team of 10 sales people can produce $5 mil in revenues. It offers the entrepreneur a real-world projection of cash flow and projection of costs (number of prospects, number of salespeople etc.).
How to do market research when you product or service is new
In the early days of an enterprise there’s a lot of uncertainty about exactly what you should create and what customers really want.
In these times, traditional market research is useless because there aren’t any surveys or focus groups that can predict customers’ acceptance for a product or service that you can barely describe.
Would you buy a new computer with no software, no hard discs, and no colour that simulates the real world?
Use a “get going” prototype
One answer is to take a prototype to market and get customer feedback (good and bad!) quickly. If you spend time planning, waiting, pondering and looking for ideal environment with all right information (will never happen anyway), the market opportunity will pass you by.
What you are after is a first release of product or service. It won’t be perfect. However, the revisions you make based on customer feedback means:
- you’ll have a better idea if your product/service is going to be a winner or not
- you have some real-life research to show to investors
- the next round of customers will have a better experience than the first.
Speak to any successful entrepreneurs and they will almost all tell that that their biggest mistakes were not getting product or service into customers’ hands sooner.