Identifying Opportunities Prt 2

In Part 1 of the Identifying Opportunities Series I discussed markets vs customers and how I like to think about market segments.  In Part 2 I will focus on how opportunities and innovations come about.

It may seem overly simple, but business opportunities and innovations come from one place - problems.  Identifying and truly understanding the problem is not as simple.  I like to categorize problems into 3 buckets:

  • market inefficiencies
  • product or service gaps
  • customer driven issues

It may be easier to see how the first two categories can lead to business opportunities and innovations.  The third category, customers, may be more difficult.

Customers drive business and create businesses.  For example, a service company may have a client that in turn provides services to a different end user.  This waterfall affect demonstrates how customers may have their own customers to serve.  Additionally, customers may drive a business in one location to open a 2nd location, making the business more accessible to a greater market segment.

Regardless of the problem category, understanding why the problem exists and who it affects is critical when evaluating an opportunity.  Problems exist for one simple reason - there is a friction between two different entities.  These entities may be business to consumer (or product to consumer/business), consumer to consumer (how a transaction or relationship is or is not working) or business to business.  If the friction (often called pain-point) affects enough people then removing that friction, via innovation, is the first check-point when identifying a "good" business opportunity.

Assuming our opportunity affects a large number of people, the next step is to determine "will the business float," ie, will the opportunity work as a business.  I want to be clear, at this point we are not creating a business plan, but instead a basic top-level gut-check on our potential opportunity.  I find answering the following questions really helps clarify both the opportunity and what potential issues the business could face.

Is the market real?

–Who is the customer?

–What do they want and at what price?

–When do they want to buy it?

–Where do they want to buy it / use it?

What are the barriers to entry?

–Regulatory (FDA, CPSC, etc…)

–Competitors

Looking at industry trends

–Is the industry growing or shrinking?

–What can affect the industry?

The last question I like to consider is "What are the risks?"  And that is where we will pick things up in the next post.

 

 

Identifying Opportunities Prt 1

Before drafting a pitch deck, raising financing, or thinking about scaling a business, it's critical to understand the difference between a market and a customer.  Differentiating markets and customers is where I begin my class lectures each semester and where I will begin this post.

Customers and markets are often confused.  Additionally, general markets and the actual target market of interest are often further confused.  A lot of "green" entrepreneurs highlight market figures of billions of dollars.  For example, I might hear, "As a cutting edge off road tire company we are entering the approximately $200 billion dollar auto parts market."  What they fail to identify is that their target market is actually a segment of the auto parts market that represents about $400M in annual sales.  Investors are not stupid (generally).  This type of market analysis leaves investors feeling like the entrepreneur does not really understand their product or service.

When analyzing markets I like to start large and end small (tire market -> off road tire market). Sticking with our auto tire example, the largest market segment is considered our Total Available Market or TAM.  The TAM includes the total number of auto tires sold each year.  We know this figure is likely larger than the sales we could actually achieve with our off road specific tire, ie, not every tire sold is an off road tire.  From the TAM we determine the number of off road tires that are sold annually.  This is our Served or Serviceable Available Market (SAM).  The SAM is a segment or portion of the TAM.  The next step is to think about what percentage of the SAM could be converted into customers (people who buy our product).  This segment is known as the Serviceable Obtainable Market or SOM.  Understanding how TAM > SAM > SOM will not only help you understand your market, but will also help you with financial forecasts, inventory forecasts, and growth strategy.

The pie chart illustrates how the off road tire market is only a portion of the TAM.  The SAM (green) is the real market segment of interest, and the SOM (purple) is the market share we hope to take in sales over some duration of time.

The pie chart illustrates how the off road tire market is only a portion of the TAM.  The SAM (green) is the real market segment of interest, and the SOM (purple) is the market share we hope to take in sales over some duration of time.

Another mistake I see over and over is confusing market figures with sales figures.  Markets do not purchase products or services, customers do.  A market is nothing more than a group with the desire and ability to purchase a product or service.  Within a given market segment it is important to understand that not everyone will want to buy your product or service and that this is ok.  What is most important is understanding why certain people will and will not buy your product or service.  This is knowing your customer - the individual or business that actually pays for your product or service.