Why Entrepreneurs Must Research Market Size

March 24, 2015
"Everyone will buy this product!" This overambitious misjudgment underscores an all too common fallacy in the world of entrepreneurs: the entrepreneur's bias. After all, ideas quickly become "your baby," and no one wants to hear their baby is ugly. But this thought process, could be a costly mistake. Instead, entrepreneurs need to ensure there is a need for their "baby"

Reasonably and thoughtfully estimating an idea's potential market size is a key step to successfully bringing an idea to market. When seeking out potential licensors or investors, you can bet they’ll consider market size to judge the revenue generating potential of a new idea.

Put simply: an invention or concept that could only potentially appeal to a small population is typically a riskier investment than those with mass-market appeal.

Related: Know Your Target Market

How do you go about determining the size of your idea’s potential market? Sure, you could hire an expert to conduct a market analysis. However, I adamantly believe that the more involved inventors are, the more information they are able to absorb, and the better off they’ll be in the long run.

With government data, trade association data, censuses and customer surveys at your fingertips, there is no excuse to not at least estimate a ballpark figure.

For the sake of this article, let’s say you’ve invented a new product that you believe will dramatically improve the way people groom their dogs. Using publicly available data and a touch of critical thinking, you can easily estimate the idea’s potential market size.

According to the 2013-2014 APPA National Pet Owners Survey, there are 83.3 million dogs owned in the U.S, which is up from 78 million dogs in the previous year. So your market size is 83.3 million, right? Not quite.

According to the same APPA survey, 47 percent, or 56.7 million households, own a dog with 30 percent of those households owning more than one dog. That leaves you with about 17 million households; since it’s likely each household will only need one. Keep in mind, this estimate doesn’t factor in price point, perceived value, necessity and durability, which are all potential purchase objections that will dictate market penetration, or the percentage of the target market that consumes a product or service. Market penetration is why not every household with a dog will buy your product. So, while 17 million could be the true market size, you need to take these factors into consideration and drill down to come to your true targeted market demographic.

Because even if your idea is truly revolutionary, it is impossible to achieve a 100 percent market adoption rate. To put things in perspective, as of January 2014, 10 percent of American adults in the United States still don’t own a cell phone. As of April 2014, 53 percent of Fortune 500 companies have adopted marketing automation. And as of October 2013, 52 percent of Americans 12 to 64 own or use a household tablet.

Taking the time to research the market your invention will potentially enter will help you answer these important questions:

Is the potential market size big enough?

For example, you may discover that the market size is too niche to be even worth pursuing. Realizing this early on, before any resources are exhausted, will save valuable time and money that can be contributed towards other ventures.

Alternatively, you may find that there is a greater potential market than originally anticipated. Having this information prepared, with reliable sources to support your assertions, can be immensely valuable when approaching potential licensing or acquisition partners.

Related:10 Questions to Ask Before Determining Your Target Market

Do you understand your target market’s preference?

While conducting research to understand potential market size, you will likely learn valuable lessons about the characteristics of your target demographic. Even seemingly minor data such as spending habits, aesthetic preferences and trend studies, along with price elasticity can alter the trajectory of development, patenting and marketing. Understanding the nuances of your product's potential market is key to the survival and success of your product.

Are you someone you’d want to go into business with?

Potential licensors and business partners will respect well-informed entrepreneurs that have taken the time to conduct research and understand their product and the target market. Using exaggeration and unsubstantiated assertions to support your claims is not a responsible or professional way to conduct business.

While it’s important to be educated, ultimately licensing partners are the true experts of their product lines and consumer preferences. I always urge entrepreneurs to maintain an appropriate level of detachment to their products.

So, before cashing in your 401k or quitting your day job to pursue an idea, be sure you do your part to learn the market. Both you and partners will appreciate the diligence in the long run.

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