Estimating market should be fact-based

Last updated 07:46 03/02/2014

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Q. I have come up with a cool product, how do I figure out its market potential?

A. Getting to this is a mix of black magic and basic nuts and bolts. There is no easy way to do this.

The potential for your product is a combo of how many customers will buy it and your ability to build, market, distribute and sell it.

The nuts and bolts part is about getting early sales. The black magic part is figuring out how to multiply those sales.

For market size, there are two traditional approaches.

The first is the top-down approach. It is the one most early-stage businesses think sounds better. You work out how many people in the world could possibly use your product and then take a percentage and use that as your Big Hairy Audacious Goal.

This is typically done when you have very little information about the customer set and have not understood who you will actually target for first sales.

For young companies and entrepreneurs without million-dollar marketing budgets, this method is at best irrelevant and at worst extremely misleading and dangerous.

Even if your numbers are spot on, there is no logic to show how you would access this supposed customer market. So it's really just pie in the sky.

The second is the bottom-up approach. This is where you take the customers you have and extrapolate out to predict how many more of them you can find and how quickly you can market and sell to them.

You will need a strong appreciation of who your core customer is and be able to at least make an informed guess of how many more of them there are.

This is a better way to go as it gives you a trajectory for proving who your customers are first then selling to a few and using that to prove out the growth circles.

For figuring your potential to access and monetise that market, there are myriad variables, so focus on the things you can control or at least influence, and run different scenarios for the elements you cannot.

You may be able to seek out similar- type products or even direct competitors and map your potential against their performance, then tweak it based on your point of difference and your ability to steal market share from them.

Whatever combination of facts, figures, graphs and guesstimates you concoct, be honest about your assumptions, realistic about your estimates and then seek to prove them both.

A forecast of product potential is only as good as the facts it's based on.

At the startup end of the spectrum, facts are slim, so your forecasts aren't much chop until you get some traction.

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Nick Churchouse is venture manager at Creative HQ, www.creativehq.co.nz

If you have a question for our experts please email laura.walters@fairfaxmedia.co.nz

- Fairfax Media

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