Don’t think, notice: notice a problem around you that needs a solution
Most entrepreneurs approach starting a business coming up with a “Big Idea” or solution first. Then, they work backward to figure out what customer problem their idea actually solves. It is estimated that this way leads to business failure in 98% of the cases. However, working on an idea that sounds plausible doesn’t necessarily mean that this is providing a solution to a problem people care about in a meaningful way. Focusing on problems first is often a challenge for most entrepreneurs, as they fall in love with a solution and start to see that as something really doable and actively start working on it. However, the reality is that a lot of solutions don’t solve a problem, and so products fail because nobody needs that solution.
As Paul Graham, founder of YCombinator, puts it: “The verb you want to be using with respect to startup ideas is not ‘think up’ but ‘notice.’ At YC we call ideas that grow naturally out of the founders’ own experiences ‘organic’ startup ideas. The most successful startups almost all begin this way.”
Figure out if you can find customers for your idea.
Finding a solution for a problem, it is not going to do the work. You need to make sure that your potential clients would really care to solve that problem. Finding a solution without a passionate client will never lead to business success. The second step of the Prioritization process is about getting to know your potential clients, how they feel about the solution you are proposing to them, and to how to reach them.
During this step, you want to figure out if your idea, once fully developed, could really get the interest of your clients. A way to achieve this is by interviewing different customer segments trying to give an answer to a very – apparently – simple question: What is the best solution to your problem? During this phase, you collect information from the people your potential product would target, rather than just assuming who they are and start looking for patterns in the market. Many would suggest using surveys and interviews to collect this information. You want to start selling your product – even if you don’t have it – in the same way as you would do if you did have it. Once you have identified your customer segments, it is important that your idea is solving a problem your clients have a strong need for – you want to build something that is for them a must-have, rather than a nice-to-have. You should be able to measure and assign a value to “how big” the problem we’re trying to solve is for your customer segments. This value – called pain – can be assigned based on the answers to simple questions such as, “how important is for your segment to fix the problem you are trying to solve?” or, “which ways are currently in the market to fix this?” The bigger the pain, the more likely a segment will be early adopters, and the bigger the pain our business solves, the more likely it will be successful. Customers with a lot of pain are looking for someone to help them, and they will turn out to be extremely happy to listen to our solutions.
Determine how big is the market for the product that you want to build.
You have identified that there are customers in immediate need of a solution to their problem and willing to pay for it. The next step is to determine how big and wealth is the market for the product that you want to build. An extended analysis of the market need would probably go beyond the scope of this book, so I will try to explain the basic concepts, offering some simple tools for your research. To do this, I need to define what, in startup terms, is called TAM, or Total Available Market. TAM can be defined as:
- the total number of potential clients or customers
- the number of users in your target market. That will help you figure out the potential number of units you will sell into that market, assuming that users are going to buy one or units.
- Most commonly, the total amount of dollar revenues from the potential market assuming that your business achieved the 100% market share
The goal is not to write down a big number, but to develop a defensible number to you and your team believes in. Entrepreneurs, armed with endless optimism, tend to have tremendous enthusiasm and inflate the TAM. Ideally, you should look for a market that is big enough for you to get critical mass, but at the same time that is not that so big that you get overwhelmed by competition and not have sufficient resources to compete. In order to calculate TAM, you will primarily use a bottom-up analysis. In this way, you can actually know how many users feed your end user profile. This is a must-have number for your market research. Once you have found have the number of users, you can determine how much annual revenue an individual and user this worth, thus how much they spend on average per year. We can do this by multiplying the amount of revenue per user by the number of end users; this number represents the TAM.
You want to look for a TAM of 20 million up to 100 million per year. A TAM over 1 billion raises flags and anything less than 5 million is really a niche market and, at the same time, doesn’t convince investors. But an initial TAM of 5M could be a good thing if you feel you can truly capture that market quickly and with high profit margins. That is because you are very likely to be cash flow positive in that market and establish a good niche that you can then build on. So the key factors in how to determine your market size are the profitability of that market, the speed in which you can capture it and how that position, going forward, can ultimately help you to achieve a dominant market share. The combination of all those factors is what makes it an attractive market.