Market choice impacts everything. Is it a real market inhabited by buyers, a hype frequented by the-next-big-thing sniffers, or a dead-end infested by freeloaders? Will you drown in a sea of competition or burn out by trying to create a market that simply isn’t there? Does it offer enough room to grow? Will you be able to attract external investment?

Yes, it impacts everything.

Market choice is made early, and determines your likelihood of success. It makes a difference between a hobby and a business. Between having a fun experience and getting stinking rich.

But how do you answer all these questions? How can you make such an important decision so early on? Here are a couple of concrete steps you can take, none of which involves reaching out for your crystal ball.

The Nuts and Bolts of Market Research

1. Name Your Market

This step can be surprisingly difficult. But the essence is simple. Imagine being a fishmonger or a fruit seller. You would have to choose a market where you’d offer your products. You would do bad selling fruit at the flea market. Instead, you would look for places where others sell and buy fruit: the fresh food market, supermarket.

To name your market therefore does not mean to invent a new name. It means to find the existing market of sellers and buyers of similar products.

Not every market is as well established as the local fresh food market around the corner. Sometimes you are bringing a different offering to an existing marketplace.

Imagine you are building Cater.me, an online service that enables people to organize their own catering using a planning software and a rental service for catering equipment. You could either be choosing to target the home catering market or a professional catering market. Both are currently dominated by the catering service providers, and existing software tools for catering professionals.

2. Name your Market Niche

To enter an existing market means to compete. It may seem daunting to take on a big established incumbent. And it probably is – unless you select a smaller market niche to start from.

Dave McClure calls this a “Niche to Win” strategy: suppose you’re building products for women, competing against big brands, the likes of Proctor & Gamble or Johnson & Johnson. But unlike them, you choose to target a very specific niche: professional women who are first time mothers. By focusing on a much more narrow demographic, you can build a product that are solving specific their problems, and use much more targeted and efficient marketing.

The niche may be too small to be interesting for the big competitors. But it can allow you to compete with an inferior and even more expensive product.

How do you determine a target niche? This article from Mandy Porta on Inc.com providers a couple of ideas:

• Dig deeper in your existing customer base, and determine opportunities to up-sell additional services
• Look at niches your competition is not serving well
• Choose specific demographic (age, location, gender, income, occupation…) or psychographics (attitudes, values, interests/hobbies…)

Starting in a niche can give you more time you to develop your business before going into a head on competition. However, there has to be a way in the foreseeable future to grow out of the niche and into the bigger market. Otherwise, you will invest a significant part of your life in building something with little potential.

3. Calculate Market Potential

A budding entrepreneur was pitching in front of a panel of more experienced colleagues and investors. His product was targeting venture capital firms, at a price of couple of hundreds per year. The room went silent. The jury members looked at each other. One spoke what all were thinking: “in the highly unlikely scenario that you get all of US VC firms on board, your total annual revenue will remain under half a million. In best case, you are describing a job, not a business”. It turns out, there are not that many VC firms.

Don’t choose a market with no or too few customers. Give yourself a chance – at least on paper. Spend some time researching, and try to find out:

• The total amount of money made in your market
• The % of the total that goes to your segment
• Is it growing or shrinking?
• Potential number of customers (projects, licenses…) in your segment

At this point, you may be wondering:

But where can I find all this information?

This is no easy task, but don’t give up after half an hour of unsuccessful Googling. Look at:

• Reports of market research companies (e.g. Gartner, Forrester). These can be expensive, but often you can find an online article that summarizes a recently published report
• Companies active in the market. Their websites can prove to be an invaluable source of market information (tip: check out their news section). To find out more about them, use CrunchBase to find out about their recent investments, LinkedIn to research their employees, Internet Archive to research historical versions of their web sites, compete.com or alexa to estimate their traffic
• Keyword research tools to estimate demand (the number of searches for terms related to your product) and understand what people are looking for. There are plenty of tools that will do the job: Google Keyword Tool (free), Wordze, Keyword Discovery, Wordtracker…)
• Government resources. For example, the Bureau of Labor Statistics can help you find industry data and growth projections, and http://www.census.gov can help you find demographic information (in the US)
• Trade and professional organizations and their websites
• Speeches, presentations and articles from industry experts and consultants, material from trade shows and industry conferences

Pour your creativity into this. The better you get to know the market, the more you increase your chance of success.

4. Research your competition

The right number of competitors – not too few and not too many

Just like when you hear the birds stop chirping in a horror film, you ought not stick around if there are no others making noise about your idea.

Isn’t that great – no competitors?

Not really. Okay, assume you are somehow magical and have insights no-one else has had and there really is a market for the idea. You will have to do a lot of work to figure everything out. This is the irony of the so called “blue ocean ideas”. You will have to somehow identify who your customers will be. You will have to convince everyone that your idea is something for them. The only way to do that is to guess and iterate, guess and iterate, guess and iterate. And spend lots and lots of money doing that.

And guess what. The next person interested in your idea will look at what you have done and begin from where you are at, not where you started. Because as you promote your product, you lay out all of your groundwork in plain sight for anyone to see and benefit from.

So, before the axe murderer pops out from behind a tree and buries a meat cleaver in your cerebellum, get out of the forest where there are no birds chirping.

You want to be the axe murderer!

Well not really, it is not so cutthroat. What you really want to do is build and extend what others have done. Maybe even go in a different direct from them. So, it is important to know who your competitors are.

How do you know who your competitors are?

Sounds like a stupid question. If you really want to benefit from market research, you should think about this question really hard.

A competitor is someone who solves the same problem as you do.

Thinking in this way will broaden the field of competitors you are going to look at. An example would be if you were looking to make a task management system your competitors are not only other task management systems, but also email solutions, discussion forums, Gantt chart producers.

Steps to identifying competitors:

1. State the problem that you solve
2. Search Google for that problem
3. Look at the sites from the perspective of someone with the problem you solve
4. Do they offer something I would use to solve that problem
5. If the answer is yes – they are your competitor
6. Once you have looked a few of these set up some categories: i.e. email providers, other tasks management systems, Gantt chart systems
7. Take a few that look quite slick and enter their url into an internet page ranking system Alexa
8. Those that get down to a rank of 1 million are doing really well.
9. Put the urls of the top 5 ranked sites in each segment you identified into a spreadsheet

It’s time to mine

What most people do not realize is that the websites of most company contain a gold mine of information useful for competitor research.

Blogs and news items, especially from the early days of a company often reveal some of their initial ideas, how many customers they have or had at that time, what investments they received. They also contain statements of their value propositions or what they thought was their value propositions at that time.

The “about” section sometimes reveals how many employees they have or how many customers they have. Landing pages often list out arguments to objections potential customers may have etc.

Do they have Twitter account? Some companies use Twitter to deal with customer questions. The number of followers is also a reflection of the number of customers.

Collect the data relevant to scaling:

1. In your spreadsheet add columns for employee number, what they are selling, value proposition, Evidence of big investments (yes/no), Are they scaling themselves rapidly (yes/no)
2. Mine the sites for this information.
3. The most important is to get a sense of how fast they are growing – just make a judgement on whether or not they are scaling.
4. Take an honest look and what you found – are those closest to your idea scaling?
5. If not consider shifting towards ideas from those who are

It is also useful to pay attention to their messaging. You don’t want to rip off their wording, but the general tone and direction they are discussing can be very insightful. Who do they think they are targeting? Add a column title “Notes on messaging” when something strikes you make note of it. Remember, you can also use Internet Archive to research historical versions of their web sites.

A noisy forest is also not pleasant

If everyone is doing the same as you want to do, or there are big innovative players dominating a market you may want to reconsider.

CAUTION: such a decision should only be taken in like of your market potential calculation. There might be a lot of competitors but if the market potential is substantial, there may still be enough room for you too.

5. Understand Your Market Type

According to Steve Blank, there are three different market types:

• Existing: you are bringing a product that is better or faster than established products
• New: you are enabling something that was not possible before
• Re-segmented: you are either targeting:
  • The low end: you’ve found a way to do the same as other, only cheaper
  • A niche with specific needs – currently not addressed by existing products

Why should you care? Because according to Steve, the market type impacts everything: how you’ll market and sell, how quickly your customers will accept your product, how much cash you’ll need before you start making money…

Here are some pros and cons of each market type:

• Existing market is great because you start from the validated need for your product, customers willing to pay, and there is no need to educate the customers. But, do customers care about performance? How easy would it be for existing companies to achieve the same improvement?
• New market implies little competition. You may be tempted to say yours is a new market. Think carefully, more often than not, it will be a re-segmented type. And new is not necessarily better. You may burn lots of money educating people they need something they didn’t have before only to realize people don’t want it, or that you are too early, or that you run out of money just in time for the competition to enter the market you prepared for them.
• Re-segmented market may seem like the best of both worlds. However,
  • at the low end, are there customers willing to go for the “good enough” at the lower price? Are you able to run a profitable business at that price? Established companies often abandon the low end – for a good reason.
  • in a niche, how much do the customers actually care about the specific problems? How easy would it be for existing companies to adapt their products to solve the problem for the niche?

6. Make a Choice

Yes, you do get to chose your market. Even when you realize your initial idea pushes you in a certain direction, you can repurpose it for a different market.

Let’s say you are building Meetingz, a online meeting scheduler for enterprises. Your market is SaaS productivity tools, which generated less than a billion in revenues in 2011 ($700M-$800M), and you are competing with Google, Microsoft and IBM, but also some growing “challengers”, like Atlassian and Zoho. This does not sound like a large and inefficient market, not yet disrupted by technology. Maybe Meetingz could be repurposed as Nurse.Me, an online scheduling tool for home visits of nurses, in a growing market of personalized medicine.

Do not forget about your passion and personal preferences. You’ll be stuck working with the people inhabiting your market for a while. Is this where you want your contribution to be?

And know your choice might change.

What about Customer Interviews and Surveys?

No, we haven’t forgotten about this. In fact, making sure you are building what your customers really want is so important we’ll spend a whole lesson showing you how to do that.

Conclusion and Next Steps

Market choice impacts everything, so do take the time to make it wisely. Look back at your different ideas and re-evaluate them based on what you learn.

At the same time, don’t let yourself be blocked. You can spend days and months digging through market research. Aim to get the relevant data within one week, so you can make your decision and move on. If you have questions, just fire away – we’ll do our best to help. Simply use the comments below or send us a mail.

Next up, you’ll dive deeper and learn how to design a money making machine.