#6 | ? Are you working on the right product? Defining Market Size and Value Proposition

Daniele Dellavalle – January 2nd, 2023?

There is nothing worse than spending years in a startup only to discover that it can never grow enough to be worth the sweat and tears that founders put in. The first phase of Customer Discovery is essential for ensuring that the foundational assumptions of the business are sound and have the potential for scalable growth.?

Market opportunities are fueled by three ingredients: a large number of potential active users, clear future-user growth, and the opportunity to attract active customers or users.?

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Step 1 – define market size (TAM, SAM and SOM)?

Estimating TAM, SAM and SOM is a good starting point for the market size hypothesis.?

Total Addressable Market (TAM) refers to the total market demand for a product or service. It's the maximum amount of revenue a business can possibly generate by selling their product or service in a specific market.?

Example: For a startup developing a fitness tracking app, the TAM would be the total global market of individuals interested in fitness and health tracking.?

Serviceable Available Market (SAM) is the segment of the TAM targeted by your products and services which is within your geographical reach.?

Example: If the fitness app startup is initially launching in the United States, the SAM would be the U.S. market segment of individuals interested in fitness tracking.?

Serviceable Obtainable Market (SOM) also known as Share of Market or Target Market, is the portion of SAM that you can realistically capture or serve. It's your short-term target market.?

Example: Within the U.S., the startup's SOM might be health-conscious adults aged 20-35 in urban areas who use smartphones, which is a more achievable market segment in the first few years.?

A top-down estimate is a first step. You can use industry reports, market research, competitors’ press releases, university documents and discussions with investors and customers to size the overall market.?

Specifically, for web/mobile market an easy way to gauge the size of a web market involves the free use of Google tools brainstorming all the keywords that prospective customers might use to find your product.?

Another way to approach the market-sizing question is the 30/10/10 law of web/mobile physics by Wilson:?

• 30% of registered users will use the service each month?
• 10% of registered users will use the service each day?
• 10% of the daily users will be concurrent users of a real-time service?

Heads-up Founders!?

1. You should keep in mind that market research firms are great at predicting the past therefore a bottom-up estimate is usually more realistic. ?
2. In assessing an existing or re-segmented market, be sure to consider the adjacent markets that customers might switch from.?
3. Beware of the hidden barriers to switching like long-term contracts, sunk costs like training and installation.?
4. Calculating the audience without understanding who will pay money to access that audience is a mistake.?

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Step 2: Value Proposition 1 - Low Fidelity MVP?

The best way to think about the Value Proposition is as a contract between the customer and your company where the customer hires your startup to solve a problem. ?

The Value Proposition should cover three main items:?

Product Vision?

• What’s your long-term vision for your company? ?
• Which series of products are you going to develop? ?
• What’s the world look like after you arrive on the scene??

Product Features?

The Product Benefits / features list should be developed and seen through customers’ eyes. Then develop a user story, a short narrative that will explain what job the product will do.?

A user story is even more important in web/mobile channels, where intense competition often makes product differentiation harder.?

Once you have the feature list, you shape the product benefits: saves money or time? Relieves a symptom? Fun, relaxing, faster? Better? Cheaper??

Minimum Viable Product (MVP)?

The MVP is the summary of the smallest possible group of features that will work as a stand-alone product while still solving the core problem. ?

The MVP is a tactic for cutting back on wasted engineering hours, founders’ goal should be to get the product into earlyevangelists hands as soon as possible thus learning in the shortest time possible.?

Don’t build new features until you’ve exhausted the search for a business model!?

The low- and hi-fidelity MVPs are used very differently: while the low fidelity MVP is a quick and dirty solution to test whether you’ve accurately identified a problem that customers care about, the high-fidelity MVP will later test if the product is on the right path to solving that problem.?

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* Sources:?

The startup owner manual, Blank/Dorf?