Researching Your First Best Market
Market Research
April / May 2007
Volume 5 Number 2
Most of the entrepreneurs I work with are lucky in that they have multiple options for markets for their products. They are unlucky in that they have to figure out which one to go after first. This isn't an easy task; there are multiple variables to consider when looking at the options. It's best to consider possible markets objectively, with a planned strategy, in order to arrive at the best solution.
Let's clear up a few things before getting started. Unless you are an entrepreneur with deep pockets, you can't do it all, at least not in the beginning. You won't have the staff, industry expertise, or money to enter multiple markets simultaneously. Contrary to what you might think, venture capitalists want to see a focused business plan as the surest way to get a return on their money. It's nice for them to see that there are future options, but even they know that you can't do it all at once. And remember, biggest isn't always best. So, let's go through some steps to help you figure out which is your first best market.
You should keep in mind a standard list of questions and ask them for each potential market you are considering. Here are some common questions:
—What is the application for the specific market? This could be the same across all markets, but most likely there are variations in the application for each.
— What is the value proposition for each market? What this question is getting at is how your product/application is really differentiated in each market, and how much of an impact it will have in the market.
— What kinds of customers are there for each application in each market? What you are looking for are actionable characteristics that will help guide you in marketing your product. Who are they, where are they, what size are they, are they regulated, how do they buy, etc.?
— What is the market size for each market application? This is important, but remember again that the biggest isn't always the best. You need to also remember to get as specific as possible.
— Who are the competitors in each market? Be realistic. Just because no one has your technology (yet) doesn't mean you don't have competition. There are all kinds of competition, from inaction on the part of the customer to doing something manually.
— What are the issues in bringing your product to each market? There are certifications, regulatory issues, lots of competition, good old boys syndrome that creates a barrier to entry into the market, and stodgy markets that are resistant to innovations.
— What will it take to reach your customers? This is intended to help you look at the costs of sales efforts, distribution, promotion, etc., and thus help you give you some idea of what kinds of resources, both human and capital, will be needed to reach your markets. It can also mean tweaking your product for each application. Once you've thought through the basics, you'll have a better idea of what kind of product margins are realistic.
— What kind of experience or contacts do you have in each market? It's important to have some kind of exposure in the market. Many entrepreneurs do not have this expertise, which is normal, but that means that they should look to hire someone with the industry background once you decide on a market.
You may add to add specific questions related to your particular product or industries.
Now let's look at a fictitious example. Let's say you have a laser product with applications in the medical field (surgical devices and diagnostics) and in semiconductors. How do these markets measure up?
Your research indicates that the medical surgical device market might enhance surgeries and reduce complications by 25 perecent, resulting in savings of $500 million to potential customers. There are about 7,500 U.S. hospitals and 8,500 specialty surgeons in 100 surgical centers, spread out across the US, who could be customers. They buy mostly through major purchasing groups or distributors that aim to keep costs very low. The market sizes for specific types of cardiovascular and orthopedic surgeries that could use your laser are $300 million and $500 million, respectively. There are about 10 major competitors and you've heard of two new companies who might enter the market. You will need to make slight modifications to your product to accommodate both cardio and orthopedic applications, and they will need FDA certification, which can take years. You would need to hire some industry folks to help guide the product development, certification and launch.
The medical diagnostics market is huge, but after narrowing down the numbers to areas your laser can best be used in, the market is still about $900 million and covers about 50 different applications for which your product will need to be modified and FDA-certified. You would need some industry expertise for that.
Better precision and speed is what your laser brings to the market. Potential US customers include about 150,000 doctors' offices, hospitals, sporting organizations, corporate health centers, laboratories, and a host of other applicable organizations. Customers make purchases through many buying groups and many other types of distributors. There seem to be about 20 competitors for each diagnostic application, for a total of about 1000. The diagnostics market is extremely spread out, with lots of organizations, buyers, trade magazines and industry shows. This market is starting to sound very complex.
The laser application in the semiconductor field is optical lithography. Your shorter wavelength allows for more capacity on each chip, which spells more revenue for chip companies. Your research indicates that the U.S. market for such lasers is about $400 million. The product would be sold to about 200 U.S. fabs, and while they are spread out, there are only a handful of buyers that can be reached through several trade associations, shows, and journals. You may need to modify the laser to accommodate different chip sizes. There's no formal certification needed, but you must prove results to customers. You have a few contacts in the materials, not equipment, side of industry.
So what's the upshot of all this for our example? You decide that although the medical diagnostics market has the most revenues, it is fragmented into so many segments that it would take too much time and money to develop the product for each segment. The two surgical markets sound reasonable: both markets seem reasonably attainable and are growing due to the aging population. The semiconductor market is quicker to market, has a reasonable market size, and is simpler to get into, plus you have a few contacts in the industry. You then decide to start with the semiconductor market, but will look at the two surgical markets in 2-3 years and may begin development then, after some traction in the semiconductor industry.
Obviously this is a very basic example and you would need to research many more layers of details to arrive at your first best market. However, by applying some structure around your research and analysis, your task will be doable and your path to success should become more manageable.
Betsy Gillette is director of market research and planning for Technology Ventures Corporation.
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