Market Analysis
This area of business planning is always a quagmire of terms and definitions, but it’s not difficult if you step through it slowly and deliberately.
Ultimately a market is the interception of a product with a number of buyers – and exchange of value. And ultimately a market is just the prioritization of spending in one market to another.
To put this in “business” and “economic” terms:
• Total Market is the sum of all $, £, or € spent by all buyers of a product or a class of product..
• Value Proposition is the price a buyer is willing to give in return for the value they derive from the product.
• Competition is anything that prioritizes a buyer‘s spending on something other than your product.
• Competitive Advantage is a value proposition that prioritizes a buyer’s spending on your product rather than a competitors’, usually expressed in terms of Unique Selling Points.
I’ll carefully side step Available Market and Addressable Market for the moment, and simplify things for illustrative purposes.
So then, the Total Market are all those $, £, or € that could be spent on the class of product that you are selling.
For example, if your product is a new notebook computer, the market for it will be all potential buyers of notebook computers. And your share of that market will be those buyers you convince to reprioritize their spending away from the competition, with your value proposition and completive advantage. In this scenario the market size (the “pie”) is static and you are just taking a more market share (a bigger “slice” of the “pie”) from your competitors.
Your notebook may also have some very strong features that convince buyers of more powerful laptop computers to switch to your notebook. In this scenario you, and other notebook manufacturers, are increasing the market size (a bigger “pie”) by convincing this buyer that your notebook as enough value for them to switch.
There are two ways to think about market size; as the total $, £, or € spent (e.g. $10B to be spent of netbook computers in 2014), or the total number of purchases (e.g. 50M netbook computers will be sold in 2014). Of course the relation between those numbers is the Average Sales Price (ASP). If given the choice, I always prefer dealing with the latter.
So, when considering your market size, think about the following:
• How many buyers are there for your product? How many purchases?
• How much is being spent on similar products or services.
• How much is being spent generally in the space your product or service is in – remember it’s a zero sum game, if buyers spend money on your product, that’s $, £, or € that will not be spent somewhere else.
• Remember, if your competitive advantage is lower price (ASP), then the market size (in $, £, or € terms) is shrinking.