When I announced my product management course, Idea To Revenue Masterclass, I asked the folks who manage product teams — Directors, VPs, SVPs of Product — what they’re looking for in their product managers.
The responses I got were eye openers.
Here are some of the replies I got, with certain parts bolded by me that I think are super important:
“A well balanced product manager knows how to take a concept from ideation to delivery. I find some are strong in one but not the other.”
“Our product managers need to learn to drive product innovation by deeply understanding the ecosystem in which our customers operate, address the most pressing customer needs, and ensure we deliver business and customer value and drive company revenue.”
“Currently, our PM team is not leading. They mostly focus on fixes to the current products. They need to be more strategically driven, and be able to size the market opportunity for new ideas. As a result, to be honest, our executive team is not comfortable empowering our product managers to make decisions, and so priorities keep changing constantly.“
In other words, they want product managers who can be strategic product leaders that can drive innovation and deliver business results… not just be backlog grooming sprint release operators.
Having worked with 100s of product innovators and numerous software and digital products and services, I’ve learned that the best product managers think and act beyond tactical activities like backlog grooming, sprints, requirements, stories, releases, user testing, etc.
These activities are important, but in and of them they don’t drive innovation and don’t deliver business results that matter.
The best product managers think and act strategically — that is to say:
- They think about and pursue monetizable market opportunities.
- They think about and actively work at tying their activities to business results that matter — acquiring new customers, increasing LTV or ARPU, speeding time to market, etc.
- They think about the “whole product” — not just the core software app itself, but also how to market, sell, deliver and support that product to customers — and execute accordingly.
It’s this strategic perspective that then drives their tactical day-to-day activities.
In this post, I’m going to talk about one of the ways — one of the most important ways, actually — that the best product managers impact business value:
Validating the market opportunity for a product idea.
The best product managers know that to pursue any product idea it must be a problem worth solving. In an earlier post, I talked about how there are 3 criteria any product idea must satisfy in order for it to be worth pursuing:
- It must solve an urgent problem for a customer.
- The problem must be pervasive — that is, enough customers must feel that pain or have that need.
- Customers must be willing to pay to have the problem solved. Or, more specifically, they must be willing to buy your solution to their problem.
This is what it means to have a monetizable market opportunity. And being able to identify these opportunities (and then execute on them) is exactly what the product team leaders above are looking for in their product managers.
Unfortunately, it’s a big area where many product managers fall short.
Why is it important to analyze the market potential for a product idea?
Because quite simply, if enough people aren’t experiencing the problem and are willing to pay for your solution, then the market potential for your product idea isn’t big enough, and it’s not worth pursuing it. Period.
- Establishes whether the business opportunity for your idea is reasonable.
- Informs how you look at, analyze, understand, and segment the market.
- Demonstrates an understanding of your customers’ pain points and the value of your solution.
- In turn, informs how to enter the market — your go-to-market strategy, pricing model, etc.
- Provides optics for the growth of your product — a sounding board to measure your financial model and your progress against it.
This isn’t just for brand new product ideas alone. It applies to new feature ideas for existing products and other product expansion ideas as well.
Any new feature or capability must deliver both customer value and business value. There has to be some clear ROI for adding a new feature to a product. Perhaps the new feature will help up-sell existing users to a higher pricing plan. Or maybe help accelerate new customer acquisitions in your target market segment. Or reduce churn and increase lifetime value. Or maybe it will help improve customer satisfaction leading to increased retention.
Your company has a choice of whether to focus its resources on developing feature A or feature B. In fact, it has a choice of whether to have its resources focused on your new feature idea or something else entirely.
So it’s important to vet whether there’s enough of a market demand for that feature before investing engineering cycles building it.
There are several common mistakes product managers make in estimating market potential. Let’s talk about these and then go through specific examples of how you can calculate the market potential for your product idea.
Common mistakes in estimating market size
Your market is NOT “everyone” or “anyone”, as in “everyone who drives a car”, or “every business that needs a CRM”, or “anyone who uses social networks”, etc.
Heck, the market for this blog isn’t “everyone who reads blogs”!
In fact, it’s not even “every product manager” out there. If you’re a product manager for a hardware product, it’s nice to think there may be nuggets in these posts that could help you, but I’ll tell you straight up I don’t specifically target you. So if you find zero value in these posts, that’s cool with me.
Even for a new feature for an existing product, your market potential may not be “all our existing customers”. For example, not all customers using your messaging service may be interested in archiving old messages.
You need to drill down and get specific about the true size of your market. Otherwise, your executives and Board will question the validity of your product idea — and, frankly, your credibility.
To make this super tangible, let’s talk through how you can size the market for a new product and a new feature.
Assessing the market size for a new product
The most common way folks do this is what’s called the “top-down approach”. This approach uses a broad market size figure and whittles it down to the target market.
It typically goes something like this:
- Let’s say your product is an analytics algorithm that can decide the sentiment of a Twitter stream.
- You find that IDC (or Gartner, whatever) says the market for big data technology services is $6.2 billion. You estimate that the portion that’s for sentiment analytics software is 20% = $1.24 billion.
- With your existing sales and marketing channel, you believe you could realistically reach 25% of this market = $310 million.
- But there are 10 other competitors in that same reach. So assuming you can capture 15% of the market, your target market share = $46.5 million.
Now, if you read that and are feeling uncomfortable, yeah, you should.
‘Cos it sounds squishy, right?
That’s why I’m not a big fan of the top-down approach:
- The broad market size figure used as the starting point in the top-down analysis often includes different market segments, so it’s easy to forget to take some of these out of the estimate.
- You’re extrapolating without direct customer validation. So top-down can come off as a bit optimistic (and even fuzzy).
- When extrapolating, you’re typically using a percentage off a very large number, like 1% of a billion dollar market, but it doesn’t take into consideration which 1% or how you’ll get this 1% with your specific product.
- Plus, how do you know if a 1% market share is the right success criteria for you?
As such, the top-down method can give you a false sense of comfort.
(Plus, smart execs will see right through it and tear it apart.)
Instead, a “bottom-up” approach is better. This approach builds up the total addressable market by using the main variables of the revenue model — typically total number of potential customers multiplied by what they typically spend or are willing to spend.
It requires more effort, because you’re evaluating where your product can be sold, the sales of comparable products, and the slice of current sales that you can carve out.
(BTW, this is where your customer persona and primary market research really comes in useful. You can use them to identify how many customers are in your target market, and extrapolate from there.)
Let’s go through an example:
Your product is an app that helps people play basketball more regularly by helping them find the right place, time and people.
You’ve discovered that people pay to book time at basketball venues, and your idea is to charge these venues a fee for referring basketball players who use your app.
You interview 10 basketball venues, and discover they typically get 100 bookings per month, each booking consists of 10 players, and each player typically pays $50 to play.
So the total value of monthly bookings at any given venue = $50 * 10 * 100 = $50,000 or $600k per year. And if there are 2,000 venues in your target market, that’s a total market of $1.2 billion.
You find that 70% of venues (1,400) have already signed deals with your competitors, leaving you with 600 unsigned venues. You believe you could steal 10% (140) of already signed venues — so if you signed up all 740 (i.e., 600+140) of these venues, that’s a serviceable market of $600k * 740 = $0.44 billion or 37% of the total market. (It may reasonably take several years to do that, of course.)
You feel confident all 10 of those venues you had interviewed could be initial customers. You extrapolate that there are about 200 venues just like those, i.e., they fit your customer persona. You could target them in the first year, giving you a target market of $120M (27% of your serviceable market and 10% of the total addressable market).
While there are undoubtedly some assumptions inherent in this analysis (and many dependencies to achieving those targets), this type of analysis is much more useful.
For one, it gives you more grounded assumptions to use to extrapolate to the broader market. It’s less likely to include non-addressable revenue since your basis is to start from your primary market research. Finally, it forces you to consider how you’ll be able to attract and acquire customers — for example, you’d love to sell internationally, but if that’s unrealistic for several years, you can’t really factor that in. On the other hand, you can focus your go-to-market efforts specifically on targeting that initial $120M in the first year.
You can also play with the variables to get a sense of best-case and worst-case scenarios. For example, what if you could steal 20% of already signed venues? Or only 5%? What if there are only 100 venues like the 10 customers you interviewed? What if it takes longer to acquire any of those 600 unsigned venues?
Assessing the market size for a new feature
Now, for a new feature or capability for an existing product, how you analyze the market size depends on your goals for the new feature — things like accelerate new customer acquisition, up-sell existing customers, penetrate an adjacent market segment, etc.
For the sake of simplicity and illustration, let’s assume the goal is new customer adds — e.g., this feature is the key missing ingredient that has prevented new customers from purchasing your product till now.
Let’s say your product is targeting a $50 million market and currently generates $5 million in revenues. It’s been successful with early adopters, but now you want to expand within your target market to “early majority” type customers (in the technology adoption curve).
You’ve identified a new feature that your product would need to have to attract this group of customers, and your problem hypothesis testing validated the pain point it solves. From this work, you’ve built a customer persona to target for the new feature, and through further market research and analysis, have identified that 25% of your product’s current target market fit that persona (i.e., they have the same problem).
Your total market opportunity is 25% of your product’s target market * your product’s price (assuming no change).
You believe it could be possible to capture 10% of those customers in the first year. So your target share of market is 25% of your product’s target market * your product’s price * 10%.
Again you could play with the variables for best-case/worst-case scenarios. For example, what if you captured only 5% in the first year? Or 20%? What if it only 15% of your product’s current target market fit the persona?
Once you have your market size, what next?
Play around with the assumptions and variables in your analysis. For example, try different pricing levels, or vary the percentage or number of customers.
This analysis shouldn’t take you very long — you’re merely trying to estimate the opportunity to get a quick sense as to whether there’s a market opportunity for your product idea. If you’re spending hours or days torturing a spreadsheet, you’re spending too long on it.
Of course, you don’t know definitively whether customers will actually validate your product idea, let alone buy it. But you want to do this exercise at this stage because you’re essentially trying to answer if there are enough customers in the market with the problem you’ve identified, and how much revenue you could potentially target if they’re willing to buy?
In other words, is it big enough? If the market opportunity is too small, if there aren’t enough monetizable customers, it’s not worth going after, and you’ll be faced with a pivot. (And a pivot isn’t a bad thing.)
* * *
The best product managers understand that to really drive innovation and deliver value to their businesses they need to be thinking and acting strategically.
As part of that, they understand they need to be testing and validating whether a product idea is worth pursuing before investing major capital, budget or resources on it.
A critical part of that validation exercise is assessing the market potential for a product idea. Doing so exposes important assumptions inherent in the initial product strategy hypothesis. It helps product managers justify the product idea to themselves and to their internal stakeholders, and serves as a reality check for the product idea.
This kind of analysis it NOT about arbitrarily picking a large number out of thin air and then working some Excel magic to rationalize the number. As I’ve shown, there’s a grounded way to approach it.
And, as a result, should the market opportunity for the product idea have potential, it allows for a more actionable way to pursue it.
As Ash Maurya has correctly said:
“While we all need a ballpark destination to justify the journey, it’s not the destination itself but the starting assumptions and milestones along the way that inform whether we are on the right path or need a course-correction.”
To your product success!