< Previous chapter: Motivation

OBJECTIVES: Learn about the market you're creating a product fore, estimate its value and list the ways you'll try to make money in it, because a successful product needs a good market.

If you're ready, you can use this chapter's practical tasks. Or you can read about the theory below.

Theory

Most products won't create enormous wealth, and depending on your goals, they don't have to. But whether you're looking to make a modest income from your product, or an empire, understanding how it might make money, who will buy it and why, is our task at hand. In other words, analysing our market.

For the initiated amongst you, this is the basis of our product/market fit, which I discuss later in the book. For the uninitiated, don't worry, we'll learn what this means soon.

There's a huge diversity in products, in terms of their profitability, size of audience, how long they can stay relevant, and so on. But all profitable companies have one thing in common; they made something people wanted, and got paid for it.

Let's dig deeper to understand if there's a valuable market for our product. This won't take too long, and should give us confidence in the value we want to provide. We'll get into the details later on our journey, when we've proven demand for our product.

Here are the aspects of winning products we'll focus on in this chapter:

All problems great and small. And markets.

Some of the most successful startups which are product-led, like Facebook, AirBnB, even Apple, all created products to solve problems where the potential size of the market was hugely underestimated. The founders in these companies believed their products were fairly niche, most famously Facebook being a service for universities only.

Focusing on a niche market to launch a product into, paradoxically helped many tech unicorns eventually reach their eye-watering valuations. Because they started with a simple product, custom-made for a small and well-understood audience.

If you’re looking for a product with mass-appeal, either for a client, or for yourself to become a billionaire, the chances are you’ll spend more time looking for a sure-fire solution with an enormous market, than actually testing your assumptions.

Think about that. We live in a chaotic universe, where we can barely predict tomorrow’s weather (admittedly incredibly complex), and yet we’re convinced we can predict the next big thing (which I suggest relies on far more unknown variables than meteorology).

Trying, testing and trying again is a much better use of time than endlessly thinking about what will make you a billionaire.

Even the most successful products aren’t used by the entirety of a suitable market. Some amazing products will only be used by hundreds of people; think super luxe cars. So what can you do to increase your chances of making something great? Make something people need, even if the market seems small.

As the legendary Paul Graham of Y-Combinator said:

To prove the point, Airbnb now offers luxurious rentals to millionaires. That’s a long way from selling stays on actual airbeds to conference attendees.

Can you make money?

A lot of emphasis is often put on knowing how much money your product will make and how it will make money.

If you follow my assertion that the future is unknowable, then knowing how much money your product will make is nonsensical.

How do you know if you'll make money? Most likely by building something people really want.

Even if we're creating a product within an existing company, where it looks like we can simply borrow from the experience of previous products in the portfolio, we should resist calls to be overly specific about the commercial opportunity we're seeking out. We'll probably be wrong, and if we were right, it was more likely chance than expertise.

Our focus right now should be on maximising the likelihood that our product can make money*, understanding that we may need to iterate many times on our business model before we reach profitability.

_{* There are some exceptions of course, like not-for-profit solutions, but still, there's a cost-benefit analysis that could be done, which would tell you if the problem is really worth solving. In these cases, if the cost of solving the problem (including ongoing costs) is more than the costs the problem incurs, it may not be worth solving. You may have to look at moral costs (like illness or death) vs financial costs, for example digging a well for clean water, but I won't get into that obstacle course here.}

If your product is not-for-profit, kudos to you, but be realistic about how much it could end up costing.

If you're trying to make a profit, how do you know it can make money? In other words if your product will be commercially viable? Fundamentally you need people willing to pay you more money than it costs you to provide the product/service. The profit margin and scale you want to achieve is really down to you, your strategy and how you run your business. Some of you will be happy with a 'lifestyle' level of revenue, enough to live a comfortable life upon. Some of you are working at companies looking for moonshot, monopoly-worthy profits.

If your aim is to make money, we need to assess if it's commercially viable and worth your time, cash and effort to pursue. We won't know the exact margin we'll achieve, but if the market is valuable enough (either lots of potential customers, or fewer customers but your product is very valuable), and people need the product, we'll very likely make a profit.

At this stage, we simply want to:

You wouldn't build a kite if there was no wind. Let's look out of the window and make sure the trees are swaying.

What we won't do, however, is try to predict the direction, duration and speed of the wind to know how well our kite will fly (i.e. what money you'll make, how, and what from). Once the wind is up, the quickest way to know is to get out and test it.

Predicting your market

There are probably an infinite number of markets, depending on your definition. To me, it's a system where parties exchange goods / products / services. A market can be further defined my many things, like its location, its dependancies (e.g. Supreme resellers depend on Supreme), its parties, the goods / products / services exchanged, the currency traded, and so on. These dimensions are limited only by your imagination, and the way in which you combine them.

We can't know what our market will look like when it's running. Right now we're trying to predict what it might look like, so that our first attempt at selling to it is more likely to work. You wouldn't take apples to a market where no-one wants fruit. So how do you predict your market? We'll gather information, hypothesise, and then as with our product, we'll experiment with our market until we find the optimal combination (big margins, little competition, predictable cashflow).

That being our aim, here's what we want to know:

• Who has the problem and needs our solution? What's common about them? Age, sex, possessions (e.g. owning a car), level of income, attitudes, biases and so on.
• How many of those people are there?
• Is the number of people increasing or decreasing? How fast?
• Where are these people?
• What's the estimated cost of the problem?
• What's the estimated value of a solution?
• Why do they need your solution?
• How often do they need your solution?
• What affects how often and how many of your solutions they need?

To define the dimensions/characteristics of your market, you can use this template. If you have more than one audience, like a product connecting parents and childminders, treat them as separate audiences, not one large audience. This helps us make sure we define our markets more thoroughly and will help in almost all future tasks. You can skip ahead to read about multiple audiences in Audience Development: More than one audience?, just make sure to come back!

Note: If your product has no direct alternatives, make sure to ask your audience what they would pay to use it. This will be an estimate, and the more people you speak to, the more confident you'll feel. It's only when trialling your product will you get realistic data on the actual value of your product, however. If your product connects one party to another, like dog owners to dog walkers, or parents to childminders, make sure to capture the value of the service you'd provide, that is to say the value of connecting the two parties. If childminders charge £30 per hour, are you taking £2.50 from the childminder and the parent as a booking fee? This would mean your product value was an estimated £5 per booking.

On top of of the more general questions, like how many people are affected by the problem, and is this number shrinking or growing, I believe there are a few core questions which unearth very valuable research.

They are:

• How much are the problems costing their audience annually?
• Who has money to solve these problems (potential customers)?
• Who is paying to solve these problems and how much are they paying annually?

Let's break down why these questions matter.

Problem cost

Getting a rough estimate on what the problem is costing its audience, directly relates to how much money our product can generate.

The value a product will generate is unlikely to be higher than the cost of the problem, so knowing the cost of the problem helps provide a ceiling to the most we can expect to make.

Knowing the impact of the problem, whether it’s in money or an emotional toll on its users, is also an extremely powerful way to contextualise why our product will be valuable.

The cost doesn’t always neatly relate to a cash amount, and often it could be intangible. Let me break down that jargon. Sometimes a problem is measured in how much of a nuisance it is (intangible), like for example online privacy. Worrying about companies or governments tracking your every move is an ongoing concern for some people. These people often use software called a VPN, or Virtual Private Network, which essentially means their online activity can’t be tracked.

The cost here could simply be an emotional one; the cost of freedom. If you're unable to show a direct cost this problem causes its audience, you may be able to calculate a part of the cost, by looking at related problems. If you can maintain your privacy online, the chances of experiencing fraud is lower. You could look at online fraud statistics and the costs to its victims. Perhaps at stolen identities. With some research, you’ll likely find at least one related problem you’re helping to solve.

Another example of an intangible problem that was solved by a product is Facebook. What was the cost to its audience and users, of not having a platform to share personal information and keep in-touch digitally? Hard to say. But Facebook's customers, that is to say advertisers and marketers, have clear tangible problem costs. Their problem is needing to sell products or services, and the cost is of not selling them.

Tangible costs are often easier to calculate. Take for example your household bills. People spend money for energy, phone, broadband and so on, and their problem is often that they’d like to spend less. We can calculate what they’re currently spending and compare that with lower cost suppliers to see the difference, which would be the cost of the problem. Creating a product which switches customers from high cost utility suppliers, to a lower cost, and taking a small amount to arrange the switch is an obvious way to solve this problem; a solution we see in many comparison websites.

Who are potential customers

If we can identify where money is ‘stored’ in the market, and who has a vested interest in seeing the problem solved, we can think about how to offer our product to release that cash, or in other words how to make customers out of the people who have money.

For example, parents paying for childcare are already spending large amounts of money to solve their problem, so we know some of the market’s value lies with the parents. If we look deeper, we might also find that employers have a vested interest in their employee parents finding childcare, so employers may be potential customers too, as they have a problem to solve and cash to solve it. A product that connects parents with childminders, could also connect employers with childminders, for example, maybe offering discounts to their services if the employer buys at scale.

Finding additional potential customers doesn’t mean that we will necessarily build our product to suit their needs, but knowing they’re there is helpful, to know that we could add them as a customer in future to increase our revenue, or even pivot to them if we find serving parents isn’t working.

An obvious but often forgotten rule is, people will pay less for a solution, than the problem is costing them.

A farmer will not pay £50 to spray each acre of crops with pesticide, if the pests are causing £40 of damage per acre.

Bear in mind that any potential customers need to really care about the problem being solved. The government isn’t interested in making sure dog walkers earn enough money from their work. Ask the audience / potential customers you have in mind to ensure they actually care.

Who is paying for a solution

Knowing who is already paying for a solution and how much they’re paying, provides evidence that there is appetite to solve the problem. Back to the Airbnb example, people were already looking for rooms to use in peoples’ homes. Bed and breakfast businesses are prevalent and provide lots of data on how much rooms are worth to the guest, and how often they’re used.

Airbnb actually increased the price of staying at a B&B with the service they provide on top of the otherwise offline, manual transaction. They offer insurance, easy payment and refunds, reviews and so on. From the host’s perspective, B&Bs often advertise their accommodation, which Airbnb does for them, and provides bookings directly. Guests and hosts paid for some these services in the old, offline model, so Airbnb combined them into a digital product, on top of an already well established industry.

Make sure you know what a customer would pay you to solve. Example: People can already pay other people to walk their dogs. If your solution helps connect dog owners with dog walkers, your audiences are paying for the connection, not the task of walking dogs.

This research will help start expand your concept into areas you may not yet have considered. Monthly subscription or a one-off payment once every ten years? 20,000 people or 20 million? £5 per person per month, or £3,000 once a lifetime?

Now let's look at market sizes.

Mass-market products

Thinking of a mass-market product? One way to measure its commercial viability is taking the amount someone is willing to pay for your product, multiplied by the potential audience size (the maximum number of people across the globe who share the problem). Now take 1% of that big number, and if it's still a big enough number, it's probably worth continuing. I say 1% because getting one percent of the entire market to pay for your product is a huge ask in itself.

Sense the flippancy here? It's so hard to predict what the product will make, that really we're just applying a sniff test here. Let's imagine a mobile app. If your product is applicable to the 7bn people on the planet, and its price is £1 per download, that's a whopping £7bn! Hey, and 1% of that is £70m! Now think about the cost and effort required to create a product which solves the same problem of 70m people, let them know it exists (marketing), and distribute it! Think years, not months, for acquiring 1% of a huge market. 70m is the current population of the UK, for reference. Without a doubt it can, and has happened, but a large market size does not equal huge profits necessarily.

There are few common wants and needs all humans share, so the probability of creating a product so universal, that it can realise the potential of an enormous market, is fairly low.

If your audience is huge, your initial product should be very, very simple. Alternatively if your product is fairly complex, it may make sense to segment your audience down to the point they become their own niches (covered later on in this guide), start with a much smaller audience, and growing from there.

Niche markets

Your product seems like it will only appear to a small audience? This may be a blessing in disguise. Because you have fewer users, it's true you may need to think deeper about how to create maximum revenue, like implementing a more complex business model, for example subscriptions, affiliate sales, merchandise and so on. However, it's far easier to create a product 100 people love, than 1,000,000. Creating products which are loved, builds your brand, raises team morale, and gives you real confidence in what you're making. Success breeds success, as the adage goes, so even if you have a potentially huge market, try looking for niches within it. Then you can win over a smaller audience and create evangelists who spread the word for you, into the rest of the market.

It pays to treat every market like a niche market. If your market is big, break it into niches.

Ways of making money

A major component of your business model is how your product will make money. It’s both exciting to think about, and intimidating.

There are many ways you could monetise your product, like taking subscriptions, payment per transaction, advertising, and almost endless variations that can be applied to these different types of revenue models.

My belief is that sustainable success is achieved through aligning your revenue model(s) with your users’ interests.

Apple for example almost exclusively sell their products through Apple retail. They wan’t to provide the ‘Apple experience’ throughout the entire customer journey, enabling them to control quality, brand perception and customer care. Apple could no doubt sell its products through millions of partners, but its customers enjoy an enhanced experience via its strictly controlled sales process.

Tesla implements ‘vertical integration’, which means it owns and operates the majority of its value chain (the activities to deliver its valuable product, e.g. the electric cars); that includes sales via its website and showrooms.

Etsy provides the marketplace for creators to sell their own products to buyers on the platform. They control the overall experience, including the sale, but leave postage and communication to the buyer and seller. If you’ve ever returned anything to Amazon, you’ll know the process is almost too easy, sometimes to the detriment of its sellers, and this is because their model is aligned with their primary customer, the consumer / buyer.

So although we don’t have to pick a model yet, understanding some of these considerations upfront will help us to pick good candidates for our revenue models in future.

The takeaway here is, if you make something people really need, there’s a very, very high likelihood they’re willing to pay for it. How you sell your product is a secondary consideration.

You can find more detail in this list of revenue models.

Future growth

Additional products, other audiences, or possibly alternative markets, may offer potential growth opportunities for your product, beyond your first offering. They're worth keeping at the back of your mind. But aiming to have a small audience love your product is your first, very difficult mission. Keep your eye on the game, not on winning the league, so to speak.

I don't advise getting too hung up on 'measuring commercial feasibility'; it is after all a prediction. Necessary, but a prediction. That's not to say that we can paper over not knowing, either. I believe the most reliable way to get a sense of how successful your product might be, is to make fanatics of your work, one tribe at a time, like Seth Godin recommends (see 'Develop your audience' later in this guide). Just make sure someone in your audience has the money to cover the bill.

Competitor Alternative analysis

Irrespective of how novel your product is, it's almost a certainty that you can find an alternative solution your audience could use. The term is ordinarily competitor analysis, however I see it that you're missing obvious alternatives which may render your product redundant. Look up the Juicero for a lesson in what happens when you build a product when there were already good alternatives available.

These alternatives might be work-arounds they invented themselves, most likely manual tasks, or it could be a fully fledged competitor.

We shouldn't expend a lot of energy researching competitors before we've really engaged with our audience, but knowing what's out there helps give us inspiration for what our product might do, and reveal gaps we can capitalise on.

Competitors or alternative solutions should be part of what’s inspiring you to create your product. So much emphasis is placed on watching your competitors, that it’s easy to get distracted from your vision, your product. As Peter Thiel says:

Thiel's comment is related to entering markets where there is already stiff competition, like being the 3rd pizza restaurant in a small town. The concept is still relevant to worrying about competitors also though. By this point, the problem you're working on should be one you don't see as being solved satisfactorily by alternatives, or competitor products, and your job is focus on how to capitalise on solving the unsolved problem.

I've personally fallen foul of worrying about my competitors too much. There were several products I'd started and given up on, because I saw a competitor launch something seemingly similar. Yet very often, you see there are very real differences in what you're planning, and what your audience is telling you it needs. So look to copy ideas from competitors or alternatives, and if you believe you have something different, keep looking ahead and not to the side.

There are few better ways to evaluate an alternative solution or competitor, than trying them for yourself. Sign up for a free demo, get on a sales call with a competitor, ask your audience to try them. It’s such a powerful way to learn about what’s out there.

The Gap
By evaluating the alternatives and competitors the audience can use, we should very clearly find the gap in the market. What it is that compels someone to use your product, over anything else. This gap might be why you can charge more, or if not, why you're chosen at all. Evaluating alternatives is about ensuring we have a solution to the unsolved problem that needs to be solved.

To help you capture what you need to know about alternatives and competitors, try this simple tool.

Regulation

One less exciting, but sometime inescapable part of analysing a market, is whether your product or operations will need to be regulated.

If your concept is a brand new electronic wallet, you’ll need to check with the relevant regulatory bodies on what you need to do, to ensure they accept your product into the market.

It can sometimes be a competitive advantage, for example if your product is regulated and other solutions aren’t. It’s often expensive however, and time-consuming, directly related to the potential impact of your product going wrong, and the dangers it poses to its users.

How?

If there are competitor products already in the market, look for their credentials, pose as a customer and call to ask them if they’re regulated. Get in touch with professional bodies, ombudsman, government agencies who are involved in the industry your market lives in.

Don’t spend too long on learning how to get regulated, until you've tested a prototype with your audience and they love it. Only commit to getting regulated when you’re confident you’ll be building a product.

What's the market worth?

Now we can make a basic estimate as to the potential value this market offers us, so that we know how much money we can generate, and get some guidance on how much we should be investing in developing and maintaining our product.

There are a huge number of methods you could use, but my view is to keep it simple from the outset, and only invest time into analysing the market, proportional to how accurate your estimates will be. By that I mean that these estimates aren’t likely to be incredibly accurate, so don’t spend too long calculating them.

A market's value is the total amount which all people in the market are willing to spend to solve their problem.

I personally don’t look at the industry size a problem exists within.

Entrepreneurs often cite the x billion dollar industry they’re looking to crack, in their pitches to investors; yet the market for their product will only be a fraction of that gargantuan number.

So I stick to the figures relating to the problem I’m solving. It’s helpful to know an industry is enormous, in case we want to release related products into it, but looking ahead this far is a concern for venture capitalists, seeking to generate returns high enough to offset their many losses (the ventures that failed).

Calculating good estimates can be tough

When creating innovative products, it's very hard, and often impossible, to accurately judge the value of a market. Gaining confidence that a market will generate revenue is key, and sniffing out where the value lies; but correctly estimating its real potential is a fruitless task, if you’re solving a problem in a unique way. Airbnb’s founders enormously underestimated the potential value of its market, in-part because they created new capacity in the hospitality sector, i.e. people with a spare room to rent decided to list it for the first time. Contrast that with launching a new soft drink for example, where you’d have an enormous amount of market data to mine and research, and therefore calculate a more accurate estimate. We could look at shareholder reports from the largest companies such as Coca-Cola, or reports by research firms like Gartner or Forrester who have no doubt produced lots of high quality content in this area.

It's important to note that each market could become more valuable by increasing the product's price, or maybe by the number of people in the market growing rapidly, for example. So if the total value of your market seems low, there may be other markets which you haven't identified as matches to your product too. With the dog walking product, connecting owners to dog walkers, services like dog grooming companies or veterinary practices could offer more customers.

If there is more than one audience willing to pay for a solution, treat each as its own market, not as a single much larger market.

So as you work through the tasks to value your market, make sure to repeat the process for each audience, creating a set of markets, rather than one large one.

There are additional add-ons to your product, higher priced tiers of functionality, and even the revenue model, which could increase the market's value, so don't despair if the size of the prize looks low. Simply build the product to suit the market. That means not spending more than you think you'll generate from it, and if you find other markets which need your product, expand its functionality and scope at that time. Later in this book we'll decide which audience to prioritise, based mostly on who has the most pressing need.

Keeping estimates straightforward and transparent is my strong advice. If you begin creating elaborate models to estimate income and costs, with more and more data points and variables, you gain confidence in the figures it spits out. But you haven't made a more accurate estimate, you've just made it more complex.

Until you have real data (i.e. actual costs, actual revenue), make sure your estimates are only as complex as your confidence in them. Low confidence = low complexity.

Keep it simple:

A warning. If your market value seems enormous, I suggest you segment it down into smaller markets, maybe by region, or demographic, strength of the user's need and so on. Start with a smaller market, even if the potential of the product is truly global. This will mean you'll spend less on developing the product, and custom build it for a well-understood audience.

The lesson here is, keep it simple. Knowing there’s money to be made in your market is critical. Knowing just how much upfront isn’t.

You can try this method to help you calculate your market's value.

What Next?

If you're working on a product right now, try completing the tasks for this chapter. Alternatively you can read the theory of the next chapter.