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Chapter 2: Market Opportunity Assessments

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“Failure is more opportunity to begin again more intelligently.”

-Henry Ford

Instructor’s Guide

TABLE 2.1 – Part II – Learning Objectives and Outcomes

Concepts | Students will gain an understanding that:
  • Businesses need data to understand their market and should maintain a consistent awareness of barriers to entry and growth.
  • The sample of participants (or potential customers) they choose to survey during their market research is just as important as the questions they choose to ask.
  • They need to first have a hypothesis of what their target audience will be before they can then find the most effective way to reach that audience.
  • Market Opportunity Analysis uses a combination of qualitative and quantitative methods, depending on the type and complexity of the product offering, the market being evaluated, and the stage of the assessment process.
Skills | Students will gain the ability to:
  • Assess market opportunities by identifying and assessing factors that may impact the feasibility and success of a new business opportunity.
  • Understand the size of a market and determine the returns they can expect from entering a market.
  • Start building out projections that describe the best and worst case scenarios, then weighing the benefits against the risks so they can determine whether to move forward with their current project or move on to the next one.
Key Terms

Part II | Key Terms

Market Opportunity Analysis: A preliminary research method used to identify and assess market factors that may impact the feasibility and success of a business opportunity.
Back-Of-The-Envelope Analysis: A quick, informal analysis or rough estimate.
Market Sizing Assessment: Analysis used to determine the size of the total market and the size of the population willing (and able) to pay. This type of assessment is done to decide whether the market is big enough to provide returns.

Is There Enough Money in the Purse?

“Can we start selling now?” my seven-year-old asked impatiently.

“Not quite yet,” I said, gathering my team around the table. “We first need to decide if there is enough profit in this to risk family money on it.” I recalled what my finance professor at Northwestern University’s Kellogg School of Management preached: “Always have a rough idea of the financials, even if it is just a hunch.”

A man and his sons talking around the table

Armed with a hypothesis and a research method called Market Opportunity Analysis (a preliminary process used to identify and assess market factors that may impact the feasibility and success of a business opportunity), our team looked at what the market for an alternative to lemonade may look like. We did a quick back-of-the-envelope hypothetical analysis of just how big our local market could be for the kids.

Back-of-the-Envelope Analysis

  • Average cost of a neighborhood lemonade drink: $0.50
  • Average cost of a Starbucks lemonade drink: $3.50

Resulting Hypothesis: The price we can charge for a lemonade alternative is the average of these costs. ($3.50 + $0.50)/2 = $2.

  • Number of houses in our block: 10
  • Number of blocks in our neighborhood: 20
  • Total houses in neighborhood: 20 * 10 = 200
  • % of households who would potentially stop to buy lemonade alternative on a weekend: 10%

Resulting Hypothesis: Number of potential households who would buy a lemonade alternative is 10% of 200, or 20.

  • People per household who will buy lemonade alternative: 2
  • Number of potential households who would buy a lemonade alternative: 20
  • The price we can charge for a lemonade alternative: $2

Resulting Hypothesis: Potential profit the team will earn on a given day is 2(20 * 2) = $80 a day.

Data Source: Google Trends (https://www.google.com/trends).

“That’s twice the money Mike makes,” said Moksh, showing off both his math skills and his knowledge of his classmate’s highly-competitive lemonade stand.

“This is still just a hypothesis,” I reminded the little team in our kitchen. The next step was to prove or disprove our hypothesis. It was time to get into the heart of our research.

Measure by Measure

As a Strategy Consultant at McKinsey, I would use Market Opportunity Analysis and Marketing Sizing Assessments to help clients understand the size of a market and the returns they can expect from entering a market. This research is a necessity for any company planning on bringing a new product to market.

Brands must study how they can connect new products or services to the life of the consumer. Businesses need data to understand their market and should maintain a consistent awareness of barriers to entry and growth. This research is used to build accurate go-to-market strategies and business plans.

Typical outputs from Market Opportunity Analysis and Sizing Assessments include:

  • Market sizing and growth projections
  • Industry and segment attractiveness assessments
  • Competitive Landscape
  • SWOT assessment
    • Strengths
    • Weaknesses
    • Opportunities
    • Threats
  • Market requirements and barriers to entry
  • Go-to-market strategy

To get an idea of the market size and growth projections for our little lemonade stand, we pulled together a survey using a Market Opportunity Assessment template that I often recommend to my clients.

“But who’s that for?” asked my wise seven-year-old. He had a point. Who you ask to fill out the survey is just as important as what you ask them. The sample of potential customers that you ask questions matters.

Ideally we would survey an audience most likely to be the potential customers for the product. Then we would extrapolate our findings from that sample to understand the total market size.

“Most of these potential customers are my friends and their parents. Why don’t we just ask my classmates to fill out the survey?” Moksh suggested. I was impressed by his conjecture – having a hypothesis of what your target audience will be and then finding the most effective way to reach such an audience is the core of market research.

We printed out sheets of the survey and the kids handed it to their classmates. At recess, they also took the time to informally chat with their friends and ask them about their likelihood to buy lemonade drinks from our street. They also probed further on who in their house – parents, grandparents, or other kids – were most likely to buy the lemonade.

The survey was sent to a larger group and tracked how the kids and their parents answered. The results helped confirm some of our hypotheses.

  • Percent of parents that would stop by to drink lemonade or related drink: 54%, with 2% margin of error.
  • Likelihood people would buy lemonade from their own neighborhood, rather than another: 65%, with a 10% margin of error.
  • Distribution of kids to adults that would buy lemonade or a related drink: 2:1
  • Most preferred time of day to drink lemonade: 4 to 7 pm, with 95% confidence.
  • Most preferred months to drink lemonade: June to September, with 95% confidence.

We also uncovered some unexpected insights:

  • Grandparents were 15% more likely to buy lemonade than the parents, with a 5% margin of error.
  • Women were 20% more likely to buy lemonade than men.
  • Parents with kids between 3 and 9 years of age were most likely to buy lemonade.

Armed with these latest findings, we ran the numbers again.

  • Number of households in the neighborhood: About 400.
  • Expected number of households that will buy lemonade in a given weekend:
  • Expected market size of selling lemonade alternative: 216 * $2 = $432.
  • Expected Market Growth (based on when these families had moved to the neighborhood): 10% year-over-year.

Now that sounded like a pretty good sum of money to make over a weekend! Naturally, the kids were excited. Clearly our Market Opportunity Analysis had helped them get a north star on how much they could hope to make.

What we did was not far from what my clients, Fortune 500 companies of the world, do. Professional Market Opportunity Analysis works very similarly. It uses a combination of qualitative and quantitative methods, depending on the type and complexity of offering, the market being evaluated, and the stage in the assessment process. These methods include:

  • In-depth interviews, as my boys did early on, asking their close friends for their feedback. In the business world, these are utilized typically in the early stages and are most useful for very complex products and for gathering feedback from focus groups of potential customers when there is a need for a broad exploration of potential opportunities.
  • Quantitative surveys like the one we made in Qualtrics are used further along the evaluation process, when there is a need for concrete numbers for market sizing analysis, business case presentations, or testing market hypothesis.

Try It!

I would encourage you to design your own Market Opportunity Assessment for a market and product you are exploring. Remember, this includes looking at factors like:

  • What the business environment in your industry is currently like.
  • How big your market is, and whether it is growing or shrinking.
  • What your potential competitors are doing – what’s working for them, what’s not working for them, how much they’re charging for their product, how they approach marketing, what their customers identify as the strengths and weaknesses of their product, and so on.
  • Identifying your ideal customer and target market.
  • Building out projections that describe the best and worst case scenarios, then weighing the benefits against the risks so you can determine whether to move forward with your current project or move on to the next one.

Customer Case Studies for Market Analysis and Sizing

Cellphone tower in front of a sunset

A large Telecom company wanted to understand the competitive landscape and the opportunity for expansion in the 4G market. An investment in 4G would have required substantial investment, so before diving in, the company asked its Market Research group to conduct a Market Opportunity Analysis with an emphasis on understanding the competitive landscape. By asking a sample of customers across various geographies, they were able to find out which markets had the most need for 4G, and also where that need was not currently met by competitors. This allowed the company to focus on building out their 4G network in those geographies first, investing their money where the need was highest.

Instructor’s Guide

Part II | Discussion Questions

  1. Why might it be useful to do a quick back-of-the-envelope hypothetical analysis before you start doing more in-depth market research?
  2. What does it mean to “understand your market”? What do you need to understand about it?
  3. What does it mean to have a representative sample for your market research surveys? How do you know if your sample is representative?
  4. When would you choose to use a qualitative research method instead of a quantitative one, and vice versa? What are some of the strengths and weaknesses of each type of research?

 

Part II | Additional Resources

Learn more about:

  • Primary vs. Secondary Market Research: You know now that you need to do market research, but before you begin you need to ask yourself: Does the data you need to answer your research questions already exist somewhere, or are you asking new questions about an unexplored market? If you need information about an existing market, you may be able to start by doing what is known as secondary research.
    • Secondary market research consists of seeking out and analyzing data that has already been collected for reasons other than your current research. You can do secondary research on the internet by searching for reports created by government agencies (which are often available for free) or commercial reports from private research organizations or trade organizations that focus on particular industries (which you may have to pay to gain access to). You can also obtain secondary research by reading articles in magazines, trade journals, and industry publications, by visiting a reference library (campus libraries can often give you access to paid databases through a license purchased by the university), or by contacting industry associations or trade organizations directly.
    • Primary market research means that instead of analyzing existing data someone else has collected, you conduct your own research by gathering information directly from individuals in order to answer a new research question. Primary market research methods include interviews, surveys, questionnaires, focus groups, and visits to competitors’ businesses.
    • For additional information on conducting primary and secondary research and examples of the kinds of questions you should be asking, read a more in-depth article such as “Understanding the Basics of Small Business Market Research.”
  • Introduction to the Business Model Canvas: The Business Model Canvas (BMC) is a tool used to quickly and easily organize and communicate a business idea or concept. The format is structured in a way that helps people add structure to their ideas as they systematically walk through each of the fundamental elements of a new product, service, or concept so that it can be communicated in a more accessible, coherent way. Check out the article “How To: Business Model Canvas Explained” to get a better understanding of each component of the BMC tool.
  • Understanding Market Opportunity Analysis: Most sources agree that market opportunity analysis consists of a few basic steps:
    • Identify potential opportunities. Use your personal experiences, look at market trends, and talk to others to find out what their needs, wants, and pain points are or problems they want solved. Narrow down your ideas and identify the most promising opportunity based on documented market needs – not how interesting the idea is.
    • Define your target market. Who are your potential customers? What do they want? How do they buy products? What products do they currently use to meet their needs? What do they like/not like about the products they are using now? Are there any external factors that impact their buying decisions?
    • Collect data from both primary and secondary sources. There is no substitute for talking to potential customers in the target market in order to get feedback on the opportunity you have identified. Additionally, countless secondary sources exist on the web and in various library resources. Many campuses have purchased database resources for the purpose of doing secondary research and have reference librarians who can help you know how to access and use this information.
    • Analyze and interpret the results. Summarize the results of your research and extract the insights from your data. What have you learned? Does the data support moving forward with your idea, or does it show that you should pivot in a different direction?

 

Part II | Related Student Activities

Exercise 1: Secondary Market Research Project

A good way to familiarize yourself with an industry is through secondary market research.  This refers to research that is conducted by third parties and is often accessible through market research companies or databases. As a student, your campus library likely provides you access, at no cost, to many of these databases which provide industry profiles, company profiles, market research, financial data, and competitive analysis. The purpose of this assignment is to familiarize you with using these databases, and to gain in-depth knowledge about your industries and products or services before you get started on your semester projects.

What you need to do:

  1. Choose a product or service where you believe there is an opportunity for innovation.
  2. Refer to an online Market Research Guide (such as http://guides.lib.purdue.edu/c.php?g=352092&p=2848193) or visit your campus library and ask a reference librarian how to access market information for the sake of performing secondary research.
  3. Browse the various databases to find the following data related to your product or service:
    1. Describe your concept and opportunity according to the framework, outlining value, form, and technology.
    2. Describe industry size, structure, major players, and key success factors.
    3. Find market share and financial performance for the two top companies in the industry.
    4. Identify target customers, segments, and attributes.
    5. Examine barriers related to intellectual property (e.g., patents, trademarks) or market regulation.
    6. Identify new product development opportunities within this market.
  4. Conclude from the research whether this product or service is a good category to continue using as an example for your remaining semester assignments.
  5. Prepare a few brief slides presenting this data.
  6. At the bottom of each slide, provide the sources (specific databases and reports) that you used to gather the data.

(Source: Dr. Nathalie Duval-Couetil, Purdue University)