Eliminate Assumptions - Work with Facts
The whole premise of market analysis is to destroy your business plan. That’s right… bombs away, blow it up.
Your business plan is inherently chock-full of assumptions and biases. You know how the saying goes, “parents never see their ugly baby” (or something to that effect), but we all know there are ugly babies in the world. Your business plan is your baby, so you have every confidence your child will be hugely successful. Your product or service will make millions for you and your investors, and there’s no way the market won’t love it just as much as you do. Naturally, you’ll have an affinity to find information that supports your plan rather than refutes it.
For a startup, or any organization for that matter, what you should actually be looking for during market research and analysis are all the ways your plan could take an irreversible left turn sending you off a cliff and freefalling to failure.
True story
I worked in a company that had all the right ingredients to become a success. It had great scientists, good technology and deep pockets, but the product-market fit was missing. There were wild assumptions in the executive leadership group that our business line should be reaching revenue targets well-above anything realistic. The foundation for the sales projections was based on the premise the market would grow by double digits, however there was no consideration for the larger macro market dynamics (a huge downturn), and there was very little understanding of the customers and competition. The organization had a centralized market research group that organized the preliminary market size estimates and analysis, but they lacked domain and industry knowledge so much of their research was based on indirect methods such as purchased reports.
At the end of my first year with the company, they asked me to review their TAM (Total Available Market) and SAM (Serviceable Available Market), which would be used to set the MBOs for the upcoming year. It had been a difficult and frustrating first year with employee turnover, enormous pressure from the top, little product improvement, and complete lack of alignment between reality and aspiration. When I took my first spin through the TAM and SAM, I was literally shocked. It was obvious why things were in such disarray and why the business wasn’t meeting executive expectations. There was no supporting evidence for the 20-30% year-over-year market growth they assumed.
Although the business had a number of other major issues and significant hurdles to overcome, this example demonstrates one of the fundamental flaws of over-simplifying market analysis. The company had sold the story to Wall Street that there was a massive business opportunity (much of it based on rig count estimates), but they failed to factor in buying behavior, technology adoption and many of the micro obstacles that would inevitably impact business growth.
The fallacy of the 10,000-foot view
Things are beautiful from way up there! You can’t make out the details of what’s below, and you can see miles and miles of opportunity.
As demonstrated in the story, the macro view is a dangerous one to base your business on. It has a tendency to be a rosy picture from far away, but much like a Monet masterpiece, you can’t see all the tiny brushstrokes.
I bring up this example because I see this same mistake time and time again. To borrow a phrase from Lean Startup, a book by Eric Ries, “Customers don’t care how much time something takes to build. They care only if it serves their needs.” In the above case, the company was convinced customers would buy at an unprecedented rate without validating any of their assumptions by actually speaking with customers. At the end of my first year, we had a large portfolio of products and services that weren’t gaining market traction for a number of reasons. But it was painfully obvious the technology was not commercially viable, and there was a significant gap between what we were selling, and what customers wanted.
You can do all the market research in the world, but if your product isn’t solving an actual customer’s problem - no amount of research can save you. In fact, it can do the opposite by supporting your hopes to the exclusion of facing reality if you are looking for evidence that supports your assumptions.
Market research is essential, but the examples and guidance I’ve seen in blog posts, business books, business plan templates, textbooks etc. aren’t teaching the right questions to ask, and so the analysis tends to be surface deep.
Deconstructing Market Analysis
Early in my career, I conducted market analysis adopting many of the same techniques the aforementioned resources suggest. I looked at a number of factors about the market including size, market share, competitive landscape, macro dynamics, replacement rates, customer segmentation, etc. which are all essential data points to help draw conclusions about market viability.
But no matter how much research we did, the product-market fit question was never properly answered. I’ve worked in startups and mature organizations. I’ve been in small and mid-size companies. In all cases, when I joined the team the products were already built and the market research wasn’t necessarily driving business or product development behavior or decisions. So what was the point in doing it?
The companies were missing the purpose and value of conducting regular market research.
You should be eliminating assumptions at the core of your business and product development so you can forecast with greater accuracy - that’s the whole point of doing it!
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Market Analysis Tied to Cash Flow - April 5, 2018
Our Six-Step Method
We developed a different method for market analysis that aims to answer the product-market fit question as a means to drive more accurate forecasting. Below is only a snapshot, but it gives you a teaser of how to re-frame the process so you are systematically poking holes in your assumptions to see if your business plan and product have real merit. In Part 2 of this blog series, we'll elaborate on each of these six steps with practical advice and examples. You can also participate in our upcoming workshop to get access to templates, case studies and exercises that will walk through this process firsthand.
1 - Documented Assumptions: What do you need to test?
2 - Know Your C’s Intimately: Who are your competitors & customers?
3 - Direct and Indirect Research: What evidence supports a failing business or product plan?
4 - Set a Goal: What revenue target is reasonable?
5 - Validate: What critical metrics need to be monitored that would signal a failing product/business?
6 - Optimize: Modify your business plan such that you have addressed any identified failure points.
While it may seem counter-intuitive to look for evidence that refutes your business plan, it will actually help your team discover and overcome critical barriers to market entry and product acceptance. Assumptions are silent killers in a business and they leave much of the major decision-making to happenstance.
Without a doubt, it is a more positive experience to look for the facts that support your business strategy, but the problem with this market research approach is that it introduces bias. In the long run the bias will deliver frustration when the product isn't meeting sales expectations and decisions are made on partial information. Our 6-step process recommends you seek the evidence that will destroy your business plan so your team can constructively address these issues in an effort to create an company that does more than merely survive.
This certainly doesn't mean your corporate essence should breed a negative environment, and senior leadership will need to frame the purpose of these investigations appropriately. It does, however, mean you are creating a data-driven culture that not only seeks positive affirmation, but objectively and honestly reviews ALL available information to create a sustainable organization.
The best part about our six-step method is that it emphasizes realistic revenue projections that aren't based on obscure CAGRs from third-party reports. Stay tuned for Part 2 of this series which will dive in to the details of each step and give you meaningful examples of how to deconstruct market analysis to support revenue projections.