How Do You Define a Market For Your Startup?

Finding the right market is crucial to startup success. Learn what a market is, and how to define it for your startup business.

By Christian Nicolai Thiesen

What Is A Market? 

If you don't have a market, you technically don't have a product. To actually have a product,' an essential requirement is that you'll need human beings to benefit from using it and potentially (under the right circumstances) would be interested in paying money to obtain that benefit. If that is the case, you'll have a product, and the potential customer(s) that potentially would buy it represents the market. Simply put, your market is the group of people or businesses that would potentially buy what you're selling. If there's no market, there is no use for your idea - and if there's no use for your idea, well, then it would be wise to pull the plug on the venture - or at least adjust it to fit an actual need somewhere.For that reason, defining your market is crucial to your startup's future success. While it would be nice to sell your product or service to everyone, you can rest assured that won't happen. There is a limit to who needs what you're selling and an even greater limit to who will actually buy it. Not being clear on your market can severely harm your startup business. In fact, 42% of startups fail because of a wrong product-market fit. Did that get your attention? Good, now sharpen your ears, and let's get to it!

How Do You Define The Market For Your Startup Business? 🧐

Now that you are aware that many startups fail because they don't find the right product-market fit, you should prioritize doing some prober market research. Before you go ahead and invest an awful lot of time and money in your idea, make sure that you can back the notion that it is, in fact, a good idea. Market research is not just something you do to avoid failure: It's also the recipe for success! By getting to know your market, you also get to know your customers – and that's golden.

Let's say you produced an eco-friendly toothbrush. It's fair to say that everyone could use a toothbrush. But will they? In some parts of the world, people chew mint leaves instead of using brush and paste. In other parts, they may be doing something else. Even if everyone attended to their teeth in the same way, the chance that they would all choose your product is next to none. So it would be unrealistic to define the market for your eco-friendly toothbrush as "everyone". Instead, you should research who are looking for an eco-friendly alternative to the ones in plastic. You should also ask yourself where you can actually provide the toothbrushes. If your business's infrastructure makes it impossible to ship toothbrushes to China, then people using eco-friendly toothbrushes in China are not a part of your market. Defining your market is also about choices. Entering markets takes a lot of money, and even though there is a potential market in the entire world of toothbrush users, it's unlikely that you will succeed in focusing on all of them. Since your toothbrush is eco-friendly, you should choose a market that values eco-friendly products, and if it's expensive to produce, it demands a market with a certain income. For local businesses, selecting a market means choosing a location, while for online companies, it means determining what group of people to target.

When you've narrowed your market down to a realistic group of people, it is time to get to know it. To convince investors to buy in on your idea, there are three things you need to do:

  • Make a Market Snapshot 
  • Define your market size 
  • Validate your idea in the market 

Market Snapshot 🎯

The market snapshot is an analysis showing the current situation in your market. Analyzing the market is necessary because it will help you determine if it exists and, more importantly, if - and how to enter it. More often than not, the market research you do for your business plan will be one of the key ways to show investors that you're worth betting on.

To make a snapshot of your market is a number's game. But numbers can be hard to find. Luckily, we live in the 21st century - the golden age of Google - so while it may take some time and effort, there's pretty much nothing you can't find in the flood of statistical banks, articles, and research databases out-there. And although we're sure there are many unique things about your product, chances are someone has targeted your market before you. This means there's a chance someone has done (at least some of) the market research before you. If you need specific industry information, many businesses specialize in market research, but this can be a pricy option. There are several ways to go about market analysis, and there's no specific start- or finish line. There are, however, a few things you should make sure to include:

👀 Industry outlook 

The industry outlook is the big picture of where your product belongs. If you are offering a subscription-based software application (like Cuttles, for example), you're in the SaaS industry. But being in the SaaS industry doesn't say much about what you are offering. So when you define your target market, you need to dive deeper. What kind of SaaS product are you offering? And in what industry? If, for example, you've built a digital customer support platform, you're in the customer support industry, so that is what you should point your research towards. How is the landscape of your industry looking? Is it growing or declining, and why? How big is the industry? Are there any relevant trends? Make sure to involve a growth projection.

👨‍👩‍👧 Target market (Customers Demographics) 

Your target market is your specific market, meaning the customers who would be interested in precisely a product like yours. In other words, this is where it gets exciting. Who are your customers? Businesses or consumers? Where are they based? How old are they? What are their habits? What turns their crank on? Find as many relevant demographics as you can.

🏰 Barriers to entry

Now that you've defined your target market, you need to know how difficult it will be to enter that market. In other words, you need to explore and determine the barriers to entry. Is it expensive to enter the market? Is the market full of big established competitors that will make it hard to compete? Are there regulations by law, such as certificates you will need to get?

🤺 Competition

Another essential part of your market analysis is your competitors. How many are there? Who are they? What are their strengths and weaknesses? Where are you better? How are the market shares divided? An excellent tool for analyzing your competitors is the SWOT analysis. Make one for every one of your competitors, and you will learn a lot about your possible position in the market. Make sure to include competitors who don't necessarily offer the same product as you but an alternative.

🧑🏽‍⚖️ Regulation - If Any? 

Now, this point is not necessarily relevant for your business, but if it is, it is of high importance. Governments regulate some markets. If you are entering such a market, you need to know what and how it is regulated. Not knowing the details of regulations can have severe consequences for your business. Government regulations can be things such as taxes being put on your product, affecting the demand. You need to know how much tax your customer must pay and how much is placed on your business. Regulations could also be laws against specific products or the use of certain ingredients. Make sure to do your research on this one!

When you've collected the information you need, make sure to analyze your findings. When put together, what do they mean to your business and the future of it? If there is any other information that might be valuable for your business and potential investors, you should include it in your snapshot. Additional golden information could be buying trends and customers' willingness to pay. Once you've been through all the relevant parts of the market, just like that, you've got your market snapshot!

Okay, not "just" like that. Doing thorough market research is a lot of work. But you're not done yet. The next step you need to take is to research how big your market (potentially) is - you need to determine the market size.

Market size 📏

Market Size is the financial part of your market analysis. Determining the market size is vital to your business because it tells you and your potential investors how much money there is to be made in your market and how much of the market you expect to conquer. When determining your market size, an excellent place to start is to figure out how many people there are and how much money they spend on similar products. This information will allow you to calculate how much profit you can expect from your business, which is not only relevant for you but highly relevant to your potential investors. There are two methods for calculating your market size; top-down and bottom-up. The simplest is the top-down method. With this, you calculate the total number of customers on the market times the average purchase of a customer. However, this method is not always very accurate, because changes in consumer trends can affect the market in the following years.The bottom-up method is much more accurate but also very time-consuming. Nothing that comes easy is worth having, right? Using this method requires in-depth research, and you will rely a lot on general forecasts and trends. To assess your market size, there are a few steps you need to take:

🕵🏽 Define your target market

To calculate your market size, you need to know what that market is (thanks, Sherlock!) Your target market is the people you want to reach with your product or service. If you are targeting more than one market, you should define all of them individually.

🤲🏼 Get a hold of the data you need

You need to use all information available to figure out how much money your target group spends on products like yours. If you are lucky, you'll find financial reports from your market that will provide you with the necessary numbers. Sources for these reports could be from statistical banks or financial firms. It could also be that you have a close competitor targeting the same market, which makes their financial statements valuable information too. Another option is for you to get in the field and do some - you guessed it - research. Questioning a sufficiently large sample of your target group combined with financial information on the business will make a good foundation of your market size assessment. 

  • Determine your total addressable market (TAM) 
  • Serviceable addressable market (SAM) 
  • and serviceable obtainable market (SOM): 

As a startup, you are not likely to conquer the entire market. In fact, not many businesses are. Therefore, the next step is to make a realistic forecast of your market share. Perhaps you’ve heard of TAM (Total Addressable Market) or the total market demand for your product. However, your business is probably not able to service the entire market, which leads us to SAM (Serviceable Addressable Market). The total market that you can serve depends on geography, language barriers, and ability to enter the market. If your product is a learning-platform in English, your TAM would be the entire market of e-learning platforms, while your SAM will be narrowed down to English-speakers, as they are the only ones able to make use of your platform - at least, until you choose to expand, and translate your product. Your Serviceable Obtainable Market (SOM) is where it gets exciting for your investors, as it defines the market share you’re expecting to obtain. When assessing your market share, it's necessary to know your competitors. How many customers are they serving, and how much revenue are they making? When you know that, you can calculate their market share by dividing the total revenue of the market by your competitor’s revenue. Last but not least, you will need to include your business in the calculation. You are probably going to take a percentage of the market from each of your competitors.

🚍 Demand drivers

When forecasting your TAM, remember to factor in demand drivers such as consumer trends, population growth, and whatever else is relevant. It will indicate if new consumers are driven to your market - or the other way around. Your potential market share might be more prominent than in your first assessment, which will be a selling point to potential investors. Make sure to back up your demand drivers with relevant data.

💯 Analyze your findings – and make a conclusion 

When all of the research is done, it’s time to analyze your results and conclude what they mean for your business. What do your findings suggest for your business’s position in the market? And how do you expect your business to develop in the market?

Once you have determined your market size, make sure to highlight it when you go investor hunting. We cannot underline enough how important the market size is to your investors. A large (but realistically defined) market tells investors that there's a good chance you'll make a profitable business that will give them a desirable return on investment. As a startup, you will enter the market from the bottom, and if you're anticipating getting a market share of 10% within the first five years, it matters if it's 10% of 1 billion or 10% of 500.000.

Now you've done your research, and you've hopefully found out that there is a market for your idea. But before you start building, approaching investors, and spending money, we highly recommend that you validate your idea in the market you just defined. That way, you will up the odds of actually building a successful product.

Market Validation ✅

You’ve made a great product, but are people willing to buy it? Validating your product will confirm if the product fits your target market.

At the beginning of this article, we established that 42% of startups fail due to lack of market need, making it the most common reason for failure. So it’s clear that you should pay extra attention to this section. When you’ve researched your market and figured out who your target group is, there is one thing left to do: Validate your product. Simply put, it means that you should let your target customers try it out. This doesn’t mean you need to build your entire product and give it away for free. The way to do it is to pick a sample of your target group and have them try a version of your product (also called a minimal viable product, or MVP) in return for valuable feedback.

Validating your product will be a strong card on your hand when convincing potential investors to empty their pockets. One thing is that you are in love with your product, but if your customers are too, they are much more easily convinced. When a business doesn’t validate its product, it can end up being an expensive adventure. A great example is when Pepsi launched a transparent cola called “Crystal Pepsi” to respond to consumer trends leading towards clear beverages. But Pepsi forgot to ask their customers if they liked the idea, and soon found out the hard way that people want their cola brown, as they are accustomed to. There are numerous examples of big companies failing their market research and validation, but the most interesting is that there are close to no examples from startups. This isn’t because startups always get it right, but rather because startups who don’t validate their products rarely survive long enough to become an example. So, how do you validate your product? There are plenty of businesses specializing in market validation. But since it’s relatively easy to do yourself and going through the process will make you an expert on your target customer, we recommend that you do it yourself - if you have the time. To validate your market, there are a few steps to go through:

🕵🏽‍♀️ Choose Your Sample Group

When choosing a sample group, you should make sure to pick a variety of different people from the group. If your target group contains both men and women, of course, your sample group should too. The same goes for age, level of income, interests, and so on. There are no rules for the group’s size, but if you ask the statistical wizards, the more people, the better. Your investors will be much more impressed by a thumbs-up from 300 people than from a group of 30.

👉🏻 Give Them The Product And A Routine for Reporting Back

When you’ve collected your sample group, you need to give them the product. Depending on where you are in your process, you will have a more or less finished product to provide them with. If you don’t have your actual product ready (and you probably don’t), you should offer them an MVP or a demonstration or presentation of your product. Your product should come with instructions for what and how they should report back to you. Maybe it's by text, by filling out a questionnaire, or by phone calls. Have them report back on everything relevant to you. User face, efficiency, duration of use, pricing, and improvement suggestions - just to name a few options.

👨🏼‍💻 Collect The Data 

When every person in your sample group has reported back, it's essential to collect their data in a way that makes it easy for you to analyze it. An excel-sheet will do fine, as it enables you to create graphs to use in your pitch.

🔂 Make Adjustments - And Do It Again

Use the data to improve your product! Product feedback is precious—especially the negative ones. Don’t beat yourself up over criticism, but use it to make an even better product that will blow your investors’ minds. And of course, once you’ve improved your product, you should show it to your sample group again to find out if you nailed it.

When you’ve gone through those four steps, you are more than ready to dazzle your investors with a thumbs up on your product. And more importantly, you’ve saved yourself a ton of money on putting the wrong product to market.