Marc Andreeson—entrepreneur and investor—contends that “market is the most important factor in a startup’s success or failure.” A good team and the right product are both important, but without a demand market for them, the odds of finding success are long.
As Andreeson says more bluntly: “You can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail.”
How do we evaluate and understand that demand? What is the “market”? The definition seems relatively simple: the number and growth rate of users or customers for a product. But it’s a little more intricate than that. Before diving into five guiding questions worth considering when assessing a startup’s market, one more point is worth making: market analysis is not a theoretical game—quite the opposite, there are solid answers to these questions (or worthy approximations). Ideas are wonderful, but unless and until they’re tested and validated, they remain unsubstantiated ideas.
5 Guidelines to Evaluating a Startups’ Market
- What research has the startup done; particularly that of it’s potential audience and customers? Let’s begin broadly: one of the easiest ways to demonstrate market numbers is empirically. A startup should know absolutely everything about its customers: their demographics, their needs, how they engage with the product, what they tell their friends, how they discovered the product, what they are willing to pay, how much it costs to acquire each of them —absolutely everything. And, since the goal of a startup is to perfectly fit their product within that market, the only way to gauge progress, success, or failure is to thoroughly know and understand these metrics. This is done through continual testing, experimenting, iterating the product, and gathering feedback.
- Is the product built for a large number of people who value some use, or a small number of people for whom it is particularly designed? This is a more detailed follow-up to the question above so we’re reiterating it, a startup must know who their customers are. In the early days of a startup it may be impossible to truly know the depth of the market (Airbnb is a good example of this), so it’s often better to have a smaller number of rabidly enthusiastic users than a larger number of customers who mildly appreciate the product – but a breadth of reach and insight gives early entrepreneurs a larger audience from which to learn and grow.
- How much does it cost to acquire a new customer, and how does it compare to the amount of revenue that customer will generate? Without delving too deeply into the intricacies that surround different key performance indicators (we’ve explored many of them here), the answer to this question is critically important. Ideally, CAC (Customer Acquisition Cost) or CPA (Cost Per Acquisition) will fall with time, while revenue numbers continue their steady—or ideally, exponential—growth. A startup needs to know its customer acquisition channels, understand which ones work better than others, which cost more, and why.
- Why is a customer selecting this startup over another? There are a multitude of reasons. Maybe it’s a superior product or a lower price—maybe both. Perhaps they offer a service people haven’t experienced so efficiently before. Their customer service may be the differentiator. Regardless, there has to be an answer to this why, and it will shed light on the behavior of their competition—a key element to understanding the market.
- The best approach to understanding the market is to act. One of the biggest challenges a startup faces is understanding its market, and then satisfying that market with a product. Without trial and error—that is, testing, gathering feedback, and retesting—it’s difficult to accomplish either.
A final note: a market is in flux and that requires a level of comfort with flexibility. It’s perfectly ok, in fact it’s likely, for their market evolve from what you initially thought and certainly over time, from your initial evaluation, it will. Adaptability, and the willingness to pivot a product to fit the market, is a frequent part of growth.