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How to Realistically Estimate Your Market Potential

There is a fundamental flaw in the thinking process of many entrepreneurs out there in the midst of building their companies and seeking angel or venture capitalist investment: simply put, their market projections cannot be defended. The total available market (TAM), around which the typical entrepreneur plans to build their pro forma business model, is often defined by figures pulled from some random analyst report off the Internet. Many times, the research performed by an entrepreneur is nothing more than an evening of cutting and pasting data culled from the factoid-enriched information superhighway.

So maybe you’ve read through a number of presentations, possibly talked to some domain experts in the industry, or even conducted your own field study to determine the size and depth of the opportunity.

Most don’t go to this extent. In school, it was called plagiarism, and yet many entrepreneurs are guilty of this same practice.

But what if there are no clearly defined market boundaries? Where do you find the data you need? What if no analyst has invested the time to research your new and not yet mainstream field of technology? What do you do if all the available information you find online and through the major research firms is vague, with wildly varying estimates, and is, in effect, useless for your planning purposes? What then? How can you possibly construct a reasonably sound financial model capable of resisting the scrutiny of a potential investor?

Definition: The Software Modeling Approach

In my twelve-plus years working in technology and writing on business and management best practices, I have often used software modeling as an analogy of how entrepreneurs and companies should approach their business problems. The fundamental problem with most business planning – and market sizing, specifically – is that the underlying business model and the components of the “system” are ill defined and not truly understood. In parallel, a problem among software engineers is the urge (for some, arrogance) to code before properly outlining the problem and potential solutions. But how often is this same mistake made in business? Quite often, in fact.

Do you understand your product or service? What I mean is, do you truly understand your market, your target customer, and your competition? Before you answer ‘yes’ consider this technique:

A (simplified) modeling approach is to outline what you know about your offerings, and to develop use cases that help you define each of your offerings as an individual product, and to define their uses and constraints. Try to fully document the features, functions, and constraints of each offering. Once you have this outlined, you can then begin to develop scenarios for these use cases, which will help you to visualize how your customers will use your offerings. Scenarios might describe uses of a single offering, or combinations of two or more offerings. The goal is to model out every conceivable use for your offerings. These scenarios can help you to define or create new uses, or to identify customer groups not considered in your original plans. The trick is to be creative, to “think outside of the box,” and to let the ideas flow freely, abstracting your scenarios enough that you do not blind yourself from new uses, new user groups, or new industries that may find your offerings useful.

Outlining each of your business components, and then brainstorming the various scenarios for using those components is a “holistic” method of business planning and market strategy. Understand what your product is, and you’ll better understand how to position it in the market.

Sizing: Understanding Your Limits

Now that you have your product or service definition in hand, it’s time to start thinking about building your “defendable swag.” Some of you may be asking, “What is a swag, anyway?” For those unfamiliar with the term, it is jargon for “Scientific (or Silly) Wild-Ass Guess,” used when establishing high level sizings for large projects.

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