How to Identify the Right Target Market for Your Startup
There’s nothing more dangerous than wasting years in a startup to discover that it can never grow in profit. So, it is crucial to think about market size predictions from the beginning. This will help you determine your startup market opportunity. Determining the market size and especially identifying the target market helps determine whether the payoff from your new venture is worth the work on it.
Market opportunities are composed of four essential parts:
- Large quantity of potential customers for your startup,
- There is evidence for future growth in a market that is rapid and predictable, and
- There is the opportunity to attract more customers or users.
- You can easily repeat the business with your targeted customers.
Here I will show you one important process to work on market identification for your startup.
Target Market Identification Through the Market Size for Your Startup
According to Steve Blank, the co-author of “The Startup Owners Manual,” marketing experts typically consider market size three different numbers. The first is the total addressable market. The second is served available market, and the third and last is the target market. So, the goal is to come to the target market. This is the market with the most potential customers with the right purchase intent for your products and services.
How to Identify Total Addressable Market?
You will always need to start with a top-down estimate as to the first step. For this purpose, we can use industry analysis reports, market research reports, competitors’ press releases, and every available statistic we can find in units, currency, page views, etc.
Let’s explain these market numbers with a target market example for a new startup developing a smartphone productivity application.
Using Google dataset search
In such a case, I still don’t know any number related to the market. Because of that, for the total addressable market, I will start my homework and research with Google dataset search. Whenever I don’t know where to find some data, I will use this tool simply as a search engine for statistical data. As you can see, I can start writing “smartphone users worldwide” and look at possible results that Google shows me. Currently, I found the report titled “Smartphone users worldwide 2016-2023, so this will be a good starting point for me to find a total addressable market.
When I open the report, and it is on Statista, I can see the graphic related to smartphone users in the above-mentioned time frame. Now, I know that the total addressable market size can be 3.8 billion in total smartphone users worldwide, according to statistics for 2021. Until 2023 the total addressable market will be 4.3 billion smartphone users.
What if I don’t find all important information?
As you can see, here I don’t have information about 2021, and because of that, I will continue to search to find this information on Google.
Here is the result that in 2021 we will have 3.8 billion smartphone users worldwide. In this case, I will open the site and check the source of information to check the reliability of the information source. Here is how I come to the 3.8 billion users.
How to evaluate information sources?
I want to mention that you will need to use some system to help you evaluate each information you get. I always propose a “4×4” system, a method generally accepted by police and intelligence forces worldwide. We use estimates like A, B, C, and D for information source and 1, 2, 3, and 4 about the information, or how the source comes to that exact information directly or indirectly. So, the fact is A1, and it is reliable information, but the estimate of D4 is information that we need to take with reserve.
How to Identify Served Available Market?
Now, let’s continue with the available market using our target market example to develop a productivity mobile app.
If the product works only on Android phones or only iPhones, served available market size or potential market served is far less than 3.8 billion smartphone users. So, my job now is to find data about the market share between Android and iPhone users.
I will repeat the same procedure with the Google dataset search. But this time I will search for mobile market share worldwide this time. Again, Google brings to the dataset on Statista. We can see that more than 70% of smartphone users use the Android operating system. The second operating system is Apple’s iOS with a 27.4% market share.
As you can see, many different operating systems disappear from the mobile operating systems’ map between 2012 and 2018. Because of the larger market share, the logical step now will be to choose Google Play Store as the served available market. In such a case, this market will be 2.66 billion users. I get this by multiplying the total available market with market share, or in this case, 3.8 billion with 0.7 for 70%.
What if the app will work on specific operating systems?
But we cannot quit here. Suppose the app can work only on specific newer versions of the operating system. For example, Android Pie 9 and Android 10.
Repeating the same process we have used previously, I found the information for this market share on Google dataset search. So, according to this data, in January 2021, the Android 10 mobile operating system version had a share of 45.29 percent amongst all mobile Android devices worldwide. Ranked second was Pie 9.0 with 21.53 percent. So, in total, the Android operating system where can be installed our application cover 66.82%. In such a way, our Served Available Market will be 66% from 2.66 or 1.75 billion potential users.
Now, we’ve decided that our new innovative application will work only on Android mobile phones, on two last versions that also have the most significant market share – Android 10 and Android Pie. And the served available market will be 1.75 billion potential users.
How to Identify Target Market?
Now, let’s define the target market. Here we will continue with our target market example.
Because the target market will be Google Play Store for Android phones users, the next step would be to consider what percentage of those potential customers will buy the application. Each estimate further narrows the target market. For example, if only 30% of all users spend money on Google Play Store, it will mean that our target market will be these customers that will pay for the application on Google Play Store. So, now the target market will become 500 million users. But because our app is related to productivity apps and around 70% of app income on Android is associated with the gaming industry, in that case, our target market will be 30% of 500 million or 150 million potential users.
Is there need for pivoting – change the target market?
Until now, we talk about the size of the market in the number of potential customers. We talk about the payment potential of the customers on the market, but only for one market – Google Play Store. But there is another market also. So, in this case, probably a more critical metric to define the market for startups is potential income that we can generate compared to another popular store – Apple’s App Store.
If we repeat the whole process through Google dataset search for “mobile app consumer spending,” I found this report titled “Annual global mobile app consumer spending 2020-2025, by store”. Here we can see that even we have a significant difference in users for Android and iOS, more than 70% on Android and around 27% on iOS, still, in 2021, it is expected to be spent 92 billion US dollars on iOS and only 50 billion US dollars on Android. That is almost double in income generation on App Store vs. Google Play Store. And suppose we repeat the calculations related to the percent of the income related to games and other productivity-based apps. In that case, we will have a potential market worth 15 billion US dollars on Android and more than 27 billion dollars on iOS.
It’s time for pivoting
What do you think now? Is the Google Play Store a better market for our startup than Apple’s App Store?
This information tells me that I have selected the wrong market, Android or Google Play Store. It is better to build the app for iOS because of the much more significant potential in spending dollars on the App Store market and the expected trend until 2025. As you can see, we can often have vanity metrics that will look very good but still be false. So, always try to use and compare different metrics when you need to make the right decision.
Estimating Total Addressable Market, Served Available Market, and target market is a good starting point for the market size hypothesis. Later experiments with customers will help turn these hypotheses into facts. There are many different measures for market size for web/mobile products like page views, downloads, referrals, or hours. Still, what counts the most for a startup is revenue, one of the most important measures. We need to calculate from these numbers, who will pay, and who may not pay.
Finding a massive, growing audience efficiently and cost-effectively is the number one thing for each startup. This is the time to develop an initial hypothesis about where that audience might come from and how big it can become.
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