Beware This Newbie Mistake: Don’t Over-Estimate Your Market Opportunity!

By Ed McLaughlin and Wyn Lydecker

Many new entrepreneurs believe their service or product will have wide market appeal and so overestimate their market opportunity — and accordingly — their company’s potential for growth. As identified by the Business Dictionary, market opportunity is a “newly identified need, want, or demand trend that a firm can exploit because it is not being addressed by the competitors.” In our experience, the key to understanding and more accurately forecasting your market opportunity is to analyze, narrowly define, and quantify the opportunity.

Defining the Opportunity

To start, obtain a global overview of the overall market potential. How large is the industry, and what are the current trends? For a market opportunity to exist, a company must be able to identify who its potential customers are, the specific needs that need to be met, the size of the market, and its capacity to capture market share.

The pet industry is an excellent example of a good market opportunity. In 2010 the American Pet Products Association said that Americans were projected to spend about $47 billion on their beloved pooches and parakeets, and they anticipated that the pet industry would continue to grow at about $2 billion annually. Those projections demonstrate a strong industry – a good place to be if you want to build a startup in the pet supply world.

You will need to do a lot of research. This is the only way you can answer questions such as: What sector of the industry are you targeting and are there any changes taking place? What is the rate of growth of your target sector and what trends will impact that?

When I was starting USI, my real estate services outsourcing business, the entire real estate industry was in flux. Real estate services were becoming more profitable than development, and the outsourcing wave that was sweeping other industries had yet to be adopted in real estate. This combination of factors created a huge market opportunity for me.

Research

To help you find the answers you need, interview potential customers and find out what is the type or class of people or organizations that have the need or problem that you identify. What are the key characteristics that make them have this need/problem? In addition to interviews, do an online search for your particular industry data and also look up trade associations. Here are some other tried and true resources to get you started:

Research companies such as Dun & Bradstreet, Standard & Poor’s Investor Services, and the Risk Management Association publish directories and industry surveys.
FedStats is a website that provides statistics from more than 100 agencies.
The U.S. Department of Commerce provides demographic statistics on American families.
Your local Chamber of Commerce and economic development council may have helpful demographic information for a local region.
Small Business Development Centers(SBDCs) are excellent resources to assist you in defining your market potential. They have access to both federal and local demographic statistical information.

There is no easy or straight path to identifying a market opportunity. It is rarely the case that you can ask a potential customer a simple question and get the answer you are looking for. It takes a great deal of thought and care to devise an approach to finding a real market opportunity.

We have just released The Startup Roadmap: 21 Steps to Profitability. The Startup Roadmap is a step-by-step guide designed to help you understand the mechanics of starting and running a profitable new business. The print edition is available on Amazon. For a limited time, you can get a complimentary eCopy at our website (click here).

Once you have downloaded your complimentary eCopy of The Startup Roadmap, we hope you’ll do one of four things: Use it to help you launch your own business, email us to let us know what you think (ed@thepurposeisprofit.com), write a review on Amazon, and/or tell your friends about the book.

Ed McLaughlin is currently co-writing the book, The Purpose Is Profit: The Truth about Starting and Building Your Own Business, with Wyn Lydecker and Paul McLaughlin.