What is the canonical answer to "If we can get only x% of this y$ market" where x is a very small number and y a very big one?


5

One often sees business plans or pitches along the lines of "yeah we're going after a well-entrenched market, but it's a very big one and we need to get only x% of it to be profitable" where x is often ridiculously low.

Is this a valid business model? I'm pretty sure reading or hearing somewhere how bad of an idea that was, does anyone has any pointers?

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asked Aug 2 '11 at 05:27
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Lindelof
126 points

2 Answers


8

Yes, it's bad, investors will rate you right away as clueless.

One way to think about it: why is your x% any more reasonable than say, 10 times less, or 10 times more? You do realize that when you say "housing is a trillion dollar market", and we only need to capture 1% to be billionaires, it doesn't make any sense. 1% seems low, which is why you assume: "anyone could get 1% of anything". It's top-down thinking. Now think bottom-up. 1% of the housing market is 10 million households. How am I going to get 10 million people to use my product? If you can answer that, then you are in good shape.

One more way to think about this: redefine your market so you become the leader in that sub-market. That's pretty much the only way that makes sense. We want to be the best at "housing for 2-income families in New York". Ok, now I can believe you know what you are trying to do.

answered Aug 2 '11 at 06:39
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Alain Raynaud
10,927 points

4

Lindelof,

There is little value to this type of a "plan". I use quotes because it is NOT a plan at all - it is only a hope. As a wise mentor once told me Hope is not a plan. This is a TOP-DOWN view of the potential of your business.

The little value is just to give you and the investor a hypothetical view of the potential. So you can give a very large Y ($B) and a small X (<5%) say that there is a huge potential. Remember that if you show something like 20+% in 3 years, then your investor will ask you to hand over whatever you have been smoking :) and you will lose credibility. So... this X% of Y$ market is not useful and if this is all you have put in front of your investor - you will be shown the door.

To make your plan credible you need a BOTTOMS-UP PLAN - a real plan.
A real plan is not just numbers starting from zero customers/revenue growing to some realistic number over 5 years, but one that is supported by ACTIONS that your team will undertake to achieve those. These actions can be in the Development, Marketing and most importantly Sales areas.

Example: If I have an Enterprise business, and I show say 5 customers in year 1, then I need to show actions that may be something like:

  1. Attend 3 conferences, collect 200 leads
  2. Target and qualify 50 of them
  3. Pursue and close 5 of them with 2 sales personnel

These actions will be supported by a hiring (Sales/marketing) and investment plan (for marketing, lead-gen, promotions etc). Now the 5 customers (and their revenue) becomes a believable number.

Repeat this for Years 2-5 and you have a real plan supported by actions that shows the investor that you have thought through the details. By Year 5 you may have 100 customers at ~$500K a piece which will put you at $50M revenue. If your addressable market was $1B then you have reached 5% of the addressable market.

Hope this helps.

Siva

answered Aug 2 '11 at 07:02
Blank
Siva
381 points

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