The Truth About Estimating Market Potential For Your Business

I can’t tell you how many times I meet an excited founder of a new business that thinks they have a product or service that EVERYBODY on the plant will want to buy. They see huge dollar signs and are mentally spending the money they will make from their business idea. Of course, they failed to recognize the difference between Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM). I recently found an article written by a former SCORE colleague, Tuck Aikin, several decades ago that addresses this very issue. The message remains as true today as it was when Tuck penned them. I hope you enjoy it as much as I did.

Not long ago I overheard some neighborhood children playing on the lawn across the street.  “What’s your favorite color?” one asked another.  I didn’t hear the answer but I took note of the fact that the questioner didn’t challenge the answer at all.  She didn’t say “Green?  That’s a dull color, why don’t you choose red instead?  It’s exciting and used in a lot of ways, for instance, stop lights and signs, and dresses, and …”. 

“That’s dumb,” I can hear you thinking, “who would ever try to influence another person to change their natural preference for something?  What a waste of time.”  You would be absolutely correct of course, yet that’s exactly what would-be business founders often include in their business plan estimate of the potential market for their startup’s product or service.  They’ve bought into the notion that through the force of advertising and selling, they can “create a market” for what they want to sell, and that of course leads them to grossly overestimate the number of potential customers who can be stimulated to buy. 

Just because each year millions of Americans buy a car doesn’t mean that the entire adult driving population is in the market for those who might buy vehicles online via the Internet.  Nonetheless, hundreds of millions of investor dollars have been squandered establishing websites to do just that only to find out that the true market, the online auto market, was really a very small fraction of the historic car-buying public.

 Properly estimating “the market” for a product or service is critical to the decision of whether or not to launch a new business, yet it is often given the least consideration by entrepreneurs.  In their enthusiasm to start fulfilling their dream of running a thriving business, they subscribe to the idea that all that has to be done is to “build it and they will come”.  That idea may be entertaining in a movie (Field of Dreams), but unfortunately, it’s fiction in real life. 

To stand a chance of survival, the would-be business owner must make a dispassionate and hardnosed analysis of exactly who has a natural affinity for the new product or service to be offered – if there is no affinity, no amount of promotion, selling, and advertising can make it otherwise. 

Next, that affinity count must be pared down to an estimate of the number of those who might be persuaded to buy from the new company, and at what frequency.  The entire business plan, then, flows from these critical numbers.

 Not long ago the President of the National Symphony Orchestra League was interviewed on public radio and was asked about the market for live symphonic music.  He expressed frustration with the reality that regardless of the amount of money and effort spent attempting to develop an audience and appreciation for symphonic music, for decades the market has not budged above 2 percent of the U.S. population.  It is true that there are thousands of new devotees of classical music entering the market each year, he said, but there are also thousands leaving the market too.  No amount of money, exposure, or persuasion has been able to alter that fact even though many symphonic organizations try by offering ever-expanding programming, a bankrupt approach for many. 

They’ve learned the hard way that the “build it and they will come” formula doesn’t work.  And it doesn’t work in for-profit enterprises either.  Real markets dictate, and the best thing we entrepreneurs can do to survive, let alone thrive in such a system, is to subordinate our desires to the truth of what is, not what we want it to be.

Tuck Aikin was a former SCORE colleague of mine for many years until his retirement. Tuck is a prolific writer and wrote small business-themed articles for the Colorado Springs Gazette for many years. As a co-mentor, Tuck was my inspiration for me starting this blog.  The preceding post is reproduced with permission from the author.