Market Research TutorialFrom Sunstone Communication

Limited

January 2015

©Sunstone Communication Ltd 2015

Introduction

Market analysis is the art of identifying

how many potential customers you have

and how much they might be willing to

pay.

No-one expects that you will be able to

predict the size of your market exactly.

The purpose of market analysis is to

convince your audience that you have

though logically and credibly about the

potential market.

The story is more important than the

numbers.

This tutorial will walk you through the 3

most common techniques.

Market Analysis Tutorial

“Users may innovate if and as they want

something that is not available on the

market and are able and willing to pay

for its development. It is likely that many

users do not find what they want on the

market.”Eric Von Hippel – Democratizing Innovation

Back to basics 1

Before embarking on a market analysis

your business needs to address two

basic questions.

• What is the problem my business is

trying to solve?

• Who has this problem?

The answer to the second question

defines your potential customers.

Your market analysis will be based on

the definition of your potential customers.

This is known as segmentation.

Market Analysis Tutorial

AirBnB used simple and stark figures in

its initial pitch deck.

©Sunstone Communication Ltd 2015

Back to basics 2

Segmentation is defining potential

customers by common needs and

priorities.

By identifying known characteristics,

segmentation can be used to measure

the size of a potential market.

Typical segmentation factors include:

• B2B or B2C

• Geography

• Income bracket

• Age or gender

• Work or lifestyle interests

• ….endless.

Logical market segmentation underpins

all market analysis techniques.

Market Analysis Tutorial

Mint.com shows three different

dimensions of market segmentation in

this slide from its pre launch pitch deck.

©Sunstone Communication Ltd 2015

Back to basics 3

Knowing your potential customers

defines the Total Addressable Market

(TAM) for your business.

Your market analysis takes account of

the limitations of your planned business.

These can include factors such as

geography, availability of key resources,

channels to market and ability to scale.

Analysing the TAM against your business

model choices will lead you to your

Serviceable Addressable Market (SAM).

Finally, you may choose initially to go

after a subset of your SAM, this subset is

called your Target Market.

Market Analysis Tutorial

The TAM can be very large if your

product is aimed at a very common

problem such as this example from

PinMyPet.

©Sunstone Communication Ltd 2015

Three Models

All methods of market analysis provide a

structured and logical way of calculating

market potential based on the

segmentation factors leading to your

TAM and the business model choices

inherent in your SAM & Target Market.

This tutorial looks at 3 common

techniques for doing this:

• Chain Ratio

• Component Based

• Bottom Up Research

Click the NEXT button to learn more

about these approaches.

Market Analysis Tutorial

Whichever method you use, make sure

you cover the basic elements of market

opportunity. This example is from a

Startup investor template created by

Sky Fernandes. The full deck is also

included in our Business Plan Toolkit.

©Sunstone Communication Ltd 2015

Chain Ratio

The Chain Ratio (CR) method, often

referred to as top down analysis, consists

of applying a series of percentages to an

initial estimate to narrow down to the

likely market.

CR begins with a large broad estimate

that includes all potential customers, for

example the population of the USA.

Narrow the estimate using easily

measured factors such as gender or age.

Next apply specific or subjective factors

such as job title or interests.

There is no set rule but a total of 3-5

factors is normally used.

Market Analysis Tutorial

Square.com uses a good broad

estimate ($ value of US mobile

payments) and simply identifies the

narrowing factors without applying

figures – growing market interest, NFC

adoption and customer loyalty trends.

©Sunstone Communication Ltd 2015

Chain Ratio 2

What makes good CR analysis?

• Find a reliable and credible source for

your assumptions. Official sources

such as Government statistics are

best. You can find a list of good

sources in the reference card at the

end of this tutorial.

• Logical, structured thinking which

connects with your value proposition,

problem statement and ideal

customer.

• Don’t rely solely on broad, commercial

estimates such as those produced by

market research firms.

• Use reliability factors, for example

reducing those estimates based on

less credible sources.

Market Analysis Tutorial

How not to do it….this slide from sverve

relies solely on one general survey

statistic. Albeit from a credible source

(McKinsey).

©Sunstone Communication Ltd 2015

Chain Ratio - Example

Let’s work through an example of a

business to provide a financial planning

tool in a mobile app. We will aim at the

USA as our main market.

Market Analysis Tutorial

STEP 1 – BROAD ASSUMPTION

Start by finding the number of adults in

the US. Only adults could realistically be

expected to need financial planning and

management.

Number of

Adults in

USA

240 Mn

SOURCE:

US Government Census

Total population of US = 316,128,839

Percentage of people under 18 = 23.3%

©Sunstone Communication Ltd 2015

Chain Ratio - Example

Market Analysis Tutorial

STEP 2 – NUMBER WITH CREDIT

CARDS

Next we try to narrow the market to those

with need of financial planning. Let’s take

the number of adults with a credit card as

a proxy for the number with potential

complex financial affairs.

Notice that this source is a survey rather

than a census. Even thought the survey

was carried out by the Federal Reserve it

carries less weight.

No of Adults

in USA with

Credit Cards

200 Mn

SOURCE:

Federal Reserve Survey via Statistic

Brain

No of individuals with a credit card =

199,800,000

©Sunstone Communication Ltd 2015

Chain Ratio - Example

Market Analysis Tutorial

STEP 3 – NUMBER OF PEOPLE WHO

BUDGET

A large slice of the population has

complex financial affairs but how many of

them budget and track spending? This

would give us a much better idea of our

TAM.

We manage to find this figure in a Harris

Poll on Consumer Financial Literacy. Still

pretty credible but note that these are

people who “say” they budget.

A useful step in our plan but still a long

way for a definitive market estimate.

US

population

who say they

budget

78 Mn

SOURCE:

Harris Poll for NFCC

Percentage of US population who say

they budget and track spending = 39%

©Sunstone Communication Ltd 2015

Chain Ratio - Example

Market Analysis Tutorial

STEP 4 – NUMBER WHO USE AN

ONLINE TOOL TO BUDGET

We are planning a mobile app so it would

be very helpful to know how many of

those people who say they plan currently

use something online or mobile for their

budgets.

Luckily there are lots of surveys and

statistics on this type of information

including this Gallup Poll.

We have now used a series of surveys to

arrive at a TAM whish is just over 10% of

our original broad assumption.

Total

Addressable

Market

25 Mn

SOURCE:

Gallup Poll

Percentage of US population who use an

online budget tool = 32%

©Sunstone Communication Ltd 2015

Chain Ratio - Example

Market Analysis Tutorial

STEP 5 – MARKET IN NEW JERSEY

No doubt our TAM still includes many

customers who don’t fit our precise

definition. For example, the number who

budget online may include people who

simply use a spreadsheet.

The important thing is that our analysis is

a credible and logical way of approaching

the question.

We now apply a final factor based on our

business limitations. We only have a

licence to operate in New Jersey so we

limit our target market to the percentage

of the TAM likely to live in the State.

Target

Market525,000

SOURCE:

US Government Census

Percentage of US population who live in

New Jersey = 2.1%

©Sunstone Communication Ltd 2015

The Internet provides an inexhaustible

source of statistics and analysis. Here

are a few of the sources I use to find

good data for Chain Ratio based market

analysis:

GOVERNMENT & OFFICIAL

• US Government

• European Union

• UK Government

• World Bank

TRADE ASSOCIATIONS

• US trade associations

• UK trade association forum

OTHER GUIDES

• US Guide to Online Market Research

• British Statistical Data: A Guide to

Sources

Market Analysis – Chain Ratio Sources

MARKET RESEARCH FIRMS

• Gartner

• Forrester

• IDC

• Datamonitor

• JD Power

• Ovum

• 451 Research

NOTE: Research from these firms can be

very expensive. Generally press releases

and articles pick out useful highlights. Be

very sure before investing in actual

reports.

©Sunstone Communication Ltd 2015

Component Based

Component Based (CB) analysis is

performed by estimating the value of

each element of your revenue model

separately. This is sometimes called

Bottom Up analysis, for example by

Steve Blank in The Start Up Owners

Manual.

The first step in the CB method is to

establish your revenue model. This may

be used in other parts of your business

plan.

Your revenue model is a major factor of

your overall business model. For

example the revenue model for SaaS is

very different from the model for

eCommerce.

Market Analysis Tutorial

Component based analysis doesn’t

need to be complicated. Subscrea

used this example plus a general

market analysis in its pitch deck.

©Sunstone Communication Ltd 2015

Component Based 2

Your revenue model can be expressed

as a formula. An example for a SaaS

business is shown opposite.

CB requires you to make a separate

estimate for each element of that

formula.

These estimates may be made in a

variety of ways including both Chain

Ratio and Bottom Up Research

approaches.

Once you have an estimate for each

element of the formula simply plug them

into the formula and calculate your

market forecast.

Market Analysis Tutorial

©Sunstone Communication Ltd 2015

SaaS

Revenue

Model

Formula

Component Based 3

What makes a good CB Analysis?

• Use a business and revenue model

which is appropriate to your product

and customer base.

• Have a recognisable formula which

links to your revenue model.

• Make your assumptions credible with

good logic and reasoning.

• Source estimates where possible but

recognise sources may not always be

available.

• Tie your assumptions clearly to a well

defined and identifiable base of

potential customers.

Market Analysis Tutorial

Buffer is one of the most open and

transparent companies anywhere. I

love the stuff they share. Here they

use component analysis to

demonstrate market traction for one of

their fundraising pitches.

©Sunstone Communication Ltd 2015

Component Based -

Example

For this section we will use the example

of a personal time and to do organiser

built into a mobile app.

Market Analysis Tutorial

STEP 1 – REVENUE MODEL

FORMULA

There are a number of well established

models for calculating the revenue from

different types of software business. For

this example we will assume our product

is a software as a service (SaaS)

product.

Users will be able to access a basic

service for free but will pay for premium

features. This combination is called

Freemium.

Views/

DownloadsCR

Free Users CR

Paying Users

Average

Subscription

REVENUE

Freemium

Revenue

Model

Formula

©Sunstone Communication Ltd 2015

Component Based -

Example

Market Analysis Tutorial

STEP 2 – NUMBER OF FREE USERS

We can calculate this figure from the cost

per 1,000 impressions for advertising. As

this is a consumer product we will use

the cost for Facebook ads which is $3

per 1,000.

We can now immediately apply a limit

based on our business financial

respources. Lets say we can afford

$10,000 per month for advertising.

From the same market statistics, we can

calculate the click through rate (CTR).

This tells us how many of our

impressions turn into visitors.

Cost per 1000

impressions

Annual Ad

Budget

600,000

Total

impressions

PA

CTR

©Sunstone Communication Ltd 2015

Component Based -

Example

Market Analysis Tutorial

STEP 3 – CONVERSION RATES

We can also find plenty of data on the

average rate of conversions from visitors

or downloads to free users and then to

paying users.

Note that this calculation uses wide

averages. In the real world your business

may achieve more or less than the

average.

When presenting your market analysis

you should use a conversion rate that is

appropriate and have a logical

explanation of why this differs from the

average.

No of visitors/

downloads

No of free

users

1,440

Conversion to Free users

Conversion to Paying

users

©Sunstone Communication Ltd 2015

Component Based -

Example

Market Analysis Tutorial

STEP 4 – REVENUE CALCULATION

Typically for consumer apps the number

of users at the end of one year is quite

small.

We now need a figure for how much

each of these users will pay. The best

source of this type of data is to compare

with the prices charged by competitor

products. If your product is completely

innovative, then compare with lesser

products if need be.

In this case, we have used the cost of

Trello a well known personal organising

product - $5 per month.

No of paying

users

Price per

month

$86,400

revenue in

Year 1

©Sunstone Communication Ltd 2015

Bottom Up Research

Bottom Up Research (BUR) involves

researching the needs of a small sample

of potential customers and extrapolating

to estimate total market demand.

BUR requires three main elements:

• Identify and get access to a small

population that fits your definition of a

target customer.

• Carry out well designed tests on the

tendency of those customers to buy

your product – see below for types of

BUR.

• Extrapolate the results of those tests

to produce a credible and logical

estimate of your potential market.

Market Analysis Tutorial

Buffer is one of the most open and

transparent companies anywhere. I

love the stuff they share. Here they

use component analysis to

demonstrate market traction for one of

their fundraising pitches.

©Sunstone Communication Ltd 2015

Bottom Up Research 2

BUR estimates are generally considered

to be more specific and therefore more

valuable than other types of market

analysis. Why should this be?

• The selection of the sample and the

design of the research is unique to the

product and market being tested.

• Done well, both the customers

researched and the tests in the

research are much more precise than

other methods.

• BUR usually also draws out qualitative

research which gives guidance on

market potential over and above the

hard data.

Market Analysis Tutorial

Feast started with SEO based

research…

…and moved onto great specifics.

©Sunstone Communication Ltd 2015

Bottom Up Research 3

There are lots of ways to do BUR. Some

are quite expensive, others leverage the

digital world to get data very cheaply.

The value is always in the precision with

which the audience are selected and the

product is tested. This does not always

follow the money.

Some common methods of BUR:

• Electronic surveys eg using Survey

Money

• Landing pages to test responses

• Search Engine and Social Media tests

• Specific focus groups

• Agency driven market research

surveys

• Personal networks of founder or team

Market Analysis Tutorial

The Mom Test by Rob Fitzpatrick is a

great guide to getting real answers

from bottom up research.

©Sunstone Communication Ltd 2015

Bottom Up Research -

Example

In this example, lets imagine we are

starting a business which offers a

selection of unusual but healthy tea

blends by subscription. How could we

use BUR to size the market?

Market Analysis Tutorial

STEP 1 – FIND AN AUDIENCE

As a start up we are working on a

shoestring so we need to try guerrilla

tactics to find some potential customers.

A few examples are given opposite.

TACTICS:

• Cold calling – 2/100 hit rate!

• 7 degrees of separation ie use your

network

• Mailing lists – buy them but can be

expensive

• Industry events

• Personal network

TARGETS:

• Tea drinkers - salons, coffee shops etc

• Tea websites

• Tea related key words

©Sunstone Communication Ltd 2015

Bottom Up Research -

Example

Market Analysis Tutorial

STEP 2 – GATHER YOUR DATA

Once we have found an audience, we

need to talk to them. One approach is

landing pages. In this type of example we

have very little information – only

willingness to sign up based on limited

product information – but may have

reasonable numbers.

Alternatively, we can find some people

and carry out individual or group

interviews. These can be a very rich

source of data but the sample size is

likely to be small and may be biased.

LANDING PAGE:

• We design a really neat landing page.

• We spend a small amount targeting

Tea related keywords.

• This brings us 2,500 visitors.

• We are able to sign up a total of 15

people to out list as a result of this

test.

INTERVIEWS:

• We approach customers of our local

friendly coffee shop owner.

• We manage to talk to 18 people.

• 7 prefer tea to coffee.

• Of these, 2 would pay for a tea

subscription once a quarter.

©Sunstone Communication Ltd 2015

Bottom Up Research -

Example

Market Analysis Tutorial

STEP 3 – EXTRAPOLATE

Finally we need to take our BUR data

and extrapolate to find our Tam and/or

Target Market size.

Once again, the key is to find a logical

and structured way of extrapolating so

that your forecast ahs credibility.

Opposite we have used both data sets to

extrapolate and arrive at two different

TAM estimates. When pitching we would

use some combination of the two.

Landing Page

sign up rate

TAM = 5,769

Percentage of

people aged

18-35 who

drink tea

20-34 Year

olds in UK

Coffee Shop

users who

would pay

UK coffee

shop regulars

aged 20-34

TAM = 18,480

©Sunstone Communication Ltd 2015

Summary

Market analysis is an important element

of both planning and executing any

business idea.

Market analysis is more of an art than a

science.

The keys to good market analysis are

clear identification of potential customers

and a logical structure to arrive at

estimates.

We have outlined three of the most

commonly used methods of market

analysis in this tutorial. We hope this

helps.

Good Luck!

Market Analysis Tutorial

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