How to know your market; and why you need to
On running a competitive and market analysis, and why it's so important for successful products
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The purpose of a market analysis
A market analysis is the process of gathering information and gaining a better understanding of all the macro and micro dynamics of a specific marketplace within an industry, and defining an opportunity for the company.
Before building a large product (either starting from scratch at a startup, or within an existing company), performing a market analysis is extremely valuable. This is what investors and executives care deeply about, and here are a few reasons why.
A market analysis gives you insight into how big and lucrative a market is -- the size. The role of the PM is to find problems that are worth solving, and a big part of knowing what is worthwhile is being able to quantify the opportunity. In its simplest sense, this involves having a good idea of the total number of potential customers (volume), and how much they are able to pay/are worth (value). A market could either be new - where its size is currently small but it is growing rapidly, or a market can be more mature, where it’s large with slower growth.
A market analysis gives you insight into macro trends and changes. Understanding what forces are at work in the current market that you can use to your advantage (macro tailwinds), or forces that pose a risk (macro headwinds) are important factors in your overall product strategy. They also help define opportunities and prioritize projects on your roadmap. For example, if an emerging technology that can drastically increase your market reach is becoming more accessible and cheaper, this is a tailwind that you can and should heavily consider leveraging.
A market analysis helps you understand potential customer segments and their behavior changes. Customer research gives you insight into the problems, needs and motivations of different groups of people, and how these adapt overtime. It is a vital part of performing a market analysis.
A market analysis helps you understand regulations and barriers to entry. Knowing the environmental conditions of where you expect your product to be available is extremely important. This is much more significant in certain industries, where failure to understand requirements can lead to the company being shut down and legal consequences. Take a FinTech product - there are likely licenses and many other legal complexities that need to be taken care of before being able to do business. If you’re a PM helping expand into a new market, regardless of industry, take time to understand factors, like GDPR and sales tax for instance, that can affect your product and company.
A market analysis helps you understand the competitive landscape. Your competitors are all the ways that people currently solve the problem your product is a solution for. They could be direct or indirect, or even apathy to doing anything about it. It’s important to understand who else is in your space, what they do well, why people choose to use their product, and what threats and opportunities they bring you.
A market analysis helps you understand your position in the market. Once you know what the landscape looks like, you can point out and clearly communicate where you fit into it. Imagine you’d never seen a world map before -- you’d have a very hard time explaining where you live.
Difference between industry & market
As a PM, you’ll hear the terms market and industry used often, especially when working with executives. Both market and industry are economic concepts influenced by supply (sellers) and demand (buyers). Here is a very simple definition that points out the difference between the two.
Industry is all about supply. It’s about all the other companies that are producing the “same thing” that you are, and doesn’t factor in any customer demand for the products.
Market is demand and supply. As soon as there are people willing to pay for what’s being made, and there is a relationship between the buyers and sellers -- then you have a marketplace. In other words, a market is created by demand.
How to size a market
When defining the opportunity for your product, knowing the size of your market is key. It gives you an idea of how much value the company can capture in terms of number of customers, and dollars.
There are two approaches two sizing a market.
Bottoms-Up Approach. Here, you’re basing your market sizing on more reliable and known fundamentals. You start with core quantitative data that is more accurate, either about your company, or other known products - for instance, taking the number of bookings you’ve had over the last period, and your revenue per booking. Then using that data and making certain assumptions/estimates, you build towards your market size. This approach is preferred and seen as more accurate, and it does take more time and thought to do.
For example, let’s assume a new product trying to compete with Uber:
$15 - Average revenue per ride
10 - Average number of taxi rides per per person a year
$15M - Average revenue per city (100,000 people per city in target market)
$300M - Total revenue (20 cities in target market)
Top-Down Approach: Here, you start by finding out the size of the total market, and then estimating what share of that you can capture. It’s the new founder who says “Uber makes $20 billion a year, if we just capture 1% of that, we’ll make $200M a year!”. As you can see, that’s an optimistic approach that’s a lot less believable than the bottoms up approach. You should avoid this approach as your primary way to size a market, although it is a useful exercise to do with a bottoms-up, as you can see how close the two numbers end up being.
Below is a visual comparison of the two approaches.
There are three common ways to identify your market, and you’ll likely encounter these abbreviations.
Total Addressable Market (TAM). This is the largest size, as it represents the entire value of the market, or total demand for what you’re selling. This is the big picture vision, and you want this to have a good growth rate.
E.g. If you’re selling a new type of coffee -- your TAM is everyone who drinks coffee in the world.
Serviceable Addressable Market (SAM) - This is the medium size, as it represents the share(%) of the TAM you can reasonably reach with your product. This is your medium-term goal.
E.g. everyone who drinks high-end coffee in the United States
Share Of Market (SOM) - This is the smallest market size, as it represents the share(%) of the SAM you can reasonably acquire with your product. This is your short-term goal.
E.g. coffee drinks in New York City
Below is a visual representation of the different types of market sizes.
Looking at market data
In order to size a market accurately, you need reliable and up-to-date data. Data is what you’re basing your assumption and calculations on, so using trustworthy sources is important. Sometimes finding data you need isn’t that easy, and you’ll have to be creative about how you search for things and where you look. Here are some common methods for looking at market data.
Search for industry and market reports. Use Google or whatever search engine you prefer, and and play with terms like “Industry report for__”, “Market trends__”, “Market size of__”. For new and emerging markets, there may not be as many, or any, results here. When there are reports, some may have a paywall. Usually though, there are free resources available to you.
Find reports on publicly traded companies. If a company is publicly listed they have to have their annual documents available to the public. These reports can be useful at breaking down their revenue, and helping you find estimates for market value.
Use Google Adword Keyword Planner, and/or Google Trends. This is a useful free tool as it shows you the volumes and related terms of searches on Google, which indicates market demand for something and how that is trending overtime.
Use Facebook Audiences. If you’re trying to figure out how many people are in your target market, then Facebook Audiences (a tool part of their business ad platform) is extremely useful. It allows you to filter down to a number of people based on demographic info, interests, platforms they have (i.e iOS/Android), education and way more. It’s very useful for giving you the volume of customers available to you.
Use your internal metrics. If you have a product people are paying for, you should have stats on what your average revenue is per sale, and what your number of sales is. You should also have your growth rate. It’s good to utilize numbers in your approach that you know with certainty to be true.
Look at competitors' data. Some competitor sites will tell you how many customers or users they have, and they will also have their pricing public. You can use these together to find the volume and size of your competitor, and then estimate what share of the market you think they own.
As you go through market data, the most important things you’re looking for are:
How many people are there in my target market
How often do they buy (have demand for my product)
How much do they pay when they buy
Are the number of customers growing (growing demand)
As a PM, you’re responsible for knowing who your competitors are in the market, what they are doing, what they offer, and based on that being able to make a judgement on what that means for your product.
Having competition is a good thing as it validates the demand for the problem your product solves. It means people care enough to pay enough for a solution. When I was just starting on my first startup, I remember my stomach clenching every-time I discovered a competitor, thinking in order to be successful you have to be the first movers in the space. That’s wrong - you should love having competitors.
Ideally, there are just a few other companies in the market. You don’t want so many that the market is saturated. Then these companies should be solving for the problem you are solving for, but in a way that has a fundamental difference that you believe gives you the advantage to win in the market. Before Larry Page and Sergey Brin founded Google, there was Yahoo, Lycos, and AltaVist that people could use to find information. Google at its core helped people also find information, but in a way that made it one of the most valued companies on the planet and those others obsolete.
When there are competitors in the market, you need to analyze and evaluate them before tackling the opportunity. You want to ride tailwinds, not headwinds - and building a product that is the same, for the same people, against a strong brand is going to be just that. Finding competitors
If there are no competitors, understand why. You should find out if there have been others who tried to do what you’re doing before. If there are, what are the reasons they no longer exist? It could mean there was no-demand then, perhaps they got the timing wrong and there are macro tailwinds to your advantage now. If others have tried, there should be something to learn from them that either excites you, or should warn you.
If nobody has ever tried to solve the problem you are, you need to understand why. In most cases, others have had your same idea, and no competitors may be a signal that there isn’t an opportunity worth going after. That doesn’t always have to be true though, and what you’re doing could be novel, contrarian, and brilliant -- sometimes called a moonshot.
If you’re working for a company then there are competitors you already know about, and those that are unknown.
To find unknown competitors, you need to find out what the people who have the problem your product solves are currently doing about it. Here are some common methods to find unknown competitors for your product.
Create a list of keywords and phrases. The first step is to do some brainstorming, and write down a list of keywords that relate to your problem, and your product. Also come up with phrases and queries people might have when searching.
Search for those keywords and phrases. Go to Google and type in what you’re looking for. For example, “Book accommodation online”, or “Live customer chat”. You’ll see all the companies that are pitching themselves that way. Keep playing with your keywords and phrases, and even adding to your list based on the top results that come up.
Use social media and forums. Search Facebook, Twitter, Instagram, and Pinterest for your keywords. These places will give you a better view of the competitive landscape.
Channel the type of user. Put yourself in their shoes, and imagine the types of questions they would be asking online, and what they’d be complaining about. Search for phrases on Google, and look for forums and threads where people are discussing the issue. For instance, “How to____” .
Find related competitors. If you go to Owler.com, and enter a known competitor, you should see a list of that company's competitors. Another way to find more competitors from known competitors is to type in “Company vs ___” . This pulls up direct and indirect competitors.
As you find competitors, you should be documenting them in a table. This helps you evaluate them in more detail, and so it’s easy to reference each competitor and compare them on similar qualities.
There are four types of competitors, and in your table you should start by labelling what category each competitor falls within.
Direct. (i.e Uber vs Lyft)
They are going after the same customer group as you (same market)
They are solving the same problem as you, in the same way
The customers will choose between either you or them when buying
Indirect. (i.e Airbnb vs Hotels)
They may have a different customer group to you, but can overlap (same market)
They are solving the same problem as you, but by offering something different
They are going after the same customer group as you, but in a different market
They don’t address the same problem as you, and offer something different to them
The risk is they could extend their offering and become direct/indirect competitors
They may have a different customer group to you, but can overlap
They solve the same core problem as you
The solution is positioned and seen very differently
Instead of using your type of solution, they could choose this alternative approach
These are like potential competitors, except they are more likely to enter your market in the near term.
Think of them between potential and direct competitors.
You should be most concerned with your direct competitors, and spend more time analyzing them and figuring out the best strategy for beating them in the market. These are the companies you want to be most aggressive, as they are the biggest risk to taking your existing and potential target customers.
The end goal is to have a competitive matrix that you and the team can easily refer back to that summarizes all your competitive research. Once you’ve listed out your competitors in the table, and prioritized the direct and indirect ones, the next step is to spend time understanding them. Here are some common criteria you can use to evaluate each competitor that should be stored in your table.
Company Info. Write down basic details about the company. How big is their team? Have they raised any capital?
It’s important to know how large they are, if they have had any fundraising rounds, and who has participated in those rounds. A company that is bootstrapped (meaning they haven’t raised any money) compared to one who has had a Series C funding round with notable venture capital firms, like Sequoia for instance, should be regarded very differently. It indicates they have market traction on a good product with a good team, and resources to move on opportunities. It also means they are going to relentlessly pursue growth, and there will be fierce competition. Crunchbase is a great resource for this.
The core product. Look at what their main product offering is. What is their product pitch? Do they have a good product team? What technology are they using?
You want to spend time understanding their product, and getting insight into how it solves the problem you are solving. Look at how they are pitching themselves on their website - usually the main copy on their homepage. This is their value proposition, and how they are positioning themselves in the market.
A product is only as good as the people making it. If possible, take notes on whatever you can about the product team of the organization as it gives you an idea of the team you’re up against, like how skilled they are and how quickly they can probably get stuff done. If the company has a public team page, go through it to find out how big the product and engineering team is, as well as what the team composition is. For example, how many designers, engineers, PMs, data analysts do they have?
Their careers portal is a good resource. Doing some detective work is always fun, and a careers page is a great place to pry around. You should go through the open roles they are hiring for, as it shows you the areas they may be prioritizing, and what the future team composition may look like. The descriptions of the roles can give you more insight into the types of people and experience levels they look for on their team, as well as their technology stack.
All of this gives you valuable insight into who you’re up against on the product front. If you’re evaluating large companies like Google or Stripe, for instance -- you can save yourself time on this step and assume it’s excellent and ultra-competitive.
Size of their customer base. Look at how big of a user base they have. If a company has a lot of users, it means any new launches reach a lot of people very quickly and they can more easily dominate a market. The size of a user base gives a company a lot of external leverage, like getting press and closing deals with other companies and investors.
Design. Look at how good the competitor’s ability is to make products that have good design. Does the website and product look good? Is it easy and intuitive to use?
I fundamentally believe that design and experience is the second most important part of a product (for B2C and B2B at least). Assuming the problem and need exists, the design is the heart of the solution. A well designed product is harder to compete against as it means they have a good understanding of the user needs, and will be perceived as higher quality by people -- if it looks and feels good, it probably is good.
Brand. Look at how strongly regarded the brand of your competitor is. Having a good brand is a major competitive advantage as it means they have good customer loyalty and recognition in the market. This means they can charge higher prices, get early usage, and have more leeway to make mistakes as people give the brand the benefit of the doubt.
Marketing. Look at how well the product is being marketed. Marketing is a key function at a company, and competitors with strong marketing and distribution are more likely to grow demand for their product and win market share.
Speed. Look at how quickly they can make changes. Do they ship products and updates regularly? As a company gets larger, they usually get slower, which means it is harder for them to respond to feedback and sudden market threats and opportunities. The ability to move fast is a key competitive advantage of a startup or smaller company.
Business model. Look at how they charge customers and make money. What is their revenue model? What is their pricing? What do they charge for?
Below is a rough template for a competitive analysis.
Creating a feature table
A feature table is a comparison chart you can use to compare your product with a competitor's product based on a list of qualities. It’s a useful tool to see how your product sizes up, and where you or your competitor has an advantage or unique quality.
To create a feature table, list your competitors at the top of the table, where each competitor has its own column. Then, each feature or attribute you’re evaluating will have its own row.
Below is what a feature table looks like
When deciding what features to look at, think about why people would pay for your product. What attributes are important to them? For example, if it has a certain feature, its ability to do something, and it’s price.
You want your solution to clearly be better than the competitors you’re comparing your product against. That doesn’t mean make the table look that way -- you need to look at what matters to customers and honestly rank each competitor against each feature.
If it ends up that your product isn’t the better solution, you need to consider iterating your product so that it’s a winner in the market.
Feature tables can be used at various stages. Startups often compare their entire product using a feature table and include that in pitch decks to investors. If you’re working for a company with products in the market already, you can use feature tables when proposing a specific feature or larger project.
A competitive analysis is just the start. As a PM you need to be aware of what your competitors are doing so you can continuously adapt to the market.
There are many methods you can use to keep track of your competitors, for instance following their website and blogs, Crunchbase.com, and setting up Google Alerts for mentions.
You should specifically be monitoring for the following:
New products and features they release. You have to know what’s new and whether it’s competing with you.
Any fundraising rounds they close. When a competitor raises capital, this increases their threat in the market. More money means more people, a larger product and design team that can move more quickly, increased marketing, more press, increased ability to acquire strategic products, and a likely growth in their user base. Crunchbase.com is the best tool for this.
Any acquisitions. An acquisition is when one company buys another company, usually as a growth move, or to suppress competition. You want to keep an eye on whether your competitors are buying any other companies and their products, or being purchased themselves. Acquisitions pose a threat to you, but also to the company doing the acquiring because there are usually growing pains related to it, like integration work to get the two companies working smoothly together that can slow down the pace the product team is working on their own roadmap.
How to conduct a market analysis
Depending on the size of the company you work for and the types of skill sets you have on your team -- as the PM you may need to put this all together with a more holistic market analysis. This would be done when you are still in the phase proposing a project and defining the opportunity to stakeholders, or planning your product roadmap. If you need to do this, below is a high-level overview of how to run a market analysis.
First, you start by describing the current state of your industry, and where it’s heading.
You’ll want to include key industry metrics such as size, trends, and projected growth.
Your industry overview shows stakeholders that you understand the larger landscape that you are competing in.
If you’re in the United States, two useful resources are Census.Gov and Statista.
Next, you will define who your actual customers are by detailing their problems, needs and demographics.
As you start with broader customer research, you may find that you have more than one type of segment. If so, you’ll then do market segmentation, where you group similar types of customers into segments and describe the attributes of each segment.
Within each market segment, you should describe the following:
Market Size - unlike industry size which is measured in dollar value, this represents the number of customers available. The more available people who can buy, the better.
Demographics - describe your customer’s typical age, gender, education, income, and more. This will help you target your audience much better, and inform marketing and design decisions.
Location - where are your customers located? Think about a specific country, region, state, and city. This will also help refine your audience and help targeted marketing.
Psychographics - this is where the insights about your customers needs, problems, motivations, behaviors, likes and dislikes comes into play. With this understanding you can easily define problem statements, that ensure you have a much higher chance of creating winning products.
Trends - people's behavior is always changing. If there are trends that you’ve noticed with your target market, detail them here.
Then you’ll describe the competitive landscape.
Pricing and forecast
Your pricing will help determine how you position your company in the market, and your forecast will show what portion of the market you hope to get.
When pricing your product, you need to consider three variables: price, cost, and value. And the price is not what’s important, it’s understanding your value.
The diagram below is a great illustration of these three variables.
This shows that you are making your profit between the price you are charging for your product and the cost to produce it.
The greater your profit margin, the greater your incentive is to keep selling it, and the more you can further your operations.
Value is how useful your product is perceived to be by your customers or how much people want it. For instance, if you’re selling a SaaS product for $100 per month, but it enables your customers to make $1,000 per month, your value is $900. The more value you create for your customer, the more you can charge.
You can be selling your Enterprise product for $10,000,000 a month if you know it yields $15,000,0000 in value to the customer. Value can justify any price.
This is more relevant to startups as they don’t have much historical data, but another thing to be cautious of is not underestimating your costs during pricing. Be continuously testing and optimizing your prices to find the best conversion rates.
Pricing is a signal to the market. Whatever your price is, it sends a message.
Customers usually link high prices to quality. But, if you are pricing on the higher end of the spectrum, you need to make sure the rest of your marketing is also signaling that you are delivering a high-quality product. From what your business looks like to its logo and customer service experience, high-prices should come with a high-quality experience during the entire experience.
Once you have an idea of your pricing, think about how much you expect to sell. Your industry research will come into play here as you think about how much of the overall market you expect to capture. This forecast should be shown as the number of paying customers, and what the estimated revenue is of all those is, in dollars.
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Every week, I write about product, startups, growth, working with people, and anything else that I’ve found helps me have a happier and more meaningful career in product management
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