3 Key Factors for Evaluating the Potential of a Market Opportunity
- Drill down
Is This Opportunity Worth Pursuing?
Managers of small and large firms encourage their employees to identify innovative business ideas, often resulting in a wealth of opportunities for company growth.
Surely, having a set of possible market opportunities at hand is a valuable asset for the business. However, it also tends to create a dilemma for you: which option(s) should you focus on and pursue with full force? Which ones should you put aside for now?
To make this all-important decision, you need to carefully evaluate your options, as opportunities clearly differ in their level of attractiveness.
An attractive market opportunity is one that will likely produce significant potential for value creation, and that poses relatively few challenges in capturing that value.
In this post, we will focus on how you can evaluate the potential inherent in a market opportunity by looking at three key questions. In our next post, we will deal with how to uncover the challenges associated with these opportunities, so make sure to subscribe in order to get updated when it’s live.
Assessing the potential of a market opportunity is critical to your evaluation process. It involves asking certain questions, such as: How BIG is this opportunity? Is it at all worth pursuing? If so, how much value can we create if we choose this path?
To evaluate the potential of any market opportunity, you will need to assess three key factors:
- Compelling Reason to Buy
If no one wants to buy it, it isn’t worth anything…So the first thing you need to learn about a market opportunity is whether someone will really want what you have to offer. If the compelling reason to buy is low – it’s simply a ‘No-Go’, because demand will not fly.
To evaluate this key factor, you need to look deeply into three important questions:
- Is there a real unmet need?
- Can you provide an effective solution for this need?
- Can you address it (much) better than current available solutions?
An honest answer to these questions will lead you to estimating how compelling your offer is.
Note that the only way to assess this factor is to look through the eyes of your customers. It’s not what you think, it’s what they think that counts – what they say, or even more importantly, what they do. So, go out of the building and talk about this market opportunity with as many potential customers as possible, to validate your beliefs.
- Market Volume
Satisfying a real need is an important condition for creating value. Yet, it is the market volume that will determine to what extent you can sell your product and, thus, to what extent you will create that potential value.
To evaluate this key factor, you need to look closely into two important questions:
- What is the size of the current market?
- How much is it expected to grow over time?
Try to estimate how many customers actually face this need (now and in the near future) and how much they will be willing to pay for what you plan to offer them. Objective answers to these questions are the basis for estimating the volume of the market.
To size a market, you will have to talk to potential customers and other experts or sales channels representatives, look for competitive approximations, and search for existing analyst reports and relevant market research.
Remember that for completely new markets, which have no customers, no well-defined competitors, and no products yet, measuring the size of the opportunity is more of a ‘guesstimation’ than an exact evaluation.
- Economic Viability
The last factor for assessing the potential of a market opportunity estimates the economic benefit of this option for you. Without getting into a detailed sales plan or profit-and-loss calculations, it refers to the basic elements that influence the economic value of a market opportunity.
You can get a relatively good understanding of this economic potential by examining three main questions:
- Do you have sizeable margins?
- Are the customers well-funded enough to pay the price?
- How sticky are customers expected to be?
While challenging to estimate, it is important to make sure that you have enough slack between the cost of your offer and how much customers are willing to pay for it. In any case, make sure to talk to your ‘economic buyers’ to understand their perspective.
Once you have thoroughly gone through these three key factors, you can estimate the overall potential of your market opportunity. You can adopt a quantitative approach for that by scoring each factor on a pre-set scale (for example 1-5 or low to super-high), and then averaging the results to get an overall score, or you can adopt a more qualitative approach by taking into account the major pros and cons that you identified as you analyzed these factors.
In any case, using such structured framework will help you to be more comprehensive in your evaluation, and to make sure that you have not skipped any important consideration. It will also enable you to compare different market opportunities, and to make a more informed strategic choice on which markets you should focus on.