How to Prioritize Market Assumptions and Markets for Your Product or Innovation

“You’re not obligated to serve every possible customer. The products and services you develop should match your company’s overall financial and commercial goals.”Madhavan Ramanujam and Georg Tacke, Authors of Monetizing Innovation

You’ve been able to identify a few dozen markets. Many look promising. How do you know which to focus on?

I’m sorry to say, but at this point, there is no perfect formula. There’s only the formula that’s right for now.

The factors that you use to prioritize market assumptions should change based on your timeline, your need for capital, your market knowledge, your goals, and the specifics of your business strategy.

For example, if you’re in a cash crunch, you’ll probably want to go after markets with fewer decision-makers and prospects that can easily be reached and sold to. This, in turn, would help improve your ability to generate revenue quickly, and your odds of survival.

Alternatively, if for example, your technology gains in value when more people use it, you may decide to prioritize acquiring large numbers of users over generating revenue.

There are many critical and situational factors that are worth considering in your prioritization. In this post, we’ll cover both categories, to help you find the best way to prioritize your market assumptions.

Critical Prioritization Factors for Market Assumptions

Critical factors are factors that are important no matter what kind of business you’re building.

For example, your business will never grow quickly if you can’t reach the buyers. Alternatively, if a market is overserved and the needs are well satisfied by competing solutions, then you’ll have a hard time carving out a niche in the market. Ease of reach and Competition are both critically important factors.

If you decide to ignore critical factors, make sure you’re doing it in full awareness of the risks that you are introducing in your model.

In Crossing the Chasm, Geoffrey Moore recommends evaluating market assumptions using six key criteria. These criteria include:

1) Compelling Reason to Buy

Everything starts with value. If your product doesn’t solve the right pains, or deliver the right gains, you’ll have a hard time getting any sort of traction in the market.

If your product’s value isn’t meaningful at all, prospects simply won’t buy. However, if it has some—not significant—value, you might not be able to tell quickly.

The difference between selling a hard benefit (with tangible returns on investment that can be demonstrated) and selling a soft benefit (one that’s harder to quantify, and can be deemed a nice-to-have) is key.

Going after markets that experience the pain more acutely and/or will get an outsized amount of value significantly improves your odds of success.

When you have a compelling value proposition, prospects are more responsive, more likely to follow up, more willing to prioritize your solution, more likely to do the selling for you—and if your product does deliver value, they’ll be more likely to refer it to others.

Will your solution provide real value? Will it provide quantifiable benefits? Will you be able to demonstrate that value? Can prospects decide to do nothing?

2) Budget

If you want to build a business, you need to be able to get paid for the value that you create. Without a revenue model, a product is just a hobby.

If customers don’t have money, if they don’t pay for products, or if they’re in cost-saving mode, you’ll have a hard time reaching your financial goals.

Markets that are expanding, with many businesses that are well capitalized and growing, can be more forgiving and willing to spend more on innovative products. With more money, you can hire more engineers, spend more on customer acquisition, or take home more profits. Generating more revenue than your competitors can be a true advantage on the market.

Do prospects gladly pay for tools and solutions? Do they have budgets? Is their revenue growing, or declining? Will there be enough prospects with money to sustain your business?

Although the market assumptions that you consider don’t all need to be flush with cash, there should be enough revenue for you to be able to create a sustainable business.

3) Ease of Reach

You don’t sell to Fortune 500 companies in the same way you sell to startups—and you don’t sell to the CEOs of SMBs the way you sell to C-Level executives.

Your market, the price of your solution, and the budget that you’re targeting will determine the people you need to sell to. If your buyer is hard to reach, or if the organization has well-established purchasing processes, you’ll generally need to deal with longer sales cycles.

Early on, you need to decide whether you want to sell big, or sell fast. As a rule, it’s difficult to do both at the same time. How are the organizations in the market structured? Do they have procurement departments? In what team or department would your buyer be? Would you be able to reach them directly? What would need to happen for you to be able to do that consistently?

There needs to be a path for your team to reach the right decision-makers in a timely fashion, and at a cost that makes sense for your business model. If buyers aren’t reachable, or if the business model can’t make sense downstream, you’ll have a hard time capturing a large share of the market within a reasonable time frame.

4) Whole Product

There are markets that you could win next year by changing large parts of your product, there are markets that you could win in three months by making some adjustments, and then there are markets that you could win today with the product that you currently have.

To be able to gain a foothold in the market, you need the Whole Product—the minimum set of requirements (features, certifications, partnerships, etc.) required to convince businesses to work with you—or you should at least be very close to having everything they need.

To go fast, you should go after markets that you can satisfy today with your product and the help of partners and integrations. Although there may be more promising markets that require a different feature set, it makes sense to prioritize markets in which you can compete in the near term.

Never underestimate the effort required to get your product market-ready. It’s important to account for both product and distribution challenges that need to be overcome to enter the market.

Will there be design or user interface challenges? Are there regulation requirements that will need to be addressed? Are there technological challenges that will be amplified if you enter this market? What gaps will need to be filled? Are there ways to work with partners to fill those gaps?

The importance you put on having the Whole Product is ultimately a time to market decision.

5) Competition

Early on, you won’t be competing on equal footing. Other vendors will have had more time to build awareness, develop relationships with customers, learn, and build the assets they need to win.

Entering a market that is well established and already has entrenched competition requires strong differentiation, or an advantage unique enough to convince prospects to choose your solution over the incumbents’.

Although this isn’t impossible to do, it can be much faster (and easier) to go after markets that are less competitive, or where competitors are showing signs of stagnation, or moving slowly.

Ultimately, whether you choose to go after a market that has few or many competitors, you need to make sure that you are entering a market that you can win.

As management expert Constantinos C. Markides says: “There is no point rushing into a new market unless you have a way to beat the existing players at their own game.”

So, who are the competitors? Would they be direct competitors? Would you be able to compete against them? Could you actually win?

6) Market Leadership

Companies build a lot of assets and resources in the process of developing markets (expertise, thought leadership, brand, connections, pipelines, visibility, collaterals, functionalities, etc). When their market expansion strategies are well thought out, these assets compound and help accelerate the growth.

However, when companies have built brand, leadership, and expertise in markets that are either too unique, or that are negatively perceived, they can end up limiting their ability to expand into new markets.

An interesting example of this challenge is content subscription service company OnlyFans, which gained visibility and profitability by targeting the adult industry. As it tries to expand into more conventional markets, the question of whether or not their brand and notoriety will limit their ability to win more mainstream audiences is open to debate.

The market assumptions you choose to prioritize should help to open new market opportunities. At this stage, it’s important to understand the type of customers that will be guided by your early customers’ purchase decisions. Your brand, expertise, network, case studies, and product functionalities should help open new doors for you, not close them.

Situational Prioritization Factors for Market Assumptions

The previous factors are all critical. However, due to your current strategy, your funding situation, your personal interests, or your domain expertise, it may be that other, more situational, factors will point to markets that are better fits right now.

Consider using some of the factors in this section or adding your own. As an example, early on, the founding team of Flutura chose to prioritize opportunities based on the amount of value that their solution unlocked or the intensity of the pain—whether the solution was perceived as a ‘Vitamin’ or a ‘Pain Killer’, whether someone would get promoted by solving the problem, whether the organization had enough data to solve the problem, and whether simply living with the pain (e.g. status quo) was an option.

Your prioritization should reflect your current business strategy.

Market Assumptions by Market Size

The most common way to evaluate markets is by their size. This is the reason why the idea of Total Addressable Market is so alluring.

Large markets can be interesting down the road, but early on, size can actually be detrimental to your growth. Large markets have generally already attracted well-capitalized competitors; they’ll have more noise. To be able to establish your beachhead, you should go after markets that you can win quickly.

Now, perhaps even more important than the size of a market is its growth rate (current and expected). Selling into a mature market, which is either growing slowly or regressing, forces you to convince organizations that have already made their purchase decision to make a switch and adopt a new solution.

Customer acquisition in growing and stagnant markets
Customer acquisition in growing and stagnant markets

If the market is growing quickly, there is likely to be a healthy stream of new organizations that have yet to make a commitment. It’s usually easier for organizations to add new technology products, than to replace them.

Consider prioritizing markets based on the overall market size, and/or the market’s expected growth rate.

Prior Market or Industry Experience

You might have an advantage or a disadvantage in some of the markets that you choose to prioritize.

When founding teams enter markets that they already understand, or in which they have prior experience, they tend to find their bearings faster and adapt more quickly. If their networks also connect them to prospects and influencers, they also have an advantage.

Although it may make sense to target markets that are promising but require more learning later, in the early stages the learning cost may be too significant to handle. It’s been proven that the further removed a founding team’s experience is from the market that they are targeting, the longer it will take for them to build relationships, to understand the market dynamics, and to build the right product.

In general, it’s better to target markets in which your know-how and expertise can be advantages. However, if you have the time, and you feel that the investment can ultimately pay off, it can be a good idea to include opportunities that push beyond your current experiences and expertise.

The decision to (de)prioritize markets in which you have experience is really a time to product/market fit decision.

Time to Product/Market Fit

To find PMF you need to be able to iterate a lot with a lot of customer feedback.

Beyond making sure that you have the Whole Product, the best way to speed up your time to product/market fit (TTPMF)—the time that it takes you to find PMF—is by prioritizing markets in which you can have a lot of face-time with prospects.

Targeting organizations that are smaller or less constrained in how they can work with technology vendors can help create better feedback loops.

This may allow you to visit customers at their worksites or have regular calls with them, or perhaps you could set up a customer development panel with your best users. This, in turn, will help you to gain the knowledge you need rapidly, and feed your iteration cycles.

On the other hand, if the markets you choose prevent you from getting close to the customer—as might be the case in regulated industries—then this will limit the rate at which you are able to learn and iterate, and ultimately grow and fund your business. TTPMF is often an important consideration in the early days of startups.

Time to Cashflow

How long will it take you to reach the decision-makers? Can prospects buy their own solutions? Will purchases need to get escalated? Do customers already have a budget to solve this pain? How many people need to get involved in order for a sale to close? Does it need to go through procurement? How long does it take for you to receive payment once a deal closes?

For startups, cash is oxygen. If you’re bootstrapping, or if your funding situation isn’t secure, it may make sense to prioritize markets based on the time needed from initial prospect interaction to payment receipt. Businesses can implode or come to a standstill when they can’t make payroll. If you need to factor in cashflow in the near term, consider prioritizing market assumptions in which sales close quickly and payment terms can be advantageous (e.g. annual contracts).

As a rule, the fewer teams, people, or departments need to be involved in the purchasing process, the faster deals close—and the fewer checks and balances there are, the better the payment terms can be.

It can take a while to build cashflow. If you have raised capital and you’re not in a cash crunch, time to cashflow might not be a priority at the moment.

Interest

Last, but not least, it’s important to remember that businesses are social endeavors, built and operated by humans.

Most human beings find greater enjoyment and motivation when they’re helping people and businesses that they care about.

It may take years for your company to win its core market—and if you or your partners aren’t genuinely interested in the problems and reality of a market, not only will prospects feel it, you’ll also have a hard time learning fast, and sustaining momentum when the going gets tough.

If you already have investors, advisors, partners, and employees, it makes sense to consider the alignment of their interests when deciding which markets to focus on. Investors, for example, may have decided to invest because of the market that you were going after. In that case, not only should they be involved in the decision-making process, they should also probably take part in the prioritization.

Don’t disregard the human side of building a business. People’s incentives and motivations need to align in order for a business to go fast.

Shortlisting Market Assumptions

Once you know which factors you want to use for your prioritization, then you need to prioritize these factors.

Is targeting a large market the most important thing to you? Is it critical that your early customers are recognizable brands?

Knowing which factors matter most to your team will help you to make better decisions. However, since at this stage we’re really just dealing with assumptions, it’s important to understand that stacking more assumptions doesn’t create more objectivity. All it can do is give the appearance of certainty.

So resist the urge to calculate scores, or to create a prioritization algorithm. Simply add the list of market assumptions that was brainstormed to a spreadsheet and assign scores from one to ten for each factor (ten being the highest).

You can create your own spreadsheet, or you can download our template:

Get Started Fast – Download my Market Prioritization Template Free

Review markets one at a time. Make a qualitative determination by weighing the pros and cons of each market, using all the information at your disposal.

Example of a prioritization sheet for market assumptions
Example of a market prioritization sheet

Shortlist the three to five most promising market assumptions and move on. Don’t overcomplicate this process.

Case Study :: Why Algolia Prioritized Recognizable Brands

Gaëtan Gachet joined Algolia, a site search startup based in Paris, in November 2013.

At the time, the company had a product, but they were barely making any revenue. The technology, the founders’ ambitions, and their desire to scale internationally had convinced Gaëtan to join the company.

Gaëtan Gachet, Algolia
Gaëtan Gachet

After spending five years doing outbound sales in California, Gaëtan had recently returned to France, where he was looking for a new challenge. And what a challenge it would be…

Algolia’s goal for 2014 was to reach $1M in annual recurring revenue (ARR).

To reach that goal, Gaëtan knew that they would need answers to the following questions: Was Algolia an enterprise or a SMB product? Should they be targeting specific verticals, or should they offer a more generalized solution? Should they focus on certain use cases? What problem were they solving? Who were their customers? And had they found PMF, or not?

Gaëtan says: “When you put yourself in such a high growth mode, you completely change the way you operate. You make decisions much quicker. […] Fail fast, that’s really what we did.”

Early on, it became clear that selling to large French companies would be just as difficult as selling to large American companies. The difference, however, was that American brands would be recognizable globally. By starting in the US, they could sign customers whose visibility would help them land even more customers globally.

Instead of focusing on a specific niche, they let the market choose them. This, in turn, allowed them to test different positionings, and use cases that pointed to the most promising opportunities.

2014 turned out to be the year of rejection. But through countless pitches, Gaëtan learned what customers valued and how to best sell their technology. By the end of the year, they had exceeded their objective and landed over 400 clients, including well-known brands like Product Hunt.

By landing these early customers, and leveraging their visibility, Algolia’s international growth was accelerated. Today, Algolia has more than 8,000 customers, including some of the world’s most recognizable companies like Stripe, Sephora, Lacoste, and Slack.

More on Market Assumptions

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