Market demand for a start-up

This chapter of your plan may well be the most difficult of all to write for a start-up. Yours may be a new product or service designed to convey a customer benefit not previously realisable. In which case, how do you define the market? What is market demand for a product that has not previously existed? What is its size? What are its growth prospects?

On the other hand, your start-up may be in a market that’s already well defined – like the Dart Valley Guest House and Oriental Spa, which will be unique and distinctive, but fits snugly into an already buoyant market for three- and four-star tourism in the West Country.

Or you may be opening a boutique selling designer childrenswear on the high street. Or you and a mate are setting up an independent plumbing business.

In each of these cases, your new venture is aiming at a definable, existing market. Your offering will be new, but the market won’t be. Thus, the market can be researched in the same way as set out in the previous sections.

But what if your product or service is indeed something that has not existed before? How can you convince your backer that there will be buyers for your offering, and at that price? How can you be sure that you are filling a need or a want that customers are prepared to pay for – and pay that much for? You need evidence.

In the previous chapter, we talked about the possibility that your business may be meeting ‘unmet needs’. You may have spotted a gap in the market.

But this leads us to the multi-million-dollar question: Is there a market in the gap?

You need to show there is one. You need evidence.

You’ll have to do some test marketing.

Test marketing

Which kind of test marketing you should do depends on whether yours is a business-to-business or a business-to-consumer proposition.

If yours is a business-to-business proposition, get on the phone and set up meetings with prospective corporate buyers. Accentuate briefly over the phone the benefits your offering will bestow and ask for the opportunity to tell them a little bit more face to face. This shouldn’t be too tough. If your proposition is to have any legs at all, it should be worth at least 10 minutes of your prospective customer’s time.

Start the meeting by exploring the customer’s needs, with you doing as little of the talking as possible. Then gently steer the discussion towards a perceived gap in the market, where the customer’s needs are not being fully met. Again, try to nudge the customer to locate and describe the gap, rather than you having to point it out.

Now is your chance to pounce. Explain how your offering is designed to bridge that very gap in the customer’s needs. Set out how it will meet the customer’s needs in ways that competitive offerings, whether direct or indirect, cannot do. And why at that price they will have a bargain!

Keep a record of these meetings and analyse the findings. Draw out key conclusions from the discussions, with each supported by bulleted evidence – using comments from named customers, backed up by comments from third parties quoted in the press or by further data dug up off the Web. Produce a short, sharp market research report, which will become Appendix A of your business plan. It will be the first appendix, because it will be the single most important item of evidence your backer will look for.

If yours is a business-to-consumer product or service, test it on the high street. Get out your clipboard, stand outside an Asda or a Waitrose, for example, depending on your target customer, and talk to people. If you’re offering a product, show them. If it’s a service, explain lucidly but swiftly its benefits.

Again, collate the responses, analyse them, draw firm conclusions, support them with quotes and data, and stick the market research report in your Appendix A.

Estimating your addressable market

Having done your test marketing, you need to make an estimate of market size. Imagine, perhaps, that there are many suppliers of your product or service and the whole country is aware of its existence. What, then, would the market size be? How does that compare with the market size for products or services not that different from the ones you’ll be offering? Does your estimate make sense?

That will give you an idea of the total available market. But when you launch it will just be you. No one will know you exist. You are invisible. It is unlikely that your available market will be the same as your addressable market – unless yours is an online business.

It is your addressable market that your backer needs to know about – the customers that you can realistically reach and try to sell your offering to in the first year or two following launch.

If you are opening a specialist sports injury physiotherapy clinic in, say, suburban East Sheen, in South West London, is it likely that the whole of London will be your market? No. Possible? Yes, if yours develops a reputation as the best in the business, worth travelling an hour or more to get to. But that is impossible in the short term, unlikely in the medium term.

Your addressable catchment area is realistically a circle around East Sheen of a radius of around five miles, taking in Richmond, Kew, Barnes, Putney, ­Roehampton, possibly as far south as Wimbledon, east to Wandsworth, west to Twickenham and even stretching north of the river to Hammersmith, Fulham or Chiswick.

You can find population numbers for each of these London villages from the Web. You can also find London-wide average sports participation rates, broken down by sex, age group and type of sport. You can apply appropriate probabilities of receiving muscle, ligament, bone, etc. injuries in any one year, best again by sex, age group or type of sport, and that will give you a first estimate of your addressable market – the total number of people in your catchment area who might benefit from your physio treatment in each year.

But your very presence, and soon word of mouth, will attract physio patients with ailments not related to sports injuries – including many, like this author, whose physio requirements are as much age- as sports-related. You should make an estimate for this – perhaps as many as one non-sports patient for each sports injury within one half of the five-mile catchment radius for sports patients.

All a bit finger in the air, you might think. Perhaps, but you have made the effort. You will have shown your backer that you understand the concept and that you have been prepared to harness the best available data and analysis to narrow down the available market into an addressable one for your start-up.

You will have shown that you understand that your addressable market is not one of 8 million London residents, but more like 3,000 potential physio patients a year in your catchment area.*

I cannot stress this enough: your backer will respect your valiant attempt at demand analysis.

And how about market demand growth? If your start-up is serving an existing market, you can use the same HOOF approach to demand forecasting that an established business would use.

If your start-up is for a new market, you may try the same HOOF process, but, in reality, this will not be the prime consideration of your backer, who will be more concerned with the existence of such a market in the first place. Any growth on top of discovering and serving a new market will be icing on the cake.