When an aspiring entrepreneur says “I’m launching a tech startup” to their friends, family or potential investors, one of the first questions they will be asked is “who is your target market?”.
Unfortunately, most entrepreneurs haven’t thought about their target market in much detail other than a broad overview, common answers include but are not restricted to: “tech mums”, “podcast listeners” or “relatable answer 3”.
In most cases, entrepreneurs focus on building a groundbreaking or revolutionary product for which no market exists. Your product may sound exciting, but who is going to be paying for it? Who is your target market?
(Elon Musk, you can create what you like, a target market will come to you)
Examine your market
Understanding the size of your market requires us to make three educated guesses:
- How many people might need your products?
- How many of them do you expect to buy from you?
- How much, on average, will your buyers spend?
Number of potential buyers
To calculate the number of potential buyers, you need to find data on how many people exist that might face the problem you solve.
Then divide that number by how many of those people you are ‘going after’. This number is your total potential buyers.
For example, there might be three million people in the UK who want a better bank account. Of these, we might be targeting only those under 35, and living in cities. Let’s say there are 200,000 all in.
Those 200,000 people are your potential buyers.
Expected market share
To calculate how many of your potential buyers will end up buying what you offer, we need to understand how many customers other companies in this market share.
To do this we use ‘market share’, which is the % of potential customers using each service. We then estimate how many customers of others could end up buying from us instead.
For example, let’s say that of our 200,000 potential customers, they are evenly split between the five big banks (Barclays, HSBC, Lloyds, RBS and Santander).
This means each bank has a 20% share of our market and we have none. Now let’s assume that our service can tempt 2000 customers of each bank to switch.
This would set our expected market share at 5%, or 10,000 people.
Average spend per customer
To calculate how much our buyers will end up spending, we need to estimate the average spend per customer.
We do this by using the average cost of our products and multiply this by how often the average person will buy. We then multiply this figure by our expected market share.
For example, let’s say our new bank has a average fee of £3 per month for an account. This means our average customer will spend £36 per year.
That means our expected return for the business is £36 multiplied by the 10,000 customers we expect will buy from us, which equals – £ 360,000.
Now you know how big (or small) your target market is, it’s time to assess the competition and find your market fit. Fortunately, our Digital Business Academy covers everything you need to know about launching your startup.