Hey all – this is my first in a series of posts I’m calling “Lessons Learned”. I read a lot of business and self help type books. They all have their merits but they all seemed a bit too theoretical to me (manage you cashflow!) or a bit to obvious (never give up!).
What I wanted to with these posts is try and share some very real world, applicable examples of what I learned as I launched Clean Bottle.
I certainly am not an expert and have made my share of mistakes. In fact a lot of these posts will be about mistakes I made so that people can learn from them. I’ll use specific examples so that you can see in a concrete, non-theoretical way, what I did right / wrong and how you can use it should you decide to look into starting a business.
Alright – today’s post is about sizing your market. Understanding your market size t is really important. If it is too small (you are selling 6 fingered gloves, for example) then no matter how much ass you kick you won’t be able to make any money.
But a lot of times people can be way too optimistic about their market size. I wasn’t so naive to not try and do a market analysis at all. But at first my market size analysis was “Hey, everyone needs water and most people use water bottles to carry water. So, my addressable market is about 6 Billion people. Even if I only get 10% of that market I can sell 600 million bottles!” Talk about optimistic.
Then I tried another way, narrowing it down a bit to the cycling market. “1 out of every 3 people in the US use a bike. That is 100 million people. If half of them use water bottles when they bike I can sell 50 million bottles!”.
Both of these analyses were giant FAILS. It is really easy to find the total number of people in the world and then assign a random percentage that you think will buy your product. That is called a top down analysis. It is also called stupid.
A much more robust analysis is a bottom up analysis – where you figure out where your product could be sold and then look at sales of comparable products to try and build up into how many units you will sell. A decent overview of top down vs bottom up is found in this article: http://www.ehow.com/how_4877969_estimate-a-market.html
So, let me take you through the right way to do a bottom up analysis of the potential Clean Bottle market in the US.
1) Where are bike bottles typically sold? If I talked with other companies that made bike bottles I would find that almost all of those bike bottles were sold through bike shops. Bike bottles sold in bike shops. What a revelation.
2) How many bike shops are there in the US? With some research I’d find that there are about 5000 bike shops in the US.
3) How many of them would stock my product? I could draw up a sample or a prototype of my product. I know people are hesitant about sharing design ideas. But believe me, you should definitely take the risk of sharing your idea FIRST, before you spend a lot of money and time to develop it only to find that no one wants it or that it is too expensive. You can have people sign confidentiality agreements if you are really wary.
I would survey at least 20 shops to see what percentage would carry Clean Bottle. If I found that 4 would carry them, then I would cut this number in half, at least, just to be conservative. This is because even if 20% of all shops would sell Clean Bottle – how am I going to reach all of them to even tell them about it and convince them to stop whatever they are doing and purchase the product (that is another post)? And how often is it the case that people say they will do or buy something, but never do?
So, out of 20 shops, maybe 1 would buy the product. That means that Clean Bottle could be sold in about 5% of bike shops, or 250 shops.
6) How many water bottles does each shop sell in a year? That is an okay question, but since Clean Bottle is a premium bottle, and is priced that way, the better question is to ask each of them “how many premium bottles, such as camelbak or polar do you sell in a year?”. That will tell you how many people are willing to pay $10 or more for a bottle.
So say the bike shops say they sell 150 premium bottles a year. The smart thing to do is to haircut that number when thinking about how many Clean Bottles I could sell to each store.
You should probably haircut that number at least by 75%. This is because i am competing in the premium water bottle market, so I will have to likely convince someone who would have bought a camelbak to buy a Clean Bottle instead. Now, i have a different feature, so that helps, but still there are only a certain number of premium bottle buyers out there. So, lets say i could sell 25 per shop per year
Now, I take the 250 shops and multiply it by 40 bottles and I get to 10,000 bottles. This is my bottoms up analysis.
10,000 bottles is a lot different than 100 million or 600 million, right? But these assumptions I am making are still fairly aggressive – I have to get into 5% of bike shops (which is a lot) and then get 25% of the premium bottle sales in those shops (which is also a lot). So a lot of things still have to go right. But this bottoms up analysis will be a lot more accurate.
You can then take a ‘worse case’ estimate where I only do half of that number, and a best case estimate where I do double that number.
This is a very hard analysis to do. It takes a lot of time and a lot of effort. And it takes a lot of guts to make a very honest, unbiased assessment on the viability of your product. It is very sobering to go from 600 million bottles and dreaming of driving in fancy cars and swimming in Clean Bottle shaped pools, to working your tail off to sell 10,000 bottles if eveyrthing works out right.
But, you are going to find out this number one way or the other, so it is better to find this number before you invest time and money into a product rather than after. Then you can weigh this potential benefit against the costs and make the right decision before you spend money and time, rather than after.
Overall, I’d give myself a B- when it came to market sizing. I did look into the number of bike shops and made some simple attach rate assumptions. And I did show the product to shops and did my best to understand the market for other premium bottles. But wasn’t nearly as robust in my analysis as I laid out here.
So – whatever product idea you have, create a simple prototype or mock up and get out there and do a good, conservative bottom up analysis! Its free and it will help you understand how much money you could make and then you can decide if it is worth the investment.