Way too often, companies lack discipline around evaluating new markets and dive head first into new areas without adequately evaluating if it really makes sense — i.e., is it a good market to go into and is it a good fit for the company to pursue.
This is one of those areas where good discipline around the use a systematic framework is essential for making good business decisions. While it takes a little time and discipline up front, the time, cost, and energy spent to adequately assess new markets (or products) before launching into them can be extremely valuable in limiting even greater investment into poorly framed decisions.
The Business Model Canvas, developed by Alexander Osterwalder, is a popular model that encourages people to think about dimensions such as customer segments, distribution channels, customer service, requirements to reach product-market fit (the value proposition), revenue streams, the cost to enter the market, and others. Mapping into a framework like this is useful in order to better understand what is necessary to capitalize on an opportunity and to start documenting assumptions more clearly. It is also a good exercise to see if the opportunity is a good fit for the company — i.e., does it leverage existing strengths and infrastructure, or does it require the company to build out new capabilities.
In my last role evaluating new markets at a rapidly growing enterprise software company, we developed a similar model. The two main questions we were trying to answer included:
- Is the market interesting to us?
- Is it a good fit for us?
The framework looked at the potential opportunity of entry in a new market on one axis, and the cost of entry on the other. We also considered known strategic initiatives.
In addition to some traditional metrics (e.g., the size of the market and average deal size), we also included dimensions around our ideal customer:
Existing processes and tools — This was a soft score on the maturity of existing processes and tools in the space — i.e., homegrown solutions and convoluted processes were better for us than when mature solutions were already in place.
Close to home — Opportunities to sell more to existing customers who were already big fans (or others on teams closely adjacent to big fans) were better than those requiring us to build completely new relationships.
Dimensions around “value creation” and “stickiness” — For these dimensions, we looked at our competitive advantages and how we defined our best customers, listing out general themes that made us successful with our existing customers so that we could evaluate new opportunities against these. For us, in compliance reporting, this included things such as:
- Amount of regulation in the space,
- # of filings required each year,
- # of data points being reported on, and
- Amount of collaboration involved in creating an end product.
There are several pieces that play into the cost of pursuing an opportunity, including (among others):
- The cost to develop a new product or service,
- The cost to build out the support organization to meet the needs of the new market, and
- The cost to build out the right type of sales channel and distribution channel.
Many of the dimensions on the Business Model Canvas are very relevant here.
In all these areas, it is important to consider how well your existing product, service, and infrastructure meet the needs of the new market as is, or with minor tweaks, versus the cost to develop new capacities to move into the market. It is also helpful to consider planned, strategic initiatives since these should enhance your competitive advantages at no additional cost (or at least an already budgeted cost).
Pulling It Together
With both opportunity and cost, we weighted factors so we could derive final opportunity and cost ratings. We then plotted these on a two dimensional chart that helped visualize each opportunity with more attractive opportunities on the top left and less attractive opportunities on the bottom right.
These types of analyses can be done at different levels of detail depending on what you are trying to accomplish. It is OK to start with a 10 minute evaluation where you clearly document assumptions, socialize it to get other opinions, and then dig deeper to clarify and deepen the analysis in future iterations (if and when needed).
This framework was useful as it was simple and easy to use without a large time investment or need to over analyze the environment, it was easy to understand and communicate, and it actually proved to deliver some pretty nice results.
Through the use of the framework we were able to identify some market opportunities that we were pursuing that we wanted to de-prioritize in order to move focus and resources into other areas. We were also able to identify several new markets that proved to be significant value creators for the company, and ultimately, helped us to go public.
In my next posts, I hope to discuss some other frameworks I have seen for assessing market opportunities (one good, one bad). See Part 2 for a discussion of a top down approach to validating markets.
In the meantime, I would love to hear what others have used, success or horror stories, or any other thoughts around assessing new markets, so please share! And, if you have any questions for me, please let me know and I would be happy to clarify.
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