So you’ve got your (relatively) new company making online to-do lists for mobile phones that you can tag and share, or perhaps it’s an electric toothbrush that you can access remotely with Bluetooth connectivity to your PC. You need to calculate the market size for your product, after which you will assume a market-capture growth from 1% to 10% over your first five years to predict revenue. The market size for the first hypothetical company is everyone who owns a mobile phone that also creates to-do lists, while for the second company it’s the number of people who brush their teeth and also have an internet-connected PC. Those numbers are huge, your market is huge, and your 1% capture will result in millions of dollars in revenue right off the bat. Right? Um, right?
The error the above market analysis should be obvious, but the same error is not so obvious with more common products. This error, in fact, is one that lives in my industry and has created a misperception that impacts the industry in many ways.
Most people in the hearing aid industry, and most outside who have bothered to do “due diligence” on the industry, believe a misinterpretation of data that seems to tell an intriguing aspect of the hearing aid industry’s potential market. Approximately 10% of the US population is hearing impaired and of those only 20% have purchased hearing aids. The numbers seem straightforward: 30 million hearing impaired, 6 million with aids, and 24 million impaired without aids. The conclusion is that the hearing aid industry has only been successful in capturing 20% of the potential market, and 80% of that market is waiting there for some company to develop the perfect technology for them to buy. Right? Um, right?
There have been a couple straightforward but ill-founded conclusions that have resulted from this faulty analysis (I'll tell you why it's faulty in a bit). The first is that the hearing aid industry is doing a terrible job because it has only captured one-fifth of the customers that want hearing help. This causes every executive who enters the industry to have the “I’m going to school you on how to do business” swagger, thinking that people in the industry are, shall we say, inadequate. The second result is that entrepreneurs and investors look at the 24 million unsatisfied potential consumers as a potential bonanza for the right product. Why would you design a product for the traditional marketplace of 6 million consumers when 24 million are sitting and waiting for the right product?
The problem here, as with the hypothetical companies in my intro, is that the analysis identifies the population that meets the base requirements to be a customer, but does not identify how many in that population have a need and desire for the product. Not all bald men are viable customers for hair plugs, only those who dislike being bald so much that they would spend the money and time for a quality hair implant. When Palm Pilots hit the market, their potential market was not every adult who keeps a calendar, contact book or to-do list (i.e., everyone), it was those who had a need for and who would spend a few hundred dollars on a portable electronic device that synched with their PC. Palm ended up in 15 million households in the US out of a total of 108 million households. Their percentage of market capture was not 13%, however, because their viable market was much smaller than 108 million households--most of those 108 million households had no need for what Palm was selling. And no one would say that Palm (at their peak) was a failure at customer capture.
In the same way, not all 24 million hearing impaired without aids have a need for any hearing help. An analysis of how many of those 24 million actually have a significant amount of difficulty with their hearing is approximately 7 million people. So, the hearing aid industry has succeeded in capturing about 46% of the viable market--not bad. And the untapped hearing impaired market no longer looks so attractive given that they will be difficult to reach and are no greater in size than those who actively seek out hearing help.
So, what is your potential market? Like most things, it’s going to take work to figure out, because it’s not simply the number of people who meet your minimum requirements—you have to determine how many of that group actually have a need for what you have to offer. Marketing 101, perhaps, but I have met many savvy business analysts and VCs who have made this simplest of mistakes.