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Good article. In fact, I'd go a step further and say that any percent is a fallacy. Most business plans and pitch decks include the requisite section on market

Good article. In fact, I'd go a step further and say that any percent is a fallacy. Most business plans and pitch decks include the requisite section on market size, but who cares? The only thing that matters is how many customers are you going to have. That cannot reliably be determined from a top-down assessment. You don’t look at a pie and just say, “I’ll take 1% of that”. Instead you spell out through which methods you will gain and keep customers and how many you will gain via those methods. For SaaS, that could look like “We have x visitors to our website. We have shown with previous products and experiments a y percent conversion rate. From this, we estimate x * y customers at $d/month. With your funding, we should be able to increase the number of visitors to the product site by z% while maintaining or improving our conversion rate." These numbers are not a factor of market size. p.s. The only thing market size can tell you is what the upper bounds are for a product niche. But unless it's a very, very small niche; why does it matter what the upper bound is. If you hit that, you've got a good problem on your hands.

raverbashing 14y ago
Saying "We're going for 1% of the market" is a top-down estimative. And they usually are very off the mark Rather, try to estimate from the bottom up. Your first realistic estimate should be 0. Then start adding up, how many lemonades can you sell at a lemonade stand? (apply to your case)
Mahn 14y ago
> You don’t look at a pie and just say, “I’ll take 1% of that”. Exactly. Pretty much sums up everything that is there to say about the article.
- james1071 14y ago
  100% wrong. Most products are launched into existing markets and estimating a likely market share is essential.
  - Mahn 14y ago
    Essential for what? You can get an idea of what the ceiling of your market looks like, but that's it. Unless you can strongly and credibly argument how, saying you'll get 1% of the market is equivalent of saying nothing.
derefr 14y ago
> The only thing market size can tell you is what the upper bounds are for a product niche. But unless it's a very, very small niche; why does it matter what the upper bound is. Presumably that is, in fact, exactly what it's for--to tell you the absolute upper-bound to growth, so investors don't accidentally invest in your "growing" company only to see growth taper off completely when you run out of market to tap. I would guess that this is actually common for brick-and-mortar businesses, because of locality. Pretty rare when your market is "anyone who can type a credit card number into a web page," though.
001sky 14y ago
but who cares? ==It's the level of abstraction that has signalling value.
mbesto 14y ago
But unless it's a very, very small niche; why does it matter what the upper bound is. If you hit that, you've got a good problem on your hands. Totally agree. I have a niche product that can be expanded further once it's gained critical mass. But, given the recent investor pitches I've done, there is some backlash from investors on that concept. They want to know is it possible to turn this into a billion dollar corporation at some point, and the reality is that in my niche market, it's not.
ozgung 14y ago
These are inductive and deductive ways of estimating the same unknown. Both ways are valid and more helpful when used combined. They're far from the reality but their purpose is to provide a general idea.
james1071 14y ago
Your example ignores the market (i.e. assumes that you are creating a new market, of which you will have 100%). That is not the typical case, as most products enter existing markets and estimating market share is key.
- bornonmars 14y ago
  Yes, but I wouldn't even go so far as to cite the 100% new market creation - where's the usual timing / major shift argument? If that actually applies for real, forget the fallacy. In all other cases, feel free to keep it in mind.
edanm 14y ago
I think you're wrong. The reason people put it on pitch decks to investors is that investors care. Now, this can be explained by investors being stupid. But there is at least one other explanation: VCs are trying to hit the 1 in 1000 startup that makes it big. These startups are, necessarily, aiming at a large market. The VC realizes that, if the size of the market is huge, your chances of getting a good chunk of that market is small. But so what? They'd rather fund 100s of startups that will fail, but are all trying to make it big, than fund 100s of successes that are mediocre successes (to them). Of course, as a founder, this isn't the math you should be doing; not by a long shot. But it is what matters to investors.

raverbashing 14y ago

Saying "We're going for 1% of the market" is a top-down estimative. And they usually are very off the mark Rather, try to estimate from the bottom up. Your first realistic estimate should be 0. Then start adding up, how many lemonades can you sell at a lemonade stand? (apply to your case)

Mahn 14y ago

> You don’t look at a pie and just say, “I’ll take 1% of that”. Exactly. Pretty much sums up everything that is there to say about the article.

james1071 14y ago
100% wrong. Most products are launched into existing markets and estimating a likely market share is essential.
- Mahn 14y ago
  Essential for what? You can get an idea of what the ceiling of your market looks like, but that's it. Unless you can strongly and credibly argument how, saying you'll get 1% of the market is equivalent of saying nothing.

derefr 14y ago

> The only thing market size can tell you is what the upper bounds are for a product niche. But unless it's a very, very small niche; why does it matter what the upper bound is. Presumably that is, in fact, exactly what it's for--to tell you the absolute upper-bound to growth, so investors don't accidentally invest in your "growing" company only to see growth taper off completely when you run out of market to tap. I would guess that this is actually common for brick-and-mortar businesses, because of locality. Pretty rare when your market is "anyone who can type a credit card number into a web page," though.

001sky 14y ago

but who cares? ==It's the level of abstraction that has signalling value.

mbesto 14y ago

But unless it's a very, very small niche; why does it matter what the upper bound is. If you hit that, you've got a good problem on your hands. Totally agree. I have a niche product that can be expanded further once it's gained critical mass. But, given the recent investor pitches I've done, there is some backlash from investors on that concept. They want to know is it possible to turn this into a billion dollar corporation at some point, and the reality is that in my niche market, it's not.

ozgung 14y ago

These are inductive and deductive ways of estimating the same unknown. Both ways are valid and more helpful when used combined. They're far from the reality but their purpose is to provide a general idea.

james1071 14y ago

Your example ignores the market (i.e. assumes that you are creating a new market, of which you will have 100%). That is not the typical case, as most products enter existing markets and estimating market share is key.

bornonmars 14y ago
Yes, but I wouldn't even go so far as to cite the 100% new market creation - where's the usual timing / major shift argument? If that actually applies for real, forget the fallacy. In all other cases, feel free to keep it in mind.

edanm 14y ago

I think you're wrong. The reason people put it on pitch decks to investors is that investors care. Now, this can be explained by investors being stupid. But there is at least one other explanation: VCs are trying to hit the 1 in 1000 startup that makes it big. These startups are, necessarily, aiming at a large market. The VC realizes that, if the size of the market is huge, your chances of getting a good chunk of that market is small. But so what? They'd rather fund 100s of startups that will fail, but are all trying to make it big, than fund 100s of successes that are mediocre successes (to them). Of course, as a founder, this isn't the math you should be doing; not by a long shot. But it is what matters to investors.