How to assess the potential for a new product
Launching a new product is hard. And yet, it is one of the most exciting things a company can do. This is why there are thousands of new products launched every year. What makes it scary is that almost everyone who has researched the subject knows that over 90% of these launches fail. There are many possible reasons for the cause of failure. Most of the people responsible for launching the products blame the launch strategy. However, in the majority of cases the cause is much simpler – there is an over optimistic view of demand.
Assessing the demand for products is something I want to talk about in this blog. Before we get to that let’s think about the frameworks we can turn to when assessing a product's potential. Some of these are designed to determine the attractiveness of the product itself. Stage Gate New Product Development is one such example. It begins with brainstorming ideas and moves through various stages which test the concept, build the business case, figure out the development of the product for market, test the new product and finally plan its launch. There are also a number of frameworks for identifying the value that people put on new products. Two economists, Gabor Granger and Van Westendorp suggested simple questions that can be asked to determine the price people will pay for a new product. And then there is the Strategy Diamond which takes us through the best markets for the new product, how it can be differentiated, the tasks needed for the launch, and the means by which a suitable profit can be collected.
In a recent addition of Dragon's Den (known as the Shark Tank in the US) it was embarrassing when someone pitching to the Dragons was questioned about the potential market for their product. It quickly became evident that the entrepreneur had no idea about the size of the potential market and, not surprisingly, the Dragons failed to invest. The entrepreneur was making the fatal and unfortunately typical mistake that most people make with their new products; they love their baby and they assume everyone else will. For this reason they fail to make a real assessment of the market potential.
The assessment of the potential market requires a market sizing framework. There are two definitions of market size that require consideration. The first is the "Total Addressable Market" (TAM). This refers to the theoretical number of people who could buy or use the product. It is frequently mentioned in the earnings calls of S&P 500 companies because the pumped up numbers can look very exciting to investors. The problem is that seldom do these potential customers become converted to actual customers.
A much more realistic definition of market size is the "Served Addressable Market" (SAM). As the term suggests, this is the number of people who actually buy a product of the type that is being researched. The Served Available Market is the real market and it can take years to develop. Admittedly some consumer products, such as children's toys, take off quickly and die equally quickly. However, most new business to business products, even techy products, can take a few years to penetrate a market. It took nearly 20 years for the personal computer to reach half US households. Even internet access took 10 years before half US households were penetrated. A wonder product such as carbon fibre, discovered in 1860, wasn't used in any volume until the 1980s when McLaren Racing introduced it into the body of its Formula 1 race car. We watch with bated breath how long it will take for Graphene, another strong building block of graphite, to become commercially successful.
The Served Available Market can be assessed in two ways – from the bottom up or from the top down. A bottom up assessment refers to a calculation based on the number of people who regularly buy the product, working out how many units of the product they buy each year and, by simple multiplication arriving at an assessment of annual consumption – ie market size. A top-down assessment takes the revenues of the manufacturers of the product, sums their sales of the product and arrives at an estimate of unit output. It is worthwhile obtaining a fix on the market size from both methods in order to be sure that assessment stands up to scrutiny. If we do this, our new product dreams have a much better chance of coming true.