The 1% market size fallacy

November 17, 2009

The Cranky PM has an insightful take on the usual ‘conservative’ take on marketing sizing.

In the beginning of a new market’s life, sure, there are lots and lots of competitors.  Enough that many players might achieve 1% of the market.  That’s what markets look like when they are immature and stupid. But soon enough, the market’s childhood is over and you have an adolescent market on your hands.

And in an adolescent market, a 1% position is completely unsustainable.  Because as that market starts sprouting the accouterments of puberty — the appearance of chest hair, voluptuous hips, or the first contrarian articles in the press (a la “this technology is not quite the shizz that was promised”)  – the number of players shrinks big-time, as the small-time players — the ONE PERCENT players — all die or get acquired.  And voila!  You end up with about 5 players.  And you better believe they all have more than one percent of the market.

And then, our frisky little teenager of a market grows up more and becomes a fuddy-duddy adult, with only 2 or 3 players — the smallest of which will almost certainly have at least a 15% market share.  And that is likely that way it will stay until the market is wheeled off in a casket, or at least put into an assisted living facility.

Without a execution plan which does not get you 15-20% market share, you are better off not being in business. To really dominate you need 50%+ market share. One of the reason this fallacy comes up is that most entrepreneurs are unable to distinguish between population and addressable market. Except in the case of utility markets like electricity or telecoms, there is no way that the addressable market is close to the population or even a significant portion of population. Even if you are making a consumer play it is better to segment via number of households or income or some such parameter which tells you what is the addressable market you are looking at. Then go and dominate that market segment.

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