Market Sizing, Revenue Models, and Value Proposition Strategy

Market Sizing Frameworks

TAM (Total Available Market): The total market demand for a product or service.

SAM (Serviceable Available Market): The section of the TAM that your product or service intends to target.

SOM (Share of Market): The portion of SAM that your company is realistically likely to reach.

Market Entry Strategies

Launch Market: Creating a launch or niche market is like the beachhead and bowling pin strategies. It involves proving that you already have a group of launch customers that really want to buy your product.

Market Analysis Approaches

• Top-down approach: Uses market analysis to determine potential revenues driven by perceptions of market demand. This is appropriate when your target market is clearly defined, but it is less effective when your target market is very large relative to the size of your start-up.
• Bottom-up approach: Focuses on supply-side logic, estimating revenue by how much you can realistically manage to produce and sell.

Market Context and Timing

• Small market & not growing: Extremely difficult to evidence a scalable project with investable potential.
• Large market & growth in the past: Difficult due to giant incumbents. However, "crowded uncrowded markets" describe apparently saturated spaces that still hold small opportunities for new entrants.
• Small market & too early: Your business idea may be excellent, but the market is not yet ready to accept it.
• Small market & growing quickly: The ideal location for your business. This often emerges due to changes in user behavior or technology.

Revenue Models and Customer Economics

Revenue: Money received from customers in return for your solution to their problem.

Customer: The individual or entity that pays for your product or service.

Analogs and Antilogs: Companies use analogs (successful companies worth copying) and antilogs (failed companies to learn what to do differently). Leaps of faith are beliefs about which neither analogs nor antilogs can provide satisfactory evidence.

Types of Revenue Models

• Commission: Revenue generated by facilitating a successful transaction between two parties (e.g., real estate agents).
• Usage Based: Selling access based on the amount of good or service used (e.g., mobile data plans).
• Freemium: A marketing strategy, not a revenue model, often used in combination with other models.
• Subscription: Selling non-exclusive access for a repeating period until cancelled (e.g., Netflix).
• Donation/Grant: Voluntary support for your organization.
• Data Reselling: Selling information about your customers.
• Ad Based: Selling the right to promote products to your customers.
• One-time Payment: Selling a good or service via a single transaction.
• Rental: Selling exclusive access for a specific period.
• Licensing/White Labeling: Selling permission for others to use your product.

Value Proposition Canvas (VPC)

The Value Proposition Canvas is a tool used to focus efforts on creating value for the customer from the start of a new venture.

Core Components

• Customer Profile: Describes the target segment, broken down into jobs to be done, pains, and gains.
• Value Map: Describes the features of your value proposition, including products and services, pain relievers, and gain creators.

Customer Insights

• Jobs to be done: What customers are trying to achieve (Functional, Social, or Personal/Emotional jobs).
• Pains: Bad outcomes, risks, and obstacles.
• Gains: Outcomes or concrete benefits customers seek (Required, Expected, Desired, or Unexpected).

Fit and Competitive Positioning

Use Case: A detailed overview of how your value proposition is made available to and used by potential customers.

Types of Fit

• Problem-Solution Fit: Evidence that customers care about specific jobs, pains, and gains, and your solution addresses them.
• Product-Market Fit: Evidence that your products and services are creating value and gaining traction.
• Business Model Fit: Evidence that your value proposition can be embedded in a profitable, scalable model.

Competitive Analysis

Competitive Position: A visual chart showing how well your solution fulfills a customer's need compared to competitors.

• Direct competition: Companies doing very similar things.
• Indirect competition: Companies solving the same problem with different products.
• Value Curves: Plotting alternative offers against dimensions of value prioritized by your persona.
• The Petal Diagram: A tool for considering new markets or those at the intersection of several different industries.