This blog first appeared as Steve Wunker's piece for Forbes
By Steve Wunker
Imagine the “Wow!” when someone first sees a flexible display screen. Tablet computers that can roll up into tiny scrolls, a comfortable “smart watch” – the potential applications abound. It is no surprise that Samsung and LG are rushing to monetize their current positions as the only companies capable of manufacturing these devices. But how much should they invest in R&D? How much plant capacity should they build? Sizing new markets can be critical, and tough.
Companies need to start this task with the end in mind. The important answer usually isn’t an exact estimate of market size, which is bound to be off by some margin. Rather, firms need to know whether the market is big enough to justify certain investment thresholds. As Columbia Business School’s Rita McGrath and her colleagues have examined in detail, they can build spreadsheets predicated on reaching some sales or profit threshold, then work backwards to determine which assumptions – “what you need to believe” – must hold true to achieve those goals. The ensuing conversation will then be about the few assumptions that really matter, rather than pinpoint estimates of market success that are exemplars of false precision.
Usually, the key revenue assumptions boil down to a handful of factors such as addressable market size, penetration, and price. Sometimes these figures can be known with near pinpoint accuracy. A new type of tool for cardiac surgery, for instance, has an addressable market size equal to the number of relevant surgeries that hospitals do annually, which the federal government helpfully publishes. But quite often there is uncertainty, and that calls for triangulation among a range of approaches. Here are five that the makers of flexible displays might use:
1. Determine the major end uses -- Unlike a tool for cardiac surgery, flexible displays can be used in a wide range of settings, many of which may be non-obvious at this early stage of the market. Start with leveraging a range of opinions -- a salesforce may be helpful to poll -- about what might be relevant uses of the technology. Determine the size of the important markets as they stand today, but don't be bound by that. I recall an IT services client that declared in 1997, "The Internet is growing fast, but it's still too small to really matter." Oops. For flexible displays, Samsung and LG might look at the market for high-end tablets, mid-range watches, and other knowable facts. They shouldn't limit their thinking to what's here-and-now, but it's simple to begin there.
2. Look at precedents -- In the relevant markets, how quickly have analogous new offerings grown? Markets change at different rates. Fashion moves fast, while eating habits shift more slowly. B2B markets have a certain sales cycle and often a desire to see others successfully using the product before they sign on. Consumer electronics is definitely a quickly-moving industry, but even then sensations such as the iPad had adoption curves that can be researched and used as potential baselines. For Samsung, relevant precedents might be the adoption of its Galaxy Gear smartwatch and its super high-end Galaxy Round smartphone, which is one of the first commercial devices to use a flexible display.
3. Assess the latent demand -- My mentor, Harvard Business School Professor Clayton Christensen, has written extensively about understanding the jobs that people are trying to get done, rather than focusing exclusively on the market from the perspective of a company trying to sell something. A six-part framework can help companies create rigorous views of these jobs to be done and other metrics of latent demand. For flexible displays, the framework may point to jobs to be done that include broadcasting prestige and exercising in extreme comfort. It may also signal success criteria including weight, ease of viewing in bright sunlight, and bending a screen to fit a curvilinear surface. Not only will this data help to size a new market, but it will also provide important guidance to the teams creating new offerings.
4. Understand value creation -- If a new offering creates calculable value for a customer, by all means run the numbers for a variety of scenarios and customer types. If the value is difficult to figure objectively, ask about the sort of trade-offs people would make. Would you prefer to save five minutes on an accounting task daily, or a half-day every quarter?
5. Learn through the marketplace -- When Pearson wanted to assess receptivity for a new online learning solution, it created a real yet very basic prototype to see how people engaged with the product and to observe their willingness to pay. When a large food company tests out new products, it sets up what it calls “lemonade stands” at grocers to see who is curious about a concept, what questions they ask, how they respond to various marketing angles, and how they react to different price points. Be wary of what people will say in sterile focus group facilities in response to abstract concept statements; the real world is the place to gauge actual reactions.
There are also several bad – although unfortunately popular – ways to size new markets. These traps include:
1. Triangulate among published estimates – IHS Display forecasts that the global flexible display market will grow from $100,000 in 2013 to $41.3 billion in 2020. That’s heady and encouraging, but those sorts of numbers can only be a guess. In new markets, forecasters will typically disagree about potential, and they won’t stipulate their assumptions and doubts in detail. They may even define the market differently. Averaging among such assumptions tells us little.
2. Concept test vs. benchmarks – Handle with care. It is useful to understand how customers react to concept statements, and to see what questions or concerns they have. But people are extremely bad at reacting to abstract and unfamiliar ideas. Back in 1997, I attended concept tests for the hitherto unheard-of product of flat-screen TVs. People were dumbfounded that anyone would want to hang a TV on a wall. A far better approach is to test a prototype, even if it isn’t working, and ideally to have people try the prototype or keep a journal for a while on when they might use it. This approach applies in B2B markets just as much as it does in B2C industries.
3. Crowdsource -- Crowdsourcing is a wonderful way to access new ideas, and “prediction markets” can forecast the uptake for line extensions and other small departures from existing norms. However, when the crowd lacks context to understand something truly distinct, and if it reflects a company’s internal outlook rather than deep marketplace understanding, this approach simply magnifies the challenge seen with traditional concept tests.
4. Quantitative simulations – Monte Carlo analysis and other quantitative techniques are beguiling in their data-rich complexity. Executives can adore the seemingly rigorous nature of such models. Alas, they are frequently bogus. Such approaches simply layer on complexity over the basic errors seen in the other models, and through doing so they hinder debate about what drives divergence in estimates. Garbage in, garbage out.
There is no single right way to size a new market, and certainly no technique that works in all circumstances. Rather, employing a range of approaches can sketch the true answer. Then you can determine how these estimates stack up against the “what you would have to believe” analysis to see if entry is worthwhile, and possibly which factors are necessary to clobber in order to thrive. New markets are inherently uncertain, but these actions can significantly bolster the odds of success.
Click to receive a chapter from the book Capturing New Markets on how to assess markets that do not exist.