Last week, during a new product presentation, I had an all too familiar moment. We had reached the point in the meeting where it was appropriate to review the business logic behind the concept at hand. At this point the presenter threw up a massive sheet of numbers and calmly commented to the audience, “well, overall this is a $4 trillion dollar market, so we think if we only capture 5% of the market, we’ll earn around $200M in the first year.” She didn’t even blink. (I changed the numbers to protect the innocent…the sad part is they’re lower than the actuals.)
I sort of live for these moments in presentations. It’s probably the same attraction that keeps baseball fanatics glued to their television for hours of what appears to be a pretty boring game. After waiting patiently, and watching things slowly play out, something goes very wrong, At that point, all hell breaks loose. At that point, you see who’s the power player in the room, who’s done their homework, and who’s completely out to lunch. This part of the meeting was pretty mush a wash, that argument basically threw itself out the window. This presenter had just committed a pretty common error, one I now refer to as a Large Market Fallacy.
I’ll get to the details on LMF, but first a slight detour.
When I was in undergrad, I remember that some odd curriculum requirement forced me into a course on Logic. I think I was somehow dodging some history requirement, and the class ended up providing me with one of the few textbooks I kept beyond school. There was this fabulous section in the book that listed out scores of logical fallacies. Things like red herrings, slippery slopes, etc. were explained in detail. The book did a great job of taking pretty common arguing topics out of context and explaining why the arguments were problematic. This is where my head went when the overall market hit the trillions, (really?)
Ok, back to the market sizing.
I read a great piece in the WSJ around Large Market Fallacies earlier this year. (They weren’t using the phrase, but that was essentially the problem). This author used a great metaphor around selling a can of coke to every kid in China. The general idea is that people created flawed plans when they assume that the market holds an opportunity just because the market is massive. These business plans just want 5% of a MASSIVE market, which seems totally reasonable, right? I mean, 5% is a small share, so how could they fail.
I often wonder how people end up in this situation. For sure there are many reasons, but I have to believe that you only drive down this road if you don’t intend on executing the plans your making. If your on the line for these projections, you have a wholly different approach to things.
Ok, so enough ridicule, how do you get around this type of thing. Some markets are actually huge, how might you go about entering? Well, try to make the market small. Think about finding a niche (or creating one). Either cut it down to something digestible, or use a DDP and build a bottom-up estimate of investment versus return. (ex. “In the first year we’ll hire 50 sales people and we estimate that those 50 people will generate $20M in revenue.)
It’s not about being a hero in the business plan, it’s about getting closer to figuring out how you’ll actually launch your venture/product/service. If you just serve up a large market with no logic around how you’re going to success, there’s a pretty good chance you don’t really know who your customer is.
A small side note: I really, really wanted to refer to this sort of thing as a Chinese Market Sizing. Partly because I’ve seen it a lot when people size market opportunities in China (it’s a massive market and the plan has no idea how things really work there). However, taken out of context, I’d just sound like an ass, but still I think it would be a hilarious scenario.
You: “What was the problem with the plan?”
Me: “Chinese Market Sizing”
You: “Ohhh, Too Bad.”