Below are a set of questions that can help the entrepreneur analyze a potential market opportunity.

  1. Environment: What is the potential customer’s current environment? Here you should describe a set of behaviors or processes that exist among a set of individuals or organizations. What is the goal or intended outcome of the processes? What else do these behaviors relate to?
  2. Need/problem: What is the need or problem that you observe? Characterize it in as much depth and detail as you can.
  3. Potential customers: Characterize the class of people or organizations that have the need or problem that you identify. What are the key characteristics that make them have this need/problem?
  4. Examples: Describe some cases that support your hypothesis.
  5. Segments: Are there important differences among potential customers (i.e., relative to the need/problem you have identified)? Is there a basis for classifying potential customers?
  6. Value: How severe or acute is the need or problem you have identified? Is the need/problem readily identified by potential customers (i.e., do they recognize that they have it)? What would be the basis for articulating (or quantifying) a value of a solution?
  7. Buying process: How would a potential customer buy a solution? Who makes the decision? Do others need to approve? Who influences the decision? Is there a budgeting process? How long does this take? Can you control your own destiny or do channel partner own the customer relation?
  8. Value chain: How would a solution to the identified need/problem relate to other products and services? Would a solution be acquired as a completely independent decision or would complementary products or services be required?  If the latter, who supplies these products and services? How would they be integrated with your proposed solution? Who would perform this integration? Is any part of the value chain characterized by monopoly or highly concentrated power? If so, how does your proposed solution align with the powerful firms?
  9. Obstacles: What are the major barriers or obstacles to the purchase and use of a solution to the identified need or problem? Would a solution be disruptive in any way? Are there people whose roles would be threatened? Are there relationships that would be threatened? Are you relying on other nascent industries and/or products or technologies to be adopted?
  10. Preliminary sizing: How many organizations or individuals have the need/problem you have identified? If relevant, how pervasive is the need within an organization? Are there issues of penetration or frequency of use? Can you translate this information into a preliminary market sizing? What are the assumptions and logic behind that translation?

Some further thoughts on analyzing a market opportunity

Often, an entrepreneur begins with a product idea or a technology and asks “What is the market potential for this product?” They then try to find reports or other sources of data that allow them to compute a “market opportunity.” Entrepreneurs have sometimes succeeded by starting this way, but this is (undeserved) luck.
A market opportunity is the existence of a need that is not being met or a desire that is not being fulfilled. This is the beginning of every business opportunity.
Finding a need: We can think of a need in two ways: it is either a problem not currently solved or it is a potential for a change in consumption. A problem may or may not be understood by the potential customer. It may be observable (or at least inferable) from how the potential customer does certain things. A potential for a change in consumption may be due to changing demographics, tastes, hopes, fears, etc. It may also be due to changes or new developments in knowledge, technology, laws or patterns of behavior (in business or in other spheres).
Therefore there is no easy or straight path to identifying a market opportunity. It is rarely the case that you can ask a potential customer a simple question and get the answer you are looking for. It takes a great deal of thought and care to devise an approach to finding a real market opportunity. The process will involve careful interviews at least with prospective consumers and probably with others involved in some process or some value chain. These interviews should allow you to understand, as deeply as possible, the environment in which the need exists. You should try to discover what it is about this consumer or this environment that gives this need its importance (or lack of importance). You should try to understand what would have to change if the consumer were to adopt a solution to this need. Ultimately, you should come away from some of these conversations with a conviction, based on solid evidence, that this consumer would pay a reasonable amount of money and invest a reasonable amount of energy for a solution to the need you have identified.
Quantifying the opportunity: Quantifying a market opportunity is simply a matter of estimating the number of consumers who have the need that you have identified and also estimating the adoption through time of the consumers in question. Your revenue projections are simply the share of this opportunity you can reasonably expect to capture over some planning horizon. Although the problem can be described simply and only a few numbers are involved, this is an extraordinarily difficult task.
Although there is a strong tendency to start with reports and large numbers, you should resist this temptation until your primary market research has become sufficiently robust that you actually know what numbers might be relevant.
You should keep in mind that your market sizing is a process of counting potential consumers. You should start with one, then proceed to a few and so on. As you understand your prospective customers, you form a hypothesis about what it is about them that would make them invest in a solution to the need. You should test your hypothesis on other consumers who share these attributes. This is the process of developing a consumer profile. Once you have a reasonably good hypothesis, then you can look to reports and other sources of data to extrapolate from your customer profile to an actual market potential.
Even if you do this work very carefully and very diligently, it is still unreliable data. It is often very useful to think of the market opportunity as a range. This will be very useful in being prepared both for the up-side and for the down-side potential of your opportunity.
Inhibitors & obstacles: Even if you have found a need, you may not always have a market opportunity that can be exploited. There may be alternatives available to potential customers that have advantages over any solution that you may offer. And even if there are not alternatives, there may be other issues that would prevent a customer from buying a solution that you propose. There may be prejudices that get in the way, there may be others whose opinions will thwart your efforts, the decision process may be unmanageable, etc., etc. These are issues that should never be far from your mind as you conduct your market research.
Some thoughts on disruptive innovation: Clayton Christensen has popularized the notion that so-called “disruptive innovations” represent good opportunities for start-up ventures. The logic is that incumbent firms are generally focused on the needs of their major customers and it will be difficult for the either to recognize or to capitalize on opportunities found among potential customers outside their main customer set (in Christensen’s terms, either “over served consumers” or non-consumers”). The opportunity may be difficult for the incumbents to address because the potential customer is not part of their mainstream, because the perceived market size or profit margins do not meet their screens, or because they do not have processes in place to address the need. Although these considerations have more to do with competing than whether their is a need, it is important to ask the question of how this newly identified market need relates to existing markets and supplier/consumer relationships.
The rate of technology adoption: Geoffrey Moore has adapted ideas from the diffusion of technology literature to make another important point in evaluating a market opportunity. Although a need may exist among a large set of customers, they will adopt a new solution at varying rates. Understanding these dynamics and especially how to “cross the chasm” from “early adopters” to “early majority” becomes a big part of how you will need to quantify your market opportunity and how you will plan to capitalize on it.

Thoughts on how to go about answering the questions outlined in the section and some helpful tools and instruments from Pragmatic Marketing can be found in the section Market Research.