champions of change

Scoping the Market Opportunity

Workshop

Mairi Robertson

March 30th 2012

Who are we?

• Advisory and investment boutique that specialises in innovation and enterprise in TMT sector;

• Known as “practitioners that consult”;

• We translate between the technologists and the creatives to make the business case that enables informed decisions to be made;

• We work with corporate and venture-backed start-up clients;

• Track record in creating successful businesses – bigger, better, faster!

• Research and Intelligence Hub coupled with the ability to deliver;

• Offices in Glasgow & London;

• International perspective.

if you don’t move forward,

you’re standing still, or worse.

• Transformation. Innovation, Re-engineering, Business Strategy Development.

• nmp have been championing change, maximising growth and enhancing return on investment since 1999 for some very happy clients; like Samsung, Sony, Oracle, Nokia, TeliaSonera, Orange, BBC, ITV and Channel 4.

• We operate on the cusp of technology and content, bringing business people, technologists and creative people together and bringing clarity, honesty and focus to the table.

champions of change

So you’ve had a good idea ….

What is the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much will

you charge?

Will they buy

it?

Who are your

competitors?

What is the product/ service?

• This should be the easiest question

• Define the product/service in a few sentences

• It needs to be jargon free and not focused on technology

• It should clearly state what the benefits are to the end user

What is

the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much

will you

charge?

Will they

buy it?

Who are

your

competitor

s?

iPad

• “Pick up the new iPad and suddenly, it’s clear. You’re actually

touching your photos, reading a book, playing the piano. Nothing

comes between you and what you love. To make that hands-on

experience even better, we made the fundamental elements of

iPad better — the display, the camera, the wireless connection. All

of which makes the new, third-generation iPad capable of so much

more than you ever imagined”

Media Composer 6

• “Professional editors and producers like you around the world

have told us what you need to succeed. More efficient and easy-

to-use video editing tools. An open platform that enables you to

work with everything you want and integrate into any workflow.

More power to eliminate bottlenecks, so you can work faster than

ever. We listened. We took notes. We made it happen.”

Angry Birds

• “The survival of the Angry Birds is at stake! Dish out revenge on

the green pigs who stole the Birds’ eggs. Use the unique

destructive powers of the Angry Birds to lay waste to the pigs’

fortified castles. Angry Birds features hours of gameplay,

challenging physics-based castle demolition, and lots of replay

value. Use logic, skill, and brute force to crush the enemy.”

Who is the customer?

• Who will buy it?

• Who will use it?

• Are these different?

What is

the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much

will you

charge?

Will they

buy it?

Who are

your

competitor

s?

Understand your customers, market position & how competitors fit

Low cost High cost

Low performance

High performance

Why is it important?

• Enables you to:

– better determine if there is enough

people willing to buy your

product/service

– tailor your offering to better meet the

needs of your potential customer base

– target your marketing efforts to reach

your most promising prospects

– use the right marketing messages

• Defining a target market will not

limit your business

• Defining a target market will

increase cost efficiency

Common consumer characteristics

Target customers

age

gender

income level

buying habits

occupation or industry

marital status

family status

geographic location

ethnic group

political affiliations

hobbies and interests

Common business characteristics

Target customers

industry

number of employees

amount of annual sales

geographic location

age of business

job role

How many people will buy it?

• In simplest terms market potential can be expressed as a function

of:

– the number of customers purchasing

– amount purchased

– frequency of purchase

• In other words, market potential = (how many * how much * how

often)

What is

the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much

will you

charge?

Will they

buy it?

Who are

your

competitor

s?

A cautionary note!

• Creating a realistic estimate of your addressable market can

seem daunting

• However, the math behind these calculations should usually be

relatively simple

• Remember that stakeholders/VCs want to see that you used an

easy to understand and logical methodology to generate the

estimate that you're giving them

– the easier it is to understand the quicker they can get comfortable

with it and focus on other questions that they might have

– building in unnecessary levels of assumptions can generate an

unrealistic result – garbage in garbage out!

Bottom Up or Top Down

• A top down approach starts with market and industry data.

Based on a geographic market area, customer profile and their

propensity to buy your products and services

– Start with the whole pie, the whole market. Narrow it down by various

means to get to the number that you’ll sell

• A bottom up starts with your customers. How much and often do

they buy? What is their profile? How many potential customers do

you have in the market based on your customer profiles? How

can you reach them?

– Instead of subtracting things from a hypothetical pie, you

multiply these assumptions to determine the market potential

Top down example – new entrant mobile operator

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Population of UK

Target market

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Population of UK

Addressable market

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Population of UK Mobile subscribers in UK

Market share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010

3UK

Everything Everywhere (inc. Virgin)

T-Mobile (inc. Virgin)

Orange

O2 (inc. Tesco)

Vodafone

Total customers

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Population of UK Mobile subscribers in UK New entrant subscribers

Price

-

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Average revenue per subscriber

Revenue

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2011 2012 2013 2014 2015 2016

Bottom up

New prepay

subscribers

Existing prepay

subscribers

Churned prepay

subscribers

Prepay subscribers

New contract

subscribers

Existing contract

subscribers

Churned contract

subscribers

Contract subscribers

Bottom up

Prepay subscribers

Contract subscribers

Average minutes per

month

Average SMS per

month

Average data usage

per month

Average minutes per

month

Average SMS per

month

Average data usage

per month

Annual prepay

minutes

Annual prepay SMS

Annual prepay data

usage

Annual contract

minutes

Annual contract

SMS

Annual contract data

usage

Bottom up

Annual prepay

minutes

Annual prepay SMS

Annual prepay data

usage

Annual contract

minutes

Annual contract

SMS

Annual contract data

usage

Price per prepay

minute

Price per prepay

SMS

Price per prepay

data usage

Price per contract

minute

Price per contract

SMS

Price per contract

data usage

Revenue from

prepay voice

Revenue from

prepay SMS

Revenue from

prepay data usage

Revenue from

contract voice

Revenue from

contract SMS

Revenue from

contract data usage

Bottom up

Revenue from

prepay voice

Revenue from

prepay SMS

Revenue from

prepay data usage

Revenue from

contract voice

Revenue from

contract SMS

Revenue from

contract data usage

Revenue from

prepay

Revenue from

contract

Total Revenue

Which to use?

• The bottom-up method is generally considered more robust

– less likely to include non-addressable revenue

– starting point for financial projections and operational planning

– identifies key drivers, such as the number of customers, essential for

determine costs, profitability and cash flow

• Top-down financial projections often don’t consider the right

market

– available figures may not be for the right region, target customer or

part of the value chain you are addressing

– it doesn’t include the operational assumptions or metrics describing

how those sales will be accomplished – can be risky when building a

full business plan

Advice

• Remember it is a forecast – it will never be correct. However

make sure you have identified the key profit/loss parameters

• Where you have assumptions that are less reliable use scenarios

(low and a high version of the estimate) to provide a range for the

size of the addressable market

• Consider estimating the market size in more than one way

– bottom-up estimate and top down to make sure that the two

approaches yield a somewhat similar number

How much will you charge?

• What is the business model

• How will you charge?

• How is it calculated?

• Does it stack up?

What is

the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much

will you

charge?

Will they

buy it?

Who are

your

competitor

s?

Business model examples

Business models

The Add-On model.

The Advertising

model

The Affiliate model

The Auction model

The Bait and Hook model

The Direct Sales model The Franchise

model

The Freemium model

The Internet Bubble model

The Low-Cost model

The Pay as You Go model

The Subscription

model

Pricing principles

• No matter what type of

product you sell, the price you

charge your customers or

clients will have a direct

influence on whether your

business succeeds

• Some key principles

– all prices must cover costs

and profits.

– the most effective way to

lower prices is to lower costs

• Do not set prices once and "hope for the best.“ It’s time to review your costs when:

– you introduce a new product

– Your costs change;

– you decide to enter a new market;

– your competitors change their prices;

– the economy experiences either inflation or recession;

– your sales strategy changes;

– your customers are making more money because of your product or service

Types of pricing methodologies

• Cost-Plus Pricing

– mostly used by manufacturers

– based on all overhead costs + percentage of profit

– essential overhead figure is accurate

• Demand Price

– optimum combination of volume and profit

– products usually sold through different sources at different prices

• E.g. wholesaler might buy greater quantities than a retailer, which results

in purchasing at a lower unit price

– difficult for new products as need to be able to correctly calculate

beforehand what price will generate the optimum relation of profit to

volume

Classic price elasticity questions

• Best done on a large scale survey

• Present the overall concept – where possible making

comparisons to existing or similar products to give a benchmark,

bringing out the core USPs of the product

– At what price would you consider the product to be so expensive that

you would not consider buying it? (Too expensive)

– At what price would you consider the product to be priced so low that

you would feel the quality couldn’t be very good? (Too cheap)

– At what price would you consider the product starting to get

expensive, so that it is not out of the question, but you would have to

give some thought to buying it? (Expensive/High Side)

– At what price would you consider the product to be a bargain—a

great buy for the money? (Cheap/Good Value)

Pricing based on Van Westendorp principles

• Optimum Pricing Point is the price at which the number of customers who see the product as too cheap is equal to the number who see the product as too expensive

– typically the recommended price

• The range of prices between the Point of Marginal Cheapness and the Point of Marginal Expensiveness is the range of acceptable prices for a product

– in established markets, few competitive products are priced outside this range

Types of pricing methodologies

• Competitive Pricing

– used when an established market price for a particular product or

service

– often in markets where there is a major market player that will set the

price that other, smaller companies will be compelled to follow

– benchmark prices of each competitor then figure out your optimum

price and decide, based on direct comparison, whether you can

defend the prices you've set

• If higher than competitors you must offer something extra like superior

customer service or added features

– difficult for service businesses as services vary widely from one firm

to another

• you can charge a higher fee for a superior service and still be considered

competitive within your market

Might want to consider trade off techniques

• Product is described in terms of attributes and levels in order to see what is being traded off

• An attribute is a general feature of a product– say size, colour, speed, delivery time.

– Each attribute is then made up of specific levels. So for the attribute colour, levels might be red, green, blue and so on

• Conjoint analysis takes these attribute and level descriptions of products and uses them ask people to make a number of choices between different products

• For instance would you choose product A or product B

A B

Analysers 3 5

Languages C C+ Java

… … …

Price £500 £1000

Attributes could be based on different

commercial options or competitor

products

Again it should emphasis the USP of

the product

Will they buy it?

• What do the potential users think?

• This should be done before you have a product to sell!! Arguably

should be the first step

What is

the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much

will you

charge?

Will they

buy it?

Who are

your

competitor

s?

Use the right techniques

Brainstorming Secondary research

Focus Group

Survey Workshop Interview

Use cases Observation Prototyping

Where do you customers hang out online?

Ask the right questions

• I’m developing a new oven

– Do you want it be gas or

electric?

– Does it need a separate grill?

– Etc …

• Answer

– A slightly improved oven

• What issues do you have

cooking food?

– “It takes too long – I want to

cook food in 5 mins rather

than an hour”

• Answer

– Microwave

Issues: What are the end user’s unmet needs when doing a

task?

Demand: How important are they?

Differentiator: How close do your/competitor’s products get

to meeting the unmet needs?

Continue to listen to your customers

• They can help you to innovate and focus your next developments

• Find out your customers concerns and try and work out ways to

address these concerns without any significant increase cost

• Sometimes providing additional features that are not essential but

attractive can just give you the edge

Who are your competitors?

• How does your product compare to your competitors?

• What is your competitive advantage or USP?

• How long can you sustain this?

What is

the

product/

service?

Who is the

customer?

How many

people will

buy it?

How much

will you

charge?

Will they

buy it?

Who are

your

competitor

s?

Competitive advantage

• Anything that helps your business attract more customers than

your competitors is a competitive advantage

– most are only temporary

• Start by thinking about the features of the product or service that

you want to promote

– then how the customer will use the product or service

– how is what you offer better than your customers product or service

– translate features into a benefit to the customer

• If you think there is a number of benefits you may want to

prioritise for specific customer groups in terms of importance for

your marketing messages

Potential areas of competitive advantage

• Cost (short term solution)

• Quality value for money is a longer term strategy that works.

Building a reputation for quality in your field is very important,

because people won’t mind paying a bit more for something that

they’re sure will be a good buy

• Service – people appreciate and will pay for excellent customer

service

• Innovation - by adding improved and unique features will you be

able to create a separate identity for your business

Your USP can be anywhere across the value chain

10 types of innovation (Source http://www.doblin.com/)

Why they are the success they are

• Facebook – interface very simple one and

the design is plain and easy to use. Clean and uncluttered

– Facebook promotes interaction between its users through many features including the Like feature, the Comments feature and the Sharing features (all of which were innovative at time of release)

– broad target market - something for everyone (critical mass)

– people have full control over their profile and what they choose to display

– continual revamp and development

• Apple

– the engineers at Apple

understand what people want -

designs of Apple products are

simple, clean and elegant

– dynamic Product Line that

keeps customers coming back

for more

– marketing campaigns that

focus on the benefits - show

how the gadget can make your

life easier