Prelude: Peloton
Peloton's Market Validation Ride In 2012, John Foley was a busy executive struggling to fit regular spin classes into his hectic schedule. He saw an opportunity to bring the studio cycling experience into people's homes. But before quitting his job to start Peloton, Foley needed to validate the market potential.
He started by analyzing industry trends and market data. Foley looked at the growing popularity of boutique fitness classes, the rise of connected fitness devices, and the increasing consumer demand for convenience. He estimated the size of the home fitness equipment market and the potential share Peloton could capture with a premium, technology-enabled product.
Next, Foley conducted extensive customer research. He surveyed cyclists to understand their pain points and gauge interest in a home-based alternative. He hosted focus groups to gather feedback on early product concepts and pricing. This qualitative insights gave Foley confidence that there was real demand for Peloton's offering.
Finally, Foley and his team built a prototype bike and invited potential customers to trial it. They collected pre-orders to validate willingness to pay and generate initial revenue. This hands-on validation helped refine the product and business model before a full-scale launch.
By combining market analysis, customer research, and tangible validation, Foley proved there was a sizable market opportunity for Peloton. The company went on to become a multi-billion dollar business, revolutionizing the home fitness industry. Peloton's story shows the power of thorough market assessment in turning an idea into a successful venture.
Lesson Overview
In this lesson we talk about:
- Learn techniques for estimating the size of your target market
- Understand how to validate customer interest in your product or service
- Discover tools to help assess market opportunity and sales potential
What is a Market Size Assessment?
Conducting a market size assessment is the process of estimating the potential sales volume and revenue opportunity for your product or service. It's different from working out startup costs or strategic analysis of your business. It involves analysing the number of potential customers, their purchasing power, and the competitive landscape to determine if there's sufficient demand to build a sustainable business.
Assessing market size helps you:
- Validate the business potential of your idea
- Is there a market for my product?
- Identify the most promising customer segments to target
- Who will buy my product?
- Estimate sales projections and revenue potential
- Will I make money from my product?
- Convince investors or partners of the opportunity
- Allocate resources and plan your go-to-market strategy
- How do I plan to sell my product?
Steps to Assess Your Market Size
Like many things in business, there are many ways to âskin the catâ - or in this case, to measure market size. We will be using steps centered around the concept of TAM/SAM/SOM, which is characterised below:
Without further adieu, letâs identify your market size:
1. Define your target market
- Start by clearly defining your target customer. Be as specific as possible in terms of demographics, psychographics, and behaviors.
- We wonât go into too much detail about your customers in this lesson, as it is covered in the next lesson.
- Next, Identify the key characteristics that make someone likely to buy your product.
For example, if you're launching a new organic baby food brand, your target market might be health-conscious parents with children under 3 in urban areas with household incomes over $75,000.
2. Estimate the total addressable market (TAM)
The TAM is the total revenue opportunity for your product if you achieved 100% market share. As in, imagine if McDonaldâs held 100% of the market share of fast food, globally. It's the broadest possible view of your market potential.
To calculate TAM, multiply the total number of potential customers by the average revenue per customer:
TAM: Total # Potential Customers X Average Revenue Per Customer
In our baby food example:
Let's say there are 10 million parents* in the U.S. that fit your target profile for organic baby food.
- The average customer spends $500 per year on baby food.
- Your TAM would be $5 billion (10 million x $500).
*Hey⊠How do I find this data?
There are many ways to find TAM values. IdeaFloat uses a number of techniques revolving around a unique formula that stems from search engine statistics. But, every business is different and will require personalisation. For example, you may use market research reports from firms like Nielsen, Gartner or IBISWorld. You may also analyse public filings of companies in your industry to get real revenue figures. Or, you could even use census data and government statistics to estimate the size of different demographic groups.
IdeaFloat also helps with this research but offering a custom market research tool, at a fraction of the cost:
3. Estimate your serviceable available market (SAM)
The SAM is the portion of the TAM that you could capture with your specific product and business model. It takes into account factors like geography, distribution channels, and pricing. In our example of McDonaldâs, while price and distribution channels are (generally) the same store to store, the relevant factor could be if you were a franchisee looking at McDonaldâs in the US.
SAM = % of TAM based on (Geography) + (Distribution Channels) + (Pricing) Factors
Another example:
Continuing the baby food example, let's say your organic product will be priced at a 20% premium, sold only through grocery stores and online, and initially launched just in the top 10 U.S. metro areas. Based on those factors, you estimate you can capture 5% of the total market in the first few years. So your SAM would be $250 million ($5 billion TAM x 5%).
Of course, this is all easier said than done. IdeaFloat uses online search statistics, as well as related keywords over a course of time to get an accurate result for TAM.
4. Estimate your serviceable obtainable market (SOM)
The SOM, the inner circle in the image above, is the portion of the SAM that you can realistically capture in the short term given your current resources, capabilities, and competition. It's the most conservative view of your market potential.
SOM = % of SAM based on (current resources) -/+ (capabilities) - (competition) Factors
In our baby food example, perhaps you estimate that with your current funding and team, you can capture 10% of the SAM in the first year by getting shelf space in 1,000 stores and running targeted online ads in your launch markets. That would make your SOM $25 million ($250 million SAM x 10%). As you scale and gain market share, your SOM will increase over time.
Validate your TAM/SAM/SOM
This really is the most important part. Once you have a ballpark market size estimate, it's important to validate that there are real customers behind those numbers. A multi-billion dollar market means nothing if the actual customers aren't compelled by your specific product.
There are a few ways to pressure test your market analysis:
Search trends: Use tools like Google Keyword Planner or Ahrefs to analyze search volume and trends for keywords related to your product. Growing search traffic indicates increasing consumer interest. For our organic baby food brand, we might look at searches like "best organic baby food", "healthy baby food", or "homemade baby food". Lots of searchers for those terms would be a positive signal of demand.
Social listening: Monitor social media and online forums to see what people are saying about your category. Look for posts and discussions related to the problem you're solving. Are people complaining about the current options and wishing there was something better? Do you see lots of recommendations and positive sentiment for products similar to yours? Social chatter is a great window into real consumer opinions.
Comparables: Analyze the traction and growth of comparable companies in your space. If there are other startups pursuing the same market with a different approach, their early results can be indicative of overall demand. Peloton looked to the success of SoulCycle and Flywheel, two fast-growing studio cycling chains, as proof points for the potential of the spin class experience.
Use Ideafloat:
The IdeaFloat Market Size Assessment tool automates much of the top-down analysis we've discussed. AI generates a search phrase related to your business that a consumer would search, and the tool will then estimate your online market size, search volume, and sales projections. It also builds in custom analytics, a go-to-market plan and much more. It's a great starting point that you can keep on iterating to get right - just without the weeks of effort and cost.
Validating Customer Interest
Estimating market size is an important first step but to really prove there's a market for your product, you also need to validate customer demand and willingness to pay. Here are some effective techniques:
| Technique | Description | Tools to Help |
|---|---|---|
| Landing Page | Create a simple website describing your product and gauging interest. Track signups to quantify demand. | Unbounce, Instapage, Squarespace |
| Smoke Test | Pretend the product is ready and see if people try to purchase it. Measure conversion rates. | Shopify, WordPress + WooCommerce |
| Surveys | Ask target customers about their needs, preferences, and reactions to your product concept. | SurveyMonkey, Typeform, Google Forms |
| Pre-Sales | Offer the product for pre-order before it's built. Set a goal for number of pre-sales as validation. | Kickstarter, Indiegogo, Celery |
| Interviews | Conduct one-on-one interviews with potential customers to get qualitative feedback and discover pain points. | Zoom, Calendly, UserTesting |
The key to successful validation is targeting the right customers and asking the right questions. Focus on your core target market - the people most likely to buy and benefit from your product. Ask open-ended questions to surface insights you may not have considered. Anchor your questions in real customer pain points and position your product as a potential solution.
Most importantly, be ready to iterate and adapt your idea based on what you learn. Validation isn't just about proving your idea is perfect as-is. Often the most valuable part is uncovering how to make your product even better at meeting customer needs. Treat validation as an ongoing process of learning and refinement, not a one-time checkpoint. We go through this more in our âbuilding an MVPâ lesson.
Bringing It All Together: Peloton's Lesson
Peloton's market validation ride demonstrates the power of combining rigorous analysis with real customer input. By sizing the opportunity from multiple angles and pressure testing their assumptions, the founders built conviction in the potential of their idea. At the same time, they stayed close to the customer, shaping the product based on real feedback and engagement.
As you assess your own idea, aim to strike a similar balance. Ground yourself in objective market data but don't lose sight of the human element. Remember that behind every impressive TAM figure are real people with real needs and preferences. The more you can validate your idea with actual customers, the more confidence you can have in your market potential.
With a thoughtful approach to market assessment and validation, you can set your business up for success from the very beginning. By putting in the work upfront to understand and engage your target customer, you'll be in the best position to capture the full potential of your market. Just like Peloton, you can turn an initial inkling of an opportunity into a market-leading business.
Further Reading
If you are interested in learning more about XYZ, these guides go into a great amount of detail.
- "TAM, SAM, and SOM - what it means and why it matters" by Lean-Case - TAM, SAM, and SOM: fundametal market size metrics
- â21 Market Sizing Questionsâ by McKinsey. This is a great one to fill ina. systematic market sizing approach. 21 market sizing questions with answers (McKinsey, BCG, etc.)
Assignment
Define your target market and estimate the TAM, SAM, and SOM for your business idea. Use at least 2-3 data sources (e.g. market research reports, public company filings, competitor information) to support your analysis.
Analyse online search trends and social media conversations related to your product category. What does this qualitative data tell you about customer needs and demand for your product?
Select 1-2 of the validation techniques from the table (e.g. landing page, surveys) and implement them with target customers for your product. Summarize your findings and key takeaways to refine your idea.
Knowledge Check
- What's the difference between TAM, SAM, and SOM in market sizing?
- What are some data sources and tools you can use to estimate market size?
- How can qualitative research techniques like surveys and interviews complement quantitative market analysis?
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