Validating an Idea: Market Validation
Welcome to the next installment of the idea/problem validation series. The first newsletter focused on validating your problem, and the next went through validating your buyer. Today, I want to discuss the next step in validating your idea: validating the market.
The Total Addressable Market (TAM) and Your Niche
First, you want to look at the Total Addressable Market (TAM) for your solution. The TAM tells you how much 100% of the market share would be worth. There are a lot of resources out there for calculating the TAM. The key is that you want to have a sufficiently large TAM to validate that you will be able to grow in this market.
While much value is typically placed on the TAM, I believe it should be thought of in two layers: the overall TAM and the TAM of your chosen niche. Once you’ve validated a sufficiently large TAM, you need to find a reasonably large niche to serve that is within that market. You should understand the market as a whole, but don’t try and serve everyone. Instead, go all-in on a niche with validated demand for a differentiated solution. In SaaS, a great niche can get you to $5M, $10M, or more in ARR very quickly. Riches are made in niches.
To validate your niche, use your customer conversations to list the key attributes of a company that would solve their problem. Ask them what they’re currently doing to solve their problem. Are they using a product to try and solve their problem? These are your competitors. What attributes of these companies make them attractive solutions? Do in-depth competitor research to understand their differentiations. Ask the problem owners about what attributes a successful solution would have. What do the current options lack? In these conversations, you should begin to get a picture of the market and its opportunities for a niche.
Try to validate multiple niches based on your core problem. Then, gauge the market size for the niches that gravitate toward your solution. You want a niche within the large TAM that can get you to at least $5M in ARR. In the long term, you can begin to look at expanding into other niches within your TAM but start with a single niche that is large enough to get early traction. Expansion comes later in the journey – this initial niche will act as your beachhead.
Reachability
Validating your market includes evaluating how reachable your customers will be. You generally want to choose a market with highly reachable target customers.
A helpful gut check is to assess how easy it was for you to validate your problem. How quickly could you get in front of many problem owners to have conversations? If you had a lot of difficulty reaching people during problem validation, your target customer likely has low reachability, and this should be considered a red flag worth exploring further.
So you can reach many people to have problem conversations, but can you reach them at scale enough to get a high-growth startup? Now you have to validate whether these customers are reachable at scale. Hence, gauging reachability has two primary components: ease of selling and scaled marketing channels.
Ease of Selling
First, you want to understand how easily you could sell to your target customer. Review your buyer’s characteristics. Then, zoom out to the market as a whole. How do the current market participants buy? Is there a generally accepted buying process? If so, what does it look like? If you can sell directly to your buyer without going through a third party, your customer is highly reachable. If the selling process is long, convoluted, and/or indirect, reachability is low.
A classic example of a large but difficult to reach population is teachers. If you’re trying to solve a problem for teachers, you have a very large TAM. However, they’re difficult to reach to try and sell to. A similar situation arises in selling to certain segments of the government. This is a large market, but you’ll have trouble reaching the buyers. In cases where a buyer has deep pockets but is hard to reach, you need to be able to sell at a much higher price point per deal – I’ll discuss more below.
Sometimes a market may seem reachable, but the reality of the buying process renders the customers challenging to reach. When TheraNest first launched, our initial target customer was nonprofit mental health practices. However, it became clear that at a higher price point, the nonprofit buying process had to include the board. We would have to go from selling to individual stakeholders to selling to boards, which had a longer and more complex decision-making process. While the nonprofits were reachable at first glance, digging into the buying process made it clear that they would be challenging to sell to. After we got scale and had millions in ARR and a sales team, we naturally expanded to selling to large nonprofits.
Another part of validating ease of selling is the market stage. Are you looking at entering an existing market or a new one? If the market is new, consider how much education you have to provide the buyer with during the selling process. If you have to educate your target customer, it will increase the difficulty of selling. If you’re entering an existing market, it’ll be easier to sell – but make sure you’re clear on your differentiation.
Marketing Channels
The other element of customer reachability is the maturity of marketing channels. To validate your market niche, you need access to channels that can reach prospects at scale. Consult your customers. Figure out where they congregate. Ask about a recent purchase they made – where did they hear about it? Is that a marketing channel you can leverage? Examining your competitors will also be necessary here. Take a look at their go-to-market strategy. What channels did they use? How did they reach their customers? Their go-to-market strategy will likely be the one that also works best for you if they’ve been around for a while and have had the chance to test different options – but remember that you’re adapting that strategy with your unique offerings and differentiators. Your messaging and positioning will be different, but the channel will likely be the same. Look at the competitors within both the TAM and your niche. Your niche may not have anyone else in the space (in fact, this is ideal), but your TAM will still offer insights into the best marketing channels.
Use the information about your ease of validation, the buying process accepted within the market, and the scalability of marketing channels to create a reachability score on a scale from 1 to 10. You want to choose a market with a large TAM, a large niche within the TAM, and a high reachability score.
If your solution has low reachability but can support very high premium pricing and solves a significant pain, it’s worth considering if you have unique advantages that give you the founder fit for the market. We will discuss founder fit next.
Let me know what you think about this week’s newsletter here, on Twitter, or Instagram. Visit my website if you’re interested in working together.
You can read the past installments of this series here: