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Wednesday, August 31, 2011

Market Or The User?

10:26 PM Posted by Deepak Nayal , 4 comments
We all love those big, colorful and beautiful graphs showing market statistics. Top management cannot live without them, marketing guys swear by them, and consultants love them. Companies use these stats because these indicate their and competitors' performance over a period of time. However, these stats are almost useless when it comes to creating a new company or a product. The reason for that is market stats and graphs are macro level indicators, and if you want to create something that people want you have to come down to micro level - understand users, competitors and their products. This can make the I-only-look-at-the-big-picture people very uncomfortable. 

[All companies are essentially a product or a service when they start, so I am going to refer to both products and startups as products. You can make out of the context which one I am talking about (probably both)

A market might be growing at a CAGR of 50%, but no amount of market data is going to help you articulate the product (its features and their development priorities) you need to create. You will have to dive deeper, do some research, understand the users, their needs, desires, what are they using currently in order to fulfill the demand that your product will suffice, what is wrong with the existing products in the market, and how can that be improved. Not easy. Not easy at all. 

I have particular problem with two marketing tools/indicators when it comes to product creation: market share and growth. While these are good indicators to reflect the performance of a company and demand in the market, these are almost useless when it comes to creating products. Even if there is a huge amount of demand in the market, it will not guarantee the success of your product. It is not even going to help a little bit in creating the product. Why the obsession? Our fascination with these indicators is so deep that even if someone understands and believes that these parameters are not going to help him in creating a product, he will still ending up including these in his product presentation - because if he does not, he will be questioned on those for certain. It is a pity that many investors look for this data in presentations from entrepreneurs, and get uncomfortable if they do not see it. They forget that market is not going to buy the products, users are. 

I think the reason people are so use to using these market indicators is that these are very easily and abundantly available. You just need to pay a few hundred dollars (thousands in some cases) and you can get your hands on detailed market data sliced from every possible angle. This kind of data is easily generated and easily consumed. On the other hand, analysis of users behavior, needs and wants is much more difficult and subjective, and is harder to consume. 

The market versus user comparison also maps well to the bottom-up and top-down debate. When market data is your trigger and inspiration for a product, it is the top-down approach. When a problem that users are facing or a benefit that they can get is the trigger and inspiration of a product, it is the bottom-up approach. In my view, best products are made using bottom-up approach; copy cats go for top-down approach (though they might go for bottom-up for following iterations). iPad is probably the best example of this. Earlier, the tablet industry was moving sluggishly and no one was paying attention to it because the market was not growing fast enough. But then Apple found tablets interesting, because they saw the benefits that a good tablet can provide to users. Few years down the line, as we all know, Apple iPad has become a huge hit, and suddenly the tablet market has become one of the most dynamic technology products market, with almost every consumer electronics company jumping into it. An interesting point to note here is that none of the tablet makers is still able to match up to Apple. Though there are many reasons for this, I think one of the key reasons is that they (at least, some of them) are looking at the tablet market from a top down point of view. They started making tablets just because the market was growing exponentially, without studying the end users.

Do not get me wrong, I am not against market data. But again, it is more helpful for retrospective analysis, and that too of the high level and quantifiable type. If you want to make good products, keep your market data aside and go to the user. The things he says or does might not be as sexy and colorful as market share and growth charts, but they will be much more helpful.

4 comments:

  1. Top down or bottom up approaches are completely contextual. In simple words, if you are taking a top down approach and studying market data you are basically looking at the pie and understanding who you will be competing against, how much more can the pie grow, what is the capacity of the existing players to serve the market. This may not look glamorous in terms of innovation but outright copying has worked. Case in point in India we have 3-4 low cost airlines, there is hardly anything to differentiate them in terms of service or product but they can survive because there is space for them in the market. And this may be much less riskier too if you know that demand is high, a tried and tested product and business model is absolutely fine business proposition that is why so many copy cat construction companies are doing so good, one company just cannot fulfill the demand. But if you talk about startups, then I agree with you, if startups dont have an innovative idea then there is hardly much about them. Barriers to entry will be so low without some innovation that they wont be able to survive, that is why it becomes imperative for startups to differentiate in service or product and be customer's delight so then can fight against big companies, hence bottom up approach.

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  2. Do you really get all that information from a pie diagram depicting the market share?

    Innovation and differentiation becomes a problem with commodities. In cases, such as low cost airlines, you have to start with big budget worth millions of dollars and the returns are nothing close to the investment. Does starting such a venture really make sense? I am sure the money one puts into these initiatives can be put to better use.

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  3. Not only the pie diagram, but similar market data. I dont have exact data but I assume with millions of $ investment time to break even runs in decades and not years but that doesnt mean it cannot be a profitable venture. I can talk about real estate development industry in India. there is no innovation in the industry, same tried and tested processes and similar end product, very high investment of the order of many a millions and return is very very good. why would anybody want to risk anything different if you can get a 30% profitability without changing a thing. Education industry (atleast in India) people just open engineering colleges and make huge money,where is the innovation. Break even time is less than 4 years in some cases, which is fantastic. Hospitals (not health care). if you look at some of the indian mobile phone OEMs like Micromax, Karbonn or Lava, there is not much product or tech differentiation, still they sell quite well. I think what I am trying to say is that in a growing market you can get away with being a good copy cat, may be not in a mature market.

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  4. You are missing out the point of this article or may be I have not explained it well. What you are saying makes sense, but the point I am trying to make is that market dynamics will not help you when you actually get on to starting your venture or creating the product. These market reports are not going to tell you what venture you need to start, what products/services should that company offer, how should you price your offerings, what distribution channel you need to use, etc. For these things you will have to put that colorful report down and get your hands dirty. And even if you do not read that market report for starting that initiative, you are not really going to miss much.

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