Chasing scale: A Pakistani investors insight
So, you've got a great idea? Now you may be the next Steve Jobs (Founder of Apple) or Mudassir Sheikha (Founder of Careem), where you create your own market, but that is certainly the exception rather than the rule. So, what should you do next?
First things first, it always starts with understanding the market you intend to serve. Let us focus on the Pakistan market here.
Key questions to first start digging into:
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Conduct your own primary research
Secondary research such as desk research is useful in many instances, particularly in industries where data and information are readily available. However, most often in Pakistan, such information is lacking or unreliable, and therefore, you have to resort to conducting your own primary research. You may do so by speaking to consumers, professionals, and practitioners in the industry who can provide insightful information based on their experience and knowledge. Another option is to engage a market research firm or university student groups which often provides a cheaper option to conduct surveys, and gather data from potential customers in the target market to understand their preferences, needs, and wants. Data will always be amongst your best friends on this journey!
The best practice, if time and resources permit, is to go out yourself along with your co-founders and do surveys, interviews, focus groups, etc. to get a first-hand feel from the market and its customers. There is something rich and unique about personal interaction and body language clues that Pakistanis tend to give off which cannot be collected any other way. In my experience, whenever I have gone out and conducted research myself or with my team, I have always felt more enlightened and enriched with the information collected first-hand as compared to reading data and statistics compiled in a report.
Understand the dynamics
Beyond getting consumer data and information, further research should be done to understand the dynamics at play here, including the following:
1. How much market share do the key players in the industry have?
2. What are their strengths and/or competitive advantages?
3. Is the industry fragmented or concentrated in few players?
4. What are the barriers to entry?
5. Are sales and marketing strategies primarily online or offline? What has been more effective?
6. How do government regulations impact the industry?
I cannot stress enough on the importance of Market Sizing. It is crucial to understand this from the onset. A startup should effectively determine how big the potential market actually is, even in an ideal world, if they were to capture the entire market how much they would and could they in fact capture. This figure will help drive the numbers, particularly in the fundraising plan and financial feasibility.
The key question to answer is how big is the market we are entering or competing in? Let’s break it down into Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM)
TAM: Total Addressable Market
TAM is the total market potential for your product. This is including every customer in your universe who could buy your product, regardless of the competition in the market.
It can be defined as the overall revenue opportunity that is available to a product or service if a 100% market share was achieved regardless of resource constraints.
SAM: Serviceable Addressable Market
SAM is the portion of the market that you can acquire. For example, your product may only be available in one language e.g. Sindhi, so your SAM would be the subset of the TAM that speaks Sindhi that your product is developed for. Similarly, if you can only serve a particular geographical area due to your logistics constraints, the SAM would be the subset of the TAM to which your product/service can be reached. This is the market value keeping in mind the demand for your type of products/services within your geographical or physical reach.
Unless you're a monopoly, you most likely can’t capture the TAM for your product or service. Even if you only have one competitor, it would still be extremely difficult to convince an entire market to only buy your product or service. That’s why it’s crucial to estimate your SAM to determine how many consumers (or PKR value) fall into this category. To calculate your serviceable addressable market, count up all the potential customers that would be a good fit for your business and multiply that number by the average annual revenue of these types of customers in your market.
SOM: Serviceable Obtainable Market
SOM is really the segment that you are going after in your business plan, generally speaking in relation to the funding you are raising. Chances are that you are not going to take a 50% market share of the SAM within your first year of operations. Therefore your SOM needs to be a reasonable fraction of your SAM. This is the market size which you can realistically serve given the geographical reach, product limitations, marketing capacity, logistics, and other resources that will be available to you.
If you can deliver SOM in the time you are projecting in your business plan, then you can gain a lot of credibility. You might be able to increase your market share and reach a more important penetration of the SAM over time, which helps in achieving the dream.
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